Transfer pricing adjustment without TPO reference. AO breached mandatory CBDT Instruction – SC

Transfer pricing adjustment without reference to TPO. Supreme Court upholds that AO breached mandatory Instruction but restored appeal to AO

ABCAUS Case Law Citation:
ABCAUS 3119 (2019) (08) SC

Important case law relied upon by the parties:

The instant Appeal by Special Leave was made by the Revenue to challenge the judgment whereby the Bombay High Court dismissed the Income Tax Appeal of the Revenue and confirmed the order passed by the Income Tax Appellate Tribunal (the Tribunal).

The respondent company was engaged in brokering and dealing in shares and other securities.

During the course of the assessment proceedings, the Assessing Officer noticed that the assessee had entered into International transaction with associated enterprises.

The respondent company had received certain amount of brokerage from its parent company. During the assessment proceedings the respondent was directed to furnish details about the parent company and the rate of brokerage that was charged.

According to the Assessing Officer, the brokerage charged by the respondent was at a very lower rate as compared to the prevalent rates in market. The Assessing Officer, therefore completed the assessment u/s 143(3) of the Income Tax Act, 1961 (the Act) and made an addition under Section 92 of the Act.  

The CIT(A) confirmed the addition made by the Assessing Officer and dismissed the appeal.

The assessee challenged the order of the CIT(A) before the Tribunal and challenged the jurisdiction of the AO in making the assessment without referring the matter to the Transfer Pricing Officer where the value of international transactions exceeded Rs. 5 crores. The assessee claimed that act of the AO was in contradiction to the provisions of Instruction No. 3 of 2003 issued by the Central Board of Direct Taxes.

The Tribunal noted that as per the said Instruction, the CBDT had mandated that wherever the aggregate value of international transaction exceeds Rs. 5 crores, the case should be pricked up for scrutiny and reference u/s. 92CA be made to the TPO. If there are more than one transaction with an associated enterprise or there are transactions with more than one associated enterprises, the aggregate value of which exceeds Rs. 5 crores, the transactions should be referred to the TPO.

The Tribunal set aside the findings rendered by the first two authorities below and held that transfer pricing adjustment made by the Assessing Officer was contrary to the mandatory instructions issued by CBDT vide its Instruction No.3/2003 dated 20.05.2003.

Observing that by not making reference to the Transfer Pricing Officer (TPO), the AO had breached the mandatory instructions making the assessment order on this issue in violation of the provisions of the law, the Tribunal set aside the findings of the CIT(A) so far as it related to Transfer Pricing.

Before the Hon’ble Supreme Court, the Revenue contended that the Assessing Officer only where he considers it necessary or expedient so to do, he may, with the previous approval of the Commissioner, refer the computation of the arm’s length price (ALP) of the international transaction/specified domestic transaction under Section 92C to the TPO. In other words, it was contended that the discretion is vested in the Assessing Officer and it would not be mandatory in every single case that he must refer the issue of computation of the Arm’s Length Price to the TPO.

Transfer pricing adjustment without TPO reference was bad

However, the Hon’ble Supreme Court opined that in view of the guidelines issued by the CBDT in Instruction No.3/2003 the Tribunal was right in observing that by not making reference to the TPO, the Assessing Officer had breached the mandatory instructions issued by the CBDT.

However, the Apex Court opined that the Tribunal ought to have accepted the request of the Departmental and the matter ought to have been restored to the file of the Assessing Officer so that appropriate reference could be made to the TPO. It would therefore be upto the authorities and the Commissioner concerned to consider the matter in terms of Sub-Section (1) of Section 92CA of the Act.

Therefore, the Hon’ble Supreme Court allowed the Appeal to the this extent and directed the AO to take appropriate steps in terms of CBDT Instruction No.3/2003.

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