In a notable legal battle centered around compliance with CBDT instructions, the Supreme Court of India delivered a crucial verdict setting aside the transfer pricing adjustment decision. The case involved intricate details regarding tax assessments and the adherence to mandatory guidelines issued by the Central Board of Direct Taxes. The judgement carries implications for future cases involving similar issues and highlights the importance of following stringent procedural norms to ensure fair and accurate tax assessments.
Facts
- The Tribunal set aside the findings of the first two authorities regarding transfer pricing adjustment made by the Assessing Officer.
- The Tribunal noted that the transfer pricing adjustment was contrary to the CBDT instructions in Instruction No.3/2003 dated 20.05.2003.
- It emphasized that the mandatory instructions issued by the Central Board of Direct Taxes cannot be ignored.
- The AO made an addition of Rs. 2,89,82,746/- under Section 92 of the Act based on the details furnished by the respondent.
- The CIT(A) confirmed the addition and dismissed the appeal filed by the respondent.
- The AO asked the respondent to establish the parent company’s involvement in arbitrage activity and the reason for the high brokerage rate charged.
- The assessment was to be computed under Section 143(3) of the Income Tax Act, 1961.
- The AO found that the respondent’s brokerage rate of 0.05% was lower compared to prevalent market rates.
Analysis
- The Central Board of Direct Taxes has issued guidelines regarding the role and procedure to be followed by Transfer Pricing Officers (TPO) and Assessing Officers in determining arm’s length price in international transactions.
- The Assessing Officer is required to refer cases where the aggregate value of international transactions exceeds Rs.5 crores to the TPO for scrutiny and determination of arm’s length price.
- The TPO plays a critical role in determining the arm’s length price based on the data available and must pass a speaking order after obtaining approval from the DIT (TP).
- The Assessing Officer has the responsibility to compute the total income of the assessee considering the arm’s length price determined by the TPO.
- There are stipulated methods and factors to be considered in determining the most appropriate method for calculating the arm’s length price.
- It is essential for procedural uniformity that the Assessing Officer follows the guidelines set by the CBDT and makes reference to the TPO when necessary.
- Failure to comply with the mandatory instructions of the CBDT regarding transfer pricing adjustments can render the adjustments made by the Assessing Officer invalid.
- The Tribunal cannot interfere in administrative matters such as following mandatory instructions, and it is the responsibility of the Assessing Officer to ensure adherence to procedural guidelines.
- The High Court affirmed the Tribunal’s decision regarding the Transfer Pricing Adjustments being deemed invalid due to non-compliance with CBDT instructions.
- The format provided for maintaining records of transfer pricing cases is crucial for ensuring timely and effective handling of references to the TPO and maintaining uniformity in determining arm’s length price.
- The conclusion reached by the Tribunal is considered correct
- The reasoning and analysis provided in the judgement support the Tribunal’s decision
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Decision
- The appeal is allowed to a certain extent.
- The Tribunal should have considered the submission made by the Departmental Representative and restored the matter to the Assessing Officer for appropriate reference to the TPO.
- The authorities and the concerned Commissioner should now consider the matter under Section 92CA of the Act.
- The Assessing Officer is directed to take necessary steps in accordance with Instruction No.3/2003.
- No costs are awarded in this case.
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Case Title: THE PRINCIPAL COMMISSIONER OF INCOME TAX 4 MUMBAI Vs. M/S S.G. ASIA HOLDINGS (INDIA) PVT. LTD.
Case Number: C.A. No.-006144-006144 / 2019
