Case Note & Summary
The case involves an appeal by the Principal Commissioner of Income Tax-4, Mumbai against the judgment of the Bombay High Court which dismissed the Revenue's appeal and upheld the Income Tax Appellate Tribunal's order. The respondent-assessee, M/s. S.G. Asia Holdings (India) Pvt. Ltd., had received brokerage from its parent company. During assessment, the Assessing Officer found that the brokerage charged (0.05%) was lower than market rates and made a transfer pricing addition of Rs.2,89,82,746 under Section 92 of the Income Tax Act, 1961. The CIT(A) confirmed the addition. The Tribunal, however, set aside the addition, holding that the Assessing Officer had failed to follow CBDT Instruction No.3/2003 which required reference to the Transfer Pricing Officer (TPO) before making such adjustments. The High Court affirmed the Tribunal's order. The Supreme Court considered the appeal and examined the nature of CBDT Instruction No.3/2003. The court noted that Section 92CA provides that the Assessing Officer may refer the computation of arm's length price to the TPO if considered necessary, but it does not mandate such reference. The CBDT instruction, while advising reference for transactions exceeding Rs.5 crores, is directory and not mandatory. The Assessing Officer had the power to determine the arm's length price himself under Section 92C(3). The court held that the failure to refer to the TPO does not invalidate the transfer pricing adjustment. Consequently, the Supreme Court allowed the appeal, set aside the orders of the Tribunal and High Court, and restored the assessment order. The court did not express any opinion on the merits of the addition.
Headnote
A) Income Tax - Transfer Pricing - Reference to TPO - Section 92CA, Income Tax Act, 1961 - CBDT Instruction No.3/2003 - The Assessing Officer made a transfer pricing adjustment under Section 92 without referring the matter to the TPO. The Tribunal and High Court held the adjustment bad in law for non-compliance with CBDT Instruction No.3/2003. The Supreme Court reversed, holding that the CBDT instruction is directory, not mandatory, and that the Assessing Officer has the power to determine arm's length price under Section 92C(3) without TPO reference. The court set aside the orders of the Tribunal and High Court and restored the assessment order. (Paras 1-6)
Issue of Consideration
Whether the failure of the Assessing Officer to make a reference to the Transfer Pricing Officer (TPO) under Section 92CA of the Income Tax Act, 1961, in accordance with CBDT Instruction No.3/2003, renders the transfer pricing adjustment made by the Assessing Officer bad in law.
Final Decision
The Supreme Court allowed the appeal, set aside the orders of the Tribunal and High Court, and restored the assessment order dated 27.12.2007 passed by the Assessing Officer. The court held that CBDT Instruction No.3/2003 is directory and not mandatory, and the Assessing Officer's failure to refer to the TPO does not invalidate the transfer pricing adjustment.
Law Points
- Transfer pricing adjustment
- Reference to TPO
- CBDT Instruction No.3/2003
- Mandatory vs directory
- Section 92CA Income Tax Act
