Case: THE PRINCIPAL COMMISSIONER OF INCOME TAX 4 MUMBAI Vs. M/S S.G. ASIA HOLDINGS (INDIA) PVT. LTD

2. The facts leading to the filing of this Appeal are as under:A) The respondent 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. After the details were furnished, the respondent was asked to establish if the parent company was involved in arbitrage activity and whether the rate charged was higher. After considering the material on record, according to the Assessing Officer, the brokerage charged by the respondent was only 0.05% which was found to be at a lower rate as compared to the prevalent rates in market. The Assessing Officer, therefore, while computing the assessment under Section 143(3) of the Income Tax Act, 1961 (the Act, for short), by his order dated 27.12.2007 made an addition of Rs.2,89,82,746/- under Section 92 of the ActB) The respondent being aggrieved preferred an appeal before the CIT(A) Commissioner of Income T ax (Appeals), who by his order dated 16.02.2009 confirmed the addition made by the Assessing Officer and dismissed the appeal. The matter was carried further by filing ITA No.2399/Mum/2009 before the TribunalC) The Tribunal by its order dated 22.04.2015 set aside the findings rendered by the first two authorities and held that transfer pricing adjustment made by the Assessing Officer was contrary to the mandatory instructions issued by CBDT Central Board of Direct Taxes in its Instruction No.3/2003 dated 20.05.2003. While allowing the appeal, the Tribunal observed as under:-16.1 After considering the entire judicial discussion discussed hereinabove, in our considered opinion, the mandatory instructions issued by the Central Board of Direct Taxes cannot be brushed aside lightly. By not making reference to the Transfer Pricing Officer, the AO has breached the mandatory instructions issued by the CBDT thereby making the assessment order on this issue in violation of the provisions of the law. We, therefore, set aside the findings of the Ld. CIT(A) on this issue and hold that the Transfer Pricing Adjustments made by the AO in contradiction to the mandatory instructions of the CBDT is bad in law. Here, we would like to make it clear that the assessment order is good but the Transfer Pricing Adjustments made therein are bad in law. Ground No.11 is therefore partly allowed16.2 Before parting with this issue, the Ld. DR has emphasized that if the AO has not followed the mandatory directions, the case may be set aside to the file of the AO so that he may refer the matter to the TPO. We do not subscribe to this argument of the Ld. DR for the simple reason that the Tribunal is an Appellate Authority and therefore cannot interfere in the administrative matters which are mandatory as per the provisions of the Act. Reference to the TPO is an administrative matter which was supposed to be followed by the AO which he has failed to do so. The Tribunal cannot make any good to such lapse made by the AO17. As we have held that T.P. Adjustments are bad in law, we do not find it necessary to dwell into the merits of the case18. In the result, the appeal filed by the assessee is partly allowed. … …3. The view so taken by the Tribunal was affirmed by the High Court which is presently under Appeal.

Reasoning:
5. It was submitted by Mr. Mahabir Singh, learned Senior Advocate that the expression …..the Assessing Officer 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 in relation to the said international transaction or specified domestic transaction under Section 92C to the Transfer Pricing Officer occurring in Section 92CA of the Act signified that discretion was 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 Arms Length Price to the TPO Transfer Pricing Officer6. However, the following expressions employed in Instruction No.3/2003 put the matter in a different perspective: -p; ...The Assessing Officer can arrive at prima facie belief on the basis of these details whether a reference is considered necessary. No detailed enquiries are needed at this stage and the Assessing Officer should not embark upon scrutinizing the correctness or otherwise of the price of the international transaction at this stage… … If there are more than one transaction with an associated enterprise or there are transactions with more than one associated enterprise the aggregate value of which exceeds Rs.5 crores, the transactions should be referred to the TPO. … … Since the case will be selected for scrutiny before making reference to the TPO, the Assessing Officer may proceed to examine other aspects of the case during pendency of assessment proceedings but await the report of the TPO on the value of international transaction before making final assessment(vi) Role of the Assessing Officer after receipt of arm s length price: Under sub-section (4) of section 92C, the Assessing Officer has to compute total income of the assessee having regard to the arms length price so determined by the TPO7. 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. We do not find the conclusion so arrived at by the Tribunal to be incorrect8. However, the Tribunal ought to have accepted the submission made by the Departmental Representative as quoted in para 16.2 of its order 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.