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2019 (8) TMI 661 - SC - Income TaxBinding effect of instruction of CBDT on AO - Instruction No.3/2003 dated 20.05.2003 regarding reference to TPO - AO made TP adjustment without making reference to TPO - ITAT deleted the addition due to non reference to TPO - whether matter was need to remanded by ITAT before AO to make further reference to TPO - HELD 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 AO had breached the mandatory instructions issued by the CBDT. We do not find the conclusion so arrived at by the Tribunal to be incorrect. 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. It would therefore be upto the authorities and the Commissioner concerned to consider the matter in terms of Sub-Section (1) of Section 92CA. We, therefore, allow this Appeal to the aforesaid extent and direct that it would now be upto the AO to take appropriate steps in terms of Instruction No.3/2003.
Issues Involved:
1. Validity of Transfer Pricing Adjustments made by the Assessing Officer without referring to the Transfer Pricing Officer (TPO). 2. Compliance with CBDT Instruction No. 3/2003 regarding mandatory reference to the TPO. 3. Appropriate remedy for the breach of mandatory instructions by the Assessing Officer. Issue-wise Detailed Analysis: 1. Validity of Transfer Pricing Adjustments made by the Assessing Officer without referring to the Transfer Pricing Officer (TPO): The Assessing Officer (AO) made an addition of ?2,89,82,746/- under Section 92 of the Income Tax Act, 1961, on the grounds that the brokerage charged by the respondent was lower than the prevalent market rates. The respondent appealed, and the Tribunal set aside the AO's findings, stating that the AO's failure to refer the matter to the TPO was contrary to the mandatory instructions issued by the CBDT in Instruction No. 3/2003. The Tribunal held that the AO breached mandatory instructions by not referring the transfer pricing issue to the TPO, thus making the transfer pricing adjustments invalid. 2. Compliance with CBDT Instruction No. 3/2003 regarding mandatory reference to the TPO: Instruction No. 3/2003 mandates that if the aggregate value of international transactions exceeds ?5 crores, the case should be referred to the TPO. The Tribunal and the High Court found that the AO's failure to refer the matter to the TPO was a breach of these instructions. The Supreme Court noted that the guidelines clearly state that the AO should not scrutinize the correctness of the price of the international transaction at the initial stage and must refer the matter to the TPO if the value exceeds ?5 crores. 3. Appropriate remedy for the breach of mandatory instructions by the Assessing Officer: The Tribunal did not agree with the Departmental Representative's suggestion to remand the matter back to the AO for reference to the TPO, stating that it was beyond their appellate jurisdiction to interfere in administrative matters. However, the Supreme Court found that the Tribunal should have accepted this submission and restored the matter to the AO for appropriate reference to the TPO. The Supreme Court directed that it would be up to the AO to take appropriate steps in terms of Instruction No. 3/2003. Conclusion: The Supreme Court allowed the appeal to the extent that the matter should be remanded back to the AO for compliance with Instruction No. 3/2003, directing the AO to take appropriate steps to refer the computation of arm's length price to the TPO. The appeal was thus allowed to this extent, with no costs awarded.
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