2020 (10) TMI 458 - HC - Income Tax

Revision u/s 263 - AO himself determining the Transfer Pricing adjustment without referring the matter to the Transfer Pricing Officer - Whether Tribunal is right in holding that, CBDT Instruction No.3 dated 20.05.2003 is not binding on the AO and as such the AO himself determining the Transfer Pricing adjustment is justified and hence the order of assessment cannot be said to be erroneous in order to invoke the provisions of section 263 by the Commissioner of Income Tax? - HELD THAT - A reference to the TPO is required to be made under Sub section (1) of Section 92CA. There is no amendment to the said Section. Shri Raghavan is right in his submission to the extent that sub section (4) of Section 92CA has been substituted with effect from 01.06.2007. No authority of the Supreme Court of India is cited to show that the position of law stated in S.G.ASIA 2019 (8) TMI 661 - SUPREME COURT has been altered. Therefore, in view of the unambiguous language employed in paragraph No.7 of S.G.ASIA extracted hereinabove, we are of the considered view that Instruction No.3/2003 issued by the CBDT is mandatory. The impugned order passed by the ITAT is clearly unsustainable in law as it runs counter to S.G.ASIA. 2019 (8) TMI 661 - SUPREME COURT Hence, we have considered the first question raised by the Revenue as a substantial question of law and answer the same in favour of the Revenue.

Summary

Issues:
- Whether CBDT Instruction No.3 dated 20.05.2003 is binding on the Assessing Officer for Transfer Pricing adjustments?
- Whether the Assessing Officer determining Transfer Pricing adjustment without referring the matter to the Transfer Pricing Officer is a valid view?
- Whether the Tribunal's decision to quash the Commissioner's order under section 263 was justified?

Analysis:
1. Issue 1 - CBDT Instruction No.3 Binding: The main contention revolved around the binding nature of CBDT Instruction No.3 dated 20.05.2003 on the Assessing Officer. The Tribunal held that the Instruction is not binding, allowing the assessee's appeal. However, the Revenue argued that the Instruction is mandatory based on the case of PRINCIPAL COMMISSIONER OF INCOME TAX-4, MUMBAI VS. M/s. S.G. ASIA HOLDINGS. The court analyzed the legal position and concluded that the Instruction is indeed mandatory, especially post the Finance Act, 2007 amendment to Section 92CA.

2. Issue 2 - Assessing Officer's Determination: The second issue was whether the Assessing Officer determining Transfer Pricing adjustments without involving the Transfer Pricing Officer is a valid approach. The Tribunal considered this as one of the possible views and not erroneous. However, the court, relying on legal precedents, emphasized that post the 2007 amendment, the Assessing Officer's independent assessment power is limited, and compliance with the Instruction is necessary.

3. Issue 3 - Quashing of Commissioner's Order: Lastly, the Tribunal's decision to quash the Commissioner's order under section 263 was challenged. The court reviewed the arguments presented by both sides, including references to relevant case laws such as COMMISSIONER OF INCOME TAX VS. MAX INDIA LTD. and MALABAR INDUSTRIAL CO., LTD., VS. COMMISSIONER OF INCOME TAX. Ultimately, the court found the Tribunal's decision unsustainable in law, aligning with the principles established in S.G. ASIA, and reinstated the Commissioner's order.

In conclusion, the Karnataka High Court held that CBDT Instruction No.3 is binding on the Assessing Officer, emphasized the importance of compliance post the 2007 amendment, and reinstated the Commissioner's order under section 263, setting aside the Tribunal's decision. The judgment provides a detailed analysis of the legal aspects surrounding Transfer Pricing adjustments and the Assessing Officer's role in such determinations.