2008 (1) TMI 445 - AT - Income Tax

Revision u/s 263 - Transfer Pricing - Arm's Length Price of international transaction with Associate Enterprises (AEs) - margin of profit is higher than Indian comparables (uncontrolled transaction) - Transactional Net Margin Method (TNMM) used by the assessee taking Operating Profit upon Sales as Profit Level Indicator (PLI) - Overseas entities as 'tested parties' and their margins on mean basis and compared the same with mean of identified com parables - binding nature of CBDT Instructions issued Instruction u/s 119 of the Income-tax Act, to all its officers - Whether the CIT was wrong in saying that Central Excise Department had carried some audit and the AO erroneously completed assessment without considering the said audit report? - erroneous and prejudicial order Passed by CIT u/s 263 - HELD THAT - The object of transfer pricing exercise is to gather reliable data, which can be considered without difficulty by both the parties, i.e., taxpayer and the revenue. If the taxpayer wishes to take foreign AE as a tested party , then it must ensure that it is such an entity for which the relevant data for comparison is available in public domain or is furnished to the tax administration. The taxpayer is not then entitled to take a stand that such data cannot be called for or insisted upon from the taxpayer. As noted, the taxpayer has carried out several separate transactions with 17 AEs situated in different continents. It could have been appreciated if a particular entity in a particular country was sought to be computed with some similar entity in that very country as geographical situations in several ways influence the transfer pricing. It is quite evident that Assessing Officer did not apply his mind or carry any inquiry or investigation. Therefore, his order was erroneous insofar as prejudicial to the interest of the revenue. The Commissioner therefore was fully justified in exercising his power under section 263 and in setting aside the assessment with directions to re-do the exercise of transfer pricing. However, Shri Vohra vehemently argued that order of the Assessing Officer was fully justified and CIT was wrong in exercising powers under section 263 of the Income-tax Act. We have also considered the submission that ld. CIT failed to establish that order was erroneous and prejudicial to the interest of the revenue. In our opinion, as Assessing Officer failed to apply his mind and consider relevant facts or statutory provisions and, therefore, the ld. CIT had rightly exercised his jurisdiction and we see no reason to interfere with the impugned order except on small issue discussed hereinbelow. Assessing Officer was fully competent to consider the question of Arm's length price without making reference to Transfer Pricing Officer under section 92C of the Income-tax Act - binding nature of CBDT Instructions issued Instruction u/s 119 of the Income-tax Act, to all its officers - It is not possible for us to hold that Instructions issued by CBDT under section 119 of Income-tax Act to regulate assessment proceeding can be treated as a waste paper by officers functioning under the Board (CBDT). If such a view is taken, it would lead to chaos in the country. If various guidelines issued by CBDT for administration of Income-tax Department and for regulation of assessment etc. are not adhered to or made optional, then all schemes of assessment may fail and jeopardize the working of the department. This is neither the law of land nor there is any justification to accept such an argument. We are therefore of the view that Assessing Officer, in the light of instruction o f CBDT, was duty bound to refer the matter to the TPO, having regard to the purpose of specialized cell created by the revenue department to deal with complicated and complex issues arising under the transfer pricing mechanism. This case itself is a good example as to how department can be hoodwinked unless case is properly examined by persons having knowledge of principles of transfer pricing. The contention of Shri Vohra is accordingly rejected. We are also not convinced that in not referring the question of determination of Arm's Length Price to the TPO, Assessing Officer merely committed a procedural error and, therefore, legality of assessment order to invoke provision of section 263. In our considered opinion, the Assessing Officer failed to follow statutory regulations on a complicated issue like transfer pricing and made an assessment without application of mind. Accordingly, powers by Commissioner under section 263 were rightly exercised. Even if for the sake of argument, it is accepted that reference to TPO is not mandatory and instructions not binding; on peculiar facts of this case, as discussed, the assessment made without application of mind for purposes of section 263 was erroneous and prejudicial to the interest of the revenue. The ld. CIT rightly exercised his jurisdiction under section 263 in this case. Cases relating to non-application of provision of section 144B or other procedural errors stand on a different footing as basic jurisdiction to make assessment rests with the Assessing Officer. There is marked difference between purpose of transfer pricing regulations and scheme involved in section 144B, now deleted. At any rate, we have referred in detail to statutory provisions and material on record to show that assessment made was erroneous and prejudicial to the interest of the revenue. We, therefore, do not find any substance in above argument of Shri Vohra. Commissioner u/s 263 has power to, pass such order thereon as the circumstances of the case justify, including the order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment . He thus has sufficient statutory power to direct fresh assessment. The question raised about the margin of profit of the taxpayer and comparable Indian pharmaceutical company requires detailed investigation/verification, which could not possibly have been carried by the ld. CIT under section 263. Therefore, instead of rejecting the claim of the taxpayer, he has asked the TPO to look into the said claim. We do not find any legal infirmity in the approach of the ld. CIT. The taxpayer had vehemently claimed that its margin of profit is higher than Indian comparables (uncontrolled transaction) in respect of international transaction . This question in the light of order of CIT is wide open and can be considered and determined by TPO/Assessing Officer. Error in the approach of the ld. CIT - We do not find any error in the approach of the ld. CIT. We confirm his action. We have tried to record all the facts and circumstances placed before us. In the process, to meet the claim of the assessee that there was no error or no prejudice was caused by assessment order of the Assessing Officer, we have gone into depth to see what was placed before the Assessing Officer and how the matter was dealt by him. In this process, certain facts not mentioned by ld. CIT have also been recorded. But we must make it clear that it was not our intention to go beyond the order of the ld. CIT and to give any direction beyond the impugned order. Besides, we do not mean any disrespect to the ld. Assessing Officer in whatever we have said nor it is our intention to attribute any motive while pointing out errors in the assessment. Thus, we are convinced that impugned order of CIT is fully justified and is required to be upheld. We order accordingly. In the result, the appeal of the assessee is dismissed.

Summary

Issues Involved:
1. Non-reference to Transfer Pricing Officer (TPO) for determination of Arm's Length Price (ALP).
2. Selection of tested party for transfer pricing analysis.
3. Examination of audit report conducted under the Central Excise Act.
4. Procedural errors and jurisdiction under section 263 of the Income-tax Act.

Detailed Analysis:

1. Non-reference to Transfer Pricing Officer (TPO) for determination of Arm's Length Price (ALP):
The Commissioner of Income-tax (CIT) observed that the Assessing Officer (AO) failed to refer the issue of determination of ALP to the TPO, as mandated by Instruction No. 3 of 2003 of the CBDT. The CIT cited the decision of the Jurisdictional High Court in Sony India (P.) Ltd. v. CBDT, which emphasized that high-value transactions require careful examination by the TPO. The CIT held that the AO's failure to refer the matter to the TPO rendered the assessment erroneous and prejudicial to the revenue's interest. The Tribunal upheld this view, stating that the AO was duty-bound to refer the matter to the TPO, especially for transactions exceeding Rs. 5 crores, as per the CBDT's instructions.

2. Selection of tested party for transfer pricing analysis:
The CIT found that the taxpayer had selected its overseas Associated Enterprises (AEs) as the tested parties, which was not in line with Rule 10B(2) and Rule 10B(3) of the Income-tax Rules. The CIT noted that the taxpayer's AEs were operating under diverse conditions, and reliable data for comparison was available in India. The Tribunal agreed with the CIT's view that the taxpayer should have been the tested party, as reliable data for comparison with Indian pharmaceutical companies was readily available. The Tribunal emphasized that the selection of the tested party should be based on the availability of reliable data and the need for the fewest adjustments.

3. Examination of audit report conducted under the Central Excise Act:
The CIT observed that the AO did not consider the audit report conducted under the Central Excise Act while making the assessment. The taxpayer contended that no adverse findings were recorded in the audit report, and no additional excise duty was charged. The Tribunal found that neither the taxpayer nor the department provided the audit report. Consequently, the Tribunal vacated the CIT's directions related to the Central Excise audit report, as there was no justification for those directions without the report being available.

4. Procedural errors and jurisdiction under section 263 of the Income-tax Act:
The taxpayer argued that the AO had completed the assessment after considering all relevant details and that any procedural errors did not justify invoking section 263. The Tribunal, however, held that the AO had failed to apply his mind and consider relevant facts and statutory provisions, making the assessment erroneous and prejudicial to the revenue. The Tribunal rejected the taxpayer's contention that the AO's failure to refer the matter to the TPO was merely a procedural error. The Tribunal emphasized that the AO's lack of proper inquiry and investigation justified the CIT's exercise of jurisdiction under section 263.

Conclusion:
The Tribunal upheld the CIT's order setting aside the assessment and directing the AO to re-examine the issues afresh, including referring the matter to the TPO for determining the ALP. The Tribunal confirmed that the AO's failure to adhere to the CBDT's instructions and conduct proper inquiries rendered the assessment erroneous and prejudicial to the revenue's interest. The Tribunal also vacated the CIT's directions related to the Central Excise audit report due to the lack of availability of the report.