2018 (9) TMI 79 - HC - Income Tax

Transfer pricing adjustment - brokerage was charged at the lower rate - as the parent company was held to be involved in directional trade and the brokerage is calculated at the rate that is prevalent in the market that is 0.25 for cash market and 0.05 for futures - Held that - It is undisputed that it gave certain instructions and in the event the transaction is an international transaction then all the relevant provisions of the IT Act would be applicable. The instructions were issued by the Central Board of Direct Taxes (CBDT). The factual finding in this case is that given the nature of the transaction these instructions were applicable. If they were applicable then there ought to be some solid ground for ignoring a mandate flowing therefrom. The mandate is that the Assessing Officer should make a reference to the Transfer Pricing Officer. That is to make the transfer pricing adjustment. In this case no such reference was made despite the facts warranting so. There is no acceptable or justifiable reason on record for refusing to abide by this condition in the CBDT circular. Once the circular goes unchallenged and binds the Revenue then in the absence of all this the Tribunal held that the Assessing Officer s order cannot be sustained. He could not have proceeded to make the transfer pricing adjustment.

Summary

Issues:
1. Challenge to the order passed by the Income Tax Appellate Tribunal regarding recalculating brokerage charges.
2. Application of Section 92 of the Income Tax Act, 1961 in determining brokerage rates.
3. Dispute over the addition of a specific amount to the assessment order.
4. Appeal to the First Appellate Authority confirming the addition.
5. Tribunal's decision in favor of the assessee and the subsequent appeal.

Analysis:
The High Court dealt with a case where the Revenue challenged an order passed by the Income Tax Appellate Tribunal concerning recalculating brokerage charges received by the assessee from its parent company. The Tribunal had directed the assessee to establish that the parent company was involved in arbitrage activity and the rate charged was higher, which the assessee failed to do. Consequently, the brokerage charged was found to be lower, leading to a recalculated amount under Section 92 of the Income Tax Act, 1961. The addition of a significant sum was made due to this recalculation, which the assessee contested through appeals to the First Appellate Authority and then the Tribunal.

The High Court observed that the key issue revolved around the application of a circular issued by the Central Board of Direct Taxes (CBDT) regarding transfer pricing adjustments in international transactions. The Court noted that the Assessing Officer should have made a reference to the Transfer Pricing Officer as per the circular, which was not done in this case. The Court emphasized that in the absence of a valid reason for not following the circular, the Assessing Officer's order could not be sustained. The Tribunal's decision to reject the transfer pricing adjustment was upheld based on the binding nature of the circular on the Revenue.

Regarding the proposed substantial questions of law, the High Court found no grounds for interference with the Tribunal's decision. The Court stated that the Tribunal's view was not vitiated in law or perverse, and there was no error apparent on the face of the record. The Court concluded that the circumstances did not warrant any interference with the Tribunal's decision, leading to the dismissal of the appeal without any order as to costs.