Civil Appeal No. 6144 of 2019 @ SLP(C)No.12126 of 2019 Principal Commissioner of Income Tax-4, Mumbai vs. M/s. S.G. Asia Holding (I) Pvt. Ltd. 1 Reportable IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.6144 OF 2019 PRINCIPAL COMMISSIONER OF INCOME TAX-4, MUMBAI Appellant Versus M/s. S.G. ASIA HOLDINGS (INDIA)PVT. LTD. Respondent JUDGMENT Uday Umesh Lalit, J. 1. This Appeal by Special Leave challenges judgment and final order dated 27.08.2018 passed by High Court of Bombay dismissing Income Tax Appeal No.281 of 2016 preferred by appellant herein and thereby confirming order dated 22.04.2015 passed by Income Tax Appellate Tribunal ( Tribunal , for short) in ITA No.2399/Mum/2009. 2. facts leading to filing of this Appeal are as under:- Signature Not Verified Digitally signed by VISHAL ANAND Date: 2019.08.13 17:03:41 IST Reason: Civil Appeal No. 6144 of 2019 @ SLP(C)No.12126 of 2019 Principal Commissioner of Income Tax-4, Mumbai vs. M/s. S.G. Asia Holding (I) Pvt. Ltd. 2 A) respondent had received certain amount of brokerage from its parent company. During assessment proceedings respondent was directed to furnish details about parent company and rate of brokerage that was charged. After details were furnished, respondent was asked to establish if parent company was involved in arbitrage activity and whether rate charged was higher. After considering material on record, according to Assessing Officer, brokerage charged by respondent was only 0.05% which was found to be at lower rate as compared to prevalent rates in market. Assessing Officer, therefore, while computing assessment under Section 143(3) of Income Tax Act, 1961 ( Act , for short), by his order dated 27.12.2007 made addition of Rs.2,89,82,746/- under Section 92 of Act. B) respondent being aggrieved preferred appeal before CIT(A)1, who by his order dated 16.02.2009 confirmed addition made by Assessing Officer and dismissed appeal. matter was carried further by filing ITA No.2399/Mum/2009 before Tribunal. 1 Commissioner of Income Tax (Appeals) Civil Appeal No. 6144 of 2019 @ SLP(C)No.12126 of 2019 Principal Commissioner of Income Tax-4, Mumbai vs. M/s. S.G. Asia Holding (I) Pvt. Ltd. 3 C) Tribunal by its order dated 22.04.2015 set aside findings rendered by first two authorities and held that transfer pricing adjustment made by Assessing Officer was contrary to mandatory instructions issued by CBDT 2 in its Instruction No.3/2003 dated 20.05.2003. While allowing appeal, Tribunal observed as under:- 16.1 After considering entire judicial discussion discussed hereinabove, in our considered opinion, mandatory instructions issued by Central Board of Direct Taxes cannot be brushed aside lightly. By not making reference to Transfer Pricing Officer, AO has breached mandatory instructions issued by CBDT thereby making assessment order on this issue in violation of provisions of law. We, therefore, set aside findings of Ld. CIT(A) on this issue and hold that Transfer Pricing Adjustments made by AO in contradiction to mandatory instructions of CBDT is bad in law. Here, we would like to make it clear that assessment order is good but Transfer Pricing Adjustments made therein are bad in law. Ground No.11 is therefore partly allowed. 16.2 Before parting with this issue, Ld. DR has emphasized that if AO has not followed mandatory directions, case may be set aside to file of AO so that he may refer matter to TPO. We do not subscribe to this argument of Ld. DR for simple reason that Tribunal is Appellate Authority and therefore cannot interfere in administrative matters which are mandatory as per provisions of Act. Reference to TPO is administrative matter 2 Central Board of Direct Taxes Civil Appeal No. 6144 of 2019 @ SLP(C)No.12126 of 2019 Principal Commissioner of Income Tax-4, Mumbai vs. M/s. S.G. Asia Holding (I) Pvt. Ltd. 4 which was supposed to be followed by AO which he has failed to do so. Tribunal cannot make any good to such lapse made by AO. 17. As we have held that T.P. Adjustments are bad in law, we do not find it necessary to dwell into merits of case. 18. In result, appeal filed by assessee is partly allowed. 3. view so taken by Tribunal was affirmed by High Court which is presently under Appeal. We heard Mr. Mahabir Singh, learned Senior Advocate in support of Appeal and Mr. Arijit Chakravarty, learned Advocate for Respondent. 4. Instruction No.3/2003 dated 20.05.2003 which weighed with Tribunal and High Court, is as under:- Instruction No. 3/2003 SECTION 92 OF INCOME TAX ACT, 1961 TRANSFER PRICING COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTION HAVING REGARD TO ARM S LENGTH PRICE UNDER SECTION 92 GUIDELINES TO TRANSFER PRICING OFFICERS AND ASSESSING OFFICERS TO OPERATIONALISE TRANSFER PRICING PROVISIONS AND TO HAVE PROCEDURAL UNIFORMITY. INSTRUCTION NO. 3/2003, DATED 20-05-2003 (SUPERSEDED BY INSTRUCTION NO.15/2015 (F.NO.500/9/2015-APA-II), DATED 16-10-2015) Civil Appeal No. 6144 of 2019 @ SLP(C)No.12126 of 2019 Principal Commissioner of Income Tax-4, Mumbai vs. M/s. S.G. Asia Holding (I) Pvt. Ltd. 5 provisions relating to transfer price contained in sections 92 to 92F of Income-tax Act, have come into force with effect from assessment year 2002-03. In terms of provisions, income from international transaction is to be computed having regard to arm s length price between associated enterprises. Further, in terms of Section 92CA, Transfer Pricing Officer, on reference received from Assessing Officer, is required to determine arm s length price of international transaction by order and Assessing Officer is required to compute income having regard to price so determined by TPO. notification regarding jurisdiction of TPOs and their controlling officers have been issued by Central Board of Direct Taxes and copies thereof are enclosed for ready reference as Annexure II. In order to maintain uniformity of procedure and to ensure that work in this important area proceeds smoothly and effectively, following guidelines are hereby issued: (i) Reference to Transfer Pricing Officer (TPO):- Power to determine arm s length price in international transaction is contained in sub-section (3) of section 92C. However, section 92CA provides that where Assessing Officer considers it necessary or expedient so to do, he may refer computation of arm s length price in relation to international transaction to TPO. Sub-section (3) of section 92CA provides that TPO after taking into account material available with him shall, by order in writing, determine arm s length price in accordance with sub-section (3) of section 92C. Sub-Section (4) of section 92CA provides that on receipt of order of TPO, Assessing Officer shall proceed to compute total income of assessee having regard to arm s length price, determined by TPO. Thus, whereas determination of arm s length price, wherever reference is made to him, is required to be done by TPO under sub-section (3) of section 92CA, read with sub-section (3) of section 92C, computation of total income having regard to arm s length price so determined by TPO is required to be done by Assessing Officer under sub- section (4) of section 92C, read with sub-section (4) of section 92CA. Civil Appeal No. 6144 of 2019 @ SLP(C)No.12126 of 2019 Principal Commissioner of Income Tax-4, Mumbai vs. M/s. S.G. Asia Holding (I) Pvt. Ltd. 6 In order to make reference to TPO, Assessing Officer has to satisfy himself that taxpayer has entered into international transaction with associated enterprise. One of sources from which factual information regarding international transaction can be gathered is Form No.2CEB filed with return which is in nature of accountant s report containing basic details of international transaction entered into by taxpayer during year and associated enterprise with which such transaction is entered into, nature of documents maintained and method followed. Thus, primary details regarding such international transactions would normally be available in accountant s report. Assessing Officer can arrive at prima facie belief on basis of these details whether reference is considered necessary. No detailed enquiries are needed at this stage and Assessing Officer should not embark upon scrutinizing correctness or otherwise of price of international transaction at this stage. In initial years of implementation of these provisions and pending development of adequate database, it would be appropriate if small number of cases are selected for scrutiny of transfer price and these are dealt with effectively. Central Board of Direct Taxes, therefore, have decided that wherever aggregate value of international transaction exceeds Rs.5 crores, case should be pricked up for scrutiny and reference under section 92CA be made to TPO. If there are more than one transaction with associated enterprise or there are transactions with more than one associated enterprises aggregate value of which exceeds Rs.5 crores transaction should be referred to TPO. Before making reference to TPO, Assessing Officer has to seek approval of Commissioner/Director as contemplated under Act. Under provisions of section 92CA reference is in relation to international transaction. Hence all transactions have to be explicitly mentioned in letter of reference. Since case will be selected for scrutiny before making reference to TPO, Assessing Officer may proceed to examine other aspects of case during pendency of assessment proceedings but await report of Civil Appeal No. 6144 of 2019 @ SLP(C)No.12126 of 2019 Principal Commissioner of Income Tax-4, Mumbai vs. M/s. S.G. Asia Holding (I) Pvt. Ltd. 7 TPO on value of international transaction before making final assessment. threshold limit of Rs.5 crores will be reviewed depending upon workload of TPOs. work relating to selection of cases for scrutiny and reference to TPO on above basis in respect of pending returns filed for assessment year 2002-03 should be completed by June 30, 2003. (ii) Role of Transfer Pricing Officer:- role of TPO begins after reference is received from Assessing Officer. In terms of section 92CA this role is limited to determination of arm s length price in relation to international transaction(s) referred to him by Assessing Officer. If during course of proceedings before him it is found that there are certain other transactions; which have not been referred to him by Assessing Officer, he will have to take up matter with Assessing Officer so that fresh reference is received with regard to such transactions. It may be noted that reference to TPO is transaction and enterprise specific. transfer price has to be determined by TPO in terms of section 92C. price has to be determined by any one of methods stipulated in sub-section (1) of section 92C and by applying most appropriate method referred to in sub-section (2) thereof. There may be occasions where application of most appropriate method provides results which are different but equally reliable. In all such cases, further scrutiny may be necessary to evaluate appropriateness of method, correctness of data, weight given to various factors and so on. selection of most appropriate method will depend upon facts of case and factors mentioned in rules contained in rule 10C. TPO after taking to account all relevant facts and data available to him shall determine arm s length price and pass speaking order after obtaining approval of DIT (TP). order should contain details of data used, reasons for arriving at certain price and applicability of methods. It may be emphasized that application of method Civil Appeal No. 6144 of 2019 @ SLP(C)No.12126 of 2019 Principal Commissioner of Income Tax-4, Mumbai vs. M/s. S.G. Asia Holding (I) Pvt. Ltd. 8 including application of most appropriate method, data used, factors governing applicability of respective methods, computation of price under given method will all be subjected to judicial scrutiny. It is, therefore, necessary that order of TPO contains adequate reasons on all these counts. Copies of documents or relevant data used in arriving at arm s length price should be made available to Assessing Officer for his records and use at subsequent stages of appellate or penal proceedings. (iii) Role of Assessing Officer after receipt of arm s length price : Under sub-section (4) of section 92C, Assessing Officer has to compute total income of assessee having regards to arm s length price so determined by TPO. While sub-section (4) of section 92CA clearly provides that such computation of income will be made having regard to arm s length price so determined by TPO, it is imperative that formal opportunity is given to taxpayer before making adjustments to total income. opportunity with regard to determination of arm s length price has already been given by TPO and, therefore, opportunity by Assessing Officer, for final determination of income under sub-section (4) of section 92C, read with sub-section (4) of section 92CA is to be given by Assessing Officer. (iv) Maintenance of database: It is to be ensured by DIT (Transfer Pricing) that reference received from Assessing Officer is dealt with expeditiously so as to leave Assessing Officer with sufficient time to offer opportunity of being heard of taxpayer before computing income and completing assessment. In order to ensure that all references are attended to timely and effectively, record of all such developments should be maintained in format enclosed as Annexure I to these guidelines. This format will also serve as important data base for future action and also help ensure uniformity in determination of arm s length price in identical or substantially identical cases. These instructions are under Section 119 of Income-tax Act. Civil Appeal No. 6144 of 2019 @ SLP(C)No.12126 of 2019 Principal Commissioner of Income Tax-4, Mumbai vs. M/s. S.G. Asia Holding (I) Pvt. Ltd. 9 ANNEXURE I Register of record to be maintained by Transfer Pricing Officer 1 2 3 4 5 6 7 8 9 10 11 12 13 Sl.No Date of Name of Name Nature and Name and Nature of Date of Transfer Arms Method Reference `Date of . receipt A.O. and quantum of address of association issue of price as length applied to any despatch of making address international as per notice taken by price as database of reference reference of transaction associate section to determined adopted order of from tax as per d 92A taxpayer taxpayer by by TPO A.O. A.O. payer section 92B enterprise Transfer and and and Pricing nature assessment country in Officer of year which it under business is resident section 92CA (3) ANNEXURE II Order under section 120, read with section 92CA of Income-tax Act, 1961, dated April, 2003 In exercise of power conferred by sub-section (1) and sub-section (2) of section 120 of Income-tax Act, 1961, Central Board of Direct Taxes hereby directs that Transfer Pricing Officers mentioned in column 2 having their headquarters mentioned in column 3 shall exercise such powers and perform such function of Transfer Pricing Officers as mentioned in Section 92CA for purpose of sections 92C and 92D of Act, in respect of persons or classes of persons mentioned in column 5: 5. It was submitted by Mr. Mahabir Singh, learned Senior Advocate that expression ..the Assessing Officer considers it necessary or expedient so to do, he may, with previous approval of Commissioner, refer computation of arm s length price in relation to said international transaction or specified domestic transaction under Section 92C to Transfer Pricing Officer occurring in Section 92CA of Act signified that discretion was vested in Assessing Civil Appeal No. 6144 of 2019 @ SLP(C)No.12126 of 2019 Principal Commissioner of Income Tax-4, Mumbai vs. M/s. S.G. Asia Holding (I) Pvt. Ltd. 10 Officer and it would not be mandatory in every single case that he must refer issue of computation of Arm s Length Price to TPO3. 6. However, following expressions employed in Instruction No.3/2003 put matter in different perspective: - ...The Assessing Officer can arrive at prima facie belief on basis of these details whether reference is considered necessary. No detailed enquiries are needed at this stage and Assessing Officer should not embark upon scrutinizing correctness or otherwise of price of international transaction at this stage If there are more than one transaction with associated enterprise or there are transactions with more than one associated enterprise aggregate value of which exceeds Rs.5 crores, transactions should be referred to TPO. Since case will be selected for scrutiny before making reference to TPO, Assessing Officer may proceed to examine other aspects of case during pendency of assessment proceedings but await report of TPO on value of international transaction before making final assessment. (vi) Role of Assessing Officer after receipt of arm s length price : Under sub-section (4) of section 92C, Assessing Officer has to compute total income of assessee having regard to arm s length price so determined by TPO. 7. In view of guidelines issued by CBDT in Instruction No.3/2003 Tribunal was right in observing that by not making reference to TPO, Assessing Officer had breached mandatory 3 Transfer Pricing Officer Civil Appeal No. 6144 of 2019 @ SLP(C)No.12126 of 2019 Principal Commissioner of Income Tax-4, Mumbai vs. M/s. S.G. Asia Holding (I) Pvt. Ltd. 11 instructions issued by CBDT. We do not find conclusion so arrived at by Tribunal to be incorrect. 8. However, Tribunal ought to have accepted submission made by Departmental Representative as quoted in para 16.2 of its order and matter ought to have been restored to file of Assessing Officer so that appropriate reference could be made to TPO. It would therefore be upto authorities and Commissioner concerned to consider matter in terms of Sub-Section (1) of Section 92CA of Act. 9. We, therefore, allow this Appeal to aforesaid extent and direct that it would now be upto Assessing Officer to take appropriate steps in terms of Instruction No.3/2003. 10. Appeal is allowed to aforesaid extent. No costs. .J. [Uday Umesh Lalit] .J. [Vineet Saran] New Delhi; August 13, 2018. Principal Commissioner of Income-tax-4, Mumbai v. S.G.Asia Holdings (India) Pvt. Ltd