2015 (5) TMI 419 - AT - Income Tax

Transfer pricing adjustments invalidated for non-compliance with CBDT instructions. Appeal partially allowed.

The Tribunal partially allowed the appeal, finding the transfer pricing adjustments made by the Assessing Officer (AO) to be invalid due to the AO's ... Validity of the assessment - jurisdiction of the AO in making the assessment without referring the matter to the Transfer Pricing Officer where the value of international transactions exceeded ₹ 5 crores - Held that:- The mandatory instructions issued by the Central Board of Direct taxes cannot be brushed aside lightly. By not making reference to the Transfer Pricing Officer, the AO has breached the mandatory instructions issued by the CBDT thereby making the assessment order on this issue in violation of the provisions of the law. We, therefore, set aside the findings of the Ld. CIT(A) on this issue and hold that the Transfer Pricing adjustments made by the AO in contradiction to the mandatory instructions of the CBDT is bad in law. Here, we would like to make it clear that the assessment order is good but the Transfer Pricing adjustments made therein are bad in law. - Decided partly in favour of assessee. Issues Involved:1. Jurisdiction of the Assessing Officer (AO) in making the assessment without referring the matter to the Transfer Pricing Officer (TPO) where the value of international transactions exceeded Rs. 5 crores.2. Validity of the AO's assessment order in light of the CBDT Instruction No. 3 of 2003.3. Whether the Tribunal can set aside the case to the AO for referring the matter to the TPO.Detailed Analysis:1. Jurisdiction of the AO:The assessee challenged the jurisdiction of the AO in making the assessment without referring the matter to the TPO, as the value of international transactions exceeded Rs. 5 crores. The assessee argued that this act of the AO contradicted Instruction No. 3 of 2003 issued by the Central Board of Direct Taxes (CBDT). The Ld. CIT(A) dismissed this claim, and the assessee brought the issue before the Tribunal.2. Validity of the AO's Assessment Order:The Tribunal analyzed the validity of the AO's assessment order in light of the CBDT Instruction No. 3 of 2003. The instruction mandates that cases where the aggregate value of international transactions exceeds Rs. 5 crores should be referred to the TPO. The Tribunal referred to various judicial decisions, including the Hon'ble Delhi High Court's decision in Sony India Pvt. Ltd. Vs CBDT, which upheld the validity of the instruction. The Tribunal also considered the Special Bench decision in Aztec Software & Technology Services Ltd Vs ACIT, which emphasized that the AO is bound to refer such cases to the TPO.The Tribunal concluded that the AO breached the mandatory instructions issued by the CBDT by not referring the matter to the TPO, thereby making the transfer pricing adjustments in the assessment order bad in law. The Tribunal held that while the assessment order itself was valid, the transfer pricing adjustments made therein were not.3. Tribunal's Authority to Set Aside the Case:The Ld. Departmental Representative argued that if the AO had not followed the mandatory directions, the case should be set aside to the AO to refer the matter to the TPO. However, the Tribunal rejected this argument, stating that it is an appellate authority and cannot interfere in administrative matters which are mandatory as per the provisions of the Act. The Tribunal emphasized that the reference to the TPO is an administrative matter that the AO was supposed to follow, and the Tribunal cannot rectify such lapses.Conclusion:The Tribunal partially allowed the appeal, holding that the transfer pricing adjustments made by the AO were bad in law due to the AO's failure to follow the mandatory CBDT instructions. The Tribunal did not find it necessary to delve into the merits of the case since the transfer pricing adjustments were invalidated. The appeal was partly allowed, with the assessment order being upheld but the transfer pricing adjustments being set aside.