TaxTMI 
TaxTMI 
2011 (11) TMI 196
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....e of pharmaceutical products, such as, patented and/or generic drugs and medicines. For the relevant previous year, the return of income of the appellant was filed on 29th October, 2004 declaring an income of Rs. 330,64,05,014/-. The appellant entered into certain international transactions with its Associated Enterprises (AEs) in the various overseas foreign jurisdictions, viz., (a) Sale of Active Pharmaceutical Ingredients (API) and spare parts;(b) Sale of dosage formulations: (c) Provision of technical assistance and know-how, etc. The transfer pricing in respect of the said international transactions was carried out by M/s RSM Advisory Services Pvt. Ltd, Chartered Accountants, who issued the certificate in Form 3CEB on the basis of Transfer Pricing study of documentation maintained as per section 92D of the Act read with rule 10D of the Income-Tax Rules, 1962. The international transactions were certified to be at arm's length, based on the study carried out. A certificate from a Chartered Accountant in Form 3CEB was appended alongwith the return of income. It is the case of the appellant that the Assessing Officer in the course of scrutiny assessment required the appellant to,....
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.... the assessment year 2004-05 from its AE in respect of goods and services were at arm's length and, therefore, no further adjustment is required". The assessment was completed on 30th March, 2005 under Section 143(3) of the Act at book profit of Rs.398,48,42,660/- under section 115JB of the Act and at an income of Rs.363,45,44,931/- under regular provisions of the Act as against income of Rs.330,64,05,614/- returned by the appellant, i.e. after making additions/disallowances amounting to Rs.32.81 crores. Thereafter, notice dated 9th March, 2007 was issued by the Commissioner of Income-Tax, Delhi-V, New Delhi (CIT) under Section 263 asking to show cause why the assessment completed under Section 143(3) of the Act be not revised on the grounds that the same was erroneous and prejudicial to the interests of Revenue with regard to determination of arm's length price of international transactions with AEs. It was stated in the show cause notice that the assessment was erroneous and prejudicial to the interests of the Revenue on the following grounds:- (i) No referring the matter to the TPO as required by instruction no. 3 of 2003 dated 20th May, 2003. (ii) Tak....
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....nt. The assessment was set aside on the three grounds as aforesaid. The assessing officer was directed to refer the case to the TOP for determination of arm's length price. Being aggrieved by the aforesaid order, the appellant filed an appeal before the Tribunal. The Tribunal vide order dated 22nd January, 2008 upheld assumption of jurisdiction under Section 263 of the Act by the Commissioner of Income-Tax, Delhi-V, New Delhi. 4. Challenging the aforesaid order of the Tribunal, present appeal is preferred in which aforesaid two questions of law have been formulated for determination. With this background, we take up these questions for our answer. 5. We find from the perusal of the judgment of the Tribunal that the Tribunal has affirmed the invocation of powers by the CIT (A) under Section 263 of the Act on the ground that the Assessing Officer had made the assessment without considering the relevant question without application of mind. It is settled position in law that powers under Section 263 of the Act can be invoked only when assessment is established to be erroneous and prejudicial to the interest of the Revenue. It cannot be invoked merely for making a finding inquiry....
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....tion by the Commissioner under Section 263(1) was justified." 6. The Tribunal also took note of the following observation contained in Jagdish Kumar Gulati v. CIT 269 ITR 71:- "It is well settled that if the Assessing Officer fails to make a proper enquiry this is erroneous and prejudicial to the interest of the Revenue vide K.A. Ramaswamy Chettiar v. CIT [1996] 220 ITR 657 (Mad.); Addl. CIT v. Mukur Corporation [19978] 111 ITR 312 (Guj.); Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Delhi); Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC); CIT v. Active Traders 9P) Ltd. [1995] 214 ITR 583 (Cal.); Swarup Vegetable Products Industries Ltd. (No.1) v. CIT [1991] 187 ITR 412 (All.); CIT v. Rampiyari Khemka [1067] 63 ITR 367 (Cal.); Bagsu Devi Bafna v. CIT [1967] 63 ITR 333 (Cal.); CIT v. Kiran Debi Singhee [1967] 65 ITR 167 (MP); CIT v. Everest Cold Storage [1996] 220 ITR 241 (MP) and Duggal and Co. v. CIT [1996] 220 ITR 456 (Delhi), etc. " 7. This position of law was not disputed by the learned counsel for the appellant before the Tribunal or before us. The entire case, therefore rest on the issue as to whether the Assessing Officer had made the assessment wit....
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....to TPO as according to him it was not "necessary or expedient" so to do. 9. Mr. Syali further submitted that while holding that such a reference was compulsory in case the aggregate value of transaction exceeds Rs. 5 crores, the CIT (A) and the Tribunal had relied upon the CBDT instruction no.3 dated 20th May, 2003 by CBDT. According to Mr. Syali, this was misreading of the said instruction which was only in the nature of a guideline as held by this Court in Sony India Pvt. Ltd. v. Central Board of Direct Taxes and Another 288 ITR 52. Relevant portion of this instruction reads as under:- "...wherever the aggregate value of international transactions exceeds Rs. 5 crores, the cases should be picked up for scrutiny and reference under Section 92CA be made to the TPO. If there are more than one transaction with the associated enterprise or there are transaction with more than one associate enterprise, the aggregate value of which exceeded Rs. 5 crores, the transaction should be referred to the TPO." He submitted that judgment in Sony India (supra) would bring forth the following principle qua the aforesaid instruction viz-a-viz powers of the Assessing Officer under Section 92....
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....e of the transaction, he feels that the arm's length price needs to be determined by the TPO." Mr. Sabharwal, on the other hand argued that all these submissions of the appellant which were advanced before the Tribunal as well were duly taken note of and after due consideration by a well reasoned order, the Tribunal has repelled these contentions. He read out those portions of the order of the Tribunal and submitted that the reasons given by the Tribunal were valid. 11. It is not in dispute that under Section 92CA of the Act enables the Assessing Officer to refer computation of arm's length price in relation to an international transaction, under Section 92C of the Act, when the Assessing Officer considers it 'necessary or expedient' to do so. Thus, discretion lies with the Assessing Officer. Having regard to the circumstances of a particular case and reference to the TPO is not mandatory. In Maruti Suzuki (supra) this Court observed that ordinarily the Assessing Officer would make reference to the TPOs in those cases where he is not in agreement with the particular price disclosed by the assessee or where, on account of complex nature of the transaction, he feels that the ar....
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....s considered relevant scheme of the Act relating to transfer pricing under Indian regulation, its purposes and the legal validity of above instructions. The matter for consideration was taken in two parts: Firstly, statutory provisions were considered in detail without going into the question of validity of the instruction; and secondly, the question of validity of instructions was considered in the light of Article 14 of the Constitution. It is quite clear from what is stated above in paras 12,29 and 31 of the judgment. Shri Vohra has referred to that part of the decision where discretion of Assessing Officer to determine Arm's Length Price in respect of transaction of value of less than Rs. 5 crore remaining unaffected is discussed. While maintaining the validity of the instructions, their lordships made pertinent observations in para 32 and 37. Para 37 has already been quoted. Para 32 is as under:- 32. Applying the above test, the impugned instruction cannot be held to violate article 14. The classification brought about by the impugned instruction is based on a straightforward recognizable basis giving no room for confusion. Transactions of a high value require a careful exa....
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....l not be abused. It correctly interprets the law as requiring only a formation of a prima facie opinion by the AO at the stage of the reference. Therefore, the question of the CBDT supplanting the judicial discretion of the AO does not arise. It is perfectly possible that, independent of the circular, the AO might still "consider it necessary or expedient" to refer an international transaction of such value to the TPO for determination of the ALP. At the same time it is not as if the transactions of the value of less than Rs. 5 crores cannot be referred to the TPO by the AO. Ultimately, any exercise of discretion by the AO is bound to be judicially reviewed by the statutory appellate authorities as well as by courts. Therefore, it is not as if there is no check on the exercise of discretion by the AO. 39. For these reasons, we hold that the impugned Instruction No. 3 dated 20.5.2003 issued by the CBDT is consistent with the statutory objective underlying Section 92CA(1) and acts as a guidance to the AO in the exercise of discretion in referring an international transaction to the TPO for determination of its ALP. It is neither arbitrary nor unreasonable, and is not ultra virus t....