Civil Appeal No. 6144 of 2019 @ SLP(C)No.12126 of 2019 The Principal Commissioner of Income Tax-4, Mumbai   vs.  M/s. S.G. Asia Holding (I) Pvt. Ltd.

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Reportable IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.6144 OF 2019   

THE PRINCIPAL COMMISSIONER  OF INCOME TAX-4,  MUMBAI  …Appellant

 Versus

M/s. S.G. ASIA HOLDINGS  (INDIA)PVT. LTD. …Respondent

J  U  D  G  M  E  N  T

Uday Umesh Lalit, J.

1. This Appeal by Special Leave challenges the judgment and final

order dated 27.08.2018 passed by the High Court of Bombay dismissing

Income Tax Appeal No.281 of 2016 preferred by the appellant herein and

thereby confirming the order dated 22.04.2015 passed by the Income Tax

Appellate Tribunal (‘the Tribunal’, for short) in ITA No.2399/Mum/2009.

2. The facts leading to the filing of this Appeal are as under:-

Civil Appeal No. 6144 of 2019 @ SLP(C)No.12126 of 2019 The Principal Commissioner of Income Tax-4, Mumbai   vs.  M/s. S.G. Asia Holding (I) Pvt. Ltd.

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A) The respondent had received certain amount of brokerage from

its  parent  company.   During  the  assessment  proceedings  the

respondent  was  directed  to  furnish  details  about  the  parent

company and the rate of brokerage that was charged.  After the

details were furnished, the respondent was asked to establish if

the  parent  company  was  involved  in  arbitrage  activity  and

whether  the  rate  charged  was  higher.   After  considering  the

material  on  record,  according  to  the  Assessing  Officer,  the

brokerage charged by the  respondent  was  only 0.05% which

was found to be at a lower rate as compared to the prevalent

rates  in  market.   The  Assessing  Officer,  therefore,  while

computing the assessment under Section 143(3) of the Income

Tax  Act,  1961  (‘the  Act’,  for  short),  by  his  order  dated

27.12.2007 made an addition of Rs.2,89,82,746/- under Section

92 of the Act.   

B) The respondent being aggrieved preferred an appeal before the

CIT(A)1,  who  by  his  order  dated  16.02.2009  confirmed  the

addition  made  by  the  Assessing  Officer  and  dismissed  the

appeal.   The  matter  was  carried  further  by  filing  ITA

No.2399/Mum/2009 before the Tribunal.

1 Commissioner of Income Tax (Appeals)

Civil Appeal No. 6144 of 2019 @ SLP(C)No.12126 of 2019 The Principal Commissioner of Income Tax-4, Mumbai   vs.  M/s. S.G. Asia Holding (I) Pvt. Ltd.

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C) The  Tribunal  by  its  order  dated  22.04.2015  set  aside  the

findings  rendered  by  the  first  two  authorities  and  held  that

transfer pricing adjustment made by the Assessing Officer was

contrary to the mandatory instructions issued by CBDT2 in its

Instruction No.3/2003 dated 20.05.2003.   While  allowing the

appeal, the Tribunal observed as under:-

“16.1   After  considering  the  entire  judicial discussion  discussed  hereinabove,  in  our considered  opinion,  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.  Ground No.11 is therefore partly allowed.

16.2 Before  parting  with  this  issue,  the  Ld. DR has emphasized that if the AO has not followed the mandatory directions, the case may be set aside to the file of the AO so that he may refer the matter to the TPO.  We do not subscribe to this argument of  the  Ld.  DR  for  the  simple  reason  that  the Tribunal  is  an  Appellate  Authority  and  therefore cannot interfere in the administrative matters which are  mandatory  as  per  the  provisions  of  the  Act. Reference to the TPO is an administrative matter

2 Central Board of Direct Taxes

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which  was  supposed  to  be  followed  by  the  AO which he has failed to do so.  The Tribunal cannot make any good to such lapse made by the AO.

17. As  we have  held  that  T.P.  Adjustments are bad in law, we do not find it necessary to dwell into the merits of the case.

18. In  the  result,  the  appeal  filed  by  the assessee is partly allowed. … …”

3. The view so taken by the Tribunal was affirmed by the High Court

which is presently under Appeal.  We heard Mr. Mahabir Singh, learned

Senior  Advocate  in  support  of  the  Appeal  and  Mr.  Arijit  Chakravarty,

learned Advocate for the Respondent.

4.      Instruction No.3/2003 dated 20.05.2003 which weighed with the

Tribunal and the High Court, is as under:-

“Instruction No. 3/2003

SECTION  92  OF  THE  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 The Principal Commissioner of Income Tax-4, Mumbai   vs.  M/s. S.G. Asia Holding (I) Pvt. Ltd.

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The  provisions  relating  to  transfer  price  contained  in sections 92 to 92F of the Income-tax Act, have come into force with effect from assessment year 2002-03.  In terms of the provisions, income from an international transaction is  to  be  computed  having  regard  to  arm’s  length  price between the  associated  enterprises.   Further,  in  terms  of Section 92CA, a Transfer Pricing Officer,  on a reference received  from  the  Assessing  Officer,  is  required  to determine arm’s length price of an international transaction by  an  order  and  the  Assessing  Officer  is  required  to compute  the  income  having  regard  to  the  price  so determined  by  the  TPO.   The  notification  regarding jurisdiction  of  TPOs  and  their  controlling  officers  have been issued by the Central Board of Direct Taxes and the 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, the following guidelines are hereby issued:

(i) Reference  to  Transfer  Pricing  Officer  (TPO):-  The Power to determine arm’s length price in an international transaction is contained in sub-section (3) of section 92C. However, section 92CA provides that where the Assessing Officer considers it necessary or expedient so to do, he may refer the computation of arm’s length price in relation to an international  transaction to  the  TPO.   Sub-section  (3)  of section  92CA provides  that  the  TPO  after  taking  into account the material available with him shall, by an order in writing, determine the arm’s length price in accordance with sub-section (3)  of section 92C.   Sub-Section (4)  of section 92CA provides that on receipt of the order of the TPO, the Assessing Officer shall proceed to compute the total  income  of  the  assessee  having  regard  to  the  arm’s length price, determined by the TPO.  Thus, whereas the determination of the arm’s length price, wherever reference is made to him, is required to be done by the TPO under sub-section (3) of section 92CA, read with sub-section (3) of  section  92C,  the  computation  of  total  income  having regard to the arm’s length price so determined by the TPO is required to be done by the 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 The Principal Commissioner of Income Tax-4, Mumbai   vs.  M/s. S.G. Asia Holding (I) Pvt. Ltd.

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In  order  to  make  a  reference  to  the  TPO,  the  Assessing Officer has to satisfy himself that the taxpayer has entered into  an  international  transaction  with  an  associated enterprise.   One  of  the  sources  from  which  the  factual information  regarding  international  transaction  can  be gathered is Form No.2CEB filed with the return which is in the nature of an accountant’s report containing basic details of an international transaction entered into by the taxpayer during the year  and the associated enterprise with which such transaction is  entered into,  the nature of documents maintained and the method followed.  Thus,  the primary details  regarding  such  international  transactions  would normally  be  available  in  the  accountant’s  report.   The Assessing Officer can arrive at  prima facie belief on the basis  of  these  details  whether  a  reference  is  considered necessary.  No detailed enquiries are needed at this stage and  the  Assessing  Officer  should  not  embark  upon scrutinizing the correctness or otherwise of the price of the international transaction at this stage.  In the initial years of implementation  of  these  provisions  and  pending development of adequate database, it would be appropriate if  a  small  number  of  cases  are  selected  for  scrutiny  of transfer  price  and  these  are  dealt  with  effectively.   The Central Board of Direct Taxes, therefore, have decided that wherever  the  aggregate  value of  international  transaction exceeds  Rs.5  crores,  the  case  should  be  pricked  up  for scrutiny and reference under section 92CA be made to the TPO.   If  there  are  more  than  one  transaction  with  an associated  enterprise  or  there  are  transactions  with  more than  one  associated  enterprises  the  aggregate  value  of which  exceeds  Rs.5  crores  the  transaction  should  be referred to TPO.  Before making reference to the TPO, the Assessing  Officer  has  to  seek  approval  of  the Commissioner/Director  as  contemplated  under  the  Act. Under  the  provisions  of  section  92CA reference  is  in relation  to  the  international  transaction.    Hence  all transactions have to be explicitly mentioned in the letter of reference.   Since  the  case  will  be  selected  for  scrutiny before making reference to the TPO, the Assessing Officer may proceed to examine other aspects of the case during pendency of assessment proceedings but await the report of

Civil Appeal No. 6144 of 2019 @ SLP(C)No.12126 of 2019 The Principal Commissioner of Income Tax-4, Mumbai   vs.  M/s. S.G. Asia Holding (I) Pvt. Ltd.

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the  TPO on the  value of  international  transaction before making final assessment.

The  threshold  limit  of  Rs.5  crores  will  be  reviewed depending upon the workload of the TPOs.

The  work relating  to  selection  of  cases  for  scrutiny  and reference to TPO on the above basis in respect of pending returns  filed  for  the  assessment  year  2002-03  should  be completed by June 30, 2003.  

(ii) Role of Transfer Pricing Officer:- The role of the TPO begins  after  a  reference  is  received  from  the  Assessing Officer.  In terms of section 92CA this role is limited to the determination  of  arm’s  length  price  in  relation  to  the international transaction(s) referred to him by the Assessing Officer.  If during the course of proceedings before him it is found that there are certain other transactions; which have not been referred to him by the Assessing Officer, he will have to take up the matter with the Assessing Officer so that  a  fresh  reference  is  received  with  regard  to  such transactions.  It may be noted that the reference to the TPO is transaction and enterprise specific.

The  transfer  price  has  to  be  determined  by  the  TPO  in terms of section 92C.  The price has to be determined by any  one  of  the  methods  stipulated  in  sub-section  (1)  of section 92C and by applying the most appropriate method referred  to  in  sub-section  (2)  thereof.   There  may  be occasions  where  application  of  the  most  appropriate method  provides  results  which  are  different  but  equally reliable.   In  all  such  cases,  further  scrutiny  may  be necessary to  evaluate  the  appropriateness  of  the  method, the correctness of the data, weight given to various factors and so on.  The selection of the most appropriate method will  depend  upon  the  facts  of  the  case  and  the  factors mentioned in rules contained in rule 10C.  The TPO after taking to  account all  relevant  facts  and data  available  to him shall determine arm’s length price and pass a speaking order after obtaining the approval of the DIT (TP).  The order should contain details of the data used, reasons for arriving at a certain price and the applicability of methods. It  may  be  emphasized  that  the  application  of  method

Civil Appeal No. 6144 of 2019 @ SLP(C)No.12126 of 2019 The Principal Commissioner of Income Tax-4, Mumbai   vs.  M/s. S.G. Asia Holding (I) Pvt. Ltd.

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including the application of the most appropriate method, the  data  used,  factors  governing  the  applicability  of respective  methods,  computation  of  price  under  a  given method  will  all  be  subjected  to  judicial  scrutiny.   It  is, therefore,  necessary  that  the  order  of  the  TPO  contains adequate  reasons  on  all  these  counts.   Copies  of  the documents or the relevant data used in arriving at the arm’s length  price  should  be  made  available  to  the  Assessing Officer  for  his  records  and  use  at  subsequent  stages  of appellate or penal proceedings.  

(iii) Role of  the Assessing Officer after  receipt of  “arm’s length price”:  Under sub-section (4) of section 92C, the Assessing  Officer  has  to  compute  total  income  of  the assessee  having  regards  to  the  arm’s  length  price  so determined by the TPO.  While sub-section (4) of section 92CA clearly  provides  that  such  computation  of  income will  be  made having regard to  the arm’s length price  so determined  by  the  TPO,  it  is  imperative  that  a  formal opportunity  is  given  to  the  taxpayer  before  making adjustments  to  the  total  income.   The  opportunity  with regard  to  the  determination  of  arm’s  length  price  has already been given by the TPO and, therefore, opportunity by the 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 the Assessing Officer.

(iv) Maintenance of database:  It is to be ensured by the DIT (Transfer Pricing) that the reference received from the Assessing Officer is dealt with expeditiously so as to leave the  Assessing  Officer  with  sufficient  time  to  offer  an opportunity  of  being  heard  of  the  taxpayer  before computing the income and completing the assessment.  In order to ensure that all the references are attended to timely and effectively, a record of all such developments should be maintained in the format enclosed as Annexure I to these guidelines.  This format will also serve as an important data base for future action and also help ensure uniformity in the determination  of  “arm’s  length  price”  in  identical  or substantially identical cases.  

These instructions are under Section 119 of the Income-tax Act.

Civil Appeal No. 6144 of 2019 @ SLP(C)No.12126 of 2019 The Principal Commissioner of Income Tax-4, Mumbai   vs.  M/s. S.G. Asia Holding (I) Pvt. Ltd.

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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 receipt of reference from A.O.

Name  of the  A.O. making reference

Name and address of  the tax payer and nature of business

Nature  and quantum  of international transaction as  per section  92B and assessment year

Name and address of the associate d enterprise and  the country in which  it is resident

Nature  of association as  per section 92A

Date  of issue  of notice to taxpayer

Transfer price  as taken by the taxpayer

Arms length price  as determined by  the Transfer Pricing Officer under section 92CA (3)

Method applied

Reference to  any database adopted by TPO

`Date  of despatch of  the order  of the A.O.

ANNEXURE II Order under section 120, read with section 92CA of the

Income-tax Act, 1961, dated April, 2003

In exercise of the power conferred by sub-section (1) and sub-section (2) of section 120 of the Income-tax Act, 1961, the Central Board of Direct Taxes hereby directs that the 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 the purpose of sections 92C and 92D of the 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  the expression “…..the Assessing Officer considers it  necessary or

expedient  so  to  do,  he  may,  with  the  previous  approval  of  the

Commissioner, refer the computation of the arm’s length price in relation

to  the  said  international  transaction  or  specified  domestic  transaction

under Section 92C to the Transfer Pricing Officer”  occurring in Section

92CA of  the  Act  signified  that  discretion  was  vested  in  the  Assessing

Civil Appeal No. 6144 of 2019 @ SLP(C)No.12126 of 2019 The Principal Commissioner of Income Tax-4, Mumbai   vs.  M/s. S.G. Asia Holding (I) Pvt. Ltd.

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Officer and it would not be mandatory in every single case that he must

refer the issue of computation of the Arm’s Length Price to the TPO3.

6. However,  the  following  expressions  employed  in  Instruction

No.3/2003 put the matter in a different perspective: -

“… ...The Assessing Officer can arrive at prima facie belief on the basis of these details whether a reference is  considered  necessary.   No  detailed  enquiries  are needed at this stage and the Assessing Officer should not  embark  upon  scrutinizing  the  correctness  or otherwise of the price of the international transaction at  this  stage…  …   If  there  are  more  than  one transaction with an associated enterprise or there are transactions with more than one associated enterprise the aggregate value of which exceeds Rs.5 crores, the transactions  should  be  referred  to  the  TPO.  …  … Since  the  case  will  be  selected  for  scrutiny  before making reference to the TPO, the Assessing Officer may  proceed  to  examine  other  aspects  of  the  case during pendency of assessment proceedings but await the report  of  the TPO on the  value of  international transaction before making final assessment.

… …

(vi) Role  of  the  Assessing  Officer  after  receipt  of “arm’s  length  price”:   Under  sub-section  (4)  of section  92C,  the  Assessing  Officer  has  to  compute total  income  of  the  assessee  having  regard  to  the arm’s length price so determined by the TPO.”  

7. In  view  of  the  guidelines  issued  by  the  CBDT  in  Instruction

No.3/2003  the  Tribunal  was  right  in  observing  that  by  not  making

reference to the TPO, the Assessing Officer had breached the mandatory

3 Transfer Pricing Officer

Civil Appeal No. 6144 of 2019 @ SLP(C)No.12126 of 2019 The Principal Commissioner of Income Tax-4, Mumbai   vs.  M/s. S.G. Asia Holding (I) Pvt. Ltd.

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instructions issued by the CBDT.  We do not find the conclusion so arrived

at by the Tribunal to be incorrect.

8. However, the Tribunal ought to have accepted the submission made

by the Departmental Representative as quoted in para 16.2 of its order and

the matter ought to have been restored to the file of the Assessing Officer

so that appropriate reference could be made to the TPO.  It would therefore

be upto the authorities and the Commissioner concerned to consider the

matter in terms of Sub-Section (1) of Section 92CA of the Act.

9. We, therefore, allow this Appeal to the aforesaid extent and direct

that it would now be upto the Assessing Officer to take appropriate steps in

terms of Instruction No.3/2003.

10. The Appeal is allowed to the aforesaid extent.  No costs.

…………………….J. [Uday Umesh Lalit]

…………………….J. [Vineet Saran]

New Delhi; August 13, 2018.