(i) If the AO & CIT make a mechanical reference to the TPO without applying mind to the TP report & other data filed by the assessee, the reference is invalid, (ii) A transfer pricing adjustment cannot be made if the assessee’s income is exempt u/s 10A or 80HHE or (iii) if the AE is assessed at a rate of tax higher that tax rate in India (Nov 17, 2015)
The assessee contended before the Tribunal:
(i) that under section 92C or 92CA of the Act, it is the statutory duty of the AO to decide independently, whether the determination of arm’s length price by the assessee should be accepted, or whether or not after applying the provisions of section 92CA, the transfer pricing adjustment should be made. This is a statutory safeguard for the assessee. It was contended that similarly, it is only after proper application of mind to all the facts and holding a prima facie belief that the AO can make reference to the TPO, or that the CIT can grant approval to such a reference. This, again, is a statutory safeguard for the taxpayer. It was submitted that CBDT Instruction No. 3 of 2003, dated 20.05.2003 detracts the AO and the CIT from the above obligation in complete violation of the statutory provisions of the principles of natural justice. It has been submitted that in the present case, in compliance of the said CBDT Instruction No.3 of 2003, the AO did not himself examine the issue of transfer pricing and with the approval of the CIT, made a reference to the TPO u/s 92CA(1) of the Act. The AO and the CIT did not apply their minds to the Transfer Pricing Report, or to any other material or information or document. The TPO made an adjustment which was incorporated by the AO in the assessment order. On their part, the AO and the CIT did not discharge necessary judicial functions conferred upon them u/s 92C or 92CA of the Act and
(ii) that Transfer Pricing adjustment cannot be made in a case where the assessee enjoys benefit u/s 10A or section 80HHE of the Act, or where the tax rate in the country of the Associated Enterprise is higher than the Indian rate and where, accordingly, establishment of tax avoidance or manipulation of prices or establishment of shifting of profits is not possible.
HELD by the Tribunal:
(a) In Vodafone India Services P. Ltd. vs. Union of India 361 ITR 531 (Bom.) the Bombay High Court has held that CBDT Instruction No.3 dated 20.05.2003 is contrary to the decision being taken therein and it is not binding on the AO. It was held that this Instruction departs from the provisions of law. It was held that the decision in Sony India P. Ltd. vs. Central Board of Direct Taxes 288 ITR 52 (Delhi), is not applicable after the amendment of 2007 (paras 35 to 37 of the judgment are relevant in this regard);
(b) The AO abrogated his obligation under a wrong assumption that CBDT Instruction No.3 of 2003 dated 20.05.2003 mandated him to go ahead without making any reference to the TPO. The AO did not examine the question, whether he should himself accept the transfer pricing report of the assessee or whether he should himself determine the arm’s length price;
(c) The AO erred in not himself examining the issue of Transfer Pricing and with the approval of the CIT, made a reference to the TPO u/s 92CA(1) of the Act; that the AO as well as the CIT failed to apply their mind to the TP Report filed by the assessee, or to any other material or information or document furnished. The TPO made an adjustment which was incorporated by the AO in the assessment order. Thereby, the AO as well as the CIT did not discharge necessary respective judicial functions conferred on them under sections 92C and 92CA of the Act;
(d) Further, the assessee is also correct in contending that no TP adjustment can be made in a case like the present one, where the assessee enjoys u/s 10A or 80HHE of the Act, or where the tax rate in the country of the Associated Enterprises is higher than the rate of tax in India and where the establishment of tax avoidance or manipulation of prices or establishment of shifting of profits is not possible.
(Coca Cola India Inc vs. ACIT 309 ITR 194 (P&H), Sony India P. Ltd. vs. Central Board of Direct Taxes 288 ITR 52 (Delhi), Aztec Software and Technology Services Ltd. vs. ACIT 294 ITR (AT) 32 (Bangalore) [SB] Coca Cola India Inc vs. Addl. CIT, 336 ITR 1 (SC) Sony Ericsson Mobile Communications Pvt. Limited 374 ITR 116 (Delhi) Interra Information Technology (I) Pvt. Limited vs. DCIT (2012) 27 Taxman.com.1(Del) (Trib.), Good year India Ltd. vs. State of Haryana 188 ITR 402 (SC), Ranbaxy Laboratories vs. Addl. CIT”, 110 ITD 428 (Del.) Motif India Infotech Pvt. Limited”, the decision in ITA No. 3043/Ahd/2010, rendered on 25.03.2013, Cotton Naturals (I) Pvt. Ltd. vs. DCIT 22 ITR (AT) 430 (Del) (Trib), Indo-American Jewellery 41 SOT 1 (Mum), DCIT vs. Lumax Industries Ltd 36 Taxman.com.380 and other judgements referred)