TMI Blog2011 (11) TMI 196X X X X Extracts X X X X X X X X Extracts X X X X ..... SIKRI, SIDDHARTH MRIDUL, JJ. JUDGMENT A.K. Sikri, Actg. CJ. 1. This appeal was admitted on the following two substantial questions of law:- "1. Whether on the facts and circumstances of the case, the Tribunal erred in law in holding that CIT had validly assumed jurisdiction under Section 263 of the Act? 2. Whether on facts and circumstances of the case, the Tribunal erred in not holding that in terms of Section 92C (3) read with Section 92CA (1) of the Act, the Assessing Officer was fully competent to determine the arm's length price of international transactions even if the aggregate value thereof exceeded Rs. 5 crores, without making reference to TPO?" 2. The aforesaid questions have cropped for consideration under the following circumstances. The appellant is a company incorporated under the Companies Act, 1956 engaged in the business of manufacture and sale 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 Asso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reached to the conclusion that as compared to the other prescribed methods, in case of the assessee, TNMM is the Most Appropriate Method. The net margins realized by the uncontrolled comparable companies were identified on similar type of transactions applying the TNMM method. On comparison of the transfer prices charged by the assessee from its Associated Enterprises and net margins thereon, in respect of these international transactions, it is observed that the prices charged by the assessee on international transactions with its Associated Enterprises (AE) were at arm's length. I have also observed that the declared margins/profits as per the books, are higher than the profits/margins computed as per the Most Appropriate Method and, therefore, I hold that the assessee was in compliance of the Transfer Pricing Provisions and the prices charged during the previous year relevant to 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of international transactions; (iv) Although the Central Excise Department had carried out the audit, no audit report was issued to the assessee company. No adverse findings were recorded or communicated to the assessee company which is further reinforced by the fact that till date the assessee has not received any show cause notice for the said period from the Central Excise authorities. 3. The CIT (A) however did not countenance the aforesaid submissions of the appellant and passed orders dated 29th March, 2007 holding that assessment completed under Section 143(3) of the Act was erroneous and prejudicial to the interests of the Revenue on account of (i) non-reference of the case to TPO,(ii) taking overseas AEs of assessee as tested party and (iii) non consideration of findings of audit of Central Excise Department. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent without application of mind. Indeed, the High Court recorded the finding that the Income-tax Officer failed to apply his mind to the case in all perspective and the order passed by h8im was erroneous. It appears that the resolution passed by the board of the appellant company was not placed before the Assessing Officer. Thus, there was no material to support the claim of the appellant that the said amount represented compensation for loss of agricultural income. He accepted the entry in the statement of the account filed by the appellant in the absence of any supporting material and without making any inquiry. On these facts the conclusion that the order of the income-tax Officer was erroneous is irresistible. We are, therefore, of the opinion that the High Court has rightly held that the exercise of the jurisdiction 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee subject to conditions provided in clauses (a), (b), (c) and (d) thereof. It was argued that Section 92CA (1) of the Act provides that, where the Assessing Officer considers it "necessary or expedient" so to do, he may refer computation of arm's length price in relation to an international transaction to the TPO with the previous approval of the CIT. Even in a case where reference is made to the TPO, the Assessing Officer is the final adjudicating authority for determining the arm's length price of international transactions; the Assessing officer is not bound by the determination made by the TPO (prior to the amendment in Section 92CA(4) w.e.f. 1.6.2007). Thus, it was argued that when the ultimate authority was the Assessing officer himself, it did not make any difference if he chose not to make the reference 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Addl. CIT, 328 ITR 210 and particularly the following observations therein:- "Section 92CA of the Income-tax Act 1961 (hereinafter referred to as the Act) provides that where the assessee has entered into an international transaction and the Assessing Officer considers it necessary or expedient to do so he may, with the previous approval of the Commissioner, refer computation of the arm's length price, in relation to the said international transaction, under Section 92CA , to the TPO. Since the reference to the TPO is not mandatory, ordinarily the assessing Officer would make reference to TPO in those cases, where he is not in agreement with the price disclosed by the assessee or where, on account of the complex nature 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue of international transaction exceeds Rs. 5 crores. The constitutional validity of above instructions dated May 20, 2003 was challenged under Article 226/227 of the constitution and contentions of the petitioner are recorded at page 59 of the report. It was claimed that classification of international transaction into two categories, those of value exceeding Rs. 5 crore and others less than Rs. 5 crores was not based on any intelligible differentia and, therefore, such instructions were violative o f Article 14 of the Constitution. Instructions issued u/s 119 of the I.T. Act were ultra vires of the statutory provision. The quasi-judicial discretion of the Assessing Officer has been taken away. 69. Their Lordships 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention of the petitioner in the said petition. That instruction completely takes away the discretion of the Assessing Officer in relation to an international transaction if the aggregate value thereof exceeded Rs. 5 crores. This contention was turned down in the following words:- "37. The other ground on which the instruction is challenged is that it completely takes away the discretion of the AO in relation to an international transaction of the value exceeding Rs. 5 crores. A reading of the impugned instruction indicates that it acts as a guideline to the AO in the exercise of the discretion conferred under Section 92CA(1). This instruction is in fact helpful in ensuring that the discretion of the AO will 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 ..... 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