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2015 (5) TMI 419 - ITAT MUMBAI

2015 (5) TMI 419 - ITAT MUMBAI - TMI - 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 ma .....

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- 22-4-2015 - Shri I.P.Bansal And Shri N.K. Billaiya JJ. For the Appellant : Shri Arvind Sonde For the Respondent : Shri N.K. Chand ORDER Per N.K. Billaiya, AM: This appeal by the assessee is directed against the order of the Ld. CIT(A)-IV, Mumbai dt. 16.2.2009 pertaining to assessment year 2005-06. 2. The assessee has raised inasmuch as 11 grounds of appeal. With ground No. 11, the assessee has challenged the jurisdiction of the AO in making the assessment without referring the matter to the Tr .....

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okering and dealing in shares and other securities. Return of income was filed on 31.10.2005 declaring total income at ₹ 24,31,82,750/-. The return of income was accompanied with the relevant audit report. The return was selected for scrutiny assessment, accordingly statutory notices were issued and served upon the assessee. 4.1. During the course of the assessment proceedings, the Assessing Officer noticed that the assessee has entered into International transaction with following associa .....

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ty of the jurisdiction of the AO before the Ld. CIT(A) also. The same has been considered by the Ld. CIT(A) at page-6 of his order and at page-8 vide para xii, the ld. CIT(A) dismissed this claim of the assessee. 6. Before us, the Ld. Counsel for the assessee vehemently submitted that the order of the AO is bad in law inasmuch as it is in contradiction to the instructions issued by the CBDT vide instruction No. 3 of 2003 dt. 20.5.2003. 7. The ld. Departmental Representative supporting the assess .....

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eference u/s. 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 ₹ 5 crores, the transactions should be referred to the TPO. 9. The constitutional validity of this instruction was challenged before the Hon ble Delhi High Court and the Hon ble High Court of Delhi in the case of Sony India Pvt. Ltd. Vs CBDT has held as under: Applying the above .....

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l of the assessment by the Assessing Officer if the exercise is referred for a specialised determination by the Transfer Pricing Officer. The classification certainly bears a nexus to this objective. We are of the considered view that the challenge to the impugned instruction on the ground of " suspect classification" must fail. 10. Prior to this decision of the Hon ble High Court of Delhi, the matter was considered by the Special Bench of the Tribunal Bangalore Bench in the case of Az .....

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instruction, the Central Board of Direct Taxes has directed all officers of the Department where the aggregate value of international transaction and transactions exceed ₹ 5 crores, to refer the matter of determination of ALP to TPO. The relevant portion of Circular is as under ([2003] 261 ITR (St.) 51, 53) : " 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 sc .....

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he transactions should be referred to the TPO. Before making reference to the TPO, the Assessing Officer has to seek approval of the Com missioner/Director as contemplated under the Act. Under the provi sions 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 .....

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abovesaid circular was issued by the Central Board of Direct Taxes under section 119 of the Income-tax Act. Aforesaid section authorizes the Board to issue orders, instructions and directions to the income-tax authorities as it may deem fit for proper administration of the Income-tax Act. Authorities are duty bound to observe and execute orders, instructions and directions of the Board. Under sub-section (2) clause (a) it is provided that where the Board considers it necessary and expedient for .....

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tiny of transfer price and to avoid arbitrariness in the application of the provision. All cases where the aggregate value of international transactions exceed ₹ 5 crores, are required to be referred to the TPO by the Assessing Officer. The limit has now been increased to ₹ 15 crores. Having regard to the object stated in the circular, no fault is found nor any illegality seen in the instructions. In the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706, their Lordshi .....

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rocedures to be followed by other income-tax authorities in the work relating to assessment or collection of revenue or the initiation of proceedings for the imposition of penalties'. In our view, the High Court was not justified in reading the circular as not complying with the provisions of section 119. The circular falls well within the parameters of the powers exercisable by the Central Board of Direct Taxes under section 119 of the Act." Therefore, when the provisions of section 92 .....

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eport and then follows directions of the Central Board of Direct Taxes. The Assessing Officer, therefore, is left with a very limited role under section 92CA(1). Likewise, while granting approval to the action of the Assessing Officer, the Commissioner has only to see whether the aggregate value of international transaction is more than ₹ 5 crores or not. If it is more, he has also to grant approval in the light of the directions of the Central Board of Direct Taxes. These directions are m .....

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the directions of the Central Board of Direct Taxes. In the light of above discussions, we do not find any illegality in the directions issued by the Central Board of Direct Taxes (CBDT). This question is also answered against the assessee. Observations of the learned Commissioner of Income-tax (Appeals) holding the contrary are set aside. 12. A similar issue was also considered by the Tribunal Delhi Bench in the case of Ranbaxy Laboratories Ltd. Vs ACIT 110 ITD 428 at para 65 of its order and .....

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termed as illegal. 13. After considering the facts and the decisions, the Tribunal came to the following conclusion: On careful consideration of decision of Sony India (P.) Ltd. (supra) and that of Special Bench in the case of Aztec Software & Technology Services Ltd. (supra), we do not find any good reason to accept the argument of Shri Vohra and interpretation he has put on the decision in the case of Sony India (P.) Ltd. (supra) leading to his inference that it is not necessary for Asses .....

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ligible differentia and, therefore, such instructions were violative of article 14 of the Constitution. Instructions issued under section 119 of the Income-tax Act were ultra vires of the statutory provision. The quasi-judicial discretion of the Assessing Officer has been taken away. 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 pa .....

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n ₹ 5 crores remaining unaffected is discussed. While maintaining the validity of the Instructions, Their Lordships made pertinent observations in paras 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 requir .....

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enge to the impugned instruction on the ground of "suspect classification" must fail." It is clear from above that validity of instruction was upheld, reason and need for making reference to TPO of international transaction exceeding ₹ 5 crore was emphasized. and at para 71 inter alia the Tribunal observed as under: It is not possible for us to hold that Instructions issued by CBDT under section 119 of Income-tax Act to regulate assessment proceeding can be treated as a wast .....

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icer, in the light of instruction of CBDT, was duty bound to refer the matter to the TPO, having regard to the purpose of specialized cell created by the revenue department to deal with complicated and complex issues arising under the transfer pricing mechanism. This case itself is a good example as to how department can be hoodwinked unless case is properly examined by persons having knowledge of principles of transfer pricing. The contention of Shri Vohra is accordingly rejected. We are also n .....

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sed on facts and in the circumstances of the case. Even if for the sake of argument, it is accepted that reference to TPO is not mandatory and instructions not binding; on peculiar facts of this case, as discussed above, the assessment made without application of mind for purposes of section 263 was erroneous and prejudicial to the interest of the revenue. The ld. CIT rightly exercised his jurisdiction under section 263 in this case. Cases relating to non-application of provision of section 144B .....

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i Vohra. 14. This decision of the Tribunal Delhi Bench is confirmed by the Hon ble High Court of Delhi in 345 ITR 193. While confirming the decision of the Tribunal, the Hon ble Court observed as under: We thus agree with the view taken by the Tribunal that the judgment of the Special Bench in Aztec Software (supra) is not in conflict with Sony India (supra) once the validity of the said instruction is upheld by this court. The followup thereof is that the Assessing Officer was supposed to refer .....

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cer. Not taking recourse thereto and passing the order amounted to making assessment without conducting proper inquiry and investigation as enjoined by law which was also warranted in the facts of this case and, therefore, the Commissioner was right in holding that such assessment was erroneous and prejudicial to the interests of the Revenue in the light of the law laid down by the apex court in Malabar Industrial Co. Ltd. [2000] 243 ITR 83 (SC). 15. The Ld. Departmental Representative has also .....

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e Ld. DR would do no good to the Revenue. Moreover in the case of M/s. Jindal Dyechem Indus (supra), the Special Bench decision in the case of Aztec Software & Technology Services Ltd (supra) and the decision of the Delhi High Court in the case of Sony India Pvt. Ltd (supra) were not considered nor the circular of the CBDT (supra) has been referred to. 16.1. After considering the entire judicial discussion discussed hereinabove, in our considered opinion, the mandatory instructions issued by .....

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