TMI Blog2016 (7) TMI 1587X X X X Extracts X X X X X X X X Extracts X X X X ..... isionary powers of CIT u/s 263 can be invoked only when the assessment order is erroneous as well as prejudicial to the interest of the revenue. Since, in the present case, the assessment order could not be established to be erroneous, the impugned order of CIT u/s 263 is not sustainable - Appeal of the assessee is allowed. - ITA No.545(Bang) 2012 - - - Dated:- 29-7-2016 - SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI A.K.GARODIA, ACCOUNANT MEMBER For the Assessee : Shri Mayank Jain, Advocate For the Revenue : Dr. Sibichen K.Mathew, CIT-III ORDER PER SHRI A.K.GARODIA, AM This is an assessee s appeal directed against the order of the ld. CIT, Central, Bangalore dated 30-03-2012 passed by him u/s 263 of the IT Act, 1961. 2. The grounds raised by the assessee are as under; 1.1 The impugned order of learned Commissioner of Income Tax passed under section 263 is against law and without jurisdiction. 1.2 The impugned order passed in haste, without providing sufficient and reasonable opportunity of being heard is illegal. 1.3 The learned Commissioner was not justified in holding that the order of assessing officer was erroneous and prejudicial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se and in law, the learned Commissioner, erred in not appreciating the case laws in right perspective. 4. The appellant seeks your leave to add, alter, amend or delete any grounds urged at the time of hearing. 3. It was submitted by the ld. AR of the assessee that on page-1 to 4 of the additional paper book is a copy of notice dated 20-04-2012 issued by the ld. CIT u/s 263 of the IT Act, 1961. Thereafter, he pointed out that the main objection of the CIT is this that as per the Board s Instruction No.3 dated 25-05-2003, the AO had not referred the matter to the file of the TPO for determination of Arms Length Price (ALP). Thereafter, he submitted that as per the judgment of the Hon ble Bombay High Court rendered in the case of M/s Vodafone India Services Pvt. Ltd., Vs Union of India as reported in 361 ITR 531 (Bom), it was held that the CBDT Instruction No.3 dated 25-05-2003 is not valid because this departs from the provisions of law. He also placed reliance on the Tribunal order rendered in the case of DCIT Vs Consultancy Services Ltd., in ITA No.7513(Mum)/2010 dated 04-11- 2015 and pointed out that in para-31 of this Tribunal order, the Tribunal has followed the same judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter this amendment in 2007, the AO is now required to pass assessment order in conformity with the ALP as determined by the TPO whereas prior to 01-06-2007, the assessment order was to be passed by the AO having regard to the ALP determined by the TPO. The Hon ble Bombay High Court has noted that as per this vital amendment, after 01-06-2007, the AO had no option but to adopt the ALP as determined by the TPO where as prior to this date, the AO was only supposed to pass the assessment order having regard to the ALP determined by the TPO. Regarding these two judgment i.e. M/s Sony India Pvt. Ltd.(Supra) and the Tribunal order rendered in the case of M/s Aztec Software Technology Services Ltd.,(Supra), it was held by the Hon ble Bombay High Court that these two judgments were rendered in the context of sec.92CA(4) as existing prior to 2007 and since after this amendment, the jurisdictional issue cannot be raised after this amendment, these judgments are not relevant after amendment with effect from 01-06-2007. Hence, it is seen that reliance placed by the ld. CIT in the impugned order on these two judgments i.e. judgment of the Hon ble Delhi High Court rendered in the case of M/s S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment order. On their part, the AO and the ld. CIT(A) did not discharge necessary judicial functions conferred upon them u/s 92C or 92CA of the 27. On the other hand, duly supporting the action of the AO and that of the ld. CIT(A) in this regard, the ld. DR has sought to place reliance on the following case laws: i) Coca Cola India Inc vs. ACIT , 309 ITR 194 (P H) ii) Sony India P. Ltd. vs. Central Board of Direct Taxes and Another , 288 ITR 52 (Delhi) and iii) Aztec Software and Technology Services Ltd. vs. ACIT , 294 ITR (AT) 32 (Bangalore) [SB] 28. With regard to Sony India Pvt.Ltd. (Supra), the Ld. DR has contended that as per this decision, the AO is not required to form a prior considered opinion before making a reference to the TPO under section 92CA(l) of the Act and that only a prima facie opinion is necessary. It is contended that the AO is not required to follow the steps enlisted in section 92CA( 1) of the Act, before making reference to the TPO. Instruction No.3/2003 is not violative of article 14 of the constitution of India. The instruction is not ultravires the Income-tax Act. The classification of International transactions is not inconsistent w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h cases also. 30 In this regard, it is seen that in Sony India Pvt. Limited (supra), their Lordships of the Hon'ble Delhi High Court were considering CBDT Instruction No.3 dated 20.05.2003, which provides that a compulsory reference has to be made to the TPO to determine arm's length price, where the aggregate value of the international transactions exceeds ₹ 5 crores. The assesseecompany in that case challenged the constitutional validity of the said Circular mainly on the ground that by issuance of the Circular, the AO's ultimate decision on computation of ALP is sought to be supplanted by the decision of the TPO for transactions of value over ₹ 5 crores and the TPO is not bound to follow the steps outlined u/s 92C of the Act, which are otherwise mandatory for the AO to follow. The question arose whether there is nothing in section 92CA itself that requires the AO to first form a considered opinion in a manner indicated in section 92CA(3) of the Act before he can make a reference to the TPO. It was held that this is indeed so. Apropos the question whether it is not possible to read such requirement u/s 92CA(l) of the Act, this was also held in the aff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the circumstances set out in sections 92CA(3)(a)(b)(c) and /or () of the Act, are not satisfied. It was held that the AO is not required to record his opinion/reason before seeking the previous approval of the ld. CIT(A) u/s 92CA(1) of the Act. It was held that before making a reference to the TPO u/s 92CA(1)rws 92C(3) thereof, it is not a condition precedent that the AO shall provide the assessee an opportunity of being heard. It was held that CBDT Instruction no.3 of 2003, dated 20-05-2003, on transfer pricing matters, is not legal and the same is not binding on the Departmental Authorities. It was also held that prior to the amendment brought in w.e.f. 01-06-2007, though the order of the TPO issued u/s 92CA(3) of the Act, is not binding on the AO, the AO may take the ALP determined by the TPO without making any change under section 92CA(3) of the Act, for making assessment. The issue of determination of quantum of ALP was remanded. 33. In Vodafone India Services Pvt.Ltd (Supra), the Hon ble jurisdictional High Court has held the decision of the Special Bench of the Tribunal in Aztec Software Technology Services (supra) to be not applicable in view of the amendment b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roposition that transfer pricing adjustment cannot exceed total profits earned by the group. It was held that the assessee as well as the Revenue Authorities are bound to determine the ALP by applying the law and rules laid down and cannot be guided by extraneous parameters. It was held that any claim for adjustment on the basis of reason or any other factors has to be based on proper data and sound calculation and ad-hoc adjustment should not be granted. It was held that where material is available with the TPO in the current year, which is vastly different from the material available with the TPO in the earlier year, the principle of consistency does not hold water. It was held that the assessee is required to support its claim for any adjustment with robust data and full details and evidence and the burden of proof is on the assessee, whenever it makes such a claim. However, this decision, we are afraid, also does not further the cause of the department, as it does not address the issue raised by the assessee before us in the present case, as discussed. 37. In this regard, the Hon'ble Supreme Court, in the case of Good year India Ltd. vs. State of Haryana , 188 ITR 402 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Hon'ble Supreme Court in the case of Krishna Pvt. Ltd. vs. ITO , 221 ITR 538 (SC) and by the Hon'ble jurisdictional Bombay High Court in the case of German Remedies , 287 ITR 494 (Born.). 41. In CIT vs. Amedius , 351 ITR 82 (Del.), it has been held that it is primarily the duty of the AO to compute the arm's length price in relation to an international transaction in accordance with the most appropriate method specified in section 92C(1) of the Act; and that however, where the AO requires the arm's length price to be computed by specialist, a reference may be made to the TPO. 42. In CBDT Circular No.14 of 2001, in para 55.11 thereof, it has been provided that under the new provisions the primary onus is on the taxpayer to determine an arm's length price in accordance with the rules and to substantiate the same with the prescribed documentation. Where such onus is discharged by the assessee and the data used for determining the arm's length price is reliable and correct, there cannot be any intervention by the AO. This is made clear by sub section (3) of section 92C, which provides that the AO may intervene only if he is, on the basis of materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dance or manipulation of prices or establishment of shifting of profits is not possible. 46. Aztec Software Technology Services (supra), holds that TP provisions are applicable even if income is exempt u/s(s) 1OA/1OB of the Act. However, as seen, Aztec Software Technology Services , stands overridden by the decision of the Hon'ble jurisdictional High Court in Vodafone India (supra). 4 7. In Motif India Infotech Pvt. Limited , the decision in ITA No. 3043/Ahd/2010, rendered on 25.03.2013, it has been held that in a case where the income derived from an international transaction is exempt from tax in India because of the provisions of section lOA of the Act, it cannot be held that because of an arrangement between the assessee and the Associated Enterprise, any income taxable in India had been under reported. 48. It has been held that in such circumstances, where the income derived from an international transaction is exempt from tax in India, it cannot be alleged that the assessee had arranged its affairs in such a manner, so as to show lesser taxable income in India. 49. In Cotton Naturals (I) Pvt. Ltd. vs. DCIT , 22 ITR (AT) 430 (Del) (Trib.), it was hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted , 44 SOT 132 (Mumbai) ii) ACIT vs. Dufon Laboratories , 39 SOT 59 (Mumbai) and iii) UM (India) Infrastructure , 28 ITR (Trib) 176 (Hyd) 54. For the above discussion, the assessee's support to the impugned order on both counts is found to be correct. The AO erred in not himself examining the issue of TP and with the approval of the ld. CIT, made a reference to the TPO u/s 92CA(l) of the Act; that the AO as well as the ld. CIT(A) 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 ld. CIT(A) did not discharge necessary respective judicial functions conferred on them under sections 92C and 92CA of the Act. 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 to avoidance or manipulation of prices or establishment of shifti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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