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Income Tax Appellate Tribunal, BANGALORE BENCH ‘C’, BANGALORE
Before: SHRI SUNIL KUMAR YADAV & SHRI A.K.GARODIA, ACCOUNANT MEMBER
O R D E R 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.
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 ITA No.545(B)/2012 erroneous and prejudicial to the interest of revenue.
1.4 Even according to the Commissioner, the AO's order was only erroneous, there was nothing to show that the same was prejudicial to the interest of the revenue.
1.5 On the facts and in the circumstances of the case In law, the learned Commissioner, while revising the assessment, erred in not appreciating the fact and the law that the view taken by the learned AO was sustainable in law, therefore, the order passed was after due application of mind by the learned AO and keeping in view the law of the land existing at the time of framing the assessment.
1.6 The learned Commissioner erred in revising the assessment under S.263 on the grounds that the AO did not refer the case to the TPO to determine the ALP, CUP data of Mar 2008 ignored by the AO and two invoices were accounted by the assessee only in the subsequent assessment years. Export to MIs Gla Trading International Pte Ltd, Dubai
2.1 The learned Commissioner erred in coming to a conclusion that there is suppression of sales and under invoicing of sales to M/s Gla Trading International PTE Ltd when there is no evidence whatsoever of any suppression of sales or under invoicing of any such sales.
2.2 The learned Commissioner ought to have accepted that the sales to Gla Trading were at market prices prevailing at that time.
2.3 The learned Commissioner erred in rejecting comparable prices, evidences and submissions furnished during the course of assessment proceedings.
2.4 The learned Commissioner erred in treating M/s Gla Trading International PTE Ltd, Dubai as an Associated Enterprises u/s.92A of the Act.
2.5 The learned Commissioner failed to notice that ITA No.545(B)/2012 the appellant had entered into Long term Sales contract with Gla trading as against Spot Sales contract.
2.6 The learned Commissioner erred in bench marking the transaction against data of March 2008.
2.7 The learned Commissioner erred m adopting dollar conversion rate at 40.1452.
2.8 The learned Commissioner was not justified in holding that the under estimation of under invoicing by AO is USD 34,73,562.
2.9 The learned Commissioner erred in concluding that the export sales made to Gla Ltd with Bill of lading dated 21.03.2008 and 28.03.2008 ought to have been accounted in the FY 2007-08 relevant to this assessment year itself. 3. On the facts and in the circumstances of the case 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.
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),
ITA No.545(B)/2012 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 dated 04-11- 2015 and pointed out that in para-31 of this Tribunal order, the Tribunal has followed the same judgment of the Hon’ble Bombay High Court rendered in the case of Vodafone India Services Pvt. Ltd., Vs Union of India (Supra) and held that the CBDT Instruction No.3 dated 20-05-2003 is contrary to the decision being taken and regarding the judgment of Hon’ble Delhi High Court rendered in the case of M/s Sony India Pvt. Ld., as reported in 288 ITR 52 (Del.), it was held that this decision of the Hon’ble Delhi High Court in the case of M/s Sony India Pvt. Ld.,(Supra) is not applicable after the amendment in 2007. He further submitted that in the present case, the assessment year involved in 2008-09 i.e. after the amendment of 2007 and therefore, this Board Instruction No.3 dated 20-05-2003 is not valid in the present case.
The ld. DR of the revenue supported the order of the ld.CIT.
We have considered the rival submissions. We find that in para-9.3 of the impugned order passed by the ld. CIT as re-produced below, it was held by the ld. CIT that the assessment order is erroneous and prejudicial to the interest of revenue for this reason alone that he has not referred the international transaction between the assessee and ITA No.545(B)/2012 its associated company i.e. M/s GLA Trading International PTE Ltd. for determination of ALP.
“ 9.3 Thus, it is seen the above that the order passed by the AO is erroneous and prejudicial to the interest of the revenue as the AO has not referred the international transactions between the assessee and its Associated Company i.e. M/s GLA Trading International PTE Ltd., to the Transfer Pricing Officer for the purpose of determining Arm’s Length Price (ALP)”.
On page-12 of his order, it is stated by ld. CIT that the CBDT has issued instruction no.3 in exercise of its power u/s 119 of the IT Act, 1961 and the Special Bench of the Tribunal in the case of M/s Aztec Software & Technology Services Ltd., Vs ACIT 294 ITR 321 has upheld the validity of this instruction and while doing so, the Special Bench has relied upon the judgment of the Hon’ble Delhi High Court rendered in the case of M/s Sony India Pvt. Ltd., as reported in 288 ITR 52(Supra) but in a latter judgment of the Hon’ble Bombay High Court rendered in the case of M/s Vodafone India Services Pvt. Ltd., (Supra), this aspect of the matter was examined in great detail in view of the amendment in the Act in the year 2007. As per this later judgment of Hon’ble Bombay High Court, after 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
ITA No.545(B)/2012 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 Sony India Pvt. Ltd.,(Supra) and the order of the Special Bench of the Tribunal render in the case of M/s Aztech Software & Technology Services Ltd.,(Supra) is misplaced because of amendments in sec.92CA(4) with effect from 01-06-2007.
Now, we examine the applicability of the tribunal order rendered in the case of DCIT Vs Tata Consulting Services Ltd., (Supra).
In this case, the dispute before the Tribunal was whether the CIT(A) has erred in deleting the additions on account of TP adjustment in relation to transaction with AE. Para-25 to 55 of this Tribunal order
ITA No.545(B)/2012 are relevant for the decision on this issue and therefore, these paras are re-produced herein below for the sake of ready reference. “25. As per Ground No.5, the ld. CIT(A) has erred in deleting the additions on account of TP adjustments in relation to transaction with AE, M/s Tata America International Corporation Inc. ( TAlC) 26. Apropos Ground No.5, invoking the provisions of Rule 27 of I.T.A.T Rules, the assessee has sought to support the order of the ld. CIT(A) by raising a plea 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 has been 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 ld. CIT(A) can grant approval to such a reference. This, again, is a statutory safeguard for the taxpayer. It is submitted that CBDT Instruction No.3 of 2003, dated 20.05.2003 detracts the AO and the ld. CIT(A) 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 ld. CIT(A), made a reference to the TPO u/s 92CA( 1) of the Act. The AO and the ld. 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 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]
With regard to "Sony India Pvt.Ltd." (Supra), the Ld. DR
ITA No.545(B)/2012 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 with, or contrary to, the objectives sought to be achieved by Chapter X of the Act. The Instruction supplements the statutory provision to achieve its objective and does not override it. It is neither arbitrary, nor unreasonable. It was held to be constitutionally valid.
So far as regards "Aztec tax software & technology Services Ltd." (supra), it has been contended that the Special Bench of the Tribunal, in the said case, has held that in view of the plain and ambiguous language of the Act, tax avoidance is not required to be proved before invoking the provisions of Chapter X of the Act. The TP provisions are applicable even if income is exempt u/s 1OA & 10B of the Act. No prior hearing is to be given to the assessee by the AO, or the ld. CIT(A) before making reference to the TPO. The conditions in section 92CA(3) of the Act are not required to be fulfilled before making reference to the TPO. CBDT Instruction No.3/2003 is binding on the AO and hence, it becomes necessary or expedient for him to refer the case to the TPO u/s 92CA(l) of the Act, if the international transaction or transactions exceeds, or exceed the limit mentioned therein. The initial burden is on the assessee to select the most appropriate method. It is also the assessee's onus to show that the price was at arm's length. In case the TPO redetermines the ALP, the burden shifts on him. Reference can be made to the OECD Guidelines, US Regulations, etc., subject to the domestic statutory regulations. Industry average (Nasscom) cannot be taken as up. The TNMM requires comparability at a broad functional level. The Special Bench of the Tribunal upheld the use of current year data. With reference to "Coca Cola Pvt. Ltd." (supra), it has been contended that as per this decision, there is no need for hearing to be given to the assessee before making reference to the TPO. Once an International transaction is there, in view of the plain and unambiguous language, ALP has to be determined. There is no requirement of showing shifting of profit, evasion of tax, etc before invoking the provisions of Chapter X of the Act. The mere fact that the assessee has chosen one method does not take away the discretion of the TPO to select any other method. Restriction of payment or remission imposed by the RBI or FERA cannot control the provisions of Chapter X of the Act; ALP has to be determined in such cases also.
ITA No.545(B)/2012
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 Rs. 5 crores. The assessee- company 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 Rs. 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 affirmative.
(B)/2012 Their Lordships held that it would suffice if the AO forms a prima facie opinion that it is necessary and expedient to make such a reference. It was also held that one possible reason for absence of such requirement of formation of a prior considered opinion by the AO is that the TPO is expected to perform the same exercise, as envisaged u/s(s) 92C(1) to 92C(3) of the Act, while determining the ALP u/s 92CA(3). It was further held that the AO is not bound to accept the ALP as determined by the TPO and always persuaded by the assessee at that stage to reject the TPO's report and still proceeds to determine the ALP himself and, therefore, the AO is the authority to finalise the assessment and the said power of the AO cannot be usurped. It was also held that therefore, it cannot be said that the AO's decision is supplanted by the decision of the TPO. Still further, it was held that that the Instruction in question, i.e., CBDT Instruction No.3, dated 20.05.2013, is consistent with the statutory objective underlying section 92CA(l) of the Act and acts as guidance to the AO in the exercise of discretion in referring an international transaction to the TPO for determination of its ALP and it is neither arbitrary, nor unreasonable and is not ultravires the act.
It has rightly been contended on behalf of the assessee with regard to “Sony India Pvt.Ltd.,(Supra) that the Hon’ble Bombay High Court, in the case of Vodafone India Services Pvt.Ltd., Vs Union of India 361 ITR 531(Bom.) has held that CBDT Instruction Noi.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 Ltd”. (Supra) is not applicable after the amendment of 2007 (paras 35 to 37 of the judgment are relevant in this regard).
In “Aztec Software & Technology Services Ltd.,”(Supra) the Bangalore Special Bench) of the Tribunal held that it is not a legal requirement under the provisions contained in Chapter X of the Act, that the AO should prima facie demonstrate that there is tax avoidance, before invoking the relevant provisions. It was held that before the case is referred to the TPO u/s 92CA(1) of the Act for computation of arm’s length price, the AO is not required to prima facie demonstrate that any one or more 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 (B)/2012 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 brought in 2007. It was held that it laid down that there was no requirement to establish tax avoidance before initiation of proceedings. Tax avoidance, in other words, is required to be established thereafter and before the completion of the assessment. It was held that the Instruction detracts from the provisions of law.
"Coca Cola India Pvt. Ltd." (supra), rendered by the Hon'ble Punjab & Haryana High Court, was appealed against before the Hon'ble Supreme Court. The Hon'ble Supreme Court, in its judgment, reported in "Coca Cola India Inc. vs. Addl. CIT", 336 ITR 1 (SC), directed that the authorities below should decide the matter afresh, uninfluenced by any of the observations made in the High Court judgment.
The position obtaining with regard to these three judgments sought to be relied on by the Department is, that none of these judgments is applicable. "Sony India Limited" has been held to be not applicable by "Vodafone India" (Supra), rendered by the jurisdictional High Court. "Aztec Software & Technology Services" (supra), has also no application in view of "Vodafone India Services P. Ltd." (supra). "Coca Cola India Inc." (supra) is also inapplicable, the Hon'ble Supreme Court having directed the authorities to decide the matter afresh uninfluenced by the observations made by the Hon'ble High Court. Further, in "Sony Ericsson Mobile Communications Pvt. Limited", 374 ITR 116 (Delhi), the same is the position maintained. This apart, the question raised before us was nowhere argued or adjudicated in any of these judgments. The assessee has contended that the AO has abrogated his obligation under a wrong assumption that CBDT Circular, i.e., CBDT Instruction No.3 of 2003 dated 20.05.2003 mandated him to go ahead without making any reference to the TPO. The AO, thus, in the present case, did not examine the question, whether he should himself accept the transfer pricing report of the assessee or whether he should himself determine the arms's length price. Therefore also, these judgments are not applicable and they do not help the cause of the Department.
The Department has further sought to place reliance on "In terra Information Technology (I) Pvt. Limited vs. DCIT", (2012) 27Taxman.com.l (Del) (Trib.). In that case, considering assessment years 2006- 07 & 2007 -08, it was held that it cannot be laid down as a proposition 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 (B)/2012 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.
In this regard, the Hon'ble Supreme Court, in the case of "Good year India Ltd. vs. State of Haryana", 188 ITR 402 (SC), has held that a decision on a question which has not been argued cannot be treated as a precedent. Further, when a statute vests certain powers in an authority to be exercised in a certain manner that authority has to exercise those powers only in a manner provided in the statute itself. It has been so held by the Hon'ble Supreme Court in "CIT vs. Anjum Ghaswala", 252 ITR 1 (SC). The Hon'ble Jurisdictional High Court has also taken a similar view in the case of "Ghanshyam K. Kharbani", 346ITR 443 (Bombay).
The Department has, then, also sought to place reliance on "Ranabaxy Laboratories vs. Addl. CIT" , 110 ITD 428 (Del.). In that case, it was held, with regard to assessment year 2004-05, that it is not right to contend that in not referring the question of determination of arm's length price to the TPO, as required by CBDT Instruction No.3 of 2003 (supra), the AO merely committed a procedural error. "Vodafone India Services P. Ltd.", (supra) was rendered by the Hon'ble jurisdiction High Court post the decision of the. Tribunal in "Ranabaxy Laboratories" (supra) and therefore, the Tribunal, clearly did not have the benefit of "Vodafone India", (supra). To reiterate, in "Vodafone India", (supra). CBDT Instruction NO.312003 has been held to detract from the provisions of law. In "Vodafone India" (supra), it has been held that necessary hearing is required to be given to the assessee in accordance with the principles of natural justice before a reference is made to the AO after the amendment in the year 2007.
ITA No.545(B)/2012
In the case of "Johari Lal vs. CIT", 88 ITR 439 (SC), it has been held that the prima facie belief of the AO that it is necessary or expedient to make a reference to the TPO is the condition precedent to be satisfied upon application of mind to the material or information or document in his possession. Such prima facie belief is a condition precedent and is mandatory and it is the statutory safeguard for the assessee's statutory right. The absence of such a belief vitiates the entire proceedings.
Like-wise, the approval of the ld. CIT for the reference to the TPO on a proper application of mind to the relevant facts and circumstances is a condition precedent and a necessary safeguard for the statutory right of the assessee and this has to be performed not in a mechanical manner. This is what has been held by the 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.).
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.
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 material or information or document in his possession, of the opinion that the price charged in the international transaction has not been determined in accordance with sub-sections (1) & (2), or information and documents relating to the international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made there under; or the information or data used in computation of the arm's length price is not reliable or correct; or the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub- section (3) of section 92D. If anyone of such circumstances exists, the AO may reject the price adopted by the assessee and determine the arm's length price in accordance with the same rules. However, an opportunity has to be given to the assessee before determining such price. Thereafter, as provided in sub section (4) of sec. 92C, the AO may compute the total (B)/2012 income on the basis of the arm's length price so determined by him."
ITA No.545(B)/2012
In the case of "Sirpur Paper Mills", 237 ITR 41 (SC), it has been held that section 119 of the Act permits the CBDT to specify conditions, but conditions cannot have the effect of curtailing the scope of the deduction granted by the section; that the amplitude of the deduction permitted by the section cannot be cut down under the guise of imposing a condition; that in fact, this is not a condition, but an impermissible attempt to re-write the section. It was held that the CBDT may control the exercise of the powers of the Officers of the Department in matters administrative, but not quasi- judicial.
In the following decisions, amongst others, it has been held that the Tribunal can ignore alone invalid Circulars of the CBDT:
(i) "Tata & Iron Steel", 69 ITD 292 (Mumbai)
(ii) "Mahindra & Mahindra", 8 ITD 427 (Mumbai) and (iii) "Pardeep Agencies vs. ITO", 18 SOT 12 (Delhi) (SB)
The assessee has further sought to support the ld. CIT(A)'s order on the contention that Transfer Pricing adjustment cannot be made in a case where the assessee enjoys benefit u/s lOA 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.
"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 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.
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.
In "Cotton Naturals (I) Pvt. Ltd. vs. DCIT", 22 ITR (AT) 430 (Del) (Trib.), it was held that the assessee's substantial profits were exempt u/s 10B of the Act and the Associated Enterprises were not (B)/2012 situated in tax havens, but in the US, where the tax rates were at par with India, or may be more than that; that the assessee's profits were exempt uls1lOB; and that hence, there was no case that the assessee would benefit by shifting profits outside India.
In the case of "Indo-American jewellery", 41 SOT 1 (Mum), the Mumbai Bench of the Tribunal found merit in the submissions on behalf of the assessee that since the tax rates were higher in the USA compared with those of India, there would not be any incentive to transfer the profits to a higher tax chargeable region, especially when the company enjoyed deduction u/s 80HHE of the Act.
5l. In" DCIT vs. Lumax Industries Ltd.", 36 Taxman.com.380, it was observed that the TPO had nowhere made out a case that the profit was shifted from a higher tax jurisdiction to a lower tax jurisdiction; that in fact, there was no motive for any such shifting of profits at the hands of the assessee-company and there could have been any reason for the majority stake holder in India, i.e., the assessee, to over pay even a single paise to the minority stake holder in Japan; that the TPO fell in error in ignoring the position that it was if and only if it stood proved that there was manipulation of prices to avoid taxes in India, that the TP provisions of the Act could be invoked; that the TP regulations in India have been brought on the statute book with the intent of preserving the tax base in India and preventing tax evasion through manipulation of pricing of inter-company transactions; that further, application of tax jurisprudence provisions could have been justified, if the rate of tax was lower in Japan as compared to that in India, which was not so; and that it was, therefore, beyond comprehension as to why the assessee would harbour any motive of shifting income.
In the case of "Philip Software", 119 TTJ 721 (Bang.), it was held that since the basic intention behind introducing the TP provisions in the Act is to prevent shifting of profits outside India, and the assessee was claiming benefit u/s 1OA of the Act, the TP provisions ought not to be applied to the assessee.
Similar is the position in the following cases, amongst others:
i)"ITO vs. Zydus Altana Healthcare (P) Limited", 44 SOT 132 (Mumbai) ii) "ACIT vs. Dufon Laboratories", 39 SOT 59 (Mumbai) and iii) "UM (India) Infrastructure", 28 ITR (Trib) 176 (Hyd)
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 (B)/2012 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 shifting of profits is not possible.
On the basis of the above reasons, qua Ground No.5, accepting the pleas raised by the assessee to support the CIT(A),s order, without going into the merits of this Ground, the order of the ld. CIT(A) is confirmed. Ground No.5 is rejected.
From the above paras of this Tribunal order and particularly para-
31 of the Tribunal order, it is seen that as per this tribunal order, CBDT
Instruction No. 3 dated 20.05.2003 is not binding on the A.O. Hence, the action of the A.O. of himself determining the TP adjustment without referring the matter to the TPO in the present case is a possible view as per this tribunal order. In this view of the matter, the assessment order cannot be said to be erroneous because the view taken by the A.O. of not referring the matter to the TPO is a possible view as per this tribunal order. Learned
DR of the revenue could not point out any other basis indicated by the learned CIT in the impugned order to say that the assessment order is erroneous. This is a settled position of law by now that revisionary 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 learned CIT u/s 263 is not sustainable and therefore, we quash the same.
ITA No.545(B)/2012
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on the date mentioned on the caption page.