M/S ISOFT HEALTH MANAGEMENT (INDIA) PVT. LTD.,,CHENNAI vs. DCIT, BANGALORE

This appeal by the assessee is directed against the assessment order dated 30.09.2011 passed u/s 143(3) r.w. section 144C(13) of the Act in pursuant to the directions of DRP dated 27.09.2011 passed u/s 144C(5) of the Act for Assessment Year 2007-08. The assesse has filed revised grounds of appeal as under:

“Appeal against the appellate order dated September 30, 2011 under Section 143(3) r.w.s. 1440 of the Income Tax Act, 1961 ("the Act") for Page 1 of 15 Computer Sciences Corporation India Pvt. Ltd. Page 2 of 15 assessment year 2007-08 passed by the Deputy Commissioner of Income Tax, Bangalore (hereinafter referred to as ("Ld. AO"), 1. That on facts and circumstances of the case and in law, the AO/DRP/TPO/have erred in passing assessment order, against the principles of natural justice, violative of provisions of the Act, devoid of merits, without appreciating the facts involved, the documents submitted, and as such is without jurisdiction.

2. That on facts and circumstances of the case and in law, AO/DRP/TPO have erred in making TP adjustment amounting to INR 2,81,93,311 to the returned income of the Appellant. 3.That on the facts and circumstances of the case and in law the AO/DRP / TPO have erred in not restricting the adjustment to receipt of software services to the value of international transaction amounting to INR 2,78,95,404. That on facts and circumstances of the case and in law, the AO/DRP/TPO have erred in making an addition of INR 75,89,812, on account interest on foreign currency loans provided to the AES by applying Prime Lending Rate (PLR) as the arm's length rate instead of London Interbank Offered Rate ("LIBOR"). Each of the above grounds is independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant prays for leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before, or at, the time of hearing, of the appeal.

“1. That on the facts and circumstances of the case and in law, the reference to the Transfer Pricing officer under section 92CA of the Income Tax Act, 1961 by the Assessing Officer was illegal, bad in law being contrary to the binding Instruction No. 3/2003 as the quantum of the international transaction is below Rs.5 crore. 2.That on the facts and circumstances of the case and in law, the final assessment order passed by the AO is time barred by limitation and is bad in law, as it has been passed beyond the time frame prescribed under third proviso to section 153(1) of the Act, as it stood prior to substitution with effect from the 1st day of June, 2016.

3. That on the facts and circumstances of the case and in law, the AO erred in assuming the Appellant to be an eligible assessee' within the Page 2 of 15 Computer Sciences Corporation India Pvt. Ltd. Page 3 of 15 meaning of section 144C(15)(b) of the Act thereby passing an invalid draft order and thereafter issuing the final assessment order which was barred by limitation."

5.1. Another issue raised by the assessee in the additional ground is regarding validity of the final assessment order passed by the AO due to barred by limitation provided u/s 153(1) of the Act. Thus it is clear that both these issues are purely legal in nature and for adjudication of the same no new fact or material is either required or investigated. These pure questions of law can be adjudicated based on the undisputed facts available on record. Therefore, in view of the judgment of Hon’ble Supreme Court in case of Jute Corporation of India Ltd. vs. CIT (supra) as well as in Page 3 of 15

Computer Sciences Corporation India Pvt. Ltd. Page 4 of 15 case of Natiohal Thermal Power Co. Ltd.vs. CIT (supra) it is settled proposition of law that the question of law arising from the facts available on record in the assessment proceedings is to be considered by this tribunal in order to correctly assess the tax liability of the assesse. Hence in the facts and circumstances of the case we admit additional grounds raised by the assesse which are purely legal in nature for adjudication. Since the additional grounds raised by the assesse are purely legal in nature and goes to the root of the matter therefore, we first take up the additional grounds for hearing and adjudication.

Computer Sciences Corporation India Pvt. Ltd. Page 5 of 15 7. On the other hand, Ld. DR has submitted that the threshold limit provided in the CBDT instruction are for compulsory reference to the TPO in the cases where the quantum of international transactions are more than Rs.5 crore. Therefore, there is no prohibition for making reference to the TPO in cases where the quantum of the international transactions is less than Rs.5 cror or prescribed under the CBDT circular. It is the discretion of the AO whether to make the reference to the TPO or not.

“1.1. International Transactions: The international transactions reported by the taxpayer company are as follows: Software consultancy and Management Consultancy Charges availed Rs.2,81,93,311/- Interest received Rs.34,95,773/- 8.1. The total of international transactions entered into by the assessee for year under consideration comes to Rs.3,16,89,084/-. The CBDT instruction no.3/2003 dated 20.05.2003 prescribed the aggregate value of international transactions exceeding Rs.5 crore should be picked up for scrutiny and reference u/s 92CA be made to the TPO. For ready reference the instruction no.3/2003 is quoted as under:

“INSTRUCTION NO.3/2003, DATED 20-5-2003 [SUPERSEDED BY INSTRUCTION NO.15/2015 (F.NO.500/9/2015- APA-II), DATED 16-10-2015]

Computer Sciences Corporation India Pvt. Ltd. Page 6 of 15 The provisions relating to transfer price contained in sections 92 to 92F of the Income-tax Act, have come into force with effect from assessment year 2002-03. In terms of the provisions, income from an international transaction is to be computed having regard to arm's length price between the associated enterprises. Further, in terms of section 92CA, a Transfer Pricing Officer, on a reference received from the Assessing Officer, is required to determine arm's length price of an international transaction by an order and the Assessing Officer is required to compute the income having regard to the price so determined by the TPO. The notification regarding jurisdiction of TPOS and their controlling officers have been issued by the Central Board of Direct Taxes and the copies thereof are enclosed for ready reference as Annexure II. In order to maintain uniformity of procedure and to ensure that work in this important area proceeds smoothly and effectively, the following guidelines are hereby issued: (i) Reference to Transfer Pricing Officer (TPO): The power to determine arm's length price in an international transaction is contained in sub- section (3) of section 92C. However, section 92CA provides that where the Assessing Officer considers it necessary or expedient so to do, he may refer the computation of arm's length price in relation to an international transaction to the TPO. Sub- section (3) of section 92CA provides that the TPO after taking into account the material available with him shall, by an order in writing, determine the arm's length price in accordance with sub- section (3) of section 92C. Sub-section (4) of section 92CA provides that on receipt of the order of the TPO, the Assessing Officer shall proceed to compute the total income of the assessee having regard to the arm's length price, determined by the TPO. Thus, whereas the determination of the arm's length price, wherever reference is made to him, is required to be done by the TPO under sub-section (3) of section 92CA, read with sub-section (3) of section 92C, the computation of total income having regard to the arm's length price so determined by the TPO is required to be done by the Assessing Officer under sub-section (4) of section 92C, read with sub-section (4) of section 92CA. In order to make a reference to the TPO, the Assessing Officer has to satisfy himself that the taxpayer has entered into an international transaction with an associated enterprise. One of the sources from which the factual information regarding international transaction can be gathered is Form No. 2CEB filed with the return which is in the nature of an accountant's report containing basic details of an international transaction entered into by the taxpayer during the year and the associated enterprise with which such transaction is entered into, the nature of documents. maintained and the method followed. Thus, the primary details regarding such international transactions would normally be available in the accountant's report. The Assessing Officer can arrive at prima facie belief on the basis of these details whether a reference is considered necessary.No detailed enquiries are needed at this stage and the Assessing Officer should not embark Page 6 of 15

Computer Sciences Corporation India Pvt. Ltd. Page 7 of 15 upon scrutinizing the correctness or otherwise of the price of the international transaction at this stage. In the initial years of implementation of these provisions and pending development of adequate data base, it would be appropriate if a small number of cases are selected for scrutiny of transfer price and these are dealt with effectively. The Central Board of Direct Taxes, therefore, have decided that wherever the aggregate value of international transaction exceeds Rs. 5 crores, the case should be pricked up for scrutiny and reference under section 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 Rs. 5 crores, the transactions should be rence to the TPO, die A referred to the TPO. Before making reference to the TPO, the Assessing Officer has to seek approval of the Commissioner/Director as contemplated under the Act. Under the provisions of section 92CA reference is in relation to the international. 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 aspects of the case during pendency of assessment proceedings but await the report of the TPO on the value of international transaction before making final assessment. The threshold limit of Rs. 5 crores will be reviewed depending upon the workload of the TPOs. The work relating to selection of cases for scrutiny and reference to TPO on the above basis in respect of pending returns filed for the assessment year 2002-03 should be completed by June 30, 2003- (ii) Role of Transfer Pricing Officer. The role of the TPO begins after a reference is received from the Assessing Officer. In terms of section 92CA this role is limited to the determination of arm's length price in relation to the international transaction(s) referred to him by the Assessing Officer. If be during the course of proceedings before him it is found that there are certain other transactions; which have not been referred to him by the Assessing Officer, he will have to take up the matter with the Assessing Officer so that a fresh reference is received with regard to such transactions. It may be noted that the reference to the TPO is transaction and enterprise specific. The transfer price has to be determined by the TPO in terms of section 92C. The price has to be determined by any one of the methods stipulated in sub-section (1) of section 92C and by applying the most appropriate method referred to in sub-section (2) thereof. There may be occasions where application of the most appropriate method provides results which are different but equally reliable. In all such cases, further scrutiny may be necessary to evaluate the appropriateness of the method, the correctness of the data, weight given to various factors and so on. The selection of the most Page 7 of 15

Computer Sciences Corporation India Pvt. Ltd. Page 8 of 15 appropriate method will depend upon the facts of the case and the factors mentioned in rules contained in rule 10C. The TPO after taking into account all relevant facts and data available to him shall determine arm's length price and pass a speaking order after obtaining the approval of the DIT(TP), The order should contain details of the data used, reasons for arriving at a certain price and the applicability of methods. It may be emphasized that the application of method including the application of the most appropriate method, the data used, factors governing the applicability of respective methods, computation of price under a given method will all be subjected to judicial scrutiny. It is, therefore, necessary that the order of the TPO contains adequate reasons on all these counts. Copies of the documents or the relevant data used in arriving at the arm's length price should be made available to the Assessing Officer for his records and use at subsequent stages of appellate or penal proceedings. (ii) Role of the Assessing Officer after receipt of "arm's length price," Under sub-section (4) of section 92C, the Assessing Officer has to compute total income of the assessee having regards to the arm's length price so determined by the TPO. While sub-section (4) of section 92CA clearly provides that such computation of income will be made having regard to the arm's length price so determined by the TPO, it is imperative that a formal opportunity is given to the taxpayer before making adjustments to the total income. The opportunity with regard to the determination of arm's length price has already been given by the TPO and, therefore, opportunity by the Assessing Officer, for final determination of income under sub-section (4) of section 92C, read with sub- section (4) of section 92CA is to be given by the Assessing Officer. (iv) Maintenance of database: It is to be ensured by the DIT (Transfer Pricing) that the reference received from the Assessing Officer is dealt with expeditiously so as to leave the Assessing Officer with sufficient time to offer an opportunity of being heard to the taxpayer before computing the income and completing the assessment. In order to ensure that all the references are attended to timely and effectively, a record of all such developments should be maintained in the format enclosed as Annexure I to these guidelines. This format will also serve as an important data base for future action and also help ensure uniformity in the determination of "arm's length price" in identical or substantially identical cases.

8.2. The guidelines issued by the CBDT in para (i) reveals that the CBDT had decided that in cases wherever the aggregate value of international transactions exceed Rs.5 crores, the case should be picked up for scrutiny and reference u/s 92CA be made to the TPO. The procedure is also Page 8 of 15

Computer Sciences Corporation India Pvt. Ltd. Page 9 of 15 prescribed that before making the reference to the TPO the assessing officer has to seek the approval of the Commissioner/Director as contemplated under the Act. In case in hand the AO made reference to the TPO for determination of Arm’s Length Price in respect of the international transactions however, the reference made by the AO is not in accordance with the CBDT instruction no3/2003. This issue has been considered by this tribunal in a series of decisions and in case of Calance Software P. Ltd. vs. DCIT (supra). The Delhi Benches of the Tribunal has considered and decided this issue in para 13 as under:

“13. We have heard both the parties and perused the material available on record. At the time of hearing the Ld. AR has taken a ground which is on legal point that as per the Instruction No. 3/2003 issued by the CBDT, the Assessing Officer should have decided the issue of international transaction himself instead of referring it to Transfer Pricing Officer as the quantum of International Transaction is below the monetary limit of Rs.5 crore. Prima facie, it appears that the contention of the Ld. AR is supported by the Instruction No. 3/2003. Therefore, we have to verify whether that Instruction has a binding force or it is just an administrative Instruction within the Departments day to day activities. The Circular has been considered by the Andhra Pradesh High Court in case of CIT Vs. Nayana P Dedhia 270 ITR 572 wherein it is held that the authorities responsible for administration of the Act shall observe and follow any such orders, instructions and directions of the board. This is actually reiterated from the decision of the Hon'ble Apex Court in case of UCO Bank Vs. CIT 237 ITR 889. But at the same time the Hon'ble Supreme Court also held that the Circulars can be adverse to the IT Department but still are binding on the authorities of the Income Tax Departments but cannot be binding on the assessee if they are adverse to the assessee. These ratio laid down by the Apex Court has an impact on the argument of the Ld. AR regarding the Board's Instruction to be followed. The Special Bench of this Tribunal also in case of Aztec Software & Technology Services Ltd. vs. ACIT held that CBDT directions are mandatory and binding on the Assessing Officer and CIT. Further the Jurisdictional High Court in case of CIT vs. SPL's Siddhartha Ltd. (supra) held that "Section 116 of the Act also defines the income-tax authorities as different and distinct authorities. Such different and distinct authorities have to exercise their powers in accordance with law as per the powers given to them in specified circumstances. If powers conferred on a particular authority are arrogated by other authority without mandate of law, it will create chaos in the administration of law and hierarchy of administration will mean nothing. Satisfaction of one authority cannot be substituted by the satisfaction of the other authority. It is trite that when a statue requires, a thing to be done in Page 9 of 15

Computer Sciences Corporation India Pvt. Ltd. Page 10 of 15 a certain manner, it shall be done in that manner alone and the court would not expect its being done in some other manner." Therefore, the additional Ground of the assessee is allowed. At this juncture, the assessment has become time barred as the reference made to TPO itself is not sustainable and the Assessing Officer should have passed Assessment Order at the prescribed time provided under the statute. We are not deciding on the merit of the case as the additional ground is decided in favour of the assesse.”

8.3. The Tribunal has held that the CBDT instruction is mandatory on the tax authorities. The Assessing officer proceeded contrary to the CBDT instruction vitiates the order of the TPO whereby the adjustment was made. Similarly in case of Sava Healthcare Ltd. vs. DCIT (supra), Pune Benches of the tribunal held in para 19 to 27 as under:

“19. There is no merit in the contention. We have noted earlier that an assessment order can be said to be ripe for consideration by judicial authorities either at the time of pendency of appeal or its disposal in which the transfer pricing adjustment has been upheld only when it has irretrievably gone out of the hands of the AO, who has become functus officio. If the AO has yet to continue with Sava Healthcare Limited the assessment, it cannot be said that the second condition of para 3.3(b) of the 2016 Instruction is satisfied. Obviously an appeal will lie only when an assessment order has been passed. As proceedings before the DRP are continuation of assessment proceedings, being a stage prior to the completion of assessment, we cannot approve the contention that the pendency of the matter before the DRP can be equalized with the pendency of an appeal so as to satisfy the second condition of para 3.3(b) of the 2016 Instruction. Our view is fortified by the judgment of the Hon'ble Bombay High Court in Vodafone India Services (P) Ltd. Vs. Union of India (2013) 39 taxmann.com 201 (Bom.) in which it has been held in para 47 that "The process before the DRP is a continuation of the assessment proceedings as only thereafter would a final appealable assessment order be passed. Till date there is no appealable assessment order'. It further went to hold that : `The proceeding before the DRP is not a appeal proceeding but a correcting mechanism in the nature of a second look at the proposed assessment order by high functionaries of the revenue keeping in mind the interests of the assessee. It is a continuation of the Assessment proceedings till such time a final order of ITA No.114/PUN/2019 Sava Healthcare Limited assessment which is appealable is passed by the Assessing Officer".

Computer Sciences Corporation India Pvt. Ltd. Page 11 of 15 20. We have referred to the appellate recourse in an earlier para. One needs to appreciate the difference between the remedy through the CIT(A) on one hand and through the DRP on the other. Whether it is a case of appeal before the CIT(A) or filing of objections before the DRP, the AO has to first notify the draft order u/s 144C(1) in the same manner. In the scenario of the straight appeal to the CIT(A), the assessee does not file objections before the DRP within the stipulated period. On the expiry of the given period, the AO has to necessarily complete the assessment on the basis of the draft order u/s 144C(3) of the Act, which order is then appealed against before the CIT(A). The DRP also does not pass an appellate order. It also only issues direction to the AO u/s 144C(5), whereafter the assessment order is passed. Irrespective of the fact that it is a case of filing an appeal before the CIT(A) or taking a way out with the DRP, in both the situations, the AO has to complete the assessment separately after first notifying the draft order at the initial stage u/s 144C(1) of the Act. Whereas in the case of DRP route, the AO completes the assessment u/s 144C(13) in the case of the CIT(A) route, the AO completes the assessment u/s 144C(3) of the Act. The contention of the ld. DR that pendency of the proceedings before the DRP should be considered as having the same force as the pendency of the appeal, ergo, does not fit into the scheme as the completion of assessment can take place only after the DRP has disposed of the objections.

Computer Sciences Corporation India Pvt. Ltd. Page 12 of 15 pricing issues have been recorded by the Investigation wing or the AO. The ld. DR submitted that though the year under consideration is not a search year but the earlier years were covered under search and seizure operations.

Computer Sciences Corporation India Pvt. Ltd. Page 13 of 15 looks attractive, but cannot pass the scrutiny for the raison d'etre that all the Income-tax authorities are bound by the CBDT Circulars / Instructions. They have no choice but to follow the same even if the same are not in conformity with the relevant statutory provision. Our view is fortified by above noted judgment of Hon'ble Apex Court in S.G. Asia Holdings (India) Pvt. Ltd. (supra) in which it has been held that the authorities under the Act are bound by the Instruction No. 03/2003 requiring mandatory reference to the TPO in case the aggregate of the international transactions exceeds Rs.5.00 crore. Though in that case, the aggregate of the international transactions crossed Rs.5.00 crore, but the AO, instead of making a reference to the TPO, took upon himself the task of determining the ALP which was otherwise supported by section 92C(3). The Hon'ble Supreme Court held that the AO was mandatorily required to get the ALP determined from the TPO in the face of Instruction 2003. We, therefore, find even this submission of the ld. DR as bereft of force.

8.4. The Pune Bench has considered all the contentions raised by the department which are also raised before us and found that the AO is barred from exercising any power u/s 92C(3) of the Act at his own and the instruction of the CBDT is binding on the AO. The reference to TPO in contravention of instruction No.3/2016 is held as invalid. Further the Chennai Benches of the Tribunal in case of DCIT vs. Sensible Software Solution P. Ltd.(supra) has considered this issue in para 8 as under:

“8. We have considered the rival submissions on either side and perused the relevant material available on record. It is not in dispute Page 13 of 15

Computer Sciences Corporation India Pvt. Ltd. Page 14 of 15 that there was a circular issued by the CBDT not to refer the matter to the Transfer Pricing Officer for determination of arm's length price in relation to international transaction. We have carefully gone through the provisions of Section 92CA of the Act. If the Assessing Officer considers it necessary to determine arm's length price in relation to international transaction, with previous approval of the Principal Commissioner or Commissioner, as the case may be, refer the matter to the Transfer Pricing Officer. Therefore, the reference to be made to the Transfer Pricing Officer is after previous approval of the Commissioner or Principal Commissioner, as the case may be. Now the CBDT vide its circular instructed its officers not to refer the matter to the Transfer Pricing Officer wherever the turnover was less than 15 Crores. In the case before us, it is not in dispute that the turnover of the assessee is less than 15 Crores. When the CBDT decided not to refere the matter to the Transfer Pricing Officer wherever the transaction of the international transaction was less than 15 Crores, this Tribunal is of the considered opinion that the reference made by the Assessing Officer is contrary to the instruction given by the CBDT. The CBDT being the administrative body to administer the direct tax laws, the instruction issued by it is binding on all the lower authorities. Therefore, the instruction issued by the CBDT to all its officers not to refer the matter to the Transfer Pricing Officer wherever the total turnover was less than 15 Crores is binding on the Assessing Officer. Hence, the Assessing Officer should not have referred the matter to the Transfer Pricing Officer. Since the reference itself was contrary to the instruction issued by the CBDT, this Tribunal is of the considered opinion that there cannot be any adjustment towards international transaction by determining the arm's length price. In view of the above, this Tribunal is unable to uphold the order of the lower authority and accordingly the same is set aside. The adjustment made by the Assessing Officer towards international transaction is deleted.”

8.5. In view of the facts and circumstances of the case the reference made by the AO to the TPO for determination of the Arm’s Length Price in respect of the international transactions having aggregate value of less than Rs.5 crores as prescribed by the CBDT No.3/2003 is bad in law and consequently vitiates the entire transfer pricing proceedings conducted by the TPO. Accordingly the additions made by the AO on account of transfer pricing adjustment as the order of the TPO are invalid and liable to be deleted. The only grievance of assesse in this appeal is the addition made by the AO on account of transfer pricing adjustment as proposed by the TPO. Once the reference to the TPO and consequential order of the TPO

Computer Sciences Corporation India Pvt. Ltd. Page 15 of 15 are not valid then the issue raised in the appeal regarding the TP adjustment need not to be taken up on merits. Hence in the facts and circumstances of the case the addition made by the AO on account of TP adjustment is deleted being invalid

Order pronounced in the open court on .08.2023.