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Reference to TPO- Law & Important Judgements

Sec 92CA provides that the Assessing Officer (“AO”) may make reference to Transfer Pricing officer (“TPO”) for computation of arm's length price (ALP) of international transaction entered into by assessee if the AO considers necessary and expedient to do so with prior approval of Principal Commissioner or Commissioner. Further, CBDT instruction No. 3/ 2003 made it mandatory for AO to make such reference if the value of international transactions exceeded Rs. 5 crores. Transfer pricing arena has seen many disputes revolving around making reference to TPO and powers/duties of AO and TPO around that. In a recent landmark decision in the case of Tata Consultancy Services Ltd., the Mumbai ITAT held that AO cannot make a reference to the TPO mechanically without applying his mind to the TP report or to any other material or information, despite CBDT Instruction No. 3/2003.The CBDT has recently revised CBDT Instruction No. 3/2003, by issuing Instruction No. 15/2015,  which stated that making reference to TPO on the basis of value of international transactions is no more necessary, in view that selection of TP cases for scrutiny will now be based on risk assessment.Taxsutra's Transfer Pricing portal currently has 39 rulings on this issue, out of which the top 10 rulings are listed below:

Judicial Rulings:-
In favor of Assessee:

1. Veer Gems [TS-670-HC-2011(GUJ)] - dated 19 October 2011
HC : TPO not competent to decide validity of AO's reference

HC held that AO is not required to grant hearing to assessee before transfer pricing reference to TPO. It was held that TPO was not authorized to determine the validity of transfer pricing reference made to him by the AO u/s 92CA. Further, HC held that even though AO was bound by the TPO’s order u/s 92CA(4) on determination of arm’s length price, he was not bound by the TPO’s ‘opinion’ on whether assessee infact carried out an ‘international transaction’.
2. Vodafone India Services Pvt. Ltd. [TS-320-HC-2013(BOM)-TP] - dated 29 November 2013
HC : AO to give hearing opportunity before making TPO-reference when assessee challenges jurisdiction

HC held that grant of opportunity of hearing before referring the matter to TPO must be read into Sec. 92CA(1) where jurisdiction is challenged by the assessee. HC distinguished Revenue’s reliance on rulings in Sony India P. Ltd [TS-3-HC-2006(DEL)] and Aztec Software & Technology Services Ltd. [TS-4-ITAT-2007(Bang)-TP] stating that they were rendered in the context of Section 92CA(4) as existing prior to 2007. HC also distinguished Gujarat HC ruling in Veer Gems relying on coordinate bench ruling in Vodafone [TS-261-HC-2013(BOM)-TP]. As regards CBDT circular, HC held that it cannot detract from the obligation of AO to follow the principles of natural justice, “because once AO refers the transaction to TPO, AO will be bound to act in conformity with the order of TPO”.
3.  SAP Labs Pvt. Ltd. [TS-262-HC-2014(KAR)-TP] - dated 25 August 2014

HC : No revisionary jurisdiction u/s 263 vests in Commissioner when TPO approved AO's ALP

HC quashed Commissioner’s revision order u/s 263, holding that AO’s adjudication on determination of ALP not erroneous and prejudicial to the interest of Revenue, when TPO had accepted ALP valuation by AO. However, HC observed that on the day of TPO reference there was no return pending for consideration by AO, thus TPO reference was bad in law.

4. SG Asia Holdings (India) Pvt Ltd [TS-166-ITAT-2015(Mum)-TP] - dated 22 April 2015

ITAT : TP-adjustment (not entire assessment) invalid absent TPO reference as per CBDT Instruction

ITAT set aside CIT(A)’s order confirming TP adjustment made by AO without referring matter to TPO, where value of international transactions exceeded Rs 5 crore, holding that AO’s action in contradiction to provisions of CBDT Instruction 3/ 2003. ITAT however clarified that while the assessment order is good in law, the TP adjustments made therein are bad in law. Further, ITAT rejected Revenue’s request of setting aside matter to AO for reference to TPO, stating that Tribunal cannot interfere in administrative matters which are mandatory as per the Act and make good lapse made by AO.
5.  Carrier Race Technologies Pvt Ltd [TS-583-HC-2015(MAD)-TP] - dated 12 October 2015

HC : Quashes assessment; Remits matter to AO to make TPO-reference, following CBDT instruction

HC disposed of assessee's writ challenging assesment order as AO did not make a reference to TPO in contradiction to CBDT Instruction dated May 20, 2003 which provides for TPO reference where value of international  transactions exceeds Rs. 5 Cr. HC observed, "Since the provisions of the Act makes it very clear that under Section 92 CA of I.T. Act the only option is to place the matter to the TPO and the same has not been followed, this Court feels it appropriate to set aside the order of the assessing authority so that the matter can be referred to the TPO".

6. Tata Consultancy Services [TS-521-ITAT-2015(Mum)-TP] - dated 4 November 2015

ITAT : AO’s statutory duty to independently analyze TP provisions before making TPO-reference

ITAT held that, only after proper application of mind to all the facts and holding a prima facie belief, AO can make reference to the TPO or CIT can grant approval for such a reference, as it is primarily AO’s duty to compute arm’s length price and only where AO requires ALP to be computed by a specialist can a reference be made to TPO.  ITAT stated that CBDT Instruction 3/2003 detracts AO/CIT from the above obligation in complete violation of the statutory provisions of the Act and necessary hearing is required to be given to the assessee in accordance with natural justice principles before a reference is made to AO after the 2007 amendment, relying on Bombay HC ruling in Vodafone India Services P. Ltd.
In favor of Revenue:
7. Sony India P Ltd [TS-3-HC-2006(DEL)] - dated 16 October 2006

HC : CBDT Instruction No. 3 of 2003 held not violative of the IT Act

HC held that CBDT Instruction requiring AO to compulsorily refer cases exceeding Rs. 5 crore in value to TPO, was neither arbitrary nor unreasonable. HC held that the CBDT Instruction was consistent with the statutory objective and hence, not ultra vires to the Act.

8.  Aztec Software & Technology Services Ltd [TS-4-ITAT-2007(Bang)-TP] - dated 12 July 2007

ITAT : AO need not establish 'tax evasion' or afford hearing before TPO reference

ITAT held that AO need not establish tax avoidance or hear assessee before invoking transfer pricing provisions & making reference to TPO. It was held that Prior to June 2007, TPO’s order not binding on AO, and since burden of proof to establish ALP was on assesse, HC held that rejecting ALP determined by TPO cannot be the basis to delete adjustment.  

9.  Fab India Overseas Pvt. Ltd. [TS-349-HC-2011(DEL)] - dated 16 May 2011

HC : AO to verify ALP of international transactions with AEs, even if their value is less than 5 crores
HC held that AO was bound to examine prima facie, international transactions with AEs, even if their value was less than 5 crores, before making reference to TPO.
10. Ranbaxy Laboratories Ltd [TS-739-HC-2011(DEL)-TP] - dated 18 November 2011
HC : Sec 263 revision upheld in Ranbaxy for non-reference of ALP determination to TPO

HC held that AO was duty-bound to refer determination of arm's length price to TPO where aggregate value of international transactions exceeds Rs 5 crores. HC rejected assessee’s contention that SB Aztec decision was in conflict with Sony decision. HC thus upheld revision u/s 263 by CIT in case of failure to make such reference to TPO.


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