Holding

The Tribunal was correct; the Assessing Officer’s failure to refer the case to the Transfer Pricing Officer violated mandatory CBDT instructions, rendering the transfer pricing adjustment bad in law.

Summary

M/s S.G. Asia Holdings (India) Pvt. Ltd. received brokerage from its parent company at a rate of 0.05%, which the Assessing Officer (AO) deemed lower than market rates and made a transfer pricing addition of Rs.2,89,82,746 under Section 92 of the Income Tax Act. The AO did not refer the matter to a Transfer Pricing Officer (TPO) as required by CBDT Instruction No.3/2003. Both the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal set aside the addition, holding that the AO’s failure to refer to the TPO breached mandatory instructions. The High Court affirmed this view. The Supreme Court allowed the appeal, confirming that the AO must comply with the mandatory reference to the TPO and remitted the matter to the AO to make the appropriate reference.

Issues considered

Whether the Assessing Officer is mandated to refer transfer pricing matters to the Transfer Pricing Officer under Section 92CA and CBDT Instruction No.3/2003.
Whether the addition made under Section 92 is invalid if the AO fails to make such a reference.

Legislation cited

Income Tax Act, 1961s. 119, s. 143(3), s. 92, s. 92C, s. 92CA

Subjects

Transfer pricingSection 92Transfer Pricing OfficerCBDT Instruction No.3/2003Arm's length priceAssessmentMandatory instructions

Judgment

[2019] 10 S.C.R. 133 133

THE PRINCIPAL COMMISSIONER OF INCOME TAX-4, A
MUMBAI
v.
M/s. S.G. ASIA HOLDINGS (INDIA)PVT. LTD.
(Civil Appeal No. 6144 of 2019) B
AUGUST 13, 2018
[UDAY UMESH LALIT AND VINEET SARAN, JJ.]
Income Tax Act, 1961: s.92 – Transfer Pricing Adjustment –
Respondent received certain amount of brokerage from its parent
C
company – During the assessment proceedings, respondent was
directed to furnish details about the parent company and the rate
of brokerage that was charged – According to the Assessing Officer,
the brokerage charged by the respondent was only 0.05% which
was found to be at a lower rate as compared to the prevalent rates
in market – Assessing Officer, therefore, while computing the D
assessment made an addition of Rs.2,89,82,746/- under s.92 of the
Act – Appellate Authority confirmed the addition made by the
Assessing Officer – Tribunal set aside the findings rendered by the
first two authorities and held that Transfer Pricing Adjustment made
by the Assessing Officer was contrary to the mandatory instructions
E
issued by CBDT in its Instruction No.3/2003 dated 20.05.2003 –
The view so taken by the Tribunal was affirmed by the High Court
– On appeal, held: In view of the guidelines issued by the CBDT in
Instruction No.3/2003 the Tribunal was right in observing that by
not making reference to the Transfer Pricing Officer (TPO), the
Assessing Officer had breached the mandatory instructions issued F
by the CBDT – Matter remitted to the Assessing Officer for making
appropriate reference to the TPO – CBDT’s Instruction No.3/2003.
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 6144
of 2019.
From the Judgment and Order dated 27.08.2018 by the High Court G
of Bombay in Income Tax Appeal No. 281/2016.
Mahabir Singh, Sr. Adv., V. Girish Chowdary, H. R. Rao,
Mrs. Anil Katiyar, Advs. for the Appellant.

H
133
134 SUPREME COURT REPORTS [2019] 10 S.C.R.

A Arijit Chakravarty, Arush Negi, Abhishek Tilak, Himanshu Tyagi,
Advs. for the Respondent.
The Judgment of the Court was delivered by
UDAY UMESH LALIT, J.
B 1. This Appeal by Special Leave challenges the judgment and
final order dated 27.08.2018 passed by the High Court of Bombay
dismissing Income Tax Appeal No.281 of 2016 preferred by the appellant
herein and thereby confirming the order dated 22.04.2015 passed by the
Income Tax Appellate Tribunal (‘the Tribunal’, for short) in ITA No.2399/
Mum/2009.
C
2. The facts leading to the filing of this Appeal are as under:-
A) The respondent had received certain amount of brokerage
from its parent company. During the assessment
proceedings the respondent was directed to furnish details
D about the parent company and the rate of brokerage that
was charged. After the details were furnished, the
respondent was asked to establish if the parent company
was involved in arbitrage activity and whether the rate
charged was higher. After considering the material on
record, according to the Assessing Officer, the brokerage
E charged by the respondent was only 0.05% which was
found to be at a lower rate as compared to the prevalent
rates in market. The Assessing Officer, therefore, while
computing the assessment under Section 143(3) of the
Income Tax Act, 1961 (‘the Act’, for short), by his order
F dated 27.12.2007 made an addition of Rs.2,89,82,746/-
under Section 92 of the Act.
B) The respondent being aggrieved preferred an appeal
before the CIT(A)1, who by his order dated 16.02.2009
confirmed the addition made by the Assessing Officer
and dismissed the appeal. The matter was carried further
G
by filing ITA No.2399/Mum/2009 before the Tribunal.
C) The Tribunal by its order dated 22.04.2015 set aside the
findings rendered by the first two authorities and held that

1
H Commissioner of Income Tax (Appeals)
THE PRINCIPAL COMMISSIONER OF INCOME TAX-4, MUMBAI v. 135
M/s. S.G. ASIA HOLDINGS (I) PVT. LTD. [UDAY UMESH LALIT, J.]

transfer pricing adjustment made by the Assessing Officer A
was contrary to the mandatory instructions issued by
CBDT2 in its Instruction No.3/2003 dated 20.05.2003.
While allowing the appeal, the Tribunal observed as under:-
“16.1 After considering the entire judicial discussion
discussed hereinabove, in our considered opinion, the B
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 making the assessment
order on this issue in violation of the provisions of C
the law. We, therefore, set aside the findings of the
Ld. CIT(A) on this issue and hold that the Transfer
Pricing Adjustments made by the AO in contradiction
to the mandatory instructions of the CBDT is bad in
law. Here, we would like to make it clear that the D
assessment order is good but the Transfer Pricing
Adjustments made therein are bad in law. Ground
No.11 is therefore partly allowed.
16.2 Before parting with this issue, the Ld. DR has
emphasized that if the AO has not followed the E
mandatory directions, the case may be set aside to
the file of the AO so that he may refer the matter to
the TPO. We do not subscribe to this argument of
the Ld. DR for the simple reason that the Tribunal is
an Appellate Authority and therefore cannot interfere
in the administrative matters which are mandatory F
as per the provisions of the Act. Reference to the
TPO is an administrative matter which was supposed
to be followed by the AO which he has failed to do
so. The Tribunal cannot make any good to such lapse
made by the AO. G
17. As we have held that T.P. Adjustments are bad
in law, we do not find it necessary to dwell into the
merits of the case.

2
Central Board of Direct Taxes H
136 SUPREME COURT REPORTS [2019] 10 S.C.R.

A 18. In the result, the appeal filed by the assessee is
partly allowed. … …”
3. The view so taken by the Tribunal was affirmed by the High
Court which is presently under Appeal. We heard Mr. Mahabir Singh,
learned Senior Advocate in support of the Appeal and Mr. Arijit
B Chakravarty, learned Advocate for the Respondent.
4. Instruction No.3/2003 dated 20.05.2003 which weighed with
the Tribunal and the High Court, is as under:-
“Instruction No. 3/2003

C SECTION 92 OF THE INCOME TAX ACT, 1961 – TRANSFER
PRICING – COMPUTATION OF INCOME FROM
INTERNATIONAL TRANSACTION HAVING REGARD TO
ARM’S LENGTH PRICE UNDER SECTION 92 –
GUIDELINES TO TRANSFER PRICING OFFICERS AND
ASSESSING OFFICERS TO OPERATIONALISE TRANSFER
D PRICING PROVISIONS AND TO HAVE PROCEDURAL
UNIFORMITY.
INSTRUCTION NO. 3/2003, DATED 20-05-2003
(SUPERSEDED BY INSTRUCTION NO.15/2015 (F.NO.500/
9/2015-APA-II), DATED 16-10-2015)
E
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,
F
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
G 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:
H
THE PRINCIPAL COMMISSIONER OF INCOME TAX-4, MUMBAI v. 137
M/s. S.G. ASIA HOLDINGS (I) PVT. LTD. [UDAY UMESH LALIT, J.]

(i) Reference to Transfer Pricing Officer (TPO):- The Power A
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
B
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 C
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
D
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 E
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 F
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 G
needed at this stage and the Assessing Officer should not embark
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 database, it would be appropriate if a small number of H
138 SUPREME COURT REPORTS [2019] 10 S.C.R.

A 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
B
associated enterprise or there are transactions with more than
one associated enterprises the aggregate value of which exceeds
Rs.5 crores the transaction should be referred to TPO. Before
making reference to the TPO, the Assessing Officer has to seek
approval of the Commissioner/Director as contemplated under
C the Act. Under the provisions 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
aspects of the case during pendency of assessment proceedings
D
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.
E 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
F 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 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
G 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
H section 92C. The price has to be determined by any one of the
THE PRINCIPAL COMMISSIONER OF INCOME TAX-4, MUMBAI v. 139
M/s. S.G. ASIA HOLDINGS (I) PVT. LTD. [UDAY UMESH LALIT, J.]

methods stipulated in sub-section (1) of section 92C and by applying A
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,
B
weight given to various factors and so on. The selection of the
most appropriate method will depend upon the facts of the case
and the factors mentioned in rules contained in rule 10C. The
TPO after taking to 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 C
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
D
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. E
(iii) 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 F
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 G
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
H
140 SUPREME COURT REPORTS [2019] 10 S.C.R.

A Officer is dealt with expeditiously so as to leave the Assessing
Officer with sufficient time to offer an opportunity of being heard
of 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
B
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.
These instructions are under Section 119 of the Income-tax Act.
C
ANNEXURE I
Register of record to be maintained by Transfer Pricing
Officer
1 2 3 4 5 6 7 8 9 10 11 12 13

Sl.No. Date of Name of Name Nature and Name and Nature of Date of Transfer Arms Method Reference `Date of
D receipt the A.O. and quantum of addressof association issue of price as length applied to any despatch
of making address international the as per notice takenby price as database of the
reference reference of the transaction associated section to the determined adopted order of
from tax as per enterprise 92A taxpayer taxpayer by the by TPO the A.O.
A.O. payer section 92B and the Transfer
and and country in Pricing
nature assessment which it Officer
of year is resident under
business section
E 92CA(3)

ANNEXURE II
Order under section 120, read with section 92CA of the
Income-tax Act, 1961, dated April, 2003
F In exercise of the power conferred by sub-section
(1) and sub-section (2) of section 120 of the
Income-tax Act, 1961, the Central Board of Direct
Taxes hereby directs that the Transfer Pricing
Officers mentioned in column 2 having their
G headquarters mentioned in column 3 shall exercise
such powers and perform such function of Transfer
Pricing Officers as mentioned in Section 92CA
for the purpose of sections 92C and 92D of the
Act, in respect of persons or classes of persons
mentioned in column 5:”
H
THE PRINCIPAL COMMISSIONER OF INCOME TAX-4, MUMBAI v. 141
M/s. S.G. ASIA HOLDINGS (I) PVT. LTD. [UDAY UMESH LALIT, J.]

5. It was submitted by Mr. Mahabir Singh, learned Senior Advocate A
that the expression “…..the Assessing Officer considers it necessary
or expedient so to do, he may, with the previous approval of the
Commissioner, refer the computation of the arm’s length price in
relation to the said international transaction or specified domestic
transaction under Section 92C to the Transfer Pricing Officer”
B
occurring in Section 92CA of the Act signified that discretion was vested
in the Assessing Officer and it would not be mandatory in every single
case that he must refer the issue of computation of the Arm’s Length
Price to the TPO3.
6. However, the following expressions employed in Instruction
No.3/2003 put the matter in a different perspective: - C

“… ...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 upon scrutinizing the
correctness or otherwise of the price of the international D
transaction at this stage… … If there are more than one
transaction with an associated enterprise or there are transactions
with more than one associated enterprise the aggregate value of
which exceeds Rs.5 crores, the transactions should be referred
to the TPO. … …Since the case will be selected for scrutiny E
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.
…… F
(vi) 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 regard to the arm’s length price so determined by the TPO.”
7. In view of the guidelines issued by the CBDT in Instruction G
No.3/2003 the Tribunal was right in observing that by not making
reference to the TPO, the Assessing Officer had breached the mandatory
instructions issued by the CBDT. We do not find the conclusion so
arrived at by the Tribunal to be incorrect.
3
Transfer Pricing Officer H
142 SUPREME COURT REPORTS [2019] 10 S.C.R.

A 8. However, the Tribunal ought to have accepted the submission
made by the Departmental Representative as quoted in para 16.2 of its
order and the matter ought to have been restored to the file of the
Assessing Officer so that appropriate reference could be made to the
TPO. It would therefore be upto the authorities and the Commissioner
concerned to consider the matter in terms of Sub-Section (1) of Section
B
92CA of the Act.
9. We, therefore, allow this Appeal to the aforesaid extent and
direct that it would now be upto the Assessing Officer to take appropriate
steps in terms of Instruction No.3/2003.
C 10. The Appeal is allowed to the aforesaid extent. No costs.

Devika Gujral Appeal allowed.

D

E

F

G

H