Supreme Court ruling: Assessing Officer cannot determine arm’s length price without referring to TPO

The determination of the arm’s length price (ALP) cannot be carried out by the Assessing Officer alone, as it is mandatory to refer the matter to the Transfer Pricing Officer (TPO). The provisions concerning transfer pricing are outlined in Sections 92 to 92F of the Income-tax Act, which became effective from Assessment Year 2002-03 and have undergone several amendments over time. These amendments include the introduction of Safe Harbour and Advance Pricing Agreement provisions, as well as the extension of the applicability of transfer pricing provisions to Specified Domestic Transactions.

In a notable case, PCIT, Mumbai v. S.G. Asia holdings (India) Pvt. Ltd. (2019) 108 213 (SC), the Hon’ble Supreme Court clarified that CBDT’s Instruction No.3/2003 dated 20.05.2003 makes it obligatory for the Assessing Officer to refer the matter to the TPO. The failure to do so renders any Transfer Pricing Adjustments made therein invalid in law, even if the assessment order itself is deemed valid. Therefore, the matter should be returned to the Assessing Officer’s jurisdiction so that the appropriate reference can be made to the TPO.

CBDT Instruction No. 3/2003, Dated 20.05.2003 (superseded by Instruction No. 15/2015 (F. No. 500/9/2015-APA-ii), dated 16.10.2015) emphasizes that the provisions relating to transfer pricing in sections 92 to 92F of the Income-tax Act, which came into effect from Assessment Year 2002-03, require the computation of income from an international transaction based on the arm’s length price between associated enterprises.

Considering the instructions issued by the CBDT and the judgment of the Hon’ble Apex Court, it is firmly established that the Assessing Officer is compelled to refer the matter to the Transfer Pricing Officer (TPO) for the determination of the Arm’s Length Price (ALP). Failure to adhere to this requirement constitutes a breach of mandatory instructions, and any order passed without following the prescribed procedure will be rendered null and void. Therefore, in the case of DCIT v. Meneta Automotive Components (2023) 150 484 (ITAT Delhi), the appeal of the Revenue was dismissed, favoring the assessee.

To summarize, the power to determine the arm’s length price lies outside the jurisdiction of the Assessing Officer alone. The Assessing Officer must adhere to the CBDT’s instructions and refer the matter to the Transfer Pricing Officer (TPO) for the necessary assessment. Failure to comply with this obligation would result in the violation of mandatory instructions and render any order passed without fulfilling the prescribed procedure invalid. It is essential to recognize the significance of involving the TPO in the determination of the arm’s length price to ensure fair and accurate assessment in cases involving transfer pricing.

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