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The Principal Commissioner of Income Tax-4, Mumbai v. M/s S.G. Asia Holdings (India) Pvt. Ltd.

Civil Appeal · 2019 INSC 898Decided 13 Aug 2019
Civil Appeal No. 6144 of 2019
Justice Uday Umesh Lalit · Justice Vineet Saran

Background

The tax department added about Rs. 2.89 crore to the respondent company's income, concluding that brokerage it charged its parent company (0.05%) was below the prevailing market rate. The company challenged this before the Income Tax Appellate Tribunal, which set aside the addition on the ground that the Assessing Officer had failed to follow the Central Board of Direct Taxes' (CBDT) mandatory Instruction No. 3/2003, which required such pricing questions above a certain transaction value to be referred to a dedicated Transfer Pricing Officer (TPO) rather than decided by the Assessing Officer alone. The Bombay High Court upheld the Tribunal's ruling, and the tax department appealed to the Supreme Court.

Decision Breakdown

The Supreme Court agreed that the CBDT's Instruction No. 3/2003 was mandatory, and that the Assessing Officer had breached it by not referring the international-transaction pricing question to the TPO before making the addition. However, the Court held that rather than simply striking down the addition outright, the correct remedy, as the tax department's representative had argued before the Tribunal, was to send the matter back to the Assessing Officer so a proper reference could now be made to the TPO under Section 92CA of the Act. The appeal was allowed to that limited extent, with the matter remanded for the Assessing Officer to follow the mandatory procedure.

Lesson Learnt

When a government authority is legally required to follow a specific procedural step (such as referring a technical pricing question to a specialist officer) and skips it, courts will not simply let the authority's conclusion stand nor wipe it out entirely: they will often send the matter back so the correct procedure can be followed from that point onward.

Official source (sci.gov.in)View Judgment (PDF)

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