Ranbaxy Laboratories Ltd vs. CIT (Delhi High Court)

AO’s self-determination of ALP without referring to TPO is “erroneous & prejudicial to interests of revenue”

The assessee entered into international transactions with its AEs, the value of which exceeded Rs. 5 crores. The AO passed an order u/s 143(3) in which he recorded the finding that he had examined the transactions and found them to be at arms’ length and no transfer pricing adjustment was required to be made. The CIT thereafter passed an order u/s 263 on the ground that in view of Instruction No. 3 of 2003 dated 20.5.2003, the AO ought to have referred the issue to the TPO instead of himself determining the arms’ length price of the transactions and that the assessment order was consequently “erroneous and prejudicial to the interests of the revenue”. On appeal, the Tribunal (114 TTJ (Del) 1) upheld the revision order. On further appeal by the assessee, HELD dismissing the appeal:

Though s. 92CA enables the AO to refer an international transaction to the TPO if he considers it “necessary or expedient” to do so, Instruction No. 3 dated 25.5.2003 makes it mandatory for the AO to make a reference to the TPO if the aggregate value of the international transaction exceeds Rs. 5 crores. This Circular, having been issued u/s 119, is binding on the AO. The AO ought to have referred the matter to the TPO having regard to the fact that Specialized Cell was created to deal with complicated and complex issues arising out of the transfer mechanism. The AO’s omission to follow the binding Circular amounted to making assessment without conducting proper inquiry and investigation and resulted in the order becoming “erroneous and prejudicial to the interest of the Revenue”. The observations in Sony India 288 ITR 52 (Del) (while upholding the constitutional validity of the aforesaid Circular) that the said Circular was a “Guideline” which did not take away the discretion of the AO was made in a different context.