2017 (2) TMI 1318 - AT - Income Tax

TPA - computation of ALP - proof of reference to the TPO u/s 92CA - approval from competent authority - assessment barred by limitation - Held that - If the Assessing Officer considers it necessary to do so, he may refer the computation of the ALP, in relation to the said international transaction, u/s 92CA of the Act, to the TPO, after obtaining approval from the Commissioner or from the Principal Commissioner. What has to be referred by the Assessing Officer is the computation of ALP in relation to the said international transaction. No letter or correspondence making the reference to the TPO by the Assessing Officer is produced before us. Moreover, the approval was taken from the DIT(IT)-Kolkata, for referring M/s. Dongfang Electric, Kolkata Project Office to the TPO and not any international transactions. The TPO, in this case tried to identify the international transactions that the assessee has entered into and then proceeded to determine the ALP. No international transaction was identified by the Assessing Officer and referred to the TPO after taking approval of the DIT (International Taxation). The assessee s case is that there is no international transaction on the facts of his case. This aspect should have been adjudicated and approval taken from the appropriate authority. Thus, the mandate of the Section has not been followed by the Assessing Officer. Hence we have no other alternative but to hold that the reference to the TPO, u/s 92CA of the Act is bad in law. Assessing Officer is bound to pass an assessment order before 31st March, 2014 for the Assessment Year 2011-12. The extended time u/s 153(1) of the Act, does not come into play in the facts of this case. Hence in our considered view, the assessment is barred by limitation. - Decided in favour of assessee.

Issues Involved:

1. Validity of reference to the Transfer Pricing Officer (TPO) by the Assessing Officer (AO).
2. Determination of Arm's Length Price (ALP) for international transactions.
3. Method of determining ALP (CUP vs. TNMM).
4. Limitation period for completion of assessment.
5. Inclusion/exclusion of comparables in Transfer Pricing analysis.
6. Validity of assessment order based on TPO's findings.

Detailed Analysis:

1. Validity of Reference to TPO:

The assessee contended that the reference made by the AO to the TPO was erroneous and violated principles of natural justice. The AO referred the entire assessment to the TPO instead of specific international transactions as required by Section 92CA of the Income Tax Act, 1961. The Tribunal noted that no specific letter or communication referring the international transaction by the AO to the TPO was produced. The letter dated 14/03/2014 only communicated the approval from the DIT(TP) but did not specify any international transactions. The Tribunal concluded that the reference to the TPO was invalid and not in accordance with the mandate of Section 92CA.

2. Determination of ALP for International Transactions:

The assessee argued that the AO failed to determine the existence of specific international transactions before referring the matter to the TPO. The Tribunal noted that the AO did not identify any international transactions and referred the entire project office of the assessee to the TPO. This was contrary to the requirement of referring only the computation of ALP in relation to specific international transactions. The Tribunal held that the reference to the TPO was bad in law as the AO did not follow the prescribed procedure.

3. Method of Determining ALP (CUP vs. TNMM):

The assessee claimed that the Comparable Uncontrolled Price (CUP) method was the Most Appropriate Method (MAM) for determining the ALP, whereas the AO adopted the Transactional Net Margin Method (TNMM). Detailed arguments were made by both parties regarding the appropriateness of the methods and the inclusion/exclusion of certain comparables. However, the Tribunal decided to first address the preliminary issue of the validity of the reference to the TPO before delving into the merits of the methods used.

4. Limitation Period for Completion of Assessment:

The Tribunal observed that since the reference to the TPO was invalid, the extended time for completion of assessment under Section 153(1) of the Act did not apply. Consequently, the assessment order should have been passed before 31st March 2014 for the Assessment Year 2011-12. The Tribunal held that the assessment was barred by limitation and quashed the assessment order on this ground.

5. Inclusion/Exclusion of Comparables in Transfer Pricing Analysis:

The revenue's cross-appeal challenged the exclusion of a comparable (M/s Ceragon Network India Ltd.) by the DRP. However, since the Tribunal quashed the assessment order on the ground of limitation, the cross-appeal was dismissed as infructuous.

6. Validity of Assessment Order Based on TPO's Findings:

Given that the reference to the TPO was held invalid, the Tribunal concluded that the assessment order based on the TPO's findings was also invalid. The Tribunal emphasized that the AO did not follow the proper procedure in referring the matter to the TPO, leading to the assessment being barred by limitation.

Conclusion:

The Tribunal allowed the appeal of the assessee, quashing the assessment order on the ground of limitation. The cross-appeal of the revenue was dismissed as infructuous. The Tribunal's decision was based on the invalidity of the reference to the TPO and the consequent limitation period for completing the assessment.

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