2014 (4) TMI 809 - AT - Income Tax

Jurisdiction u/s 263 of the Act Determination of ALP Held that - The decision in CIT vs. Max India Limited 2007 (11) TMI 12 - Supreme Court of India followed - where two views are possible and the TPO has taken one possible view the proceedings u/s 263 cannot be invoked - in the case instead of initiating proposal on TPO order, the CIT initiated the proceedings under AO s order which is not erroneous or prejudicial to the interests of the Revenue, as AO sincerely followed the mandate of provisions of section 92CA in proceeding to compute the total income under sub section 4 of section 92CA in conformity with the arm s length price so determined by the TPO - the provisions of section 92CA(4) have been amended w.e.f. 1.6.2007 which used the word shall AO is bound to follow the TPO s order determined under sub section 3 (which was itself modified by an order under sub section-5) of 92CA. No issue arises as the CIT wrongly invoked the proceedings u/s 263 on AO s order when the proposal by the TPO itself is for initiating the proceedings u/s 263 on the TPO order u/s 92CA(3) - Therefore, the order passed by the CIT cannot be justified on the facts of the case - any order of TPO is prejudicial to the interests of Revenue - CIT cannot exercise jurisdiction over TPO as TPO functions separately under the Director of Income Tax (TP) - the DIT should have initiated the proceedings u/s 263 on the order of the TPO instead of sending proposal to the CIT for revising the order of the TPO - the CIT wrongly initiated the proceedings on the assessment order u/s 143(3) which was in conformity with the TPO order u/s 92CA(3) Decided in favour of Assessee.

Issues Involved:
1. Jurisdiction of CIT under section 263 of the Income Tax Act.
2. Determination of Arm's Length Price (ALP) by the Transfer Pricing Officer (TPO).
3. Validity of the TPO's method for determining ALP.
4. Compliance by the Assessing Officer (AO) with the TPO's order.
5. Whether the CIT can revise the AO's order under section 263.
6. The applicability of Supreme Court judgments and ITAT precedents.

Detailed Analysis:

1. Jurisdiction of CIT under section 263 of the Income Tax Act:
The primary issue was whether the CIT-5, Mumbai, correctly invoked jurisdiction under section 263 to set aside the AO's order dated 01.01.08, which was passed in consonance with the TPO's order determining the arm's length price for certain transactions. The CIT initiated proceedings under section 263 based on a proposal from the DIT (TP-I), which suggested that the TPO's order was erroneous and prejudicial to the interest of the Revenue. The CIT set aside the AO's order, directing the AO to reframe the assessment after considering the observations in the section 263 order.

2. Determination of Arm's Length Price (ALP) by the Transfer Pricing Officer (TPO):
The assessee sold 10,700 equity shares in PT Essar Dhananjaya, Indonesia, to M/s. Essar Global Ltd, Mauritius, and claimed a long-term capital loss. The TPO initially determined the ALP at USD 7197.22 per share, resulting in a total sale price of Rs. 335.61 crores. However, upon noticing an error, the TPO revised the ALP to Rs. 44,99,23,887/-, reducing the difference in shares to Rs. 11,62,46,042/-. This revised ALP was adopted by the AO in the assessment order dated 01.01.2008.

3. Validity of the TPO's method for determining ALP:
The CIT's action was based on the TPO's contention that the net asset value (NAV) method should have been used instead of the price earning (PE) method. The TPO's revised proposal suggested an average value per share of USD 1709.46, resulting in an under-valuation of Rs. 34,72,05,236/-. However, the ITAT noted that the TPO's original order was binding on the AO, and the CIT's reference to a "revised TPO order" was factually incorrect as no such order existed.

4. Compliance by the Assessing Officer (AO) with the TPO's order:
The AO complied with the TPO's order under section 92CA(4), which mandates that the AO must compute the total income in conformity with the ALP determined by the TPO. The ITAT found that the AO's order dated 01.01.2008 did not suffer from any mistake or error as it adhered to the TPO's revised ALP.

5. Whether the CIT can revise the AO's order under section 263:
The ITAT concluded that the CIT erred in revising the AO's order when the proposal was to revise the TPO's order. The CIT does not have jurisdiction over the TPO administratively, and the AO's order, which complied with the TPO's determination, was neither erroneous nor prejudicial to the interests of the Revenue. The ITAT emphasized that the CIT should not have initiated proceedings under section 263 on the AO's order.

6. The applicability of Supreme Court judgments and ITAT precedents:
The ITAT referenced the Supreme Court's decision in CIT vs. Max India Limited, which held that when two views are possible, and the AO adopts one permissible view, it cannot be considered erroneous or prejudicial to the Revenue. The ITAT also distinguished the present case from the Sun Microsystems India Pvt. Ltd case, noting the change in the provisions of section 92CA(4) effective from 1.06.2007, which made it mandatory for the AO to follow the TPO's order.

Conclusion:
The ITAT allowed the assessee's appeal, setting aside the CIT's order under section 263. The ITAT observed that the CIT wrongly initiated proceedings on the AO's order, which was in conformity with the TPO's order. The ITAT also noted the need for clarity regarding the authority to modify the TPO's order when it is prejudicial to the interests of the Revenue.

Order Pronounced:
The appeal filed by the assessee is allowed, and the order of the CIT under section 263 is set aside. The order was pronounced in the open court on 31st October, 2012.

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