2014 (7) TMI 417 - AT - Income Tax

Transfer pricing adjustment Rectification of mistake u/s 154 of the Act Held that - The AO to be perfectly justified in rectifying his order u/s 143(3) r/w s 254 dated 24.12.2007- This is as no revision to his earlier adjustment qua lease rentals for MC has been directed by the TPO vide his order u/s 94CA(3) r/ws 254 - in allowing relief to the assessee in respect of the adjustment, had acted without any basis, legal or factual - The question is not of the binding or otherwise nature of the TPO s direction/s u/s 92CA(3), but of the AO having acted de hors and in the absence of any such direction - The TPO having rightly or wrongly not revised his earlier direction u/s 92CA(3) dated 15.02.2005 pursuant to that by the tribunal dated 30.08.2006, the AO could not have acted suo motu in firstly disregarding the understanding of the tribunal s order by the TPO. The rectification order (whereby the A.O. aligns himself with the directions by the TPO, i.e., to the extent the assessment was in disagreement therewith) merging with the original order (assessment), the assessee s appeal against the rectification order would, therefore, stand to be considered only as an appeal against an assessment order. Not doing so would leave the assessee remedy less and for no fault of its . In-as-much as rectifying a mistake would fall within the inherent powers of the court or tribunal, it could also be contended that the rectification is not constrained on account of the time limitation that attends a rectification u/s 254(2) - if only to cause the removal of the prejudice, apart from other persuasive reasons, it is only proper to conclude that the tribunal had restored the matter qua Adjustment B also back to the AO - thus, the matter is remitted back to the TPO and allowance of proper opportunity to the assessee Decided in favour of Assessee.

Summary

Issues Involved:
1. Maintainability of the Assessing Officer's (AO's) action under section 154 of the Income Tax Act, 1961.
2. Adjustment of lease rentals for Dredger Gemini (DG) and Multicat Coby (MC).
3. Jurisdiction and authority of the Transfer Pricing Officer (TPO) and the AO.
4. Interpretation of the Tribunal's order regarding adjustments.
5. The binding nature of TPO's directions under section 92CA(3).

Detailed Analysis:

1. Maintainability of the Assessing Officer's (AO's) Action under Section 154:
The primary issue in this appeal is the maintainability of the AO's action under section 154 of the Income Tax Act, 1961. The assessee argued that the AO's order under section 154, which sought to rectify and withdraw the relief granted in respect of lease rentals for Multicat Coby (MC), was unwarranted and without jurisdiction. The Tribunal found that the AO was justified in rectifying his order under section 143(3) read with section 254, as there was no revision to his earlier adjustment regarding lease rentals for MC directed by the TPO. The AO acted without any legal or factual basis when he initially allowed relief for MC, and thus, the rectification was necessary and in accordance with the law.

2. Adjustment of Lease Rentals for Dredger Gemini (DG) and Multicat Coby (MC):
The assessee's income was initially adjusted by the AO based on the TPO's recommendations, leading to a significant increase in assessed income. The Tribunal had earlier restored the matter back to the AO for fresh adjudication. The AO allowed relief for both DG and MC, but later sought to rectify this by withdrawing the relief for MC. The Tribunal found that the AO's initial relief for MC was without basis as the TPO did not revise his earlier direction regarding MC. The Tribunal concluded that the AO's subsequent rectification was justified.

3. Jurisdiction and Authority of the TPO and the AO:
The Tribunal examined the jurisdiction and authority of the TPO and the AO in making adjustments. It was noted that the AO must act in accordance with the TPO's directions under section 92CA(3). The Tribunal highlighted that the AO could not disregard the TPO's understanding of the Tribunal's order and make decisions independently on merits. The AO's actions must align with the TPO's directions unless there is a clear directive from the Tribunal to the contrary.

4. Interpretation of the Tribunal's Order Regarding Adjustments:
The Tribunal considered whether its earlier order included directions for adjustments related to MC. The Tribunal found that the order should be interpreted as including directions for both DG and MC adjustments. This interpretation was supported by the fact that the Revenue had treated the order as such for the subsequent assessment year. The Tribunal emphasized that the assessee's appeal should be considered in its entirety, including adjustments for MC, to avoid any prejudice to the assessee.

5. The Binding Nature of TPO's Directions under Section 92CA(3):
The Tribunal discussed the binding nature of TPO's directions under section 92CA(3) and the changes brought by the Finance Act, 2007. It was noted that the AO had to frame the assessment by having regard to the arm's length price determined by the TPO. The Tribunal clarified that the AO's rectification aligned with the TPO's directions, and the assessee's right to appeal against the assessment should not be denied due to procedural issues.

Conclusion:
The Tribunal allowed the assessee's appeal, concluding that the AO's rectification under section 154 was justified and in accordance with the law. The Tribunal also directed that the matter regarding the adjustment for MC should be reconsidered by the AO, following due process and providing the assessee with a proper opportunity to present its case. The Tribunal's decision emphasized the importance of aligning the AO's actions with the TPO's directions and ensuring that the assessee's right to appeal is preserved.