2022 (4) TMI 1462 - AT - Income Tax

Revision u/s 263 - As per CIT AO has not referred International Transactions and Specified Domestic Transactions (SDT) to the transfer-pricing officer for determination of Arms Length Price - HELD THAT - Case of assessee was not selected on any of the reasons which are related to transfer pricing adjustment. Merely there are outbound remittances by the assessee to a non-resident does not show that there is a transfer pricing risk involved in the above case. In view of this we find that according to paragraph number 3.3 the learned assessing officer was not required to refer to the learned transfer-pricing officer for determination of arm s-length price of the international transaction. Instructions of central board of direct taxes binds assessing officer according to us the learned assessing officer followed it - CIT did not refer at all the above instructions of CBDT. Further more it cannot be said that explanation 2 of Section 263 applies because here the learned assessing officer has passed the order in accordance with instructions issued by the board. No evidences are placed/referred in the order of the learned PCIT about any prior transfer pricing adjustment in the case of the assessee or any action of survey search and seizure. The reference of form 3CEB is made in the order of the learned PCIT itself. Therefore there not exist the circumstances which warrants the learned assessing officer to refer the matter to the learned transfer pricing officer. As decided in case of Secure meters Ltd 2021 (9) TMI 1436 - ITAT JODHPUR when a case is selected for scrutiny on non-TP risk parameters it is not mandatory for the learned assessing officer to refer the matter to the learned transfer pricing officer for determination of arm s-length price of international transactions and specified domestic transactions and therefore the order passed by the learned assessing officer cannot be said to be erroneous so far as prejudicial to the interest of the revenue and hence cannot be subjected to revision u/s 263 of the act by the learned PCIT. Accordingly on the first ground of non-reference to the learned transfer pricing officer we do not find any infirmity in the order passed by the learned assessing officer by not referring it to the learned transfer pricing officer for determination of arm s-length price of the international transactions and specified domestic transaction and therefore the order of the learned that AO is not erroneous and hence cannot be subject to revision u/s 263 of the act. Depreciation on goodwill - As in the first year itself wherein depreciation was claimed by assessee in assessment year 2015 16 the claim was allowed in scrutiny assessment which is not disturbed by revenue. This is the second year the claim of the depreciation on goodwill. Ld AR has also stated that it is not a self generated goodwill but arising on acquisition of above partnership firm. AR has placed before us the decision of the coordinate bench in case of Bodal chemicals Ltd 2019 (10) TMI 914 - ITAT AHMEDABAD wherein in paragraph number 10 it has been held that revenue once allowed the deduction for the depreciation claimed by the assessee then it is debarred to reject the claim of the assessee in the subsequent year on the written down value carried forward from the earlier assessment year. Therefore we fully agree that on this issue the learned principal Commissioner of income tax could not have invoked the provisions of Section 263 of the act. Even otherwise claim of depreciation on goodwill is a debatable issue on which provisions of Section 263 could not be invoked. Appeal filed by the assessee is allowed.

Summary

Issues Involved:
1. Validity of the order passed under Section 263 of the Income-Tax Act.
2. Requirement of referring international and specified domestic transactions to the Transfer Pricing Officer (TPO).
3. Depreciation claim on goodwill.

Issue-wise Detailed Analysis:

1. Validity of the Order Passed Under Section 263 of the Income-Tax Act:
The assessee, Bhavani Gems Private Limited, challenged the order passed under Section 263 by the Principal Commissioner of Income-Tax (PCIT) -5, Mumbai, which held that the assessment order dated 21.11.2018 under Section 143(3) was erroneous and prejudicial to the interest of Revenue. The PCIT's order directed the Assessing Officer (AO) to pass a fresh assessment order. The Tribunal examined whether the AO's failure to refer international and specified domestic transactions to the TPO and the allowance of depreciation on goodwill rendered the assessment order erroneous and prejudicial to Revenue's interest.

2. Requirement of Referring International and Specified Domestic Transactions to the TPO:
The PCIT found that the AO had not referred the international transactions amounting to Rs. 133.76 crores and specified domestic transactions of Rs. 20.89 crores to the TPO for determination of Arm's Length Price (ALP). The Tribunal noted that the case was selected for scrutiny under CASS for reasons unrelated to transfer pricing risk parameters. According to CBDT Instruction No. 3/2016, cases selected for scrutiny on non-transfer pricing risk parameters should be referred to the TPO only under specified circumstances, which were not applicable in this case. The Tribunal held that the AO was not required to refer the matter to the TPO as per the instructions, and thus, the AO's order was not erroneous.

3. Depreciation Claim on Goodwill:
The PCIT also noted that the AO allowed depreciation of Rs. 4.87 crores on self-generated goodwill, which should have been taken at Rs. Nil. The Tribunal observed that the goodwill was acquired from a partnership firm and had been part of the block of assets since 2012, with depreciation allowed in previous years. Citing precedents, the Tribunal held that the Revenue could not disallow depreciation in subsequent years if it was allowed in the initial year. Therefore, the AO's allowance of depreciation on goodwill was not erroneous.

Conclusion:
The Tribunal concluded that the order passed under Section 263 by the PCIT was not sustainable. The AO's failure to refer the transactions to the TPO and the allowance of depreciation on goodwill did not render the assessment order erroneous or prejudicial to the interest of Revenue. Consequently, the appeal filed by the assessee was allowed, and the order under Section 263 was quashed.