2018 (11) TMI 1172 - AT - Income Tax

Revision u/s 263 - non reference of matter to the Transfer Pricing Officer(TPO) - Held that - It is settled law that the CBDT Circulars are binding on Revenue authorities. The assessee s contention that in earlier years the matter was referred to the TPO, no transfer pricing adjustment was made, cannot at all be an excuse for the A.O. for not referring the matter to the TPO. As already explained herein above there is no discretion to the A.O. in this regard. Once it is so held the assessment order passed is clearly erroneous so as to be prejudicial to the interest of the Revenue. In the background of the aforesaid discussion, in our considered opinion, in light of the CBDT Circular Instruction 3/2016 dated 10th March, 2016, it was incumbent upon the A.O. to refer the transfer pricing matter to the TPO. The A.O. having failed to do so, the case admittedly falls under the jurisdiction of the Pr. CIT as an order by the A.O. which is erroneous so as to be prejudicial to the interest of the Revenue. - Decided against assessee

Summary

Issues Involved:

1. Legality and jurisdiction of the notice and order under Section 263 of the Income Tax Act.
2. Exercise of jurisdiction by Pr. CIT under Section 263 based on assumptions.
3. Requirement of mandatory reference to the Transfer Pricing Officer (TPO).
4. Validity of the assessment order passed after inquiries.

Issue-wise Detailed Analysis:

1. Legality and Jurisdiction of the Notice and Order under Section 263 of the Income Tax Act:

The appellant contended that the notice issued under Section 263 and the subsequent order passed by the Principal Commissioner of Income Tax (Pr. CIT) were illegal, bad in law, and without jurisdiction. The appellant argued that the original assessment order under Section 143(3) was neither erroneous nor prejudicial to the interest of the Revenue. However, the Pr. CIT observed that the assessment records indicated large international transactions with Associated Enterprises (AE), necessitating scrutiny under CASS. The Pr. CIT noted that the AO failed to refer the matter to the TPO, which was mandatory as per CBDT Instruction 3/2016.

2. Exercise of Jurisdiction by Pr. CIT under Section 263 Based on Assumptions:

The appellant argued that the Pr. CIT exercised jurisdiction under Section 263 based on mere assumptions without any basis. The Pr. CIT, however, emphasized that the AO did not make the mandatory reference to the TPO despite the case being selected for scrutiny due to large international transactions. The Pr. CIT held that this failure rendered the assessment order erroneous and prejudicial to the interest of the Revenue, thus justifying the exercise of jurisdiction under Section 263.

3. Requirement of Mandatory Reference to the Transfer Pricing Officer (TPO):

The appellant contended that the Pr. CIT erred in holding that the AO should have mandatorily referred the matter to the TPO. The appellant argued that the AO had examined the international transactions and applied his mind during the assessment proceedings. However, the Pr. CIT rejected this argument, stating that the AO's role was limited to determining whether a reference to the TPO was necessary. The Pr. CIT cited CBDT Instruction 3/2016, which mandates reference to the TPO for cases selected for scrutiny based on transfer pricing risk parameters. The Pr. CIT concluded that the AO's failure to refer the matter to the TPO rendered the assessment order erroneous.

4. Validity of the Assessment Order Passed After Inquiries:

The appellant argued that the assessment order was passed after making inquiries, and therefore, the notice and order under Section 263 were illegal. The Pr. CIT, however, noted that the AO's inquiries did not include a mandatory reference to the TPO, as required by CBDT Instruction 3/2016. The Pr. CIT emphasized that the AO's failure to follow this mandatory procedure rendered the assessment order erroneous and prejudicial to the interest of the Revenue.

Conclusion:

The Tribunal upheld the order of the Pr. CIT, stating that the AO's failure to refer the transfer pricing matter to the TPO was a clear violation of CBDT Instruction 3/2016. The Tribunal emphasized that the case was selected for scrutiny based on transfer pricing risk parameters, making the reference to the TPO mandatory. The Tribunal concluded that the assessment order was erroneous and prejudicial to the interest of the Revenue, thus falling under the jurisdiction of the Pr. CIT under Section 263. The appeal by the assessee was dismissed.