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2020 (3) TMI 542 - AT - Income TaxTP Adjustment - jurisdiction of AO in making a reference to the Transfer Pricing Officer (TPO) for determining the arm s length price (ALP) of the international transactions reported by the assessee - Whether Instruction 2016 cannot override section 92C(3) of the Act ? - HELD THAT - We find that though the amount of the proposed transfer pricing adjustment was more than ₹ 10.00 crore in an earlier assessment year but the same fell short of the transfer pricing adjustment as it was still pending with the DRP at the time of the AO making a reference to the TPO for the year under consideration. Till then, the Assessing Officer had simply forward a draft of the proposed order of assessment to the eligible assessee proposing to make variation in the income returned. To sum up, we find that none of the two conditions enshrined in the Instruction of 2016 were satisfied in as much as neither transfer pricing adjustment of more than ₹ 10 crore was made for an earlier year nor, as a sequitur there was any question of such transfer pricing adjustment having been either upheld by a judicial authority or pending in appeal. That being the position, we hold that the AO made a reference to the TPO in contravention of Instruction No.3/2016. Since the Instruction is binding on the AO, such reference is declared as invalid and the consequential transfer pricing adjustment of ₹ 10.14 crore is directed to be deleted.- Decided in favour of assessee.
Issues Involved:
1. Jurisdiction of the Assessing Officer (AO) to refer the case to the Transfer Pricing Officer (TPO). 2. Validity of the transfer pricing adjustment made by the TPO. Detailed Analysis: 1. Jurisdiction of the Assessing Officer (AO) to Refer the Case to the Transfer Pricing Officer (TPO): The assessee challenged the jurisdiction of the AO in making a reference to the TPO for determining the arm's length price (ALP) of the international transactions. The AO made the reference based on the reasons that there was a transfer pricing adjustment of more than ?10 crore in an earlier year, as per Instruction No. 3/2016 issued by the CBDT. The AO sought approval from the Principal Commissioner of Income-tax (Pr. CIT), which was granted, and then made the reference to the TPO. The Tribunal examined the relevant documents, including the CASS reasons for scrutiny selection, which were based on non-transfer pricing risk parameters. It was noted that the case was selected for scrutiny on these parameters, and the AO sought approval from the Pr. CIT based on a previous transfer pricing adjustment exceeding ?10 crore. The Tribunal analyzed the relevant sections of the Income-tax Act, 1961, particularly Sections 92C and 92CA, which empower the AO to determine the ALP or refer it to the TPO with prior approval from the Commissioner. The Tribunal also considered various CBDT Instructions, including Instruction No. 3/2003, Instruction No. 15/2015, and Instruction No. 3/2016, which provide guidelines for making references to the TPO. The Tribunal noted that Instruction No. 3/2016, which was in force at the time of the reference, provided for two categories of cases for mandatory reference to the TPO: cases selected for scrutiny on transfer pricing risk parameters and cases selected on non-transfer pricing risk parameters. The AO's reference was based on para 3.3(b) of the 2016 Instruction, which requires a reference where there has been a transfer pricing adjustment of ?10 crore or more in an earlier year, and such adjustment has been upheld by judicial authorities or is pending in appeal. The Tribunal found that the transfer pricing adjustments for earlier years were only proposed in draft orders and were pending before the DRP, and no final assessment orders were passed making such adjustments. Therefore, the conditions stipulated in para 3.3(b) of the 2016 Instruction were not satisfied. The Tribunal held that the reference made by the AO was invalid as it did not meet the requirements of the 2016 Instruction. 2. Validity of the Transfer Pricing Adjustment Made by the TPO: Since the Tribunal declared the reference to the TPO as invalid, the consequential transfer pricing adjustment of ?10.14 crore was directed to be deleted. The Tribunal did not consider the merits of the transfer pricing adjustment due to the decision on the legal ground itself. Conclusion: The Tribunal allowed the appeal filed by the assessee, declaring the reference made by the AO to the TPO as invalid and directing the deletion of the transfer pricing adjustment of ?10.14 crore. The decision was based on the failure to satisfy the conditions stipulated in Instruction No. 3/2016 issued by the CBDT.
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