2021 (11) TMI 741 - AT - Income Tax

Revision u/s 263 by CIT - Faulty computation of ALP - As per CIT assessment is erroneous as reference to TPO was not made - HELD THAT - PCIT has failed to specify as to how and on what ground the assessment order is erroneous and/ or which part of the CBDT instructions were not adhered to by the AO. Merely not recording the satisfaction Ld AO on the records does not make the assessment order erroneous and prejudicial to the interest of revenue, as is decided in the various judicial pronouncement by various courts. We have also perused Instruction no 3/2016 and are of the opinion that it was not mandatory for the AO to make a reference to the TPO. Even as per the order and the show cause notice u/s 263 which has been issued it is evident that the selection of the case was for complete scrutiny and the issues was not on transfer pricing parameters risk factors.The Instruction No. 3 of 2016 in para 3.3 states that where cases are selected for scrutiny on non transfer pricing risk parameters but also having international transactions or specified domestic transactions, shall be referred to TPO in specified circumstances The said clause 3.3 of the Instruction specifies three situations and we find that none of the situation is applicable in the case of the assessee. The clause (a) states where there are international transactions or specified transactions or both and the taxpayer has not filed any report required to be submitted under section 92E. This is not a situation in the case of the assessee, and report was submitted and also during the assessment the same was submitted. The second situation where in previous assessments if any addition on account of transfer pricing adjustment of more than ten crores and addition being upheld in appellate proceedings is also not applicable in the case of the assessee, and this is not a case where search or seizure or survey operations had been carried out. In such a situation it cannot be said that the assessment is erroneous as reference to TPO was not made. See M/S AMIRA PURE FOODS PVT. LTD. VERSUS THE PR. C.I.T, CENTRAL GURGAON 2017 (12) TMI 189 - ITAT DELHI - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the order passed under Section 263 of the Income Tax Act, 1961.
2. Whether the original assessment order was erroneous and prejudicial to the interest of revenue.
3. Requirement and validity of reference to the Transfer Pricing Officer (TPO).

Issue-wise Detailed Analysis:

1. Validity of the order passed under Section 263 of the Income Tax Act, 1961:
The assessee challenged the validity of the order passed under Section 263 by the Principal Commissioner of Income Tax (PCIT), Udaipur, arguing that the mandatory statutory requirements for invoking jurisdiction under Section 263 were not fulfilled. The assessee relied on the Supreme Court's decision in Malabar Industrial Co. Ltd., which mandates that both conditions—erroneous order and prejudice to the interest of revenue—must co-exist for invoking Section 263. The Tribunal noted that the PCIT had not conducted any independent inquiry to substantiate the claim that the original assessment order was erroneous and prejudicial to the revenue. The Tribunal emphasized that a mere statement that the Assessing Officer (AO) did not conduct proper inquiries does not suffice for assuming jurisdiction under Section 263.

2. Whether the original assessment order was erroneous and prejudicial to the interest of revenue:
The PCIT held that the original assessment order was erroneous and prejudicial to the revenue because the AO failed to verify the large outward remittances to non-residents and did not properly examine the replies submitted by the assessee. The Tribunal found that the AO had issued detailed questionnaires and the assessee had duly responded to all queries, with the AO considering these responses during the assessment proceedings. The Tribunal concluded that the PCIT failed to specify how the assessment order was erroneous or which part of the CBDT instructions were not adhered to by the AO. The Tribunal also referred to various judicial pronouncements which held that not recording the AO's satisfaction does not make the assessment order erroneous and prejudicial to the interest of revenue.

3. Requirement and validity of reference to the Transfer Pricing Officer (TPO):
The PCIT directed the AO to make a reference to the TPO for the computation of Arm's Length Price (ALP) concerning international transactions. The assessee argued that the case was not selected for scrutiny based on transfer pricing risk parameters, and therefore, a reference to the TPO was not mandatory. The Tribunal referred to CBDT Instruction No. 3/2016, which outlines specific circumstances under which a reference to the TPO is required. The Tribunal found that none of these circumstances applied to the assessee's case. The Tribunal also noted that the AO had verified the audit report under Section 92E and the books of accounts during the assessment proceedings, and no adverse inference was drawn. The Tribunal concluded that the PCIT's direction to refer the case to the TPO was not justified.

Conclusion:
The Tribunal quashed the order passed under Section 263, holding that the original assessment order was neither erroneous nor prejudicial to the interest of revenue. The Tribunal emphasized that the AO had duly considered all the information and responses provided by the assessee during the assessment proceedings, and the PCIT had failed to conduct any independent inquiry to justify the invocation of Section 263. The Tribunal also found that a reference to the TPO was not mandatory in the assessee's case, as the conditions outlined in CBDT Instruction No. 3/2016 were not met.