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2022 (1) TMI 1198 - AT - Income TaxRevision u/s 263 - as per CIT neither the TPO, nor the Assessing Officer had made any inquiry in respect of various models of earth moving equipments, except 3DX model - CIT was of the view that the orders passed by the TPO and the Assessing Officer are erroneous and prejudicial to the interest of Revenue - TPO determined the ALP of royalty to the AE at 2% in respect of 3DX model, however, he has not suggested any adjustment on other models, like 2DX, excavators, JCB Earth Movers, JCB Heavy Wheel loader etc - HELD THAT - Notice issued under Section 263 of the Act as well as the order passed under the said provision would make it clear that learned PCIT has considered the assessment order to be erroneous and prejudicial to the interest of revenue, since, the TPO has not examined the arm's length nature of royalty paid to the AE in respect of other models of earth moving equipment. The show-cause notice issued under Section 263 of the Act and the order passed there under would leave no room for doubt that the shortcoming, according to the PCIT, is in the order passed by the TPO under section 92CA(3) of the Act due to non-inquiry/non-examination of certain transaction. However, section 263(1) empowers the Revisionary Authority to revise any order passed by the Assessing Officer, if in his opinion, such order is erroneous and prejudicial to the interest of Revenue. Thus, due to restriction imposed under section 263(1) of the Act, learned PCIT has no administrative power to revise the order passed by the TPO under section 92CA(3) of the Act. Therefore, the question arising for consideration is, when the PCIT has no power to revise the order passed by the TPO under section 92CA(3) of the Act, can he revise the assessment order which has been passed in conformity with the order of the TPO, as mandated under Section 92CA(4) of the Act? Our answer to the question is in the negative. When the provision contained under Section 92CA(4) of the Act makes it mandatory upon the Assessing Officer to compute the total income of the assessee in conformity with the order of the TPO and the Assessing Officer has computed the total income following the statutory mandate, the assessment order cannot be considered to be erroneous. Even, assuming that some prejudice might have been caused to the Revenue, nevertheless the twin conditions of 'erroneous' and 'prejudicial' to the interest of the revenue as provided under section 263(1) of the Act have to be fulfilled to enable the Revisionary Authority to assume jurisdiction under the said provision. Thus, once learned PCIT has no administrative power under Section 263(1) of the Act to revise the order of the TPO, he cannot revise the assessment order passed thereafter in compliance to the provision contained under Section 92CA(4) - See ESSAR STEEL LIMITED VERSUS ADDL. COMMISSIONER OF INCOME TAX, MUMBAI 2014 (4) TMI 809 - ITAT MUMBAI Non-examination of royalty payment on other models of earth moving equipment - Facts on record clearly reveal that every details relating to the royalty paid on all models, including 3DX model was furnished before the TPO and were examined by him. The reason for him to accept the royalty paid on other models is, similar payments were accepted consistently in the preceding assessment years. Therefore, the view of the TPO in accepting the royalty paid in respect of other models is a possible view considering the past history of such payment. That being the case, the orders passed by the TPO and thereafter by the Assessing Officer in conformity thereof, cannot be considered to be erroneous and prejudicial to the interest of the Revenue. In any case of the matter, neither in the show-cause notice, nor in the order passed under Section 263 of the Act, learned PCIT has provided any valid reason to demonstrate the prejudice caused to the Revenue. He has not pointed out even a single reason how the royalty paid on other models is not at arm's length, except, saying that the TPO has not inquired into and examined the royalty paid on other models. Thus as a natural corollary, the impugned order passed under Section 263 of the Act has to be declared as invalid and quashed. Accordingly, we do so. Resultantly, assessment order is restored.- Decided in favour of assessee.
Issues Involved:
1. Validity of the assumption of jurisdiction by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income-Tax Act, 1961. 2. Examination of the arm's length price (ALP) of royalty payments for models other than 3DX. 3. Adequacy of inquiry conducted by the Transfer Pricing Officer (TPO) and Assessing Officer (AO). 4. Adherence to principles of natural justice by providing adequate opportunity of being heard. Issue-wise Detailed Analysis: 1. Validity of the Assumption of Jurisdiction by the PCIT under Section 263: The assessee challenged the jurisdiction assumed by the PCIT under Section 263, arguing that the PCIT's action was based on conjectures and surmises without objective findings or conclusive evidence. The Tribunal noted that once a reference is made to the TPO under Section 92CA(1), the AO must compute the total income in conformity with the ALP determined by the TPO as per Section 92CA(4). The Tribunal held that the PCIT has no administrative power to revise the TPO's order under Section 92CA(3) and, consequently, cannot revise the assessment order passed in conformity with the TPO's order. Therefore, the Tribunal concluded that the PCIT's assumption of jurisdiction under Section 263 was invalid. 2. Examination of the ALP of Royalty Payments for Models other than 3DX: The PCIT's primary grievance was that the TPO did not examine the ALP of royalty payments for models other than the 3DX model. The Tribunal observed that the TPO had examined the royalty payments and accepted the royalty rate of 5% for all models except the 3DX model, where a rate of 2% was applied based on past assessments and the Dispute Resolution Panel's (DRP) directions. The Tribunal noted that the royalty payments for other models had consistently been accepted as being at arm's length in previous and subsequent years, and there was no factual difference warranting a different treatment for the impugned assessment year. 3. Adequacy of Inquiry Conducted by the TPO and AO: The Tribunal found that the TPO had called for and examined various details relating to royalty payments, including those for models other than 3DX. The TPO's decision to adjust the royalty rate only for the 3DX model was based on consistent findings from previous years and the fact that the patent for the 3DX model was developed in India. The Tribunal concluded that the TPO's view was a possible view considering the past history of such payments, and there was no non-inquiry or non-application of mind by the TPO or AO. 4. Adherence to Principles of Natural Justice: The assessee argued that the PCIT passed the order in haste without providing an adequate opportunity of being heard, violating the principles of natural justice. The Tribunal did not specifically address this issue in detail, as it found the PCIT's assumption of jurisdiction itself to be invalid. However, the Tribunal restored the assessment order, implicitly addressing the concern about the lack of adequate opportunity. Conclusion: The Tribunal allowed the appeals, setting aside the orders passed under Section 263 and restoring the assessment orders. The Tribunal held that the PCIT had no jurisdiction to revise the assessment orders, as the AO had fully complied with the statutory provisions and the TPO's order was based on a consistent and possible view. The Tribunal also found that the royalty payments for models other than 3DX had been adequately examined and accepted as being at arm's length in previous and subsequent years.
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