2021 (2) TMI 1111 - HC - Income Tax

Validity of draft order u/s 144C passed by the Deputy Commissioner of Income Tax - whether the assessee is right in contending that the assessee's case was selected for a limited scrutiny and the reference to the TPO was beyond the scope of the scrutiny? - HELD THAT - As rightly contended by Revenue the first respondent is not competent to check whether the value of the international transactions as furnished in Form 3CEB by a Chartered Accountant and return of income is correctly shown. Assessing Officer, being not competent to examine the said issue, necessarily, the case has to be referred to the TPO as per Section 92CA - the contention of the appellant/assessee that the case was selected for mere reconciliation is an incorrect interpretation. This is clear from the reason for which the case was selected for scrutiny and the issue arising there from. Thus, we find that there is no violation of the instructions issued by the CBDT. In our considered view, the learned Single Bench rightly took note of these aspects as well as paragraph 3.4 of the CBDT Instruction No.15/2015, which states that the issue on which a reference was thought to be necessary, has to be explicitly mentioned in the Assessing Officer's letter seeking reference to the TPO and such letter of the Assessing Officer dated 17.07.2018, was found to have complied with the said condition. We also agree and endorse the finding rendered by the learned Single Bench that the reason for selection of scrutiny by CASS was only for numerical reconciliation is a over simplification of the reason stated for selection. In fact, the learned Single Bench has observed that the officer might have been more detailed in the choice of words employed so as to specifically refer to the issue of total employee cost, however, non-reference to this, is not fatal, as the reason for selection by CASS has been produced and placed on record by the officer while seeking approval of a Principal Commissioner of Income Tax (PCIT) for reference to the TPO. As Court noted that after the interim order, which was initially granted, was not extended, the Assessing Officer issued show cause notice dated 11.10.2019, the appellant/assessee submitted their reply dated 23.10.2019, enclosing various details on the computation of the ALP as sought for by the Assessing Officer. However, the affidavit filed in support of the writ petitions was silent with regard to these facts. Thus, the learned Single Bench rightly concluded that the appellant has not only cooperated and participated in the conduct of assessment, but has also filed objections before the DRP that are pending disposal. Hence, we are of the considered view that the learned Single Bench rightly dismissed the writ petitions and the order does not call for any interference.

Summary

Issues Involved:
1. Validity of the notice issued by the Transfer Pricing Officer (TPO) under Section 92CA(2) and Section 92D(3) of the Income Tax Act, 1961.
2. Legality of the draft order under Section 144C of the Act passed by the Deputy Commissioner of Income Tax.
3. Jurisdiction of the Assessing Officer to refer the case to the TPO for determination of the Arm's Length Price (ALP).
4. Compliance with the Central Board of Direct Taxes (CBDT) Instructions regarding limited scrutiny and reference to TPO.

Detailed Analysis:

1. Validity of the Notice Issued by the TPO:
The appellant/assessee challenged the notice dated 19.12.2018 issued by the TPO under Section 92CA(2) and Section 92D(3) for the assessment year 2016-17. The appellant argued that the notice issued under Section 143(2) was for limited scrutiny to verify if the value of international transactions was correctly shown in Form 3CEB and the return of income. They contended that the reference to the TPO for determining the ALP was unauthorized as per Instruction No.3 of 2016 issued by the CBDT. The court, however, found that the reason for scrutiny, which included large aggregate value of total employee cost in comparison to aggregate value of international transactions, justified the reference to the TPO.

2. Legality of the Draft Order under Section 144C:
The appellant also challenged the draft order under Section 144C passed by the Deputy Commissioner of Income Tax on 27.11.2019. The court noted that the appellant had cooperated and participated in the assessment proceedings and had filed objections to the draft order before the Dispute Resolution Panel (DRP). The court held that the issues raised in the writ petitions could not be agitated before the DRP, thus justifying the appellant's prosecution of the appeals.

3. Jurisdiction of the Assessing Officer to Refer to TPO:
The appellant argued that the Assessing Officer was not competent to refer the case to the TPO for determining the ALP, as the case was selected for limited scrutiny. The court, however, held that the Assessing Officer, being not competent to examine the value of international transactions, necessarily had to refer the case to the TPO as per Section 92CA of the Act. The court found no violation of CBDT instructions and concluded that the reference to the TPO was within jurisdiction.

4. Compliance with CBDT Instructions:
The appellant contended that the reference to the TPO violated CBDT instructions regarding limited scrutiny. The court examined the reasons for scrutiny, which included TP risk parameters, and concluded that the case was not merely for numerical reconciliation but involved substantial issues justifying the reference to the TPO. The court endorsed the finding that the reason for selection by CASS was not oversimplified and that the Assessing Officer's letter seeking reference to the TPO complied with the required conditions.

Conclusion:
The court dismissed the appeals, holding that the reference to the TPO was justified and within jurisdiction. The court found no violation of CBDT instructions and concluded that the learned Single Bench rightly dismissed the writ petitions. Consequently, both appeals were dismissed with no costs, and the connected miscellaneous petition was closed.