2023 (5) TMI 696 - AT - Income Tax

Revision u/s 263 by CIT - TPA of loan given to AE - PCIT directing AO to refer the international transaction of loan given to the Associated Enterprises, Mauritius which came into existence on conversion of assessee s investment in redeemable preference share and to incorporate the Arm's Length Price determined by the learned Transfer Pricing Officer to be incorporated in the assessment order - HELD THAT - It is an undisputed fact that conversion of redeemable preference shares into unsecured loan is an international transaction entered into by the assessee with its associated enterprises in Mauritius. Therefore, any adjustment arising on account of the arm's-length price of this international transaction is falling into the domain of the learned transfer-pricing officer only. Sole responsibility lying on the AO is to make reference of this international transaction to the learned transfer-pricing officer which has been made by the learned assessing officer after obtaining the prior approval of the PCIT It is also not the case of PCIT while passing order under section 263 of the income tax act that the provisions of explanation 2 are applicable as the order of the assessment has not been made in accordance with any orders/directions or instruction issued by the board u/s 119 of the act. There is no allegation/assertion in the order under section 263 of the income tax act that the learned assessing officer has not followed the mandatory instructions issued by the central board of direct taxes of referring to the learned transfer-pricing officer. It is also clear that prior to The Finance Act 2022 amended with effect from 1/4/2022, the order of the learned transfer pricing officer were not subject to revision under section 263 of the income tax act by the principal Commissioner of income tax. By The Finance Act 2022, with effect from 1/4/2022 clause (iii) to explanation 1 inserts order under section 92CA by the transfer-pricing officer. Thus, it is clear that the order passed under section 92CA by the learned TPO was not subject to revision under section 263 of the income tax act by the principal Commissioner of income tax. The order of the learned principal Commissioner of income tax is indirectly revising the order of the learned transfer-pricing officer. In the assessment order passed under section 143 (3) of the act there is no error on the part of the learned assessing officer either in making reference to the learned transfer pricing officer or in not incorporating any modification made by the learned transfer pricing officer. Therefore, No error in the order of the learned assessing officer but it is an attempt by the learned principal Commissioner of income tax to revise the order of the learned transfer-pricing officer, which is not permitted prior to 1/4/2022. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Validity of the Revision Order under Section 263 of the Income-tax Act, 1961.
2. Jurisdiction of the Principal Commissioner of Income Tax (PCIT) in revising the order of the Transfer Pricing Officer (TPO).

Summary:

Issue 1: Validity of the Revision Order under Section 263 of the Income-tax Act, 1961

The assessee filed an appeal against the Revision Order passed under Section 263 of the Income-tax Act, 1961 by the PCIT, which directed the Assessing Officer (AO) to refer the international transaction of interest on a loan (arising from the conversion of redeemable preference shares) to the TPO for determination of Arm's Length Price (ALP). The PCIT found the assessment order for A.Y. 2013-14 erroneous and prejudicial to the interest of the Revenue because the interest of Rs. 18.83 crores was not added to the total income. The assessee contended that this transaction was already examined by the TPO and AO, who determined the ALP at NIL and made no adjustments. The assessee argued that the PCIT's order was wrong and contrary to the provisions of the Income-tax Act, 1961, as the view adopted by the TPO and AO was one of the possible views within the Act's provisions.

Issue 2: Jurisdiction of the Principal Commissioner of Income Tax (PCIT) in Revising the Order of the Transfer Pricing Officer (TPO)

The assessee argued that the PCIT did not have the power to direct the TPO to recompute the ALP of the international transaction, as such powers were available only with effect from 1/4/2022. The PCIT's order was passed on 29/3/2019, and the issue pertained to A.Y. 2013-14. The Tribunal noted that the original reference to the TPO was made by the AO after obtaining prior approval from the PCIT, and the TPO's order was not subject to revision under Section 263 by the PCIT before 1/4/2022. The Tribunal found that the PCIT's order indirectly attempted to revise the TPO's order, which was not permitted.

Conclusion:

The Tribunal held that the order passed by the PCIT under Section 263 of the Income-tax Act was not sustainable in law and quashed it. The appeal of the assessee was allowed.