2023 (6) TMI 260 - AT - Income Tax

Revision u/s 263 - determination of ALP of transactions to TPO - non reference of matter of determination of ALP to the TPO by AO - HELD THAT - In the instant case, we notice that the Instruction no.3/16 issued by CBDT mandates that the AO should refer the matter of determination of ALP of international transactions to TPO. As per paragraph 3.2 of the Instruction, the AO is required to refer the matter of determination of ALP of international transactions to the TPO after obtaining approval from PCIT/CIT, if the return of income of the assessee has been selected under T.P risk parameter. AO, in the instant case, did not refer the matter of determination of ALP to the TPO as per the mandatory requirement of Instruction No.3/2016. As per clause (c) of Explanation 2 to sec. 263, the order passed without complying with the instruction etc., issued by CBDT u/s 119 of the Act would render the order erroneous and prejudicial to the interests of revenue. Since Explanation 2 is a deeming provision, the same has to be read strictly and in the instant case, in our view, clause (c) of Explanation 2 shall squarely apply to the facts of the present case. Decided against assessee.

Issues Involved:
1. Validity of the revision order passed by the Commissioner of Income Tax (IT).
2. Requirement for the Assessing Officer (AO) to refer the determination of Arm's Length Price (ALP) of international transactions to the Transfer Pricing Officer (TPO).
3. Applicability and binding nature of CBDT Instruction No.3/2016.
4. Examination of whether the assessment order was erroneous and prejudicial to the interests of revenue under Explanation 2 to Section 263 of the Act.

Summary:

1. Validity of the Revision Order:
The assessee challenged the revision order dated 17-03-2022 passed by the Commissioner of Income Tax (IT) for the assessment year 2018-19, asserting that the revision order was not valid.

2. Requirement to Refer ALP Determination to TPO:
The Commissioner noted that the assessment was selected for scrutiny under CASS due to "TP Risk Parameter - International Transactions" and observed that the assessee had entered into international transactions amounting to Rs.279457.28 crores. The Commissioner highlighted that as per Instruction No.3/2016 issued by CBDT, the AO was mandatorily required to refer the determination of ALP to the TPO, which the AO failed to do, rendering the assessment order erroneous and prejudicial to the interests of revenue.

3. Applicability and Binding Nature of CBDT Instruction No.3/2016:
The assessee argued that the AO had made adequate inquiries and applied his mind to the issue, and that the discretion to refer the matter to the TPO was vested in the AO under Section 92CA. They contended that the CBDT circular could not override the express provisions of the Act. However, the Commissioner relied on the binding nature of the CBDT instruction, which mandated the referral of ALP determination to the TPO for cases selected on TP risk parameters.

4. Erroneous and Prejudicial Assessment Order:
The tribunal examined Explanation 2 to Section 263, which introduces a deeming fiction where an order is deemed erroneous and prejudicial if not made in accordance with any instruction issued by the Board under Section 119. The tribunal found that the AO's failure to refer the matter to the TPO, as mandated by Instruction No.3/2016, rendered the assessment order erroneous and prejudicial to the interests of revenue under clause (c) of Explanation 2 to Section 263.

Conclusion:
The tribunal concluded that the revision order passed by the Commissioner was neither infirm nor illegal. The appeal filed by the assessee was dismissed, affirming the validity of the revision order and the mandatory requirement for the AO to comply with CBDT instructions regarding the referral of ALP determination to the TPO.

Result:
The appeal filed by the assessee was dismissed.

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