2023 (9) TMI 1080 - AT - Income Tax

Revision u/s 263 - TP Adjustment - international transaction with its Associates Enterprises (AEs) - CIT concluded AO s failure to examine the issue by not referring the SDT specified domestic transactions to TPO - HELD THAT - There is no dispute that the AE while filing return of income, in its report in Form 3CEB reported various international as well as specified domestic transfer. The assessing office made reference to TPO for determination of Arm s length price of certain international transactions only. Admittedly the assessee reported specified domestic transactions with its associated enterprises for more than Rs. 47.00 Crore, which is more than the threshold limit of Rs. 10.0 Crore for making reference to the TPO. The specified domestic transaction which consist of transfer of steam from boiler unit is of Rs. 23.65 Crore. Thus, admittedly remaining specified domestic transaction of more than threshold limit of Rs. 10.00 Crore, nowhere discussed examined or disallowed by assessing officer. Deduction of section 80IA disallowed on the basis of finding of TPO in earlier years - Such action of assessing office in not in accordance with mandate of CBDT Circular no.3 of 2016. There is no dispute that the Circulars of CBDT is binding on the assessing officer. So far as other / remaining specified domestic transaction of more than Rs. 23 Crore, the assessment order is totally silent, hence, the assessment order is certainly not only erroneous on such issue but so far as prejudicial to the interest of revenue. In absence of reference to TPO with regard to such domestic transaction, the transaction remained unexamined. The specified domestic transaction has direct bearing on the computation of income, therefore, to that extent it is certainly prejudicial to the interest of revenue. Further clause (c) of Explanation-2 of section 263 is also attracts in the present case. In our considered view the twin conditions for invoking the jurisdiction under section 263 is fully met out. PCIT while granting approval of reference to TPO with regards to international transaction reported by AE, considered the issue of specified domestic transaction and now cannot review of decision of his predecessor and that impugned order will enlarge the period of limitation for passing order by TPO - We are not convinced with such submission of ld AR for the assessee, once the order passed by assessing officer is found to be erroneous and so far as prejudicial to the interest of revenue and stand revised, all necessary legal consequences are to be followed as per the statutory provisions. The AO or TPO will be bound to pass order giving effect as per the statutory proceeding. And there is no such enlargement of period of limitation as argued by ld AR for the assessee. We are also not convinced with the submissions that the ld PCIT has revived order of his predecessor by passing order under section 263. As recorded earlier that once it is proved that assessment order is erroneous and prejudicial to the interest of revenue, the PCIT has no option except to exercise his jurisdiction under section 263. There is no bar in section 263 that the ld PCIT cannot revise the issue where it contained the determination of Arm s Length Price . All the grounds of appeal raised by the assessee dismissed.

Summary

Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act.
2. Disallowance of deduction under Section 80IA.
3. Non-referral of Specified Domestic Transactions (SDT) to Transfer Pricing Officer (TPO).
4. Examination of expenses incurred for earning exempt income under Section 14A.

Summary:

Jurisdiction under Section 263 of the Income Tax Act:
The assessee challenged the jurisdiction of the Principal Commissioner of Income Tax (PCIT) under Section 263, arguing that the order passed by the Assessing Officer (AO) was neither erroneous nor prejudicial to the interest of the Revenue. The Tribunal held that the PCIT was justified in invoking Section 263 as the AO failed to refer the Specified Domestic Transactions (SDT) to the TPO, which was mandatory as per CBDT Instruction No.3/2016. The Tribunal found the AO's order to be erroneous and prejudicial to the interest of the Revenue.

Disallowance of Deduction under Section 80IA:
The AO disallowed the deduction under Section 80IA for the profit on the sale of steam by the Boiler division to other divisions, based on the findings of the TPO in earlier years. The assessee argued that the Boiler division was a separate unit eligible for deduction. The Tribunal upheld the PCIT's order, noting that the AO's failure to refer the SDT to the TPO led to an erroneous assessment, thus justifying the revision under Section 263.

Non-referral of SDT to TPO:
The AO referred only the international transactions to the TPO and not the SDT, despite the SDT amounting to Rs. 47.78 crores, which exceeded the threshold limit. The Tribunal agreed with the PCIT that the AO was bound to refer the SDT to the TPO as per CBDT instructions. The Tribunal found the AO's omission to be erroneous and prejudicial to the interest of the Revenue, thus validating the PCIT's revision of the assessment order.

Examination of Expenses Incurred for Earning Exempt Income under Section 14A:
The PCIT noted that the AO did not examine the expenses incurred for earning exempt income under Section 14A. The assessee contended that this issue was not part of the show cause notice and that no opportunity was given to explain. The Tribunal found that the AO's failure to examine this aspect further justified the revision under Section 263.

Conclusion:
The Tribunal dismissed the appeal of the assessee, upholding the PCIT's order under Section 263. The Tribunal found that the AO's assessment was erroneous and prejudicial to the interest of the Revenue due to the non-referral of SDT to the TPO and failure to examine expenses under Section 14A. The Tribunal emphasized that the PCIT's actions were within the statutory provisions and did not enlarge the period of limitation for passing the order by the TPO.