2023 (12) TMI 1262 - AT - Income Tax

Revision u/s 263 by CIT - failure of the AO to send the case to the TPO - assessee s claim was that there was Specified Domestic Transactions and the payments were made covered u/s 40(A)(2)(b) and for which both the parties are paying similar rate of taxation and no Revenue has been affected - HELD THAT - We are of the considered view that Instruction No.3/2016 dated 10.03.2016 of CBDT providing for guidelines/implementation of transfer pricing provisions specifically provides that if a case is selected for scrutiny on the basis of transfer pricing risk parameters in respect of International Transactions or Specified Domestic Transactions or both the case has to be referred to TPO by the AO after obtaining the approval of the jurisdictional PCIT or CIT. The failure of Ld. AO to comply with these directions in relevant AY 2014-15 and following them in next AY 2015-16 makes it apparent that Ld. AO has not followed directions of Circular this years without mentioning any reasons for not referring the matter to TPO and that makes the order erroneous and prejudicial to the interest of Revenue irrespective of the fact that the transaction may have resulted into no loss to Revenue for the reason that both the parties were paying tax at similar rate as that is not a justification in TP issue examination by TPO. For remaining grounds for finding the assessment order to be erroneous and prejudicial to the interest of Revenue, we find that assessee had made submissions to Ld. PCIT that the issue was examined by the Ld. AO by raising queries to which assessee had responded by letters dated 29.04.2016, 11.07.2016, 11.08.2016 and 17.08.2016. The order of Ld. PCIT makes it apparent that he has taken note of these submissions of the assessee as made before Ld. AO and as available on the assessment record, but found that enquiry was not detailed without indicating by his own efforts as to where Ld. AO failed to follow the mandate of the Act in accepting the pleas. No separate and reasoning of his own are stated to establish his findings that how the submissions were not otherwise sustainable under the law to hold that assessment order was erroneous and prejudicial to the interest of Revenue. Thus, we are not inclined to interfere in the order of Ld. PCIT with regard to directions of AO to refer the matter to TPO but on other counts the order is not sustainable. Appeal of assessee is allowed partly.

Summary

Issues Involved:
- Jurisdiction of the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act, 1961
- Failure of the Assessing Officer (AO) to refer the case to Transfer Pricing Officer (TPO) for scrutiny

Summary of Judgment:

The Assessee, a partnership firm engaged in manufacturing and export of readymade garments, appealed against the order passed by the Ld. Commissioner of Income Tax (Appeals) under section 263 of the Income Tax Act, 1961 for the Assessment Year 2014-15. The PCIT observed that the case was selected for scrutiny based on various reasons including mismatch in sales turnover, specified domestic transactions, and other issues. The PCIT found the assessment order to be erroneous and prejudicial to the interest of Revenue due to lack of proper enquiries and verifications by the AO.

The PCIT questioned the assessment order on the grounds that the AO failed to send the case to the TPO for examination of specified domestic transactions and other issues. The PCIT directed the AO to refer the case to TPO and examine all reasons for scrutiny, providing the assessee with an adequate opportunity to respond.

The Assessee appealed before the Tribunal, arguing that the PCIT's jurisdiction under section 263 was beyond scope and the assessment by the AO was proper. The Tribunal considered the submissions and found that while the direction to refer the matter to TPO was justified, the PCIT did not provide sufficient reasoning to establish how the assessment order was erroneous and prejudicial to the interest of Revenue on other counts.

The Tribunal allowed the appeal partly, upholding the direction to refer the matter to TPO but finding the PCIT's order unsustainable on other grounds. The appeal was allowed partly with consequences to follow as per the determination of grounds.

In conclusion, the Tribunal upheld the PCIT's direction to refer the case to TPO but found the PCIT's order unsustainable on other grounds, allowing the appeal partly in favor of the Assessee.

(Order pronounced in the open court on 27.12.2023)