Pr.CIT cannot initiate section 263 revision proceedings based on borrowed satisfaction from AO regarding TPO order

The ITAT Mumbai held that revision proceedings under section 263 initiated by the Pr.CIT based on the AO's recommendation regarding TPO's order under section 92CA(3) were invalid. The court found that the Pr.CIT relied on "borrowed satisfaction" from the AO rather than forming independent satisfaction about the assessment order being erroneous and prejudicial to revenue. Following the precedent in Alfa Laval case, the tribunal ruled that section 263 proceedings cannot be initiated with borrowed satisfaction and must satisfy twin conditions independently. The proceedings were set aside in favor of the assessee.

---

---

Issues Involved:
1. Legality of initiating revision proceedings under Section 263 of the Income Tax Act, 1961.
2. Jurisdiction of the Principal Commissioner of Income Tax (Pr.CIT) to revise the order passed by the Transfer Pricing Officer (TPO).
3. Compliance with the twin conditions for exercising power under Section 263 of the Act.
4. Consideration of the Special Audit Report (SAR) by the TPO and the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Legality of Initiating Revision Proceedings under Section 263:
The assessee challenged the initiation of revision proceedings under Section 263 of the Income Tax Act, 1961, arguing that it was illegal and bad in law. The assessee contended that the proceedings were initiated based on the satisfaction recorded by the AO, not by the Pr.CIT, which is contrary to the requirements of Section 263. The tribunal observed that the revision proceedings were indeed initiated based on the AO's recommendation, which lacks statutory sanction and is a course of action unknown to the law. The tribunal emphasized that the Pr.CIT must independently call for and examine the record and consider the assessment order erroneous and prejudicial to the interests of the revenue. The tribunal concluded that the initiation of proceedings based on borrowed satisfaction is bad in law, and therefore, the proceedings under Section 263 were set aside.

2. Jurisdiction of the Pr.CIT to Revise the Order Passed by the TPO:
The assessee argued that the Pr.CIT wrongly assumed jurisdiction to revise the order passed by the TPO, as Section 263 does not confer any revisionary jurisdiction over the TPO. The tribunal agreed with the assessee, citing the case of JCB India Ltd. vs. DCIT, where it was held that the Pr.CIT has no jurisdiction to revise the order passed by the TPO under Section 92CA(3) of the Act. The tribunal noted that the Pr.CIT cannot exercise administrative or supervisory control over the TPO, and therefore, the revisionary proceedings initiated by the Pr.CIT were without lawful assumption of jurisdiction.

3. Compliance with the Twin Conditions for Exercising Power under Section 263:
The assessee contended that the twin conditions for exercising power under Section 263 were not fulfilled. These conditions are: (i) the Pr.CIT calling for and examining the record, and (ii) the Pr.CIT considering the assessment order erroneous and prejudicial to the interests of the revenue. The tribunal observed that in the given case, both conditions were not fulfilled by the Pr.CIT. The tribunal emphasized that the consideration that the assessment order is erroneous and prejudicial to the interests of the revenue should flow from and be the consequence of the Pr.CIT's examination of the record of proceedings. Since the revision proceedings were initiated based on the AO's recommendation, the tribunal concluded that the twin conditions were not satisfied, rendering the proceedings under Section 263 invalid.

4. Consideration of the Special Audit Report (SAR) by the TPO and the AO:
The Pr.CIT initiated proceedings under Section 263 based on the AO's observation that the TPO did not consider the SAR while determining the Arm's Length Price (ALP) for the assessment year. The assessee argued that the SAR, prepared by PWC under the direction of the Forward Market Commission (FMC), identified related parties based on a self-made definition not in accordance with any law. The assessee contended that the AO had already made 100% disallowance in respect of all transactions mentioned in the SAR, other than related parties as defined under Section 40A(2)(b) of the Act. The tribunal noted that the AO had disallowed payments to parties mentioned in the SAR and that no other payments were left out. Therefore, the tribunal concluded that no prejudice was caused to the interests of the revenue, and the mandatory twin conditions for exercising power under Section 263 were not fulfilled.

Conclusion:
The tribunal allowed the appeal filed by the assessee, setting aside the proceedings initiated under Section 263 of the Income Tax Act, 1961, due to the lack of lawful assumption of jurisdiction by the Pr.CIT and non-compliance with the twin conditions required for exercising power under the said section.

---