CIT cannot exercise Section 263 powers when TPO accepts transfer pricing treatment without adjustment

ITAT Pune held that CIT was not justified in exercising revisionary powers under Section 263 regarding transfer pricing adjustments. The assessee's treatment of exit costs of TBA-10 machines as extraordinary items excluded from operating profit was accepted by TPO without adjustment. AO followed TPO's binding order under Section 92CA(4), making no error in the assessment. CIT failed to establish both conditions required under Section 263 - that the order was erroneous and prejudicial to revenue interests. The exclusion of extraordinary exit costs from operating margin computation was upheld following precedent. Assessee's appeal was partly allowed.

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Issues Involved:
1. Invocation of revisionary powers u/s 263 of the I.T. Act.
2. Determination of Arm's Length Price (ALP) and treatment of "Exist Cost".
3. Jurisdiction of CIT to revise the order passed by TPO u/s 92CA(3).

Summary:

Issue 1: Invocation of revisionary powers u/s 263 of the I.T. Act
The appeal by the assessee challenges the order of the CIT-IV, Pune, dated 29.03.2011, for the assessment year 2005-06, passed u/s 263 of the I.T. Act. The CIT invoked the provisions of Sec. 263, asserting that the assessment order u/s 143(3) was erroneous and prejudicial to the interest of the Revenue. The CIT's primary contention was the improper adjustment of the "Exist Cost" of TBA-10 machines in the ALP computation, which was allowed without discussion. Additionally, the CIT believed that claims related to depreciation, amortization, and impairment required further verification.

Issue 2: Determination of Arm's Length Price (ALP) and treatment of "Exist Cost"
The assessee argued that the TPO had considered all relevant details, including the "Exist Cost" of Rs. 12,66,65,008/-, while determining the ALP. The TPO's order, which was followed by the AO, did not make any adjustments for the "Exist Cost," indicating acceptance of the assessee's explanation. The assessee contended that the "Exist Cost" was an extraordinary item due to the technological obsolescence of TBA-10 machines and was rightly excluded from operating profits. The Tribunal found merit in the assessee's argument, citing the decision of the Hon'ble Delhi High Court in Marubeni India Pvt. Ltd, which upheld the exclusion of abnormal expenses while computing operating profits.

Issue 3: Jurisdiction of CIT to revise the order passed by TPO u/s 92CA(3)
The assessee contended that the CIT lacked jurisdiction to revise the TPO's order u/s 92CA(3), as the AO was bound to follow the TPO's adjustments u/s 92CA(4). The Tribunal agreed, referencing the decision in Tata Communications Ltd. vs. DCIT, which held that the CIT cannot exercise revisionary jurisdiction over the TPO's order. The Tribunal emphasized that the AO's order, which followed the TPO's adjustments, could not be considered erroneous or prejudicial to the Revenue.

Conclusion:
The Tribunal concluded that the CIT was not justified in invoking revisionary powers u/s 263, as the AO's order was neither erroneous nor prejudicial to the Revenue. The Tribunal set aside the CIT's order canceling the AO's order dated 10.12.2008, and allowed the assessee's appeal. The appeal was partly allowed, and the order was pronounced on 18th November 2016.

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