Court quashes show cause notice exceeding ITAT's remit

The court held that the show cause notice issued by the Revenue was beyond the scope of the remit by the ITAT and could not be sustained. The ITAT's remand was limited to determining the correct base in the PLI of OP/TC and did not extend to questioning the comparables' inclusion. The court found that the TPO's examination of comparables was not within the remit of the remand and quashed the show cause notice and all related proceedings. The writ petition was allowed without costs.

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Issues Involved:
1. Legitimacy of the show cause notice issued by the Revenue.
2. Scope and limits of the remand by the Income Tax Appellate Tribunal (ITAT).
3. Appropriateness of the comparables used for determining the Arm’s Length Price (ALP).

Detailed Analysis:

1. Legitimacy of the Show Cause Notice:
The petitioner argued that the show cause notice issued by the Revenue was beyond the scope of the remit by the ITAT and sought to reopen issues that had attained finality in judicial orders. The petitioner contended that the Revenue's attempt to reject the 53 comparable entities previously accepted and to introduce new comparables was unlawful. The court concluded that the impugned show cause notice could not be sustained, as the TPO could not travel beyond the specific finding of the remand, which was limited to the untenability of shifting the OP/TC to FOB.

2. Scope and Limits of the Remand by ITAT:
The ITAT had remanded the matter to the TPO for fresh determination of the ALP based on the correct cost base of the petitioner, in line with the judgment of the High Court for the assessment year 2006-07. The ITAT's operative order emphasized that the base in the denominator should be the 'total cost' incurred by the assessee, not the FOB value of goods between third-party enterprises. The court noted that the ITAT was not concerned with the appropriateness of including or excluding any comparable from the list furnished by the assessee. The remand was specifically about determining the correct base in the PLI of OP/TC and did not extend to questioning the basis for the TP exercise.

3. Appropriateness of the Comparables Used for Determining ALP:
The Revenue argued that the TPO acted within his jurisdiction to examine the comparables and determine the ALP based on a functional analysis of the comparables with the FAR of the assessee. The Revenue contended that out of the 53 comparables, 51 could not be accepted due to various reasons, such as different financial years, functional dissimilarity, and lack of current year data. However, the court found that the original TPO report, draft assessment order, and DRP's determination did not reflect any concern about the appropriateness of the comparables based on functionality. The court highlighted that the ITAT's substantial ruling was focused on the base of 'total cost' and not on the inclusion or exclusion of comparables.

Conclusion:
The court concluded that the Revenue's argument that the TPO/AO could doubt the appropriateness of the comparables used by the assessee was insubstantial and unmerited. The court emphasized that the remand was limited to determining the correct base in the PLI of OP/TC and did not extend to questioning the comparables' inclusion. Consequently, the show cause notice dated 23 September 2016 and all proceedings emanating from it were quashed. The writ petition was allowed without any order on costs.

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