2018 (5) TMI 1266 - HC - Income Tax

Court Invalidates TPO Reference, Safe Harbour Option Valid; Transfer Pricing Regime Not Applicable

Mehsana District Co-Operative Versus Deputy Commissioner of Income Tax

The court deemed the reference made by the Assessing Officer to the Transfer Pricing Officer (TPO) invalid as the petitioner's safe harbour option was ... Validity of reference made by AO to the TPO of the petitioner's specified domestic transactions - safe harbour rule application - Held that:- In the present case, admittedly, after the petitioner exercised option for application of safe harbour rules in accordance with the provisions of rule 10THC the Assessing Officer passed no order under subrule( 4) of rule 10THD declaring that the exercising of option was invalid. In terms of subrule( 7) and subrule( 8) of the said rule, therefore, the option exercised by the assessee would be treated as valid. Once this conclusion is reached, it follows as a natural and necessary corollary that the Transfer Pricing regime would not apply. That being the case, the Assessing Officer had no authority to make any reference to the TPO to ascertain the arm's length price of the petitioner's specified domestic transactions. Reference itself was therefore, invalid. CBDT's circular dated 10.3.2006 could not have and does not lay down anything to the contrary. - Petition is allowed. Reference made by the Assessing Officer to the TPO in the present case is quashed Issues Involved:1. Validity of the reference made by the Assessing Officer to the Transfer Pricing Officer (TPO).2. Compliance with Safe Harbour Rules by the petitioner.3. Legality of the TPO's order dated 15.9.2017.Detailed Analysis:1. Validity of the Reference Made by the Assessing Officer to the TPO:The petitioner challenged the reference made by the Deputy Commissioner of Income Tax to the TPO regarding the petitioner’s specified domestic transactions. The petitioner argued that this reference was illegal and invalid as the petitioner had applied for safe harbour, and such application was deemed accepted under the relevant rules. The Assessing Officer made the reference to the TPO without informing the petitioner, despite the petitioner’s objections raised in a letter dated 8.12.2016. The court examined the statutory provisions under Section 92CA of the Income Tax Act, which allows the Assessing Officer to refer the computation of the arm's length price to the TPO with prior approval. However, the court found that the Assessing Officer did not follow the proper procedure, as no order was passed declaring the petitioner’s safe harbour option invalid. Therefore, the reference to the TPO was deemed invalid.2. Compliance with Safe Harbour Rules by the Petitioner:The petitioner, a District level Cooperative Milk Producers' Union, had opted for safe harbour for the assessment year 2014-2015 by filing the required application along with the income return. The court referred to Section 92CB of the Act and Rules 10THA to 10THD of the Income Tax Rules, which outline the safe harbour mechanism. The petitioner satisfied the conditions of being an eligible assessee and undertaking eligible specified domestic transactions. The court noted that the Assessing Officer did not raise any objections or pass any order invalidating the petitioner’s safe harbour option within the stipulated time. Consequently, the petitioner’s safe harbour option was deemed valid, and the transfer pricing regime did not apply.3. Legality of the TPO's Order Dated 15.9.2017:Given that the reference to the TPO was invalid, the court held that the TPO's order dated 15.9.2017, which made no adjustments to the arm's length price of the petitioner’s specified domestic transactions, must be set aside. The court emphasized that the CBDT circular dated 10.3.2016 did not override the statutory provisions and could not mandate a reference to the TPO when the safe harbour option was validly exercised.Conclusion:The court allowed the petition, quashing the reference made by the Assessing Officer to the TPO and setting aside the TPO's order dated 15.9.2017. The petition was disposed of accordingly.