Assessment not erroneous for failure to refer transactions to TPO; PCIT erred in prejudicial ruling.

The tribunal held that the Assessing Officer's failure to refer specified domestic transactions to the Transfer Pricing Officer did not render the assessment erroneous due to the retrospective omission of section 92BA(i) by the Finance Act 2017. The tribunal found that the PCIT erred in terming the assessment order as prejudicial to revenue and allowed the assessee's appeal, reversing the revision directions.

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Issues Involved:
1. Whether the Assessing Officer's failure to refer specified domestic transactions to the Transfer Pricing Officer (TPO) under section 92CA rendered the assessment order erroneous and prejudicial to the interests of the revenue.
2. Applicability of the Finance Act 2017's omission of section 92BA(i) with retrospective effect.

Detailed Analysis:

1. Assessing Officer's Failure to Refer Specified Domestic Transactions to TPO:

The Principal Commissioner of Income Tax (PCIT) exercised revision jurisdiction under section 263 of the Income Tax Act, 1961, terming the assessment dated 19.12.2016 as erroneous and prejudicial to the interests of the revenue. The PCIT's primary contention was that the Assessing Officer (AO) failed to refer specified domestic transactions to the TPO for determining the arm’s length price, as mandated by CBDT Instruction No. 3/2016 dated 10.03.2016. The PCIT argued that the AO's inaction in not making the mandatory reference to the TPO, despite the presence of large specific domestic transactions, constituted an error.

The PCIT cited several judicial precedents, including the Delhi High Court's decision in GEE VEE Enterprise vs. Addl. CIT and the Supreme Court's decision in Malabar Industrial Co. Pvt. Ltd vs. CIT, to support the proposition that an assessment order could be considered erroneous if the AO failed to make necessary inquiries. The PCIT concluded that the AO's failure to refer the case to the TPO amounted to passing an assessment order without proper inquiry, thus making it erroneous and prejudicial to the interests of the revenue.

2. Applicability of the Finance Act 2017's Omission of Section 92BA(i):

The tribunal's coordinate bench in Eveready Industries India Ltd. vs. PCIT, ITA No.805/Kol/2019, held that the omission of section 92BA(i) by the Finance Act 2017, effective from 01.04.2017, applied retrospectively to the assessment year 2014-15. The bench noted that the legal effect of the omission was that section 92BA(i) never existed in the statute. Consequently, any reference to TPO under section 92CA for transactions covered by the omitted provision would be invalid.

The tribunal found that the PCIT's reliance on the CBDT Instruction No. 3/2016 was misplaced, as the instruction did not mandate a reference to the TPO for cases selected on non-transfer pricing risk parameters. The tribunal emphasized that the AO had conducted necessary inquiries, including examining the assessee's international transactions with associated enterprises, and found no basis for the PCIT's claim that the AO's order was erroneous.

The tribunal also highlighted that the PCIT's direction to the AO to consider making a reference to the TPO in the set-aside proceedings was contrary to the view expressed in the coordinate bench's decision in DVC Emta Coal Mines Ltd & Ors Vs ACIT, which held that any proceeding initiated under the omitted clause (i) of section 92BA would not survive.

Conclusion:

The tribunal concluded that the PCIT erred in law and on facts by terming the assessment order dated 19.12.2016 as erroneous and prejudicial to the interests of the revenue. The omission of section 92BA(i) by the Finance Act 2017 with retrospective effect meant that the AO's inaction in not making a reference to the TPO did not render the assessment erroneous. The tribunal reversed the PCIT's revision directions and allowed the assessee's appeal.

Order:

The assessee's appeal is allowed, and the order is pronounced in the open court on 31.12.2019.

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