Transfer pricing reference requirement under CBDT Instruction No. 3/2016 triggered revision for erroneous assessment order

Explanation 2(c) to section 263 applies where an assessment order is not made in accordance with a Board instruction under section 119. CBDT Instruction No. 3/2016 required a reference to the Transfer Pricing Officer in cases selected on transfer pricing risk parameters, subject to prescribed approval. Because the assessing officer did not make the mandatory reference and the assessment order did not record any non-examination of the transfer pricing issue under the Instruction, the order was treated as erroneous and prejudicial to the interests of revenue. The revision order was upheld, and further objections were left to be raised in the set-aside proceedings.

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Issues: Whether the revision order under section 263 was valid on the ground that the assessing officer did not make the mandatory reference to the Transfer Pricing Officer in terms of CBDT Instruction No. 3/2016, thereby rendering the assessment order erroneous and prejudicial to the interests of revenue under Explanation 2(c).

Analysis: Explanation 2 to section 263 creates a deeming fiction under which an assessment order is treated as erroneous and prejudicial to the interests of revenue where it is not made in accordance with an order, direction or instruction issued by the Board under section 119. The Instruction No. 3/2016 required reference to the Transfer Pricing Officer in cases selected on transfer pricing risk parameters, after obtaining the prescribed approval. The assessing officer had not made such a reference, and the assessment order also did not record that the transfer pricing issue had not been examined because of the Instruction. On these facts, the statutory condition in Explanation 2(c) was attracted, and the assessee's additional objections were held to be matters that could be raised in the set-aside proceedings.

Conclusion: The revision order was upheld and the challenge to it failed.

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