2023 (6) TMI 260 - AT - Income Tax

Tribunal upholds revision order over erroneous assessment, emphasizes compliance with CBDT instructions

The tribunal upheld the validity of the revision order passed by the Commissioner of Income Tax, finding the assessment order erroneous and prejudicial to ... Mandatory reference to TPO under CBDT Instruction No.3/2016 - deeming fiction under Explanation 2(c) to section 263 that non-compliance with Board's instructions renders order erroneous and prejudicial - AO's duty to obtain approval of PCIT/CIT before referring matters to TPO and to record satisfaction as a jurisdictional requirement - requirement to record in the assessment order that transfer pricing issue has not been examined where reference is not made to the TPOMandatory reference to TPO under CBDT Instruction No.3/2016 - deeming fiction under Explanation 2(c) to section 263 that non-compliance with Board's instructions renders order erroneous and prejudicial - Validity of the Commissioner's revision under section 263 for setting aside assessment on the ground that the AO did not refer international transactions to the TPO as required by CBDT Instruction No.3/2016. - HELD THAT: - The Tribunal held that Instruction No.3/2016 mandates that where a return is selected for scrutiny on transfer pricing risk parameters the AO must, after obtaining approval of the jurisdictional PCIT/CIT, refer the computation of ALP of international transactions to the TPO. The Instruction further requires that where the AO does not make such a reference he must record in the body of the assessment order that the transfer pricing issue has not been examined due to the Board's Instruction. Explanation 2(c) to section 263 creates a deeming fiction that an order is erroneous and prejudicial to the revenue if, in the opinion of the PCIT/CIT, it has not been made in accordance with any order, direction or instruction issued by the Board under section 119. Applying these provisions, the Tribunal found that the AO had not referred the matter to the TPO nor recorded the requisite note in the assessment order although the case had been selected on TP risk parameters, and that the CIT(IT) was therefore entitled to invoke Explanation 2(c) and set aside the assessment for compliance with the Instruction. The Tribunal observed that other contentions raised by the assessee could be agitated before the AO in the remand proceedings and that any authorities relied upon by the assessee were either inapplicable or distinguishable at this stage.The revision order under section 263 setting aside the assessment for failure to comply with Instruction No.3/2016 was upheld and the assessee's appeal dismissed.Final Conclusion: The Tribunal dismissed the appeal and upheld the Commissioner's revision order under section 263 for failure by the AO to refer transfer pricing issues to the TPO and to comply with CBDT Instruction No.3/2016, as falling within Explanation 2(c) to section 263; the assessee may raise remaining contentions before the AO in the set-aside proceedings. Issues Involved:1. Validity of the revision order passed by the Commissioner of Income Tax (IT).2. Requirement for the Assessing Officer (AO) to refer the determination of Arm's Length Price (ALP) of international transactions to the Transfer Pricing Officer (TPO).3. Applicability and binding nature of CBDT Instruction No.3/2016.4. Examination of whether the assessment order was erroneous and prejudicial to the interests of revenue under Explanation 2 to Section 263 of the Act.Summary:1. Validity of the Revision Order:The assessee challenged the revision order dated 17-03-2022 passed by the Commissioner of Income Tax (IT) for the assessment year 2018-19, asserting that the revision order was not valid.2. Requirement to Refer ALP Determination to TPO:The Commissioner noted that the assessment was selected for scrutiny under CASS due to 'TP Risk Parameter - International Transactions' and observed that the assessee had entered into international transactions amounting to Rs.279457.28 crores. The Commissioner highlighted that as per Instruction No.3/2016 issued by CBDT, the AO was mandatorily required to refer the determination of ALP to the TPO, which the AO failed to do, rendering the assessment order erroneous and prejudicial to the interests of revenue.3. Applicability and Binding Nature of CBDT Instruction No.3/2016:The assessee argued that the AO had made adequate inquiries and applied his mind to the issue, and that the discretion to refer the matter to the TPO was vested in the AO under Section 92CA. They contended that the CBDT circular could not override the express provisions of the Act. However, the Commissioner relied on the binding nature of the CBDT instruction, which mandated the referral of ALP determination to the TPO for cases selected on TP risk parameters.4. Erroneous and Prejudicial Assessment Order:The tribunal examined Explanation 2 to Section 263, which introduces a deeming fiction where an order is deemed erroneous and prejudicial if not made in accordance with any instruction issued by the Board under Section 119. The tribunal found that the AO's failure to refer the matter to the TPO, as mandated by Instruction No.3/2016, rendered the assessment order erroneous and prejudicial to the interests of revenue under clause (c) of Explanation 2 to Section 263.Conclusion:The tribunal concluded that the revision order passed by the Commissioner was neither infirm nor illegal. The appeal filed by the assessee was dismissed, affirming the validity of the revision order and the mandatory requirement for the AO to comply with CBDT instructions regarding the referral of ALP determination to the TPO.Result:The appeal filed by the assessee was dismissed.