CIT's revision under Section 263 partly valid for failing mandatory TPO referral per CBDT Instruction 3/2016

ITAT Delhi held that CIT's revision u/s 263 was partly valid. The AO failed to refer the case to TPO despite CBDT Instruction No.3/2016 requiring mandatory referral for transfer pricing scrutiny involving Specified Domestic Transactions, making the assessment order erroneous and prejudicial to Revenue. However, CIT's other findings lacked proper reasoning and independent analysis of AO's examination. The assessee's appeal was partly allowed, with the TPO referral direction upheld but other revision grounds rejected.

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Issues Involved:
- Jurisdiction of the Principal Commissioner of Income Tax (PCIT) under section 263 of the Income Tax Act, 1961
- Failure of the Assessing Officer (AO) to refer the case to Transfer Pricing Officer (TPO) for scrutiny

Summary of Judgment:

The Assessee, a partnership firm engaged in manufacturing and export of readymade garments, appealed against the order passed by the Ld. Commissioner of Income Tax (Appeals) under section 263 of the Income Tax Act, 1961 for the Assessment Year 2014-15. The PCIT observed that the case was selected for scrutiny based on various reasons including mismatch in sales turnover, specified domestic transactions, and other issues. The PCIT found the assessment order to be erroneous and prejudicial to the interest of Revenue due to lack of proper enquiries and verifications by the AO.

The PCIT questioned the assessment order on the grounds that the AO failed to send the case to the TPO for examination of specified domestic transactions and other issues. The PCIT directed the AO to refer the case to TPO and examine all reasons for scrutiny, providing the assessee with an adequate opportunity to respond.

The Assessee appealed before the Tribunal, arguing that the PCIT's jurisdiction under section 263 was beyond scope and the assessment by the AO was proper. The Tribunal considered the submissions and found that while the direction to refer the matter to TPO was justified, the PCIT did not provide sufficient reasoning to establish how the assessment order was erroneous and prejudicial to the interest of Revenue on other counts.

The Tribunal allowed the appeal partly, upholding the direction to refer the matter to TPO but finding the PCIT's order unsustainable on other grounds. The appeal was allowed partly with consequences to follow as per the determination of grounds.

In conclusion, the Tribunal upheld the PCIT's direction to refer the case to TPO but found the PCIT's order unsustainable on other grounds, allowing the appeal partly in favor of the Assessee.

(Order pronounced in the open court on 27.12.2023)

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