2024 (4) TMI 145 - HC - Income Tax

AO cannot exceed TPO's ALP determination under Section 92CA for transfer pricing adjustments

M/s. Giesecke And Devrient India Pvt. Ltd. Versus Deputy Commissioner of Income Tax 2. 1 & Ors.

The HC held that the AO cannot make transfer pricing adjustments beyond the ALP determined by the TPO under Section 92CA. The AO must refer international ... TP Adjustment - Addition of international transaction related to the demerger - whether the AO can proceed to make transfer pricing adjustment beyond the ALP determination by the TPO in light of the mandate of Section 92CA? - HELD THAT:- As in order to compute the ALP of the international transactions, the AO ‘may’ refer the matter to the office of the TPO, with prior permission of the Principal Commissioner of Income Tax [PCIT] or Commissioner of Income Tax [CIT]. Mandate of Section 92CA(4) of the Act would reflect that the AO shall calculate the total income of the assessee in conformity with the ALP determined by the TPO. We may usefully refer to the dictum laid down in the case of CIT v. S.G. Asia Holdings (India) (P) Ltd., [2019 (8) TMI 661 - SUPREME COURT] wherein, the Court settled the controversy around the word ‘may’ used in Section 92CA(1) and is no longer res integra. The Hon’ble Supreme Court also referred to CBDT instruction no. 3/2003 and ruled that it is mandatory for the AO to refer the matter to the TPO in order to determine the ALP of the international transactions if selected for scrutiny on the basis of transfer pricing risk parameters. It is abundantly clear that in cases, where certain international transactions may have a bearing on the computation of total income, the AO ought to refer the matter to the TPO in order to determine the ALP of the international transactions and the AO, while computing the total income of the assessee, shall proceed in conformity with the ALP determined by the TPO. It is trite position of law that if the legislative scheme prescribes an act to be done in a certain manner, it ought to be done in that manner, and that manner alone. As per the legislative mandate behind Section 92CA of the Act, the ALP determination of any international transactions falls in the domain of the TPO. Moreover, the dictum laid down in CIT v. S.G. Asia Holdings [Supra] noticeably elucidates that the AO is not clothed with the powers to ascertain the ALP of any international transaction that is selected on the transfer pricing risk parameters. Furthermore, Section 92CA(4) of the Act evidently mandates that the AO cannot deviate itself from the TPO order while computing the total income of the assessee. In the present case, the TPO order solely reflects the transfer pricing adjustment. However, the AO, without affording an opportunity of hearing to the assessee, proceeded to add an amount to the total income of the assessee, which addition was neither determined nor directed by the TPO, as the ALP of the international transaction related to the demerger of the business. The said course of action was not available to the AO and it is a clear case of excess. Therefore, we find ourselves unable to sustain the impugned order as it clearly breaches the legislative mandate of Section 92CA of the Act. WP allowed. Issues Involved:1. Jurisdictional error by the Assessing Officer (AO) in making transfer pricing adjustments beyond the Transfer Pricing Officer (TPO) determination.2. Compliance with Section 92CA of the Income Tax Act, 1961 regarding the determination of Arm's Length Price (ALP) for international transactions.3. Adherence to CBDT instructions and judicial precedents concerning the role of AO and TPO in transfer pricing matters.Summary:Jurisdictional Error by AO:The assessee challenged the impugned order dated 24 April 2021 passed u/s 144C read with Sections 143(3) and 144B of the Income Tax Act, 1961, where the AO made an adjustment of INR 25,58,68,79,196/- to the total income. The AO's adjustment included INR 16,84,51,531/- determined by the TPO and an additional INR 25,41,84,27,665/- related to the demerged business, which the assessee argued was beyond the TPO's determination.Compliance with Section 92CA:The court examined whether the AO could make transfer pricing adjustments beyond the ALP determined by the TPO. Section 92CA mandates that the AO must compute the total income of the assessee in conformity with the ALP determined by the TPO. The Supreme Court in CIT v. S.G. Asia Holdings (India) (P) Ltd. clarified that the AO must refer the matter to the TPO for ALP determination if selected for scrutiny based on transfer pricing risk parameters.Adherence to CBDT Instructions and Judicial Precedents:CBDT instruction no. 3/2016 reinforces that the AO must refer the matter to the TPO for ALP determination and cannot deviate from the TPO's findings. The court noted that the TPO's order dated 31 January 2021 only determined an adjustment of INR 16,84,51,531/- and did not ascertain the ALP for the demerger of the business. The AO's addition of INR 25,41,84,27,665/- was not determined by the TPO and thus exceeded the AO's jurisdiction.Conclusion:The court set aside the impugned order dated 24 April 2021, finding it in breach of Section 92CA's legislative mandate. The matter was remanded back to the AO for reconsideration in accordance with the law and extant regulations. The writ petition was allowed and disposed of along with any pending applications.