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

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 transactions selected for scrutiny to the TPO, and compute total income strictly in conformity with the TPO's ALP determination. The AO's unilateral addition related to the demerger, without TPO's determination or hearing to the assessee, was held impermissible and beyond the AO's jurisdiction. The impugned order was quashed for violating the statutory mandate, and the writ petition was allowed.

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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.

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