2024 (12) TMI 973 - AT - Income Tax

DRP cannot delegate transfer pricing adjustment decisions to AO under section 144C(8)

LH Sugar Factories Ltd. Versus Asstt. Commissioner of Income Tax Bareilly

The ITAT Lucknow held that the DRP's direction permitting the AO to decide transfer pricing adjustments on an either-or basis was impermissible under ... Validity of assessment order u/s 144C - TP Adjustment - determining the Arm’s Length Price in relation to such referred domestic transactions entered by the assessee with its AE - validity of impugned direction of DRP permitting the Ld. AO to decide the subject matter of variations/adjustments on ‘either-or’ basis - HELD THAT:- Here, in the present twin cases, on a perusal of the order of the Ld. DRP, it is apparently evident that insofar as the issue of determination of ALP is concerned, they have expressed their opinion, however, they have ultimately left it to the Ld. AO to decide the issue on the basis of certificate from chartered engineer / cost accountants or determine the ALP following CPM method after taking into consideration the capacity utilization and apportionment of indirect cost etc. Thus, instead of deciding the dispute conclusively and clearly adjudicating the issue brought before it, the matter has been delegated to the Ld. AO which is impermissible under the statute. Consequently, the final assessment order passed in pursuance of such irregular direction also rendered irregular. ‘GE India Technologies Pvt. Ltd. Vs DRP [2011 (7) TMI 511 - KARNATAKA HIGH COURT] the Hon’ble Karnataka High Court has categorically held that, the DRP do not have any power to look beyond the variation/adjustment proposed by the Ld. TPO. Therefore, it was duty bound to dispose-off the objections raised before it by the assessee strictly in terms of provisions of s/s (8) of section 144C of the Act without triggering any further enquiry or verification as the case may. We deem it fit to fist set aside the impugned direction of the Ld. DRP and then impugned consequential assessment orders passed in pursuance of such direction and restore these twin matters to Ld. DRP back to the stage of filing of objections for considering them in the light of evidences and pass an appropriate order giving clear direction either confirming or reducing or enhancing or deleting the variations/adjustment made by the Ld. TPO. Issues Involved:1. Determination of Arm's Length Price (ALP) for the cost of steam transferred between units.2. Validity of the assessment order concerning the limitation period.3. Allowance of credit for Minimum Alternate Tax (MAT) under Section 115 JAA.4. Procedural irregularities in the directions issued by the Dispute Resolution Panel (DRP).Issue-wise Detailed Analysis:1. Determination of Arm's Length Price (ALP):The primary issue revolves around the determination of the ALP for steam transferred from the power co-generation unit to the sugar unit. The Transfer Pricing Officer (TPO) initially determined the ALP as NIL, leading to an upward adjustment. The Dispute Resolution Panel (DRP) found the TPO's rejection of the Cost-Plus Method (CPM) used by the assessee unjustified and directed the Assessing Officer (AO) to determine the ALP based on a certificate from a chartered engineer or cost accountant, or alternatively, using the CPM method considering capacity utilization and indirect cost apportionment. The Tribunal found the DRP's directions improper as they effectively delegated decision-making back to the AO, violating Section 144C(8) of the Income Tax Act, which prohibits the DRP from remanding issues to the AO for further enquiry. The Tribunal set aside these directions and remanded the matter back to the DRP for a conclusive decision.2. Validity of the Assessment Order:The assessee initially raised an issue regarding the assessment order being barred by limitation under Section 144C(13), arguing it was not signed, uploaded, or dispatched within the prescribed period. However, this ground was withdrawn by the assessee and was not pressed for adjudication.3. Allowance of Credit for MAT:The assessee contended that the AO erred in not allowing the credit for Minimum Alternate Tax (MAT) under Section 115 JAA. The Tribunal did not delve into this issue in detail as the primary focus was on the procedural irregularities with the DRP's directions.4. Procedural Irregularities in DRP's Directions:The Tribunal emphasized that the DRP, being a quasi-judicial authority, must provide clear and conclusive directions without delegating its authority back to the AO. The DRP's directions to the AO to determine the ALP on an 'either-or' basis were found to be in violation of the statutory framework, specifically Section 144C(8), which mandates that the DRP should conclusively settle disputes without remanding them for further enquiry. The Tribunal highlighted the principle delegatus non potest delegare, meaning a delegate cannot further delegate its powers unless expressly authorized. The Tribunal set aside the DRP's directions and the consequential assessment orders, remanding the matters back to the DRP for a fresh decision.Conclusion:The Tribunal concluded that the DRP's directions were procedurally flawed, necessitating a remand for a proper adjudication. The assessment orders based on the DRP's improper directions were deemed irregular. The Tribunal allowed the appeals for statistical purposes and directed the DRP to provide clear directions within the legal framework. The stay applications were also allowed, ceasing any recovery proceedings until the final assessment orders are passed following the DRP's fresh directions.