2025 (9) TMI 38 - HC - Income Tax

Transfer Pricing Officer findings bind Assessing Officer; AO cannot determine arm's length price independently under s.92CA(1)

Weatherford Drilling And Production Services (India) Private Limited Versus Deputy Commissioner Of Income Tax, Circle 2 (1) (1), Vadodara & Ors.

HC held that the Transfer Pricing Officer (TPO) is binding on the Assessing Officer (AO) and the AO cannot determine the arm's length price without ... TP Adjustment - determining the Arm’s Length Price without making any reference to TPO in terms of sub-section (1) of Section 92CA - HELD THAT:- TPO is binding upon the Assessing Officer and cannot be subject matter of even revision before the Commissioner of the Income Tax or by the Directorate of Income Tax. The Hon’ble Apex Court in case of S.G. Asia Holding (India) Private Limited [2019 (8) TMI 661 - SUPREME COURT] has held that the Assessing Officer could not have determined the Arm’s Length Price without making any reference to the Transfer Pricing Officer in terms of sub-section (1) of Section 92CA of the Act. The Hon’ble Apex Court referred to Instruction No. 3 of 2003 issued by the Central Board of Direct Taxes (CBDT), whereby guidelines to Transfer Pricing Officers and Assessing Officers to operationalise transfer pricing provisions and to have procedural uniformity is stipulated. In the facts of the case, once the Transfer Pricing Officer has passed an order without making any adjustments, the respondent Assessing Officer could have assumed the jurisdiction to reopen assessment on the basis of the same facts without there being any new tangible material available with the respondent other than the material which was considered by the Transfer Pricing Officer during the course of original scrutiny assessment. Petition succeeds and is accordingly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether an Assessing Officer has jurisdiction to reopen assessment under Section 147 of the Income-tax Act in respect of issues relating to determination of Arm's Length Price (ALP) that were the subject-matter of a reference to and order by the Transfer Pricing Officer (TPO) under Section 92CA. 2. Whether the notice under Section 148 (and consequential assessment) issued beyond four years from the end of the relevant assessment year is sustainable where the Assessing Officer relies on the same material that had been placed before the TPO and where no new tangible material is shown to have come to the Assessing Officer's knowledge. 3. Whether a reassessment initiated by the Assessing Officer on the grounds stated in the reasons recorded (inconsistency in selection of comparables, application of export filter, and exclusion of a particular comparable) amounts to a permissible exercise of jurisdiction or is impermissible as a mere change of opinion. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Jurisdiction of Assessing Officer to reopen ALP-related issues after TPO order (Section 92CA) Legal framework: Section 92CA provides for reference by the Assessing Officer to the TPO for determination of ALP where international transactions are involved; the order of the TPO under subsection (3) is to be sent to the Assessing Officer and, by statutory scheme and as interpreted, the TPO's determination governs computation of total income vis-à-vis ALP. Instruction No. 3/2003 (CBDT) prescribes the roles of AO and TPO and directs that AO await TPO report before final assessment on ALP points. Precedent treatment: The Court follows the principle in the apex judgment holding that the Assessing Officer cannot determine ALP without reference to the TPO and that the AO must act in conformity with the TPO's determination; earlier High Court decisions have applied the same statutory scheme to bar AO's unilateral ALP adjustments after TPO reference. Interpretation and reasoning: The Court reasons that where a reference under Section 92CA was made and the TPO passed an order without making any ALP adjustment, the Assessing Officer was bound by that TPO determination and lacked jurisdiction to independently re-open and re-assess ALP issues already within the TPO's domain. The statutory language and administrative instructions indicate the legislative and procedural intent to vest ALP determination primarily in the TPO and to restrict the AO from transgressing that role. Ratio vs. Obiter: Ratio - the Assessing Officer is precluded from reopening and re-assessing ALP issues falling squarely within the TPO's determination under Section 92CA when the TPO has already adjudicated those issues without any adjustments. Conclusion: The Assessing Officer had no jurisdiction to reopen or re-assess ALP-related matters that were the subject of the TPO's order; any notice or assessment on those ALP issues issued by the AO is unlawful. Issue 2 - Reopening beyond four years: requirement of new tangible material and non-application where only previously considered material exists Legal framework: Section 147 enables reopening where income has escaped assessment; Explanation 1 and related limitation provisions distinguish between mere change of opinion and cases where material facts were not fully and truly disclosed or were embedded such that AO could not, with due diligence, discover them earlier. Where a TPO reference exists, Section 92CA and related provisos and case law bear on what constitutes sufficient reason to reopen. Precedent treatment: The Court applies authoritative guidance that reopening after the four-year period requires reasons to believe that income has escaped assessment because of non-disclosure of material facts or existence of new tangible material not previously considered; mere re-evaluation of the same material by the AO, particularly on matters within TPO's domain, is insufficient. Interpretation and reasoning: The Court examined the reasons recorded for reopening and concluded that they relied on the Dispute Resolution Panel's observations in earlier years and on matters that were available before the TPO during original proceedings. There was no independent new tangible material purportedly discovered by the AO that had not been considered by the TPO. The Court also observed statutory and administrative constraints on the AO's power where the TPO has adjudicated ALP issues. Ratio vs. Obiter: Ratio - Reopening beyond four years cannot be sustained where it is predicated solely on the same material that had been considered by the TPO and there is no new tangible material or valid ground of non-disclosure by the assessee as defined by Explanation 1; such reopening amounts to change of opinion. Conclusion: The impugned reopening and assessment, being founded on material already before the TPO and lacking new tangible material or demonstrable non-disclosure that would validate reassessment after four years, is unlawful and is to be quashed. Issue 3 - Whether reasons recorded amount to non-disclosure/failure to disclose fully and truly (justifying reopening) or mere change of opinion Legal framework: Explanation 1 to Section 147 contemplates cases where material facts were not disclosed fully and truly; the threshold for reopening is not satisfied by mere differences in evaluative conclusions or change of opinion by the AO. The AO must form a bona fide 'reason to believe' based on facts not previously placed before him or due to concealment/embedding requiring due diligence to discover. Precedent treatment: The Court relied on precedent distinguishing legitimate reopening (non-disclosure or newly discovered material) from impermissible reopenings that reflect only a change of opinion, and reiterated that an AO cannot rework ALP determinations that were decided by the TPO absent new material. Interpretation and reasoning: The recorded reasons claimed inconsistency by the assessee in selection and filtering of comparables across years and non-inclusion of a particular comparable. The Court found these issues had been considered in the TPO proceedings, and the AO's reasons did not demonstrate that material facts had been concealed or were embedded in such a way that only through later due diligence they could be discovered. Consequently, the AO's reliance on those contentions constitutes a change of opinion rather than a permissible basis for reopening. Ratio vs. Obiter: Ratio - Reopening cannot be justified where the asserted grounds (selection of comparables, export filter application, exclusion of a comparable) were already before and considered by the TPO, and the AO's fresh conclusion represents change of opinion rather than discovery of withheld material facts. Conclusion: The reasons recorded do not establish failure to disclose fully and truly such as would validate reassessment under Section 147; they amount to change of opinion and do not permit reopening. Inter-issue cross-reference The conclusions on Issues 1-3 are interrelated: because Section 92CA vests ALP determination in the TPO and the TPO had made no ALP adjustment, (a) the AO lacked jurisdiction to re-determine ALP issues (Issue 1); (b) reopening beyond four years on the same material without new tangible evidence is impermissible (Issue 2); and (c) the AO's recorded reasons amounted to change of opinion rather than proof of non-disclosure or newly discovered material (Issue 3). Each conclusion reinforces the others and collectively supports quashing the reopening notice and consequent assessment.