Transfer-pricing royalty ALP verification after TPO reference and no s.92CA(3) order; s.263 revision quashed, appeal allowed

Revision under s. 263 turned on whether the reassessment order was "erroneous and prejudicial" for allegedly not considering a TPO order under s. 92CA(3) and not verifying ALP of royalty. The ITAT held the premise failed because no s. 92CA(3) order existed; once the AO had made a reference, he could not determine ALP himself, and s. 92CA(4) ("if any") contemplates absence of a TPO order. Further, s. 263 could not be used to compel a fresh ALP determination after the TPO's power had lapsed by limitation under s. 92CA(3A). The s. 263 order was quashed and the assessee's appeal was allowed.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether revisional jurisdiction under section 263 could be validly assumed where the foundation for revision was the alleged non-consideration of an order under section 92CA(3) that, on admitted facts, was never passed.

(ii) Whether the reassessment order could be treated as "erroneous" under section 263 (including by applying Explanation 2) for not making/ensuring arm's length verification after the Assessing Officer had made a reference under section 92CA and the Transfer Pricing Officer did not pass any order.

(iii) Whether "prejudice to the interests of the Revenue" was established merely from the absence of a transfer pricing order, without a prima facie finding of understatement or likely adjustment, and whether section 263 could be used to direct a fresh arm's length exercise when the statutory time-window for the Transfer Pricing Officer's order had already lapsed.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i): Validity of invoking section 263 on the premise of non-consideration of a non-existent section 92CA(3) order

Legal framework (as discussed by the Tribunal): Section 263 jurisdiction is conditioned on the coexistence of two jurisdictional facts: the assessment order must be (a) erroneous and (b) prejudicial to the interests of the Revenue.

Interpretation and reasoning: The Tribunal found the revisional order's "central plank" to be the assertion that the reassessment was erroneous for being passed without considering the Transfer Pricing Officer's order under section 92CA(3). However, it was an "admitted and incontrovertible" fact that no such order under section 92CA(3) was ever passed. The Tribunal held that the allegation of failure to consider such an order is self-contradictory and legally untenable, because an authority cannot be faulted for not considering something that never existed.

Conclusion: The assumption of section 263 jurisdiction failed at the threshold because its foundational premise-non-consideration of a section 92CA(3) order-was factually and legally impossible.

Issue (ii): Whether the reassessment order was "erroneous" for lack of arm's length determination after reference to the Transfer Pricing Officer; applicability of Explanation 2 to section 263

Legal framework (as discussed by the Tribunal): The Tribunal examined the statutory design of section 92CA, including the distinct roles assigned to the Assessing Officer and the Transfer Pricing Officer, and the mandate that computation must conform to the Transfer Pricing Officer's order "if any". It also examined Explanation 2 to section 263 (particularly clause (a)) which deems an order erroneous if passed without enquiries/verifications which "should have been made".

Interpretation and reasoning: The Tribunal held that once a reference is made under section 92CA, the specialised function of determining arm's length price lies with the Transfer Pricing Officer, and the Assessing Officer is not a "parallel adjudicator" of arm's length issues in the absence of a Transfer Pricing Officer's order. The phrase "if any" was treated as recognising that situations may arise where no Transfer Pricing Officer order comes into existence. In such a scenario, the Tribunal reasoned, the Assessing Officer is not empowered to "invent, substitute, or simulate" an arm's length determination. Consequently, treating the reassessment as erroneous for not incorporating or considering an arm's length determination that was never made would "punish" the Assessing Officer for not doing what the law did not permit.

On Explanation 2, the Tribunal held that the deeming fiction cannot be stretched to require the Assessing Officer to make an enquiry that falls outside his lawful jurisdiction once the statute channels that enquiry to the Transfer Pricing Officer. The words "should have been made" were construed as confined to what the Assessing Officer could lawfully do; a deeming provision cannot be used to subvert the substantive scheme of the Act.

Further, even assuming a "deficiency" existed because no transfer pricing order was passed, the Tribunal held that an "error" under section 263 must be an error in the Assessing Officer's order, not a perceived inadequacy arising from the omission of another statutory authority, especially where the Assessing Officer had already discharged his statutory role by making the reference.

Conclusion: The reassessment order was not "erroneous" within section 263 merely because no arm's length order was passed by the Transfer Pricing Officer after reference, and Explanation 2 could not be invoked to deem error on the basis of an enquiry the Assessing Officer was not empowered to undertake.

Issue (iii): Whether "prejudice" was shown; and whether section 263 could direct a fresh arm's length exercise after lapse of the statutory time-window for a section 92CA(3) order

Legal framework (as discussed by the Tribunal): The second condition for section 263 is "prejudice to the interests of the Revenue". The Tribunal also considered the statutory time discipline for passing an order under section 92CA(3), noting the requirement that such order be passed within the time window described in section 92CA(3A). It examined whether section 263 could be used to set aside and remand to facilitate a fresh arm's length determination despite the expiry of that statutory period.

Interpretation and reasoning: On prejudice, the Tribunal held that prejudice cannot be presumed from the mere absence of a transfer pricing order. The revisional order proceeded on a generalized apprehension of "potential revenue leakage" without recording any prima facie finding that the royalty income offered was understated or that arm's length determination would necessarily yield an upward adjustment. The Tribunal emphasised that section 263 is not a "roving commission" to conduct exploratory enquiries in the hope of discovering something adverse.

On the direction for fresh verification/arm's length determination, the Tribunal held that revisional jurisdiction cannot be used to "create jurisdiction where none exists" or to "revive" a function that has lapsed by operation of limitation. If the Transfer Pricing Officer does not pass an order within the statutorily carved time window, the authority to determine arm's length price stands exhausted, and such exhaustion is not a curable irregularity. The Tribunal concluded that section 263 cannot enlarge limitation periods or resurrect time-barred statutory functions indirectly by setting aside the reassessment and remanding for an exercise the statute no longer authorises.

Conclusion: Prejudice to the Revenue was not established on tangible material, and section 263 could not be used to direct a fresh arm's length exercise when the statutory time to pass a section 92CA(3) order had lapsed. Both jurisdictional limbs-error and prejudice-were not satisfied; therefore, the revisional order was quashed and the reassessment order restored.

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