2026 (1) TMI 551 - AT - Income Tax

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) ... Revision u/s 263 - As per CIT reassessment order is erroneous and prejudicial to the interests of the Revenue, principally because the reassessment order was passed “without considering the order u/s 92CA(3)” and without verification of arm’s length price of the royalty transaction - scope of phrase phrase “if any” - assessee responded by contending that it had voluntarily offered the royalty income to tax, that all details were furnished, that the AO had acted strictly in accordance with law by making a reference to the Transfer Pricing Officer, and that no prejudice had been caused to the Revenue HELD THAT:- As we examine the impugned revisional order what emerges with clarity is that its central plank is the learned Principal Commissioner’s assertion that the reassessment order is erroneous because it was passed “without considering the order of the Transfer Pricing Officer under section 92CA(3)”. This singular premise, however, falters at the threshold for a reason that is not merely technical but foundational: there exists no order under section 92CA(3) on record at all. The Transfer Pricing Officer did not pass any arm’s length determination. The position is not disputed by either side; indeed, it is an admitted fact. Once that is so, the allegation that the AO failed to consider such an order becomes self-contradictory and legally untenable. One cannot fault an authority for not considering something that never came into existence. The fallacy becomes more pronounced when one appreciates the statutory scheme of transfer pricing provisions. Section 92CA is not an incidental provision; it is a carefully designed mechanism that allocates distinct roles. Upon reference by the AO, the Transfer Pricing Officer is the statutory authority entrusted with the specialised function of determining the arm’s length price. AO is not a parallel adjudicator of arm’s length issues once such reference is made. Section 92CA(4) mandates that the total income shall be computed by AO in conformity with the order of the Transfer Pricing Officer, if any. The phrase “if any” is not decorative. It is a conscious legislative recognition that there can exist situations where an order may not come into being. In such a scenario, the AO is not legally empowered to invent, substitute, or simulate the arm’s length determination which the statute assigns to the TPO. The law does not authorise the AO to step into that specialised jurisdiction in the absence of an order. Principal Commissioner seeks to treat the reassessment order as erroneous because the AO did not “consider” a non-existent order and did not “incorporate” a determination which was never made. This, in effect, punishes the AO for not doing what the law did not permit him to do. AO having made the reference, could not have proceeded to determine the arm’s length price on his own, for that would have amounted to transgressing the statutory allocation of functions. Thus, far from being an “error”, the course adopted by the Assessing Officer reflects adherence to the statutory discipline. Can the learned Principal Commissioner set aside the reassessment order so as to compel a fresh arm’s length determination? - Here again, the legal difficulty is insurmountable. The revisional jurisdiction cannot be exercised to create jurisdiction where none exists, nor can it be utilised as an instrument to revive a function that has lapsed by operation of limitation. The statute prescribes timelines for passing an order u/s 92CA(3) through section 92CA(3A), which mandates that such order must be passed at least sixty days prior to the expiry of the limitation for completion of assessment or reassessment. If the Transfer Pricing Officer does not pass an order within that statutorily carved time window, the authority to determine the arm’s length price stands exhausted. Such exhaustion is not a curable irregularity; it is statutory finality. We are of the considered opinion that the learned Principal Commissioner could not have assumed jurisdiction under section 263 in the facts and circumstances of the present case.Appeal filed by the assessee is allowed. Issues: Whether the Principal Commissioner validly exercised jurisdiction under section 263 of the Income-tax Act, 1961 to set aside the reassessment order on the ground that the Assessing Officer failed to consider an order under section 92CA(3) and without verification of the arm's length price.Analysis: The Tribunal examined the statutory scheme governing sections 92CA and 263 and the distinct roles assigned by the statute. It noted that the Transfer Pricing Officer did not pass any order under section 92CA(3), a fact admitted on record. Section 92CA channels arm's length determinations to the Transfer Pricing Officer and section 92CA(4) contemplates compliance with any such order 'if any', recognising that an order may not exist. Explanation 2 to section 263, which deems an order erroneous if necessary enquiries 'should have been made', must be read within the Assessing Officer's lawful jurisdiction. The Assessing Officer had made the statutory reference to the Transfer Pricing Officer and therefore was not required or permitted to determine arm's length price in the absence of a 92CA(3) order. The Tribunal further observed that statutory timelines (including section 92CA(3A)) may extinguish the authority to make such a determination and that setting aside the reassessment to enable a fresh arm's length determination would impermissibly revive time-barred functions. On the question of prejudice, the record did not disclose any tangible prima facie prejudice to revenue: the assessee had voluntarily offered the royalty income and no material showed that absence of a 92CA(3) order would necessarily lead to an upward adjustment. Thus, both jurisdictional limbs of section 263—error and prejudice—were not satisfied.Conclusion: The Principal Commissioner’s assumption of jurisdiction under section 263 was unsustainable; the section 263 order dated 18 February 2025 is quashed and the reassessment order is restored. The appeal is allowed in favour of the assessee.