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Income Tax Appellate Tribunal, K BENCH, MUMBAI
Per contra, the Ld. Departmental Representative supported the 4. order of the PCIT and submitted that the issue related to delay payments received by the Appellant from its Associated Enterprises M/s. Lucent Jewellers Inc. (USA) was not examined during the assessment proceeding. The material placed before the Assessing Officer was sufficient to invite further enquiry/investigation into this issue. Since the Assessment Order has been passed without carrying out necessary enquiry/investigation provisions of Explanation 2(a) to Section 263 of the Act are clearly attracted and therefore, the PCIT was justified in exercising power of revision under Section 263 of the Act to set-aside Assessment Order dated 10.04.2014 which was erroneous in so far as prejudicial to the interest of the Revenue. In this regard, he relied upon Paragraph 15 to 18 of the order impugned.
We have considered the rival submissions and perused the material on record. The Appellant filed his Return of Income for Assessment Year 2010-11 on 10.09.2010 case of the Appellant was selected for scrutiny and reference was made to the Transfer Pricing Officer
(AY 2010-11) under Section 92CA(1) of the Act on 27.07.2012. The TPO noted that the Appellant, a partnership firm, was engaged in the business of manufacture and export of diamond studded gold/platinum jewellery to its AEs (i.e. Lucent Jewels Inc., USA and N.D. Gems Inc., USA) of INR 13.73 Crores. The TPO accepted Transaction Net Margin Method (TNMM) followed by the Appellant for benchmarking the export to its AEs as the most appropriate method with Operating Profit(OP)/Operating Cost(OC) as Profit Level Indicator (PLI). However, the TPO, after taking into consideration the OP/OC margins of the twelve comparables finally selected by the TPO, arrived at Arm’s Length Mean Margin of 5.09% and proposed Transfer Pricing Adjustment of INR 82,97,763/- vide order dated 30.11.2013 passed under Section 92CA of the Act.
The Assessing Officer proposed Transfer Addition of INR 82,97,763/- 6. in the Draft Assessment Order dated 03.03.2014. The Appellant vide letter dated 04.04.2014 accepted the variation made in the Draft Assessment Order and therefore, the Assessing Officer, relying on the provision of the Section 92CA(4) of the Act which mandated the Assessing Officer to compute the total income of the Appellant in conformity with the Arm’s Length Price (ALP) determined by the TPO, passed the Final Assessment Order, dated 10.04.2014, making, inter alia, Transfer Pricing Addition of INR 82,97,763/-.
Subsequently notice was issued by the PCIT under Section 263(1) of 7. the Act on 23.02.2017 the relevant extract of which reads as under: “Please refer to the assessment order u/s. 143(3) r.w.s 144C(3) dated 10.04.2014 for the A.Y. 2010-11 passed in your case by the erstwhile Income Tax Officer 8(1)(4), Mumbai (the Assessing Officer). 2. In this regard, on going though the relevant assessment records, it is seen that the assessee Company has not claimed (AY 2010-11) depreciation on factory premises, 'Unit New Gala' and 'Royal Flat As per Explanation 5 to Sec 32, depreciation is to be allowed whether or not the assessee has claimed the deduction in computing his total income. Depreciation on the aforesaid assets has not been allowed by the Assessing Officer while passing the assessment order.
It is further observed that major purchases and sales transactions of the assessee are with its Associated Enterprise, M/s. Lucent Jewellers Inc (USA), and whereas substantial outward remittances against Imports have been made, inward remittances against exports to the same party are not received to the same extent. In other words, while payments for purchases have been made, sales proceeds are not being received, when sales and purchase transaction are with the same party. This aspect has not been enquired into by the Transfer Pricing Officer and the Assessing Officer. This issue has a bearing on the interest payment of 1.23 Crores claimed by the assessee as well as computation of the Arm's Length Price 4. In view of the above it is appears that the assessment order u/s 143(3) passed by the Assessing Officer on 10.04.2014 is erroneous and prejudicial to the interest of revenue within the meaning of Sec. 263 of the Act.
5. Therefore, you are hereby given an opportunity to appear before the undersigned Ion 01.03.2017 at 12.00 noon either in person or through a representative duly authorised in writing in this behalf to explain your case on the aforesaid issues. If you do not wish to avail of this opportunity of being heard in person or through an authorised representative, you may reply in writing on or before the said date which will be considered before any order u/s 263 of the Act is passed."
From Notice issued under Section 263(1) of the Act it is clear that 8. PCIT had sought to exercise power of revision under Section 263 of the Act on account of the following two issues – (a) Non-claim of depreciation of factory premises – ‘Unit New Gala’ & ‘Royal Flat’ [hereinafter referred to as ‘Issue No.1’], and (b) Non-consideration of aspects pertaining to purchase and sale transaction between the Appellant and its AE – M/s. Lucent Jewellers Inc., USA [hereinafter referred to as ‘Issue No.2’].
In response to the above said notice issued under Section 263(1) of 9. the Act, the Appellant furnished Written Submissions, dated 04.03.2017, 09.03.2017 & 14.03.2017. After taking the aforesaid submissions into consideration the Ld. PCIT dropped proceedings under Section 263 of the Act in relation to Issue No.1 pertaining to claim/non-claim of depreciation on factory premises name ‘Unit New Gala’ and ‘Royal Flat’. However, in respect of Issue No.2, the PCIT proceeded to exercise power of revision under Section 263 of the Act and set-aside the Assessment Order dated 10.04.2014 passed under Section 143(3) of the Act by invoking provisions of Explanation 2(a) to Section 263 of the Act. On perusal of Paragraph 10 to 18 of the order impugned, we find that the PCIT was of the view that the Appellant had undertaken purchase as well as sale transaction with its AE - M/s. Lucent Jewellers Inc., USA (for short ‘LJI’). The Appellant has made payments towards purchases but has failed to recover sale proceeds and thus, blocking its funds. The credit period granted to LJI was ranged from 100 to 150 days whereas credit period granted to non-AEs, excluding few cases, ranged from 40 to 65 days. The amount receivable from JLI as on 31.03.2010 constituted 96.73% of total outstanding debtors. In the process, the Appellant has provided undue adjustment to LJI and undertaken the burden of interest cost on borrowed funds and thereby, adversely affecting its own profitability. Therefore, in nutshell, the PCIT was of the view that the Appellant has not been compensated as Arm’s Length in respect of its transaction with LJI. The PCIT concluded that the Assessing Officer has overlooked this aspect during the assessment proceedings and failed to investigate/enquire into this issue. Therefore, the PCIT invoked provisions of Explanation 2(a) to Section 263 of the Act and set-
(AY 2010-11) aside the Assessment Order as being erroneous in so far as prejudicial to the interest of Revenue. In our view, the PCIT failed to appreciate two aspects while exercising the powers of revision under Section 263 of the Act as aforesaid. Firstly, the PCIT failed to appreciate that as per Section 92CA(4) of the Act, on receipt of Transfer Pricing Order passed under Section 92CA(3) of the Act, the Assessing Officer was mandated to compute total income of the Appellant under Section 92C(4) of the Act in conformity with the ALP determined by the TPO. The use of word ‘shall’ in Section 92CA(4) makes it clear that once a reference is made to the TPO under section 92CA(1) of the Act and an order passed by the TPO under Section 92CA(3) of the Act is received by the Assessing Officer, it is mandatory on the part of the Assessing Officer to compute the total income of the assessee in conformity with the adjustment, if any, to the ALP proposed by the TPO. Therefore, the Assessing Officer could not have carried out any further enquiry/investigation into the aspects pertaining to the transaction between the Appellant and LJI highlighted by the PCIT. Thus, it cannot be said that the Assessment Order was passed by the Assessing Officer without making inquiries or verification ‘which should have been made’. Accordingly, the PCIT erred in invoking provision of Explanation 2(a) to Section 263 of the Act. Secondly, the PCIT had no jurisdiction over the TPO administratively and did not have power to revise order passed by TPO under Section 263 of the Act prior to the amendments made by the Finance Act, 2022 (w.e.f. 01.04.2022).
Our view is in line with the decision of Mumbai Bench of the Tribunal 10. in the case of Essar Steel Ltd. vs. Additional Commissioner of (AY 2010-11) Income Tax – 5(1), Mumbai: [2013] 152 TTJ 265 (Mumbai - Trib.) [31-10-2012], wherein it has been held as under: “13. We are not considering the issue whether the TPO order could be revised by the CIT or by the DIT as that issue is not before us at this moment. As seen from the provisions, the CIT has no jurisdiction over the TPO administratively and therefore, the CIT could not have revised the order under section 92C(3) passed by the TPO. Whether the DIT can revise the order which he himself has approved as per the Board Circular can only be examined when such issue arises but for deciding this issue, we can safely conclude that the order of the CIT revising the assessment order dated 1.1.2008 passed under section 143(3) is not erroneous or prejudicial to the interests of the Revenue, as it complied with the order of TPO u/s 92CA(4). 14. xx xx 15. xx xx 16. The learned DR referred to the order of the ITAT in Sun Microsystems India (P.) Ltd. (supra). The assessment year therein was assessment year 2002-03 and the TPO order was dated 24.03.2005. At that time the relevant provisions of section 92CA(4) empowers AO to compute the total income 'having regard to' the arms length price. It was not a mandatory provision, therefore under those provisions invoking of power under section 263 by the CIT was upheld. However, provisions of section 92CA(4) were modified w.e.f. 1.06.2007. So long as the order under section 92CA(3) by the TPO was available on record, AO has no other option than to follow the same which AO did in this case. Accordingly reliance on the above decision cannot be accepted in view of the change in the provisions.”
To the same effect are the decisions of the Tribunal in the case of 11. TATA Communication Ltd. v. Dy. CIT [2014] 41 taxmann.com 486 (Mumbai)[20-12-2013], and JCB India vs. Deputy Commissioner of Income Tax, New Delhi: [2022] 136 taxmann.com 184 (Delhi - Trib.)[19-01-2022].)
(AY 2010-11) In view of the above we hold that, in the facts and circumstances of 12. the present case, the Ld. PCIT erred in exercising jurisdiction under Section 263 of the Act and therefore, the order dated 29.03.2017 passed by the Ld. PCIT is null and void. Consequently, the Assessment Order, dated 10.04.2014, passed under Section 143(3) of the Act is reinstated. Ground No. 1 raised by the Appellant is allowed, whereas, all the other grounds raised by the Appellant are dismissed as being infructuous.
In result, the appeal preferred by the Assessee is allowed. 13.
Order pronounced on 11.05.2023.