Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, KOLKATA ‘B’ BENCH, KOLKATA
Before: Sri J. Sudhakar Reddy & Sri Aby T. Varkey
Appearances by: Sh. Anil Kochar, Adv.,appeared on behalf of the Assessee. Sh. Imokaba Jamir, CIT, appeared on behalf of the Revenue. Date of concluding the hearing : March 10th, 2021 Date of pronouncing the order : April 22nd, 2021 ORDER
Per J. Sudhakar Reddy, AM:
This is an appeal filed by the assessee directed against the order of the Learned Pr. Commissioner of Income Tax, Kolkata-4, Kolkata [hereinafter the “Pr. CIT”], passed u/s. 263 of the Income Tax Act, 1961 (the ‘Act’), dated 11.02.2019 for the Assessment Year 2014-15.
The ld. Counsel for the assessee submitted that he may be permitted to withdraw ground nos. 1, 2, 3, 5 & 6 and that he would be pressing only ground no. 4. As the ld. D/R had no objection, ground nos. 1, 2, 3, 5 & 6 are dismissed as withdrawn. 3. On ground no. 4, the ld. Counsel for the assessee submits that the case of the assessee has been selected for limited scrutiny on certain defined parameters and that in parameter no. (vii) is that there is mismatch in amount paid to related persons u/s 40A(2)(b) of the Act reported in Audit Report and in the ITR. He referred to the CBDT in its Instruction No. 3/2016, F. No. 500/9/2015-APA-II dated 10.03.2016 in para-3.3 stated which is extracted for ready reference.
Assessment Year: 2014-15 Linc Pen & Plastics Ltd. “3.3. Cases selected for scrutiny on non-transfer pricing risk parameters but also having international transactions or specified domestic transactions, shall be referred to TPOs only in the following circumstances: (a) where the AO comes to know that the taxpayer has entered into international transactions or specified domestic transactions or both but the taxpayer has either not filed the Accountant’s report under Section 92E at all or has not disclosed the said transactions in the Accountant’s report filed; (b) where there has been a transfer pricing adjustment of ₹10 Crore or more in an earlier assessment year and such adjustment has been upheld by the judicial authorities or is pending in appeal; and (c) where search and seizure or survey operations have been carried out under the provisions of the Income-tax Act and findings regarding transfer pricing issues in respect of international transactions or specified domestic transactions or both have been recorded by the Investigation Wing or the AO.” 3.1. He submits that this above paragraph in the CBDT Circular does not apply to the assessee’s case as the assessee has filed the Accountant’s Report u/s 92E of the Act and has also disclosed all the transactions in the Accountant’s Report filed and as transfer pricing adjustment of ₹10 crores and above, was not made in the assessee’s case in the earlier assessment years, nor search and seizure operation was not carried out on the assessee. Thus he submits that the direction of the ld. Pr. CIT to the AO to refer the international transactions covered u/s 40A(2)(b) of the Act to the TPO is against the criteria laid down in the above circular. On a query from the Bench the ld. Counsel for the assessee submitted that the order u/s 263 of the Act passed by the ld. Pr. CIT survives as the assessee is not challenging all the other grounds on which the ld. Pr. CIT has revised the assessment order passed u/s 263 of the Act. The only grievance of the assessee is that the ld. Pr. CIT has wrongly held that the CBDT Instruction No. 3/2016 dated 10.03.2016 applies to the case of the assessee.
The ld. CIT(D/R) on the other hand relied on the order passed u/s 263 of the Act and submitted that once the ld. Counsel for the assessee agrees that the order of the ld. Pr. CIT passed u/s 263 of the Act is legal, then he cannot ask for expunging of some of the directions given in that order. He relied on the order of the ld. Pr. CIT and submitted that the same be upheld.
After hearing rival contentions we find that the only issue that arises for our adjudication is whether the CBDT Instruction No. 3/2016 dated 10.03.2016 applies to the facts of this case. This ‘A’ Bench of the Tribunal in the case of Eveready Industries Ltd.
Assessment Year: 2014-15 Linc Pen & Plastics Ltd. vs. PCIT-4, Kolkata in order dated 13.12.2019 considered the identical facts at para-25 page-20 is held as follows:
“26. It is thus noted that nowhere the CASS reason stated the selection of the assessee’s case was on the ground of there being “large value of specified domestic transactions” or “large value of international transactions” so as to warrant an inference that the case was selected on transfer pricing risk parameter. On the contrary, the CASS reason merely claimed that there was mismatch in the amount paid to related persons u/s 40A(2)(b) of the Act reported in Audit report and ITR. From plain reading of the said CASS reason, we are of the view that no prudent person properly instructed in law would have inferred that the aforesaid parameter constituted ‘transfer pricing risk parameter’ so as to warrant mandatory reference u/s 92CA of the Act in terms of the Para 3.2 of CBDT Instruction No. 3 of 2016 and failure to make TP reference made the assessment order erroneous. We further find that once the incorrect presumption on Ld. Pr. CIT’s part was highlighted by the assessee in it’s submission then in the impugned order the Ld. Pr.CIT himself completely digressed from the reason set out in the SCN but none the less justified his action on the ground that the reference to TPO was necessary because the assessee’s case was selected for scrutiny under the category of ‘complete scrutiny’. We are however unable to accept an altogether new case made out by the Ld. Pr. CIT while passing the impugned order, justifying his interference that for not making reference to the TPO, order of assessment was erroneous in terms of Section 263 of the Act. In the first instance, we note that the Ld. Pr. CIT himself gave up the reason set out in SCN viz., that one of the CASS reason for selection of scrutiny assessment was a transfer pricing risk parameter. Once it is established that the transfer pricing risk parameter was not the ground for selection of scrutiny assessment u/s 143(3) of the Act, then we have to agree with the ld. AR’s submission thatPara 3.2 of the CBDT Instruction No. 3 of 2016 was not applicable in the given facts of the present case and therefore the AO’s order could not have been held to be erroneous by the CIT for not making reference to the TPO in terms of the said CBDT Instruction 3 of 2016.
So far as the Ld. Pr. CIT’s finding justifying his case that the AO’s order became erroneous and prejudicial to the interests of the Revenue for not referring the assessee’s case to the TPO u/s 92CA of the Act on the ground that the assessee’s case came with the category of ‘complete scrutiny’, we note that this contention of the Ld. Pr. CIT is in fact contrary to the extant instructions of the CBDT contained in Paras 3.2 to 3.3 of Instruction No.3/2016 wherein the Board have set out the following specific situations/instances where the reference to TPO has been made mandatory : “3.2 All cases selected for scrutiny, either under the Computer Assisted Scrutiny Selection [CASS] system or under the compulsory manual selection system (in accordance with the CBDT's annual instructions in this regard -for example. Instruction No. 6/2014 for selection in F.Y 2014-15 and Instruction No. 8/2015 for selection in F.Y 2015-16), on the basis of transfer pricing risk parameters [in respect of international transactions or specified domestic transactions or both] have to be referred to the TPO by the AO, after obtaining the approval of the jurisdictional Principal Commissioner of Income-tax (PCIT) or Commissioner of Income-tax (CIT). The fact that a case has been selected for scrutiny on a TP risk parameter becomes clear from a perusal of the reasons for which a particular case has been selected and the same are invariably available with the jurisdictional AO. Thus, if the reason or one of the reasons for selection of a case for scrutiny is a TP risk parameter, then the case has to be mandatorily referred to the TPO by the AO, after obtaining the approval of the jurisdictional PCIT or CIT. 3.3 Cases selected for scrutiny on non-transfer pricing risk parameters but also having international transactions or specified domestic transactions, shall be referred to TPOs only in the following circumstances: (a) where the AO comes to know that the taxpayer has entered into international transactions or specified domestic transactions or both but the taxpayer has either not Assessment Year: 2014-15 Linc Pen & Plastics Ltd. filed the Accountant's report under section 92E at all or has not disclosed the said transactions in the Accountant's report filed; (b) where there has been a transfer pricing adjustment of Rs. 10 Crore or more in an earlier assessment year and such adjustment has been upheld by the judicial authorities or is pending in appeal; and (c) where search and seizure or survey operations have been carried out under the provisions of the Income-tax Act and findings regarding transfer pricing issues in respect of international transactions or specified domestic transactions or both have been recorded by the Investigation Wing or the AO.”
From perusal of the above, it is noted that none of the conditions prescribed in these Paras necessitating mandatory reference to TPO were satisfied in the instant case. In fact, we find that in the impugned order, Ld. Pr. CIT himself did not to make out a case that the assessee’s case fell under any of the situations prescribed in Paras 3.2 & 3.3 requiring mandatory reference u/s 92CA(2) of the Act. The only ground on which the Ld. Pr. CIT ultimately justified his order requiring AO to make reference u/s 92CA mandatorily was that the assessee’s case was selected under complete scrutiny criteria and therefore all possible enquiries should have been made by the AO inter alia including making reference to the TPO. We find that although in support of such conclusion the Ld. Pr. CIT has placed reliance on the CBDT Instruction No. 3 of 2016, the said Instruction nowhere even suggests let alone provides that every case of an assessee selected on non-transfer pricing risk parameter but involving ‘complete scrutiny’, the reference must be made to the TPO if such an assessee had entered into international transactions or specified domestic transactions during the relevant year. Instead in Para 3.3 the Board has enumerated only three specific instances/ situations when the reference to TPO has been made mandatory even though as per the CASS, the case of an assessee is not selected on “transfer pricing risk parameter”. We find that in the impugned order the Ld. Pr. CIT has not brought on record any material to show that the AO had acted in violation of the CBDT Instruction No. 3 of 2016 and for that reason the AO’s order was erroneous and prejudicial to the interests of the Revenue.
Even with regard to CIT’s allegation that in complete scrutiny case, the AO did not conduct any enquiries whatsoever with regard to transactions referred to in Section 40A(2)(b) as well as Section 92CA of the Act, we find that prior to completion of assessment the AO had indeed conducted enquiries with regard to CASS reason as also the assessee’s international transactions with the AEs. We note that before completion of assessment, the assessee was asked to provide explanation even with regard to its international transactions with its associated enterprises. By its letter dated 16.12.2016 [Pages 87 to 89 of paper book], the assessee had furnished its explanation in respect of its international transactions. In the said letter it was particularly brought to the AO’s attention that based on the Transfer Pricing Audit report in Form 3CEB, wherein the auditors had certified ALP of international transactions, the assessee had suo moto offered adjustments in the computation of income on account of corporate guarantee fees and interest on loan to AEs which were not actually charged. We therefore find that it was not even a case where the order of the AO suffered from the charge of failure to conduct enquiry into the relevant issue as alleged by the Ld. Pr. CIT in the impugned order.
Lastly, as pointed out by the ld. AR, in the SCN, the Ld. Pr. CIT had justified invocation of power u/s 263 with reference to assessee’s transactions with persons specified in Section 40A(2)(b) of the Act. In other words in CIT’s opinion assessee’s specified domestic transactions coming within the ambit of Section 92BA(i) of the Act should have been referred for transfer pricing scrutiny. We however note that the relevant provisions of Section 92BA were amended by Finance Act, 2017w.e.f. 01.04.2017 whereby clause (i) of sec. 92BA relating to any expenditure in respect of which payment have been made or is to be made to a person referred to clause (b) of sub- section (2) of section 40A of the Act was omitted. Now the question arises whether after the omission of clause (i) from the statute, the CIT can justifiably set aside the order of assessment for not making a reference to TPO for examining transactions coming within the ambit of Section 92BA(i) of the Act. In this regard, our attention was invited to the Assessment Year: 2014-15 Linc Pen & Plastics Ltd. decision of the coordinate bench of this Tribunal in the case of DVC Emta Coal Mines Ltd &Ors Vs ACIT in dated 01.05.2019 wherein it was held that the legal effect of clause (i) of Section 92BA being omitted by subsequent amendment, would mean that clause (i) never existed in the statute and consequently no adverse inference with reference to omitted provision can be drawn against an assessee. While omitting the clause (i) of section 92BA of the Act, nothing was specified whether the proceeding initiated or action taken on this count can continue. Therefore, this Tribunal held that any proceeding initiated or action taken under that clause would not survive at all and any reference made to TPO under section 92CA in respect of transactions referred to in clause (i) of Section 92BA of the Act shall be invalid and bad in law.
Applying the ratio laid down in the foregoing decision to the facts of the present case, we note that when the impugned order was passed by the Ld. Pr. CIT, clause (i) of section 92BA of the Act had already been omitted by the Finance Act, 2017 and in that view of the matter the Ld. Pr. CIT could not set aside the order for alleged non-compliance with provision of law which no longer existed in the statute as on the date of order. The Ld. Pr. CIT’s direction requiring the AO to consider making a reference to the TPO in the set aside proceedings is also contrary to the view expressed in the foregoing decision of the coordinate bench(supra). For all the foregoing reasons therefore, we hold that the AO’s order did not suffer from any error for the reason that he did not make reference to the TPO. Accordingly the Ld. Pr. CIT’s order for the reason setout in clause 3(b) of the SCN and for the entirely new set of reasons contained in the impugned order, is set aside. Ground Nos. 5 to 7 are accordingly allowed.” 5.1. Applying the propositions of law laid down in the above case laws to the facts of this case, we modify the order of the Pr. CIT on the above issue. The fact and the finding of the Pr. CIT that the CBDT Instruction No. 3/2016 dated 10.03.2016 applies to the case of the assessee is hereby vacated.
As there is no dispute that the order of the Pr. CIT passed u/s 263 of the Act is valid in law. Hence we dismiss this appeal of the assessee.
In the result, the appeal filed by the assessee is dismissed.
Kolkata, the 22nd April, 2021.