M/S. AIC IRON INDUSTRIES PVT. LTD.,KOLKATA vs. PR.CIT-1, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “B”, BENCH KOLKATA

BEFORE SHRI S. S. GODARA, JM & Dr. A. L. SAINI, AM आयकर अपीलसं./I.T.A No.1332/Kol/2019 ("नधा"रण वष" / Assessment Year: 2014-15) AIC Iron Industries Pvt. Ltd. Vs. PCIT-1, Kolkata 25, Ganesh Chandra Avenue, 4th Floor, Kolkata – 700013. "थायीलेखासं./जीआइआरसं./PAN/GIR No.: AACCN0217F (Appellant) .. (Respondent) Appellant by : Shri Sunil Surana, FCA Respondent by : Shri Radhey Shyam, CIT सुनवाईक"तार"ख/ Date of Hearing : 16/12/2019 घोषणाक"तार"ख/Date of Pronouncement : 31/12/2019 आदेश / O R D E R Per Shri S. S. Godara: This assessee’s appeal for assessment year 2014-15 arises against the Principal Commissioner of Income Tax (A), Kolkata dated 12.03.2019 involving proceedings u/s 263 of the Income Tax Act, 1961 (in short ‘the Act’). Heard both the parties. Case file perused. 2. Relevant facts involved in the instant lis are in a very narrow compass. The Assessing Officer has framed his regular assessment in issue dated 19.12.16 disallowing administrative expenditure of Rs.46,420/- under Rule 8D(2)(iii) r.w. section 14A of the Act. The PCIT assumed his revision jurisdiction terming the above regular assessment as erroneous causing prejudice to interest of the Revenue since there were ‘large specific domestic transactions” and the Assessing Officer had completed his assessment without making any reference to the TPO to determine arm’s length price thereof. He quotes CBDT Instruction No.3/2016 dated 10.03.16 regarding guidelines for implementation of transfer pricing

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provisions. The assessee’s reply dated 15.11.18 contested the PCIT’s above revision proposal on facts as well in law. The PCIT has thereafter directed the Assessing Officer to frame afresh assessment as follows: “5. I have considered the facts of the case and submission of the assessee. The issueis regarding completion of the impugned assessment without any reference to TPO indetermination of Arm’s length price thereby in contravention with Board's circular no.3/2016 dt. 10.03.2016. It is the case of the assessee that all documents pertaining to specified domestic transactions as per from 3CEB with details and comparisons were furnished before the AO who had duly examined the same. While placing reliance on the decision of Ld. ITAT, Lucknow (Prem Manohar Gupta)pronounced on 20.03.2018 which had quashed sec. 263 proceedings based on the 2016 circular, the assessee iterates that there was no transfer pricing risks mentioned in the circular as to make the impugned assessment order prejudicial to the interests of revenue. It is evident from the records that one of the scrutiny reasons was large domestic transactions "and as per CBDT circular no. 3/2016 dated 10.03.2016 which replaced earlier circular of 2015 and as such it was mandatory on the part of the AO to refer the case to TPO. The selection for scrutiny was on the basis of transfer pricing risk parameters. So it was not material that documents were called and examined by the ACas it was the TPO who was to examine it, being the specialised officer to scrutinycomplex and complicated issues arising out of such transfer mechanism, Thus the Assessing Officer erred in not making the mandatory reference as per Boards circular which was bindingon him. Now it is the case of the assessee that section 263 would not stand as held byLd. ITAT, Lucknow as the only ground of 263 jurisdiction was that reference was not made by-the AO. The Ld. ITAT in that case came to a finding of fact that the Assessing Officer conducted independent enquiry so far as domestic transactions were concerned and as required within the periphery of section 40(A)(2)(b) of the Act (to quote). However in the case at hand there is no evidence put forth by the assessee that any independent enquiry was made by the AO. The only evidence appears to be compliance to requisition of AO for details of specified domestic Transactions as per Form 3CEB. In other words, itis very clear that no independent scrutiny was made by the AO apart from calling and placing the submissions on record. Therefore as held in the case of Ranbaxy Laboratories Ltd. vs. CIT (DHC), not taking recourse there to and passing the order amounted to making assessment without conducting proper inquiry and investigation as enjoyed by which was also warranted in the facts of the case at hand would make such assessment erroneous and prejudicial to the interest of revenue in the light of law laid down by the Apex court in Malabar Industrial Co. Ltd. 6.Hon'ble Delhi High Court in the case of GEE VEE Enterprise vs. Addl.CIT reported in 99 ITR 375, 386 (Del) has held that the CIT may consider the order of the Assessing Officer to be erroneous not only if it contain some apparent error of reasoning or of law or of fact on the face of it but also because the Assessing Officer has failed to make enquiries which are called for in the circumstances of the case and it is an order which simply accepted what the assessee has stated in his return of income on the said issue. It is not necessary for the CIT to make further enquiries before cancelling the assessment order. The Commissioner can regard the order erroneous on the ground that the Assessing Officer should have made further enquiries. I.T.A No.1332/Kol/2019

hold, after giving the assessee an opportunity of being heard, that the impugned assessment order dated 19.12.2016is liable to set-aside. Therefore, I set aside the said assessment order directing the A.O. to frame the assessment afresh after considering the aforesaid observations, Hon'ble Supreme Court and Hon'ble High Court decisions and as per law. 12.In the result, the assessment order u/s 143(3) dated 19.12.2016 for A.Y. 2014-15is set- aside to the file of the Assessing Officer with a direction to pass a fresh assessment order after considering the aforesaid observations, as per law and after giving an opportunity of being heard to the assessee.”

“22. In Ground Nos. 5 to 7, the assessee has objected to Ld. Pr. CIT's finding with reference to reasons set out in Clause 3(b) of the SCN which read as follows: "One of the reasons for selection of scrutiny was mismatch in amount paid to related persons u/s 40A (2) (b) reported in Audit report (Form 3CEB) and ITR. However, the case was not referred to TPO. As per para 3.2 of CBDT's. Instruction No. 3 of 2016, the instant case had to be mandatorily referred to the TPO (the Transfer Pricing Officer) by the A.O after obtaining the approval of Principle CIT. However, the A.O has completed assessment u/s 143(3) of the Act on 29-12-2016 without referring the matter to Transfer Pricing Officer." 23. We find that the assessee's case was selected under CASS inter alia on the parameter that "Mismatch in amount paid to related persons u/s 40A (2) (b) reported in Audit report and ITR". We note that with reference to this CASS reason the assessee was required to provide its explanation about the alleged mismatch of the figures reported in terms of Section 40A(2)(b) in ITR and Tax Audit Report. We note that explanation in that regard I.T.A No.1332/Kol/2019

was furnished vide Para 9 of assessee's letter dated 09.12.2016 [ Page109 of paper book]. It was explained before the lower authorities as also before us that in clause 9A of Part A- OI of the Income-tax Return in ITR-6, the assessee was required to specify the quantum of the amounts debited to the Profit & Loss Account ,to the extent disallowable u/s 40A, to the persons specified in Section 40A(2)(b) of the Act. In other words in the ITR the assessee was expected to specify the amount which was disallowable in terms of Section 40A(2)(b)of the Act. On the other hand, in Clause 23 of the TAR read with Annexure - IX thereto, the auditor had reported the payments actually made by the assessee to the persons specified in Section 40A(2)(b) of the Act. It was explained that the tax auditor, while giving his report in conformity with the form prescribed by the Board u/s 44AB of the Act, was required to reportonly the amounts paid to persons specified in S 40A(2) during the relevant reporting period and he was not required to express his opinion as to whether the payments to the specified persons were excessive and for that reason any part thereof was disallowable u/s 40A(2) of the Act. The ld. AR therefore submitted that the intent and purport of information disclosed in clause 9A of Part A- OI of the Income-tax Return in ITR-6 and Clause 23 of the TAR being materially different, and the figures reported in ITR and in Clause 23 of TAR did not match. 24. The ld. AR submitted that the CASS parameter referred only to mismatch of the figures reported in tax audit report in relation to payments made to persons referred 40A(2)(b) with the figures mentioned in income-tax return. The CASS reasons did not make reference to the 'transfer pricing audit report' furnished in Form 3CEB, as wrongly alleged by the Ld. Pr. CIT in his SCN. He therefore submitted that when the reason for selection under CASS was examined and the AO was satisfied with the explanation furnished for the same, the Ld. Pr. CIT could not justify invocation of power u/s 263on the ground that before completion of assessment reference to TPO on transfer pricing risk parameter was mandatory in terms of Para 3.2 of the CBDT Instruction No. 3 of 2016. 25. Having considered rival submissions we find merit in the ld. AR's primary contention that the SCN proceeded on the wrong presumption that the assessee's case was selected on a transfer pricing risk parameter. We note that the parameter for selection was as follows: "Mismatch in amount paid to related persons u/s 40A (2) (b) reported in Audit report and ITR" 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, I.T.A No.1332/Kol/2019

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 that Para 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. 27. 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 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." 28. 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 I.T.A No.1332/Kol/2019

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. 29. 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. 30. 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 decision of the coordinate bench of this Tribunal in the case of DVC Emta Coal Mines Ltd &Ors Vs ACIT in ITA Nos. 2430-2432/Kol/2017 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 I.T.A No.1332/Kol/2019

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. 31. 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. We adopt the above detailed discussion mutatis mutandis and conclude that the PCIT has erred in law and as well as on facts in terming the above regular assessment dated 19.12.16 as erroneous causing prejudice to interest of the revenue qua the assessee’s specified domestic transaction not having subjected to section 92CA reference to the Transfer Pricing Officer. We make it clear that learned coordinate bench has already held in assessment year 2014-15 itself that the Finance Act 2017’s omission of section 92BA(i) carrying retrospective effect and therefore, such an inaction in not making reference to the TPO does not render the assessment erroneous causing prejudice to interest of the revenue. We accordingly reverse the PCIT’s revision directions therefore.

Order is pronounced in the open court on 31.12.2019. (A. L. Saini) JUDICIAL MEMBER कोलकाता /Kolkata; "दनांक/ Date: 31/12/2019 (RS, Sr.PS) I.T.A No.1332/Kol/2019

आदेशक"""त"ल"पअ"े"षत/Copy of the Order forwarded to : 1. The Appellant - AIC Iron Industries Pvt. Ltd. 2. The Respondent- PCIT-1, Kolkata आयकरआयु"त(अपील) / The CIT(A), Kolkata [sent through email] 3. आयकरआयु"त/ CIT 4. "वभागीय""त"न"ध, आयकरअपील"यअ"धकरण, कोलकाता/ DR, ITAT, Kolkata [sent 5. through email] गाड"फाईल / Guard file. 6. स"या"पत""तBy Order