INCOME TAX ACT, 1961

Section 263

Revision under section 263 - Erroneous and prejudicial order - Lack of enquiry by AO -

Assessee filed return of income declared total income of Rs. 10,73,11,330. Assessment under section 143(3) was completed and returned income accepted. Subsequently, it was noticed by PCIT that one of reasons for assessment being taken up for scrutiny was on account of transfer pricing risk parameter. PCIT further noticed that AO did not refer matter to TPO to determine Arm's Length Price (ALP) of international transactions undertaken by assessee with its Associated Enterprises (AEs), in accordance with CBDT Instruction No.3/2016 dt. 10-3-2016. Accordingly, notice under section 263 was issued directing assessee to explain why assessment completed was not to be treated as erroneous and prejudicial to interest of revenue. Assessee filed its objection but PCIT, however, rejected contention of assessee and passed impugned order under section 263, wherein he set aside assessment order as erroneous and prejudicial to interest of revenue. PCIT directed AO to make reference to TPO in respect of international transaction and specified domestic transactions listed in the Form 3CED and Form 3CD. Aggrieved with order, assessee preferred this appeal. Held: One of reasons for selection of assessment for scrutiny was transfer pricing risk parameter. In assessment completed under section 143(3), there was no discussion about ALP of international transaction or specified domestic transaction listed in Form 3CEB / 3CD. In such a scenario, as per Board Instruction No.3/2016 dt. 10-3-2016, case ought to have been mandatorily referred to TPO by AO after obtaining necessary approvals. In fact, instruction further states that if information on international transactions or specific domestic transactions has not been disclosed in return or audit report, and AO comes to know about same during course of scrutiny proceedings which have otherwise been selected on non-TP risk parameter, then also AO had to mandatorily refer transactions for examination by TPO. It was further stated in said Board Instruction that power to determine ALP of international transaction should not be carried out at all by AO. Therefore, inspite of assessment being picked up for scrutiny on account of transfer pricing risk parameter, AO having not referred matter to TPO to determine ALP of international transaction undertaken by assessee with its AE, was in direct contravention / non-adherence to Board Instruction. Clause (c) of Explanation 2 to section 263(1) states that assessment order made not in accordance with any order, direction or instruction issued by Board under section 119 is erroneous order and prejudicial to interest of revenue. Therefore, non-compliance of above said Instruction by AO will render said assessment order as erroneous and prejudicial to interest of revenue.

Relied on:Ranbaxy Laboratories Ltd. v. CIT ITA 504 of 2008, dt. 18-11-2011 : 2012 TaxPub(DT) 0814 (Del-HC)., Bank of Baroda v. JCIT in ITA No. 3699/Mum/2018, order dt. 5-10-2020

REFERRED :

FAVOUR : Against the assessee

A.Y. : 2015-16

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