2021 (9) TMI 1119 - AT - Income Tax

Revision u/s 263 by CIT - Non reference of matter to the TPO in respect of international transactions and specified domestic transactions - case selected for scrutiny to consider the mismatch in the amount paid to related persons u/s. 40A(2)(b) reported in audit report and the international transactions entered by the assessee with AE referred to in section 92A(2) reported in Form 3CEB, the AO should have referred the matter to the TPO so as to ascertain the ALP of specific domestic transactions with related parties - as per PCIT AO failed to follow the CBDT Instruction No. 3/16 dated 10.3.2016, which expressly provides for determination of ALP of international transactions as well as specific domestic transactions - HELD THAT - The case was not selected for limited scrutiny of specified domestic transactions or international transactions so as to draw inference that the case was selected on Transfer Pricing risk parameter. On the other hand, the case was selected for limited scrutiny one of the reasons being mismatch in amount paid to related persons u/s. 40A(2)(b) reported in audit report and ITR. From a reading of these reasons, we are of the view that no prudent business person properly instructed in law would have inferred the TP risk parameter as a reason for scrutiny so as to mandatorily make reference u/s. 92C of the Act in terms of CBDT Instruction No. 3/16 and failure to make such reference made the assessment order erroneous. In our opinion, the TP risk parameter was not one of the reasons for limited scrutiny of the case and as such the PCIT was not justified in invoking jurisdiction u/s. 263 of the Act so as to direct the AO to refer the matter to the TPO in respect of international transactions and specified domestic transactions listed in Form 3CEB and Form 3CD. As relying on Eveready Industries Ltd 2019 (12) TMI 1033 - ITAT KOLKATA we are inclined to quash the impugned revisionary order passed by the PCIT u/s. 263 of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Mismatch in amount paid to related persons u/s. 40A(2)(b) reported in Audit Report and ITR.
2. Low income shown by large contractors.
3. Mismatch in sales turnover reported in Audit report and ITR.
4. Transfer Pricing Risk Parameter and its referral to TPO.

Detailed Analysis:

1. Mismatch in Amount Paid to Related Persons u/s. 40A(2)(b):
The case was selected for scrutiny due to a mismatch in the amount paid to related persons as reported in the Audit Report and ITR. The Principal Commissioner of Income Tax (PCIT) observed that the payments to related persons were Transfer Pricing (TP) issues listed in Form 3CEB and Form 3CD. The PCIT argued that the Assessing Officer (AO) should have referred the matter to the Transfer Pricing Officer (TPO) as per CBDT Instruction No. 8 of 2015. However, the Tribunal found that the case was not selected for scrutiny on the basis of TP risk parameters. The Tribunal held that the TP risk parameter was not one of the reasons for limited scrutiny and the PCIT was not justified in invoking jurisdiction u/s. 263 to direct the AO to refer the matter to the TPO.

2. Low Income Shown by Large Contractors:
The Tribunal did not specifically address this issue in detail in the judgment. However, it was one of the reasons for the case being selected for scrutiny.

3. Mismatch in Sales Turnover Reported in Audit Report and ITR:
The Tribunal noted that the AO had conducted inquiries regarding the mismatch in sales turnover reported in the Audit Report and ITR. The assessee had provided explanations and reconciliations for the mismatch. The Tribunal found that the AO had applied his mind and accepted the explanations provided by the assessee. Therefore, the Tribunal held that the AO's order was neither erroneous nor prejudicial to the interests of the revenue on this issue.

4. Transfer Pricing Risk Parameter and its Referral to TPO:
The PCIT argued that the AO should have referred the matter to the TPO for determining the Arm's Length Price (ALP) of specified domestic transactions with related parties. The Tribunal observed that the case was not selected for limited scrutiny on the basis of TP risk parameters. The Tribunal also noted that the CBDT Instruction No. 3/2016 mandates referral to the TPO only if the case was selected for scrutiny with TP risk as one of the parameters. The Tribunal held that the AO had conducted inquiries and used his discretion as per the provisions of section 92CA of the Act. The Tribunal found that the PCIT's invocation of jurisdiction u/s. 263 was not justified as the AO's order was not erroneous or prejudicial to the interests of the revenue.

Conclusion:
The Tribunal quashed the revisionary order passed by the PCIT u/s. 263 of the Act, holding that the AO's order was neither erroneous nor prejudicial to the interests of the revenue. The appeal of the assessee was allowed.