Bombay High Court: Assessing Officer Can Make Reference to TPO only After Selecting Case for Scrutiny Assessment

Bombay High Court: Assessing Officer Can Make Reference to TPO only After Selecting Case for Scrutiny Assessment

The Bombay High Court has ruled that an Assessing Officer (AO) can make reference to the Transfer Pricing Officer (TPO) under Section 92CA of the Income Tax Act only after selecting the case for scrutiny assessment.

The bench of Justices K.R. Shriram and M.M. Sathaye, dismissed an appeal challenging the Order of the tribunal vide which it held that when reference was made to the TPO by the Assessing Officer for determination of arm’s length price in relation to the international transaction, no assessment proceedings were pending and hence it was an invalid reference.

In the present case the respondent/assessee is engaged in the business of manufacturing diapers and sanitary napkins.

Respondent had filed a return of income declaring total income at Rs.30,01,43,006/- on 31 October 2007 for Assessment Year 2007-08. The return of income was processed under Section 143(1) of the Income Tax Act, 1961.

The Assessing Officer (AO) made a reference under Section 92CA of the Act to the Transfer Pricing Officer (TPO). The TPO passed an order under Section 92CA(3) of the Act on 29 October 2010 making an adjustment on account of the arms-length price of the international transaction. The AO recorded reasons for re-opening the assessment and issued a notice under Section 148 of the Act on 14th January 2011.

Respondent vide its letter dated 28th January 2011 objected to the notice.

It was the case of the respondent that the reasons to believe income had escaped assessment was based on an invalid transfer pricing order and hence there was no reason for re-opening the assessment on the basis of the said order of TPO.

The respondent’s return of income was processed under Section 143(1) of the Act and there was no assessment proceeding pending under Section 143(3) of the Act during which a reference could be made to the TPO under Section 92CA of the Act and hence, such a reference to TPO itself was invalid and any order passed by the TPO would be invalid and such an invalid order of the TPO cannot be the reason for re-opening the assessment.

The Assessing Officer had in fact admitted that the case was not selected for scrutiny and no notice under Section 143(2) of the Act was issued but in view of the findings of the TPO he had re-opened the case for the Assessment Year 2007-08.

The learned counsel for the respondent submitted that reference made to the TPO by the Assessing Officer under Section 92CA(1) of the Act was invalid and consequently the order passed by the TPO under Section 92CA(3) of the Act could not be the basis for recording the reasons for re-opening the assessment, i.e., initiating re-assessment proceedings.

The bench opined that when no assessment proceedings were pending in relation to the relevant assessment year, the Assessing Officer was precluded from making a reference to the TPO under Section 92CA (1) of the Act for the purpose of computing arms-length price in relation to the international transaction.

The Assessing Officer could not have relied upon an order of the TPO which is a nullity to form a belief that certain income chargeable to tax has escaped the assessment for the relevant Assessment Year, stated the Court.

The Court avowed that, “the process of determination of arm’s length price is to be carried out during the course of assessment proceedings, may it be, under Sub Section (3) of Section 92C of the Act where the Assessing Officer determines the arm’s length price or under Sub Sections (1) to (3) of Section 92CA of the Act, where the Assessing Officer refers the determination of arm’s length price to the TPO.”

As per the Court, an Assessing Officer can make reference to the TPO under Section 92CA of the Act only after selecting the case for scrutiny assessment.

The bench while dismissing the appeal, held that the Tribunal was correct to hold that no assessment proceedings were pending, and hence the reference was invalid.