The Bombay High Court 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.
The Court observed 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.
Brief Facts:
Respondent is engaged in the business of manufacturing diapers and sanitary napkins. Respondent also markets consumer tissue products. Respondent had filed a return of income declaring total income at Rs.30,01,43,006/- on 31st 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 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 29th October 2010 making an adjustment on account of the arms-length price of the international transaction. The Assessing Officer 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 has 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 has re-opened the case for the Assessment Year 2007-08.
Contentions of the Respondent:
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 Counsel argued that where the Assessing Officer had re-opened the assessment by merely making a reference to the order of the TPO which admittedly was passed without any jurisdiction, then there was no independent application of mind by the Assessing Officer to commence the re-assessment proceedings and in the absence of the same, the assessment proceedings could not be reopened.
Observations of the Court:
The Court observed 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.
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.
The Court said that an Assessing Officer can make reference to the TPO under Section 92CA of the Act only after selecting the case for scrutiny assessment.
The decision of the Court:
The Bombay High Court, dismissing the appeal, held that the Tribunal was correct to hold that no assessment proceedings were pending, and hence the reference was invalid.
Case Title: Pr. Commissioner of Income Tax vs Kimberly Clark Lever Private Limited
Coram: Hon’ble Justice K.R. Shriram & Hon’ble Justice M.M. Sathaye
Case no.: INCOME TAX APPEAL NO. 123 OF 2018
Advocate for the Appellant: Mr. Suresh Kumar
Advocate for the Respondent: Mr. P. J. Pardiwalla
Read Judgment @LatestLaws.com
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