AO Can Make Reference To TPO Only After Selecting Case For Scrutiny Assessment: Bombay High Court

The Bombay High Court has held that the 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 Justice K.R. Shriram and Justice M.M. Sathaye has observed that when the 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 respondent/assessee is in the business of manufacturing diapers and sanitary napkins. It also markets consumer tissue products. Respondent had filed a return of income declaring total income at Rs. 30,01,43,006 on October 31, 2007, for Assessment Year 2007-08.

The Assessing Officer made a reference under Section 92CA to the Transfer Pricing Officer. The TPO passed an order under Section 92CA(3) making an adjustment on account of the arm's length price of the international transaction. The Assessing Officer recorded reasons for reopening the assessment and issued a notice under Section 148.

The respondent objected to the notice. The respondent submitted that the reasons to believe income had escaped assessment were based on an invalid transfer pricing order, and hence there was no reason for re-opening the assessment on the basis of the said TPO. The reason why the respondent took this stand was because the respondent’s return of income was processed under Section 143(1) and there was no assessment proceeding pending under Section 143(3) during which a reference could be made to the TPO under Section 92CA.

The respondent submitted that the reference made to the TPO by the Assessing Officer under Section 92CA(1) was invalid, and consequently, the order passed by the TPO under Section 92CA(3) could not be the basis for recording the reasons for reopening the assessment. Where the Assessing Officer had re-opened the assessment by merely making a reference to the order of the TPO, which was passed without any jurisdiction, then there was no independent application of mind by the Assessing Officer to commence the reassessment proceedings.

The court noted that the belief of the Assessing Officer that there has been escapement of income must be based on some material on record. There must be some material on record to enable the Assessing Officer to entertain the belief that certain income chargeable to tax has escaped assessment for the relevant Assessment Year. The only material relied upon is the order of the TPO.

The court held that when no assessment proceedings were pending, the Assessing Officer was precluded from making a reference to the TPO under Section 92CA(1) for the purpose of computing an arm's length price in relation to the international transaction.

Case Title: Pr. Commissioner of Income Tax Versus Kimberly Clark Lever Private Limited

Case No.: Income Tax Appeal No. 123 Of 2018

Date: 07/06/2023

Counsel For Petitioner: Suresh Kumar

Counsel For Respondent: P.J. Pardiwalla

Click Here To Read The order