Court Upholds TPO Reference in Limited Scrutiny: No Overreach Found

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Case Name

M/s. Transsys Solutions Private Limited (Rep. by its Directors, Mr. Venkata Krishnan S.) vs. Assistant Commissioner of Income Tax and Ors. (High Court of Madras)

W.A.Nos.1133 & 1134 of 2020 and C.M.P.No.13823 of 2020

Date: 17th February 2021

Key Takeaways

• Reference to TPO in Limited Scrutiny: The court clarified that even in cases selected for limited scrutiny, if the issue involves transfer pricing (TP) risk parameters, the Assessing Officer (AO) can refer the matter to the TPO under Section 92CA(1) of the Income Tax Act, 1961.
• CBDT Instructions Followed: The court found that the reference to the TPO complied with Central Board of Direct Taxes (CBDT) Instructions, specifically Instruction No. 15/2015, and was not an overreach.
• No Violation of Natural Justice: The company’s participation in the proceedings and the opportunity to present objections meant there was no procedural unfairness.
• Scope of Scrutiny: The court rejected the argument that the scrutiny was only for numerical reconciliation, holding that the presence of TP risk parameters justified a broader inquiry.
• Appeals Dismissed: Both the writ appeals by the company were dismissed, upholding the actions of the tax authorities.

Issue

Was the reference to the Transfer Pricing Officer (TPO) for determining the Arm’s Length Price (ALP) of international transactions valid, even though the case was selected for limited scrutiny under the Computer Aided Scrutiny Selection (CASS) system?

Facts

• Parties: M/s. Transsys Solutions Private Limited (the assessee) vs. Assistant Commissioner of Income Tax and others (the tax department).
• Timeline:
• The company filed its income tax return for Assessment Year (AY) 2016-17.
• The case was selected for limited scrutiny by the CASS system, focusing on whether the value of international transactions was correctly shown in Form 3CEB and the return of income.
• The Assessing Officer (AO) issued a notice under Section 143(2) of the Income Tax Act.
• The AO referred the case to the TPO under Section 92CA(1) to determine the ALP of international transactions, citing TP risk parameters.
• The company objected, arguing that the reference was outside the scope of limited scrutiny and violated CBDT Instructions.
• The TPO proceeded, and the AO issued a draft order under Section 144C.
• The company filed writ petitions challenging the TPO’s notice and the draft order, which were dismissed by a single judge.
• The company appealed, leading to this judgment.

Arguments

Assessee (Transsys Solutions Pvt. Ltd.):

• The case was selected for limited scrutiny only to check if the value of international transactions was correctly shown in Form 3CEB and the return of income.
• The reference to the TPO for determining ALP was not authorized, as the scrutiny did not involve TP risk parameters.
• Cited CBDT Instruction No. 3 of 2016 and other instructions, arguing that the AO overstepped the scope of limited scrutiny.
• Claimed that the reference to the TPO was without jurisdiction and violated procedural fairness.

Tax Department:

• The selection reason included TP risk parameters, not just numerical reconciliation.
• The AO was not competent to examine the correctness of international transaction values; hence, reference to the TPO was necessary under Section 92CA(1).
• The process followed CBDT Instructions, including Instruction No. 15/2015.
• The company had participated in the proceedings and had the opportunity to present objections, so there was no procedural unfairness.

Key Legal Precedents & Provisions

• Section 92CA(1) of the Income Tax Act, 1961: Allows the AO to refer cases involving international transactions to the TPO for determining ALP.
• Section 143(2): Notice for scrutiny assessment.
• Section 144C: Draft assessment order and Dispute Resolution Panel (DRP) process.
• CBDT Instruction No. 3 of 2016, No. 7/2014, No. 20/2015, and No. 15/2015: Guidelines on the scope of scrutiny and reference to TPO.
• Case Law Cited: Mohinder Singh Gill & Anr. vs. The Chief Election Commissioner, New Delhi & Ors., AIR 1978 SC 851 (on the scope of administrative orders and their justification).

Judgement

• Decision: The High Court dismissed the appeals by Transsys Solutions Pvt. Ltd.
• Reasoning:
• The court found that the reason for scrutiny included TP risk parameters, not just reconciliation.
• The AO was not competent to examine the correctness of international transaction values, so reference to the TPO was justified and required.
• The reference process followed the required CBDT Instructions, and the approval of the Principal Commissioner was obtained.
• The company’s participation in the proceedings and the opportunity to object meant there was no procedural unfairness.
• The court agreed with the single judge’s findings and found no reason to interfere.
• Outcome: Both appeals were dismissed, and the orders of the tax authorities were upheld.

FAQs

Q1: Can the Assessing Officer refer a case to the TPO in limited scrutiny?

A: Yes, if the reason for scrutiny includes transfer pricing risk parameters, the AO can refer the case to the TPO under Section 92CA(1), even in limited scrutiny cases.

Q2: What is the significance of CBDT Instructions in this context?

A: CBDT Instructions guide the scope of scrutiny and the process for referring cases to the TPO. The court found that these instructions were followed in this case.

Q3: Did the company have a chance to present its case?

A: Yes, the company participated in the proceedings, submitted objections, and had the opportunity to present its case before the TPO and the Dispute Resolution Panel (DRP).

Q4: What does this judgment mean for other taxpayers?

A: It clarifies that the presence of TP risk parameters in the scrutiny reason allows the AO to refer cases to the TPO, even in limited scrutiny, provided CBDT Instructions are followed.

Q5: What legal precedent was cited?

A: The court cited Mohinder Singh Gill & Anr. vs. The Chief Election Commissioner, New Delhi & Ors., AIR 1978 SC 851 regarding the scope of administrative orders.

These appeals by the appellant/assessee are directed against the common order dated 15.10.2020, passed in W.P.Nos.5760 and 35246 of 2019 filed by the assessee.

2. W.P.No.5760 of 2019 was filed challenging the notice dated 19.12.2018, issued by the second respondent, the Transfer Pricing Officer (TPO), in exercise of his powers under Section 92CA(2) and Section 92D(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for the assessment year 2016-17.

3.W.P.No.35246 of 2019 was filed challenging the draft order under

Section 144C of the Act passed by the Deputy Commissioner of Income Tax

on 27.11.2019.

4.The appellant filed their return of income on 15.10.2016, for the

assessment year under consideration, AY 2016-17. Notice dated

27.07.2017, was issued under Section 143(2) by the first respondent, the

Assessing Officer, which mentions the issue, which has been identified for

examination as to whether “value of international transactions is correctly

shown in Form 3CEB and the return of income”. Subsequently, the TPO

issued notice dated 19.12.2018, stating that a reference has been received

under Section 92CA(1) of the Act from the first respondent to determine the

Arms Length Price (ALP) under Section 92CA(3) in respect of international

transactions entered into by the appellant/assessee during the financial year

2015-16. The appellant was directed to produce evidence or material,

which they may rely upon in support of computation made by them of ALP

of the international transactions.

5.In paragraph 3 of the notice dated 19.12.2018, the list of

information and documents, which the assessee was required to

furnish/produce were mentioned. The assessee submitted their objection

dated 03.01.2019, to the Assessing Officer through their Chartered

Accountant, objecting for the reference made under Section 92CA(2) and

Section 92D(3) to the TPO (second respondent) to determine the ALP. In

the said objection, the appellant/assessee stated that the notice issued under

Section 143(2) of the Act dated 27.07.2017, is for a limited scrutiny to

identify as to whether the value of international transactions is correctly

shown in Form 3CEB and return of income, whereas the notice issued by

the TPO states that a reference has been received to determine the ALP

under Section 92CA(3) in respect of international transactions entered into

by the assessee during the financial year 2015-16. It was submitted that in

terms of the reasons given in the Computer Aided Scrutiny Selection

(CASS), is for a limited scrutiny, it only requires reconciliation between

Form 3CEB and return of income and it does not involve any TP risk

parameters, which call for determination of ALP by reference to TPO.

Therefore, it was submitted that the reference to the TPO for determination

of ALP of international transactions, as done by the first respondent, is not

authorized as per Instruction No.3 of 2016 dated 10.03.2016, issued by the

Central Board of Direct Taxes (CBDT) and therefore, the consequent

process of determination of ALP is also not in accordance with law and

requested for withdrawal of the reference made to the TPO.

6.The assessee addressed the TPO through their Chartered

Accountant by letter dated 03.01.2019, informing the TPO about their

objection given to the first respondent questioning the reference to the TPO

and without prejudice to the said objection, certain documents were

forwarded. Subsequently, by letter dated 25.01.2019, the assessee furnished

further details to the TPO. Subsequently, the assessee filed W.P.No.5760 of

2019 challenging the notice issued by the TPO dated 19.12.2018.

7.While entertaining the writ petition, the learned Single Bench

granted a limited interim order dated 28.02.2019, after observing that the

proceedings before the authority can continue, however, no orders shall be

passed till the next hearing date. The writ petition was directed to be listed

on 08.03.2019. The interim order was extended till 14.03.2019, by order

dated 08.03.2019, and further extended till 29.03.2019, by order dated

14.03.2019. Subsequently, the interim order was not extended. The

TPO has passed an order dated 31.10.2019, under Section 92CA(3) of the

Act determining the ALP of the international transactions.

8.The Deputy Commissioner of Income Tax, Corporate Circle-3(2),

Chennai, issued notice dated 25.11.2019, to the assessee informing them

that they have received the order of the TPO dated 31.10.2019 and that the

Department is not in possession of any order staying the proceedings as on

the said date and if there is any order of stay granted in the assessee's case,

the same may be communicated to the Department on or before 27.11.2019.

In response to the said notice, the assessee by reply dated 27.11.2019,

informed the Deputy Commissioner of Income Tax that when the writ

petition was posted for hearing, for extension of stay, the learned Standing

Counsel for the Department submitted that an assessment order was already

passed for the assessment year 2016-17 and therefore, the writ petition

(W.P.No.5760 of 2019) is infructuous.

9.Further, the assessee stated that their counsel objected to the

passing of the assessment order, when the writ petition was pending and that

the Court adjourned the matter by a week to ascertain as to whether

assessment order has been passed. A draft order under Section 144C of the

Act was passed by the Deputy Commissioner of Income Tax on 27.11.2019.

This order was challenged by the appellant in W.P.No.35246 of 2019.

10.The writ petition filed in W.P.No.5760 of 2019 challenging the

notice dated 19.12.2019 was clubbed along with W.P.No.35246 of 2019 and

both the writ petitions have been dismissed by a common order. This is

how the assessee is before us by way of these appeals.

11.Before us, the assessee seeks to prosecute W.A.No.1134 of 2020,

which has been filed challenging the dismissal of W.P.No.35246 of 2019.

As stated above, the said writ petition was filed challenging the draft order

under Section 144C of the Act dated 27.11.2019, passed by the Deputy

Commissioner of Income Tax.

12.We have elaborately heard Mr.N.V.Balaji, learned counsel assisted

by Ms.N.V.Lakshmi, learned counsel for the appellant/assessee and

Ms.Hema Muralikrishnan, learned Senior Standing Counsel for the

respondents/Revenue.

13.The argument of the learned counsel for the appellant is that the

solitary issue, which was identified for examination in the limited scrutiny

as per the notice issued under Section 143(2) of the Act dated 27.07.2017, is

whether value of international transactions is correctly shown in Form

3CEB and return of income and that whether transactions reported are at

arms length or not, was not the issue for which, the assessee's case was

taken up for limited scrutiny. Further, the TPO could not have taken up for

determination of the ALP of the international transactions firstly on the

ground that the assessee's case was not selected for limited scrutiny on the

said ground and secondly, it would be in violation of the instructions issued

by the CBDT. Therefore, it is submitted that the reference to the TPO under

Section 92CA(1) of the Act is wholly without jurisdiction.

14.Reverting back to the notice dated 27.07.2017, and referring to the

reason for which the assessee's case was selected for limited scrutiny, it is

submitted that in the counter affidavit filed in the writ petitions, the scope

has been increased and this is impermissible in law. In this regard, the

learned counsel referred to the decision in Mohinder Singh Gill & Anr. vs.

The Chief Election Commissioner, New Delhi & Ors., [AIR 1978 SC 851].

Further, in response to the query raised by the Court qua, the finding

rendered by the learned Single Bench in paragraph 13 of the impugned

order that the assessee had cooperated and participated in the assessment

proceedings and has also filed objections to the draft order before the

Dispute Resolution Panel (DRP), which is pending, as to how the appellant

would be justified in prosecuting these appeals as already, the assessee is

before the DRP raising all contentions. Mr.N.V.Balaji, would respond by

referring to Section 144C(8) and submit that the issue raised in the writ

petitions cannot be agitated before the DRP, nor adjudicated by the DRP

and therefore, the assessee is justified in prosecuting these appeals.

Therefore, it is submitted that the learned Single Bench ought to have

granted the relief sought for in the writ petitions.

15.Ms.Hema Muralikrishnan, would submit that the understanding of

the appellant/assessee is wholly incorrect and this has been clearly brought

out in the counter affidavit filed in the writ petitions and it is not a case,

where the Assessing Officer was denuded of jurisdiction to make a

reference to the TPO. The learned Standing Counsel referred to the reasons

given in the CASS selection and the assessee is not right in contending that

the case was selected for limited scrutiny only. Further, the learned counsel

referred to relevant paragraphs in the impugned order and submitted that the

learned Writ Court rightly rejected the relief sought for.

16.In reply, Mr.N.V.Balaji while briefly reiterating the submissions

made earlier, had referred to the directions issued by the CBDT in

Instruction No.7/2014 dated 26.09.2014 and Instruction No.20/2015 dated

29.12.2015 and that information cannot be called for in a routine manner

and a separate instruction has also been issued fixing monetary limits for

selecting cases for scrutiny.

17.What is required to be considered in the instant case is whether the

assessee is right in contending that the assessee's case was selected for a

limited scrutiny and the reference to the TPO was beyond the scope of the

scrutiny. In this regard, it would be relevant to see the reason and the issue

for which, the assessee's case was selected for scrutiny, which is as

hereunder:-

Reason Code Reason Description Issue Underlying Information Elements Rationale

TP 01.04 Large Aggregate value of total

employee cost in comparison to

Aggregate value of international

transactions as per books of

accounts (T.P.Risk Parameter)

(S.No.8 of Form 3CEB and Part

A-P&L of ITR)

Whether value of

international

transactions are

correctly shown

in Form 3CEB

and return of

income.

18.From the above, it is seen that the reason stated for selection of

scrutiny was the large aggregate value of the total employee cost in

comparison to aggregate value of international transactions as per books of

accounts and TP risk parameters. The issue was whether the value of

international transactions are correctly shown in Form 3CEB and return of

income. If the above is the reason and issue for which the assessee's case

was selected for scrutiny, can it be said that it is a case of a limited scrutiny.

In our considered view, such narrow interpretation cannot be given to the

case on hand.

19.As rightly contended by Ms.Hema Muralikrishnan, the first

respondent is not competent to check whether the value of the international

transactions as furnished in Form 3CEB by a Chartered Accountant and

return of income is correctly shown. Further, the Assessing Officer, being

not competent to examine the said issue, necessarily, the case has to be

referred to the TPO as per Section 92CA of the Act. Therefore, we are of

the view that the contention of the appellant/assessee that the case was

selected for mere reconciliation is an incorrect interpretation. This is clear

from the reason for which the case was selected for scrutiny and the issue

arising there from. Thus, we find that there is no violation of the

instructions issued by the CBDT.

20.In our considered view, the learned Single Bench rightly took note

of these aspects as well as paragraph 3.4 of the CBDT Instruction

No.15/2015, which states that the issue on which a reference was thought to

be necessary, has to be explicitly mentioned in the Assessing Officer's letter

seeking reference to the TPO and such letter of the Assessing Officer dated

17.07.2018, was found to have complied with the said condition. The said

letter is as follows:-

"PAN: AADCT4603N/2018-19 Dated: 17/07/2018

To

The Principal Commissioner of Income-tax,

Chennai-3,

Chennai.

THROUGH THE ADDL. CIT, CORPORATE RANGE-3,

CHENNAI

Respected Sir,

\ Sub: Computation of Arms Length Price – Request for

approval – reference to Transfer Pricing Officer (TPO) –

in the following case – AY 2016-17 – Reg.

*****

For the A.Y. 2016-17, the following scrutiny case has been selected

for Limited scrutiny through CASS and notice u/s 143(2) was duly served on

the assessee. On examination of Form 3CEBN in this case, it is observed that

the assessee has entered into international transactions with its associated

enterprises as mentioned below:

S.No. Name of the Assessee PAN A.Y CASS Reason

1 M/s.Transsy Solutions Pvt. Ltd. AADCT4603N 2016-17 (v) Large Aggregate value of total employee cost in comparison to aggregate value of

International transactions as per books of accounts. (Form 3CEB)

2. In view of the above, it is considered necessary that a reference

u/s. 92CA(1) be made to the Transfer Pricing Officer for determination of

Arm’s length Price for the said Transactions. As per Sec.92CA(1) of the

IT Act, a reference to TPO could be made only with the prior approval of

the Commissioner of Income-tax. Hence, it is requested that the necessary

approval may kindly be granted for referring the case to the TPO.

3. Copies of Form 3CEB and CASS reasons screen shot in the

above mentioned case are enclosed herewith for your kind reference.”

21.Further, we also agree and endorse the finding rendered by the

learned Single Bench that the reason for selection of scrutiny by CASS was

only for numerical reconciliation is a over simplification of the reason stated

for selection. In fact, the learned Single Bench has observed that the officer

might have been more detailed in the choice of words employed so as to

specifically refer to the issue of total employee cost, however, non-reference

to this, is not fatal, as the reason for selection by CASS has been produced

and placed on record by the officer while seeking approval of a Principal

Commissioner of Income Tax (PCIT) for reference to the TPO.

22.Further, the Court noted that after the interim order, which was

initially granted, was not extended, the Assessing Officer issued show cause

notice dated 11.10.2019, the appellant/assessee submitted their reply dated

23.10.2019, enclosing various details on the computation of the ALP as

sought for by the Assessing Officer. However, the affidavit filed in support

of the writ petitions was silent with regard to these facts. Thus, the learned

Single Bench rightly concluded that the appellant has not only cooperated

and participated in the conduct of assessment, but has also filed objections

before the DRP that are pending disposal. Hence, we are of the considered

view that the learned Single Bench rightly dismissed the writ petitions and

the order does not call for any interference.

23.For the above reasons, W.A.No.1134 of 2020 is dismissed.

Consequently, there is no merit in W.A.No.1133 of 2020.

24.In the result, the appeals are dismissed. No costs. Consequently,

connected miscellaneous petition is closed.