The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that an Assessing Officer’s failure to refer the determination of the Arm’s Length Price (ALP) to the Transfer Pricing Officer (TPO) does not automatically invalidate the assessment proceedings. Instead, such a lapse constitutes a procedural irregularity that can be rectified by remanding the matter for a fresh assessment.

The bench of Raj Kumar Chauhan (Judicial Member) and Ramit Kochar (Accountant Member) has set aside both the assessment order and the appellate order and directed the Assessing Officer to initiate a fresh assessment after making an appropriate reference to the TPO under Section 92CA(1) of the Income Tax Act.

The appellant/assessee, engaged in the business of manufacturing auto components, had filed its income tax return declaring taxable income of over ₹25.10 crore. During scrutiny assessment, the Assessing Officer made a transfer pricing adjustment of approximately ₹1.49 crore by adopting the same adjustment ratio that had been applied by the TPO in the immediately preceding assessment year.

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Instead of referring the specified domestic transactions for the relevant assessment year to the TPO, the Assessing Officer directly computed the ALP and made the corresponding addition. Apart from the transfer pricing adjustment, the assessment also involved additions relating to weighted deduction for research and development expenditure under Section 35(2AB), cessation of liability under Section 41, disallowance under Section 14A read with Rule 8D, and deductions claimed under Sections 80IB and 80IC.

The Commissioner of Income Tax (Appeals) held that the assessment was invalid because the Assessing Officer had failed to follow the statutory transfer pricing procedure.

According to the CIT(A), once the Assessing Officer proposed a transfer pricing adjustment affecting the ALP of specified domestic transactions, the matter should have first been referred to the TPO under Section 92CA. Thereafter, since the assessee qualified as an “eligible assessee,” the Assessing Officer was required to issue a draft assessment order under Section 144C, enabling the assessee to approach the Dispute Resolution Panel (DRP).

Relying primarily on the Delhi High Court’s decision in Control Risk India Pvt. Ltd., the CIT(A) concluded that the omission rendered the assessment void ab initio and accordingly quashed the assessment order.

The ITAT disagreed with the conclusion that the assessment deserved to be quashed altogether.

The Tribunal observed that the Assessing Officer should indeed have referred the specified domestic transactions to the TPO before determining the ALP. However, the Bench emphasized that this omission was merely a procedural irregularity and not an incurable legal defect.

The Tribunal noted that while Clause 3.3 of CBDT Instruction No. 3/2016 appeared to support the Assessing Officer’s understanding in certain circumstances, Clause 3.7 specifically clarified that where no reference is made to the TPO, the Assessing Officer should not independently determine the ALP.

Reading both provisions together, the Tribunal held that the proper course was not to annul the assessment but to restore the matter so that the statutory procedure could be followed.

The Tribunal placed significant reliance on the Supreme Court’s decision in PCIT v. S G Asia Holdings India Pvt. Ltd., wherein the Apex Court had restored similar matters to the Assessing Officer for making an appropriate reference to the TPO rather than invalidating the assessment.

The Bench further observed that the dismissal of the Revenue’s Special Leave Petition in Control Risk India Pvt. Ltd. did not amount to approval of the Delhi High Court’s reasoning on merits. Since the SLP had been dismissed in limine, it did not operate as a binding precedent overriding the Supreme Court’s decision in S G Asia Holdings.

Following the Supreme Court’s ruling, the Tribunal set aside both the assessment order dated 31 December 2018 and the CIT(A)’s order dated 10 August 2020.

The Assessing Officer has been directed to make an appropriate reference to the TPO for determination of the ALP of the specified domestic transactions, and international transactions, if any. Thereafter, the assessment is to be completed afresh in accordance with law after granting the assessee adequate opportunity to present evidence and submissions.

Since the Tribunal restored the entire matter for a fresh assessment, it refrained from adjudicating the Revenue’s remaining grounds relating to deduction under Section 35(2AB) for research and development expenditure; addition under Section 41 concerning sundry creditors; disallowance under Section 14A read with Rule 8D; and deductions claimed under Sections 80IB and 80IC.

These issues have also been remanded to the Assessing Officer for fresh consideration on their respective merits during the de novo assessment proceedings.

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