Assessee is Red Hat India Private Limited.
The assessee is engaged in providing software-related services and allied activities. During the relevant assessment year, the assessee entered into an international transaction involving royalty with its Associated Enterprise (AE), Red Hat Inc..
The PCIT invoked revisionary jurisdiction under section 263, alleging that the reassessment order was erroneous and prejudicial to the interests of the Revenue as the AO completed the reassessment without considering the TPO’s order under section 92CA(3) and without examining the ALP of the royalty transaction, despite having made a reference to the TPO.
Assessee Contentions -
The assessee contended that it had voluntarily offered the royalty income to tax through a revised return in the correct year of accrual.
All relevant details relating to the royalty transaction and transfer pricing were duly furnished during assessment and reassessment proceedings.
The AO had discharged his statutory obligation by making a reference to the TPO u/s 92CA.
Since the TPO did not pass any order u/s 92CA(3), the AO could not have independently determined the ALP.
The reassessment order could not be treated as erroneous for non-consideration of a non-existent TPO order, nor was any prejudice caused to the Revenue.
Revenue Contentions -
Revenue argued that the reassessment order was erroneous and prejudicial as the AO completed the assessment without considering the TPO’s order u/s 92CA(3).
The Revenue’s case was that the Assessing Officer omitted to verify the arm’s length price (ALP) of the royalty transaction, resulting in an order that was erroneous and prejudicial to the interests of the Revenue, thus attracting section 263.
Revenue relied on Explanation 2 to section 263, asserting that the AO had not made adequate enquiries which should have been conducted.
ITAT Judgment -
The ITAT held that revision u/s 263 cannot be sustained where the very basis of revision, namely non-consideration of a TPO’s order, fails because no such order existed on record.
The Tribunal observed that an “error” u/s 263 must arise from the AO’s order and not from the inaction of an independent authority like the TPO; further, once a reference is made u/s 92CA, the AO is barred from determining the ALP in the absence of a TPO’s order.
The Tribunal held that revisionary powers cannot be used to revive time-barred statutory functions or to bypass the limitation u/s 92CA(3A), and accordingly quashed the section 263 order, restoring the reassessment in favour of the assessee.
The Mumbai ITAT quashed the section 263 revision, ruling that an assessment is not erroneous for failing to consider a TPO order that was never issued.
