In Mehsana District Co-operative vs. DCIT, the Gujarat High Court held that the Assessing Officer (A.O.) doesn’t have the authority to make any reference to the Transfer Pricing Officer when an application for Safe Harbour was already deemed to be approved under sub rule (7) and (8) of Rule 10 THD of the Income Tax Rules, 1962.
The assessee-petitioner is a District Level Cooperative Milk Producers’ Union and is engaged in the collection and processing of milk from the member societies. The assessee had entered into specified domestic transactions and therefore applied for Safe Harbour. Safe Harbour means circumstances in which the income tax authorities shall accept the transfer price declared by the assessee. All required formalities specified under the Safe Harbour Rules were complied with. The A.O had neither made any objections to the application nor had he declared the application to be invalid. He took up the returns filed for assessment which should be completed by 31st December 2016.
The Petitioner wrote to the A.O and pre-empted any attempt on his part to make reference to the TPO. The petitioner even referred Central Board of Direct Taxes (CBDT) instructions which lists out the criteria for making valid reference. However, the A.O without informing the assessee-petitioner made reference to the TPO of the petitioner’s specified domestic transactions to ascertain the arm’s length price. The TPO passed an order without making any adjustments.
The Counsel for the Petitioner contended that the action of the A.O was wholly illegal and invalid when the petitioner had applied for safe harbour and when such application was deemed to have been accepted in terms of the relevant rules. He further contended that the A.O had made such a reference merely to ensure extended period of limitation for completing the assessment.
The Counsel for the Revenue argued that the A.O. had only acted as per the CBDT Circular under which he was required to make reference to the TPO when certain circumstances arise. He further submitted that TPO has not made any upward adjustment and that the order passed by the TPO was not averse to the Petitioner and that there is no need to quash it.
The bench comprising of Justice Akil Kureshi and Justice B.N. Karia observed that Section 92CB of the Income Tax Act,1961 was inserted to avoid number of transfer of pricing audits and prolonged disputes. They found that the Petitioner falls squarely in the criteria specified by Rule 10THA of the Safe Harbour Rules under Part DC to Chapter II of the Income Tax Rules, 1961. As per the said rule the eligible assessee would mean a person who has exercised a valid option for application of safe harbour rules and who is either a Government company engaged in the business of generation, supply, transmission or distribution of electricity or is a cooperative society engaged in the business of procuring and marketing milk and milk products. The Bench found that the petitioner exercised an option for safe harbour, the Assessing Officer passed no order under sub rule (4) of rule 10THD declaring that the exercising of option was invalid. They concluded that in terms of sub rule (7) and sub rule (8) of the said rule, the option exercised by the assessee would be treated as valid.
“Once this conclusion is reached, it follows as a natural and necessary corollary that the Transfer Pricing regime would not apply. That being the case, the Assessing Officer had no authority to make any reference to the TPO to ascertain the arm’s length price of the petitioner’s specified domestic transactions. Reference itself was therefore, invalid. CBDT’s circular dated 10.3.2006 could not have and does not lay down anything to the contrary. The circular merely prescribes the circumstances under which the Assessing Officer would make reference to the TPO. Nowhere does the circular provide that as soon as such circumstances exist, the Assessing Officer would make a reference to the TPO, irrespective of the fact that the assessee had opted for safe harbour and such option was treated or deemed to be treated as validly exercised. Legally speaking, CBDT could not have given any such directive. In the result, the petition is allowed. Reference made by the Assessing Officer to the TPO in the present case is quashed.” observed the bench.
Subscribe Taxscan Premium to view the Judgment
