Transfer Pricing Reference During Extended Reassessment Period Invalid: Madras High Court

The Madras High Court held that a reference to the Transfer Pricing Officer (TPO) made during the extended period available for completion of reassessment is invalid, rendering the proceedings time-barred.

Justice C. Saravanan delivered the judgment while allowing a writ petition filed by Eaton Power Quality Private Limited which challenged the order passed by the TPO under Section 92CA(3) of the Income Tax Act by which the arm's length price of corporate service fees was determined at nil and a downward adjustment was proposed.

The Bench observed:

“If a reference is made beyond the initial period of limitation for passing an assessment order under Section 153(2) of the Income Tax Act 1961 neither such a reference is valid under Section 92CA(1) of the Income Tax Act 1961 nor an order passed purportedly in pursuance of such an invalid reference will be a valid order under Section 92CA(3) of the Income Tax Act 1961.”

The reassessment proceedings were initiated against the petitioner pursuant to a notice issued under Section 148 of the Income Tax Act on 24 February 2020. During the pendency of the reassessment proceedings the Assessing Officer proposed to make a reference to the TPO which was approved by the Principal Commissioner of Income Tax on 10 February 2021.

The petitioner approached the High Court contending that the reference to the TPO itself was barred by limitation and therefore the entire transfer pricing proceedings were liable to be quashed

The High Court held that the reference was “without jurisdiction,” as it was not made withing the limit prescribed under Section 153(2) of the Income Tax Act. It noted that the law governing the time limit for completing reassessment was amended with effect from 1 April 2017.

It observed that for the notice issued on 24 February 2020 the relevant financial year ended on 31 March 2020 and the assessment order was ordinarily required to be passed on or before 31 March 2021.

However, under Section 153(4) of the Income Tax Act the time limit for completing the assessment stands extended by twelve months where a reference is made to the TPO under Section 92CA(1). In this case, the reference to the TPO was made after 31 March 2021, beyond the original period, and therefore could not validly extend the time. Even with the extension under Section 153(4), the assessment had to be completed by 31 March 2022.

Accordingly, the High Court allowed the writ petition and quashed the transfer pricing order.

For Petitioner: Vishal Kalra

For Respondent: Avinash Krishnan Ravi