If assessee exercises safe harbour option and AO do not pass order declaring it invalid than option will be deemed as valid

Mehsana District Co-operative Vs. DCIT (Gujarat High Court)

Sub­rule (7) of rule 10THD thus lays down the time limit for the Assessing Officer to pass an order under sub­rule(4) and for the concerned competent authority to pass an appropriate order under sub­rule(6). We may recall under sub­rule(4), the Assessing Officer may declare that the option exercised by the assessee for safe harbour was invalid. Under sub­rule(6), the concerned authority would dispose of the assessee’s objection to any such order that the Assessing Officer may have passed under sub­rule(4). The rules do not rest at merely laying down such time limit. Sub­rule(8) in fact, mandates that if either the Assessing Officer or the concerned competent authority does not pass the order within the time specified in sub­rule(7), then the option for safe harbour exercised by the assessee shall be treated as valid. Sub­rule(8) thus gives rise to a deeming fiction where in absence of any order passed by the Assessing Officer under sub­rule(4) declaring the option exercised by an assessee as invalid, same shall be treated as valid. In fact, even if the Assessing Officer has passed such an order under sub­rule(4) and the assessee objected to such order before the concerned authority within the time permitted and such authority fails to dispose of such objection within the time specified in clause(ii) of sub­rule(7) of Rule 10THD, in such a case, the option exercised by the assessee shall be treated as valid.

In the present case, admittedly, after the petitioner exercised such an option, the Assessing Officer passed no order under sub­rule(4) of rule 10THD declaring that the exercising of option was invalid. In terms of sub­rule(7) and sub­rule(8) of the said rule, therefore, 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. Eventually no such directive can be discerned from the circular.

FULL TEXT OF THE HIGH COURT JUDGMENT / ORDER IS AS FOLLOWS:-

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