2018 (1) TMI 1550 - AT - Income Tax

TP Adjustment - non conformity with the provisions of section 144C - assessee pointed out that in the present case the final order of assessment does not incorporate the directions of the DRP and was a verbatim repetition of the draft order of assessment - HELD THAT - AO as per law was required to pass the final order of assessment dated 17/1/2014 for asst. year 2009-10 u/s 143(3) r.w.s 144C of the Act in conformity with the directions issued by the DRP u/s 144C(5) of the Act which are binding on him as per section 144C(10) thereof and within the time prescribed u/s 144C(13) of the Act. We find that instead of passing the final order of assessment as required by law the AO passed the impugned final order of assessment dated 17/1/2014 u/s 143(3) r.w.s 92CA of the Act; which as contended by the id AR is identical to the draft order of assessment passed on 14/3/2013 by only incorporating this TPO s proposals and thereby evidently giving the DRP s mandatory directions issued u/s 144C(5) of the Act a complete go-by. It is factually established that the AO in the final order of assessment dated 17/1/2014 has not given effect to or carried out the binding directions of the DRP as required u/s 144C(10) within the time specified u/s 144C(13) of the Act; which is a clear violation of the binding provisions of sec. 144C(10) and (13) of the Act. Therefore in our considered opinion the conduct of the AO/TPO in passing the impugned final order of assessment dated 17/1/2014 is a clear case of defiance and disregard to the binding directions of the higher authorities i.e the DRP in the case on hand. In fact in the impugned order dated 17/1/2014 there is not even a single reference to the DRP s directions issued us/ 144C(5) of the Act vide order dated 30/12/2013. Impugned final order of assessment for asst. year 2008-09 passed u/s 143(3) r.w.s 92CA of the Act by the AO in violation of the express mandatory provisions of sec. 144C(10) and (13) of the Act by not passing the impugned order in pursuance of and in conformity with the binding directions of the DRP issued u/s 144C(5) of the Act within the time specified for this purpose has rendered the said impugned final order of assessment unsustainable in law - Decided in favour of assessee

Summary

Issues Involved:
1. Jurisdictional error in passing the assessment order under the wrong section.
2. Compliance with directions issued by the Dispute Resolution Panel (DRP) under section 144C of the Income-tax Act.
3. Validity of adjustments made under section 92CA of the Act.
4. Selection of comparables for software development services and IT Enabled Services (ITES).
5. Working capital adjustments and their impact on the Arm's Length Price (ALP).
6. Benefit of the proviso to section 92C(2) of the Act.
7. Selection of companies with high turnover as comparables.
8. Exceeding jurisdiction by the DRP.
9. Interest levy under section 234B of the Act.

Detailed Analysis:

1. Jurisdictional Error:
The appeal challenged the assessment order passed under section 143(3) r.w.s 92CA of the Income-tax Act, contending that it should have been passed under section 143(3) r.w.s 144C. The failure to comply with the correct section rendered the order unsustainable in law.

2. Compliance with DRP Directions:
The issue revolved around the AO's failure to pass the final order of assessment in conformity with the DRP's binding directions issued under section 144C(5) of the Act within the prescribed time. The failure to adhere to these directions led to the quashing of the assessment order.

3. Validity of Adjustments under Section 92CA:
Challenges were raised regarding the adjustments made under section 92CA of the Act, specifically related to software development services and IT Enabled Services. The appellant argued that these adjustments were legally flawed.

4. Selection of Comparables:
Disputes arose over the selection of new companies as comparables for software development services and ITES. The appellant contested the exclusion of certain comparables without cogent reasons and raised concerns over the selection criteria.

5. Working Capital Adjustments:
The authorities' decision to make working capital adjustments in software development services and ITES was questioned. The appellant argued that these adjustments led to an unsustainable increase in the ALP margin.

6. Proviso to Section 92C(2):
The appellant sought the benefit of the proviso to section 92C(2) of the Act, emphasizing its mandatory nature under the scheme of the Act.

7. Selection of Companies with High Turnover:
Criticism was directed towards the selection of companies with high turnover as comparables, with the appellant arguing that this selection was not suitable based on the case's circumstances.

8. Exceeding DRP Jurisdiction:
Concerns were raised regarding the DRP exceeding its jurisdiction by directing the consideration of internal comparables selected by the appellant, which was seen as a violation of the provisions of the Act.

9. Interest Levy under Section 234B:
The appellant disputed the levy of interest under section 234B of the Act, highlighting issues related to the computation and period of interest calculation.

This comprehensive analysis covers the various issues raised in the legal judgment, addressing the arguments and decisions made in each aspect of the case.