2025 (4) TMI 26 - AT - Income Tax

Legality and validity of the TP order u/s 92CA(3) and impugned final assessment order passed u/s 143(3) r.w.s section 144C(5) r.w.s 254 - Whether the DRP has jurisdiction u/s 144C to direct the TPO or AO in 2nd round after set aside by ITAT when the AO had already passed the final assessment order u/s 143(3) r/w section 144C(3)? - HELD THAT - We find that the DRP derives its authorities and powers from the provisions of section 144C of the I.T. Act and its procedures are governed by Income-tax (Dispute Resolution Panel) Rules 2009. The provisions of the Act or Rule do not give power to the DRP to direct TPO or AO in 2nd round. If the Legislature had intended to give such powers it had been expressly implied in section 144C itself. Therefore we are of the view that the DRP does not have powers to direct TPO or AO in 2nd round of proceedings. Our view is also strengthening by the judgment of Undercarriage and Tractor Parts (P.) Ltd. Vs. Dispute Resolution Panel 2023 (9) TMI 759 - BOMBAY HIGH COURT which held that the DRP can give directions only in pending assessment proceedings and once the assessment order is passed DRP would have no power to pass any directions as contemplated u/s 144C(5). We also take note of the fact that in this case even section 144C(5) has not been complied with. Hence in the light of the above facts and circumstances of the case we are of the considered view that Transfer pricing order u/s 92CA(3) dated 20/12/2018 and impugned final assessment order dated 31.12.2018 passed under section 143(3) r/s section 144C(5) r.w.s 254 of the Act are void ab-initio hence quashed. There is no specific time limitation or provision in section 144C of the Act which provides ld. DRP to pass direction within such time in a set aside matter to DRP by the Tribunal.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment include:

• Whether the transfer pricing proceedings were void ab initio due to the absence of a final order under Section 92CA(3) of the Income Tax Act, 1961.
• Whether the assessment order dated 31/12/2018 was barred by limitation as per the statutory time limits prescribed under the Act.
• The legality of the Dispute Resolution Panel (DRP) issuing directions in a case set aside by the ITAT directly to the DRP, and the validity of subsequent actions by the Transfer Pricing Officer (TPO) and Assessing Officer (AO) based on such directions.
• The appropriateness of various adjustments made by the TPO/DRP related to transfer pricing, including depreciation, power costs, credit periods, and risk-related adjustments.
• The treatment of unrealized forex fluctuation loss and service income in the assessment proceedings.
• The admission and consideration of additional legal grounds raised by the assessee challenging the legality of the TPO and AO's actions.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Transfer Pricing Proceedings

The appellant argued that the transfer pricing proceedings were void ab initio due to the absence of a final order under Section 92CA(3). The legal framework requires the TPO to pass a final order before the AO can issue a draft assessment order. The Court found that the TPO had only issued a draft order, and the AO proceeded without a final order, rendering the proceedings procedurally flawed.

Issue 2: Limitation Period for Assessment Order

The appellant contended that the assessment order dated 31/12/2018 was barred by limitation. The legal framework under Section 144C and Section 153 of the Income Tax Act prescribes specific time limits for completing assessment proceedings. The Court noted that the DRP did not pass directions within the stipulated time, and the subsequent assessment order exceeded the permissible period, thus being time-barred.

Issue 3: Jurisdiction of DRP in Set-Aside Matters

The Court examined whether the DRP had the jurisdiction to issue directions in a matter set aside by the ITAT directly to the DRP. The legal provisions under Section 144C do not empower the DRP to issue directions in such cases. The Court concluded that the DRP's actions were beyond its jurisdiction, rendering subsequent orders void.

Issue 4: Transfer Pricing Adjustments

The appellant challenged various adjustments made by the TPO/DRP, including those related to depreciation, power costs, credit periods, and risk-related adjustments. The Court noted that the TPO/DRP's denial of adjustments lacked proper justification and failed to consider the appellant's specific circumstances, such as operational capacity and industry practices.

Issue 5: Treatment of Forex Loss and Service Income

The appellant argued that the AO's disallowance of unrealized forex fluctuation loss and the treatment of service income were incorrect. The Court found that the AO did not adequately consider the appellant's evidence and explanations regarding these items, leading to an erroneous assessment.

Issue 6: Additional Legal Grounds

The appellant raised additional legal grounds challenging the legality of the TPO's order and the AO's reliance on it. The Court admitted these grounds, noting that they addressed fundamental legal issues affecting the validity of the assessment proceedings.

3. SIGNIFICANT HOLDINGS

The Court made several significant holdings in this judgment:

• The absence of a final order under Section 92CA(3) invalidates the transfer pricing proceedings, rendering them void ab initio.
• The assessment order dated 31/12/2018 is barred by limitation, as it was not completed within the statutory time limits.
• The DRP lacks jurisdiction to issue directions in matters set aside by the ITAT directly to the DRP, and any such directions are void.
• The adjustments made by the TPO/DRP were not justified, and the AO's treatment of forex loss and service income was erroneous.
• The additional legal grounds raised by the appellant were valid and addressed critical legal deficiencies in the assessment proceedings.

The Court concluded that the transfer pricing order dated 20/12/2018 and the final assessment order dated 31/12/2018 were void ab initio and quashed them. The additional grounds raised by the assessee were allowed, rendering other grounds academic and infructuous.