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2025 (5) TMI 785 - AT - Income TaxValidity of final order of assessment - AR contented order against the direction of the DRP related the issues depreciation on business right and interest on deemed loan - Contravention of section 144C(13) - HELD THAT - We find that instead of passing the final order of assessment as required by law the Ld. AO passed the impugned final order of assessment which as contended by the Ld. AR against the direction of the DRP related the issues depreciation on business right and interest on deemed loan. In view of the provisions of the Act and respectfully relied on the ruling of AZZ WSI B.V. 2023 (3) TMI 1349 - ITAT MUMBAI and Flextronics Technologies (India) (P.) Ltd 2023 (2) TMI 712 - KARNATAKA HIGH COURT AO is required to pass the final assessment order in conformity with the DRP directions. In the present case since the final assessment order passed by the Ld. AO is not in conformity with the DRP directions. In the present appeal since the impugned assessment order passed by the Ld. AO related both the issues is not in conformity with the DRP directions the addition in both the issues are bad in law. We find that the addition made on the TP issue by the Ld.AO by ignoring the direction of the Ld.DRP is in contravention of the provisions of section 144C(13) of the Act related to depreciation on business rights and adjustment on account of interest on deemed loan. Assessee appeal allowed. Depreciation on intangible assets - assessee claimed depreciation on various intangible assets comprising commercial rights customer relationships and non-compete fees - HELD THAT - In view of the consistent judicial findings of the ITAT Mumbai in the assessee s own cases we hold that the depreciation claimed on intangible assets namely customer contracts customer relationships and non-compete fees is allowable u/s 32(1)(ii) of the Act. The impugned disallowance sustained by the Assessing Officer is hereby deleted. Accordingly Ground of the assessee s appeal is allowed. Deduction u/s 80G instead of CSR expenses - HELD THAT - The provisions of section 80G of the Act permits deduction for the contributions made by an assessee to specified relief funds and charitable institutions except were CSR expenditure. Respectful reliance is placed on judicial precedents where it was held that CSR expenditure is eligible for deduction u/s 80G subject to satisfaction of the conditions mentioned in the said section. We respectfully relied on the order Mahyco Monsanto Biotech (India) Pvt. Ltd. 2024 (11) TMI 1454 - ITAT MUMBAI we remand the matter to the file of the Ld. AO with direction to allow the deduction U/s 80G subject to fulfilment of requisite conditions.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this appeal are:
2. ISSUE-WISE DETAILED ANALYSIS Limitation and Validity of Final Assessment Order (Grounds 2 and 3) Relevant legal framework and precedents: Sections 144C(10) and 144C(13) of the Act mandate that the AO must pass the final assessment order in conformity with the binding directions of the DRP. The final order must be passed within the limitation period prescribed under section 153 of the Act. The binding nature of DRP directions is well settled, and failure to comply renders the order void ab initio. The Tribunal relied on the coordinate bench decisions including AZZ WSI B.V. v DCIT and the Hon'ble Karnataka High Court ruling in PCIT v. Flextronics Technologies (India) Ltd., which held that non-compliance with DRP directions violates section 144C(13) and invalidates the assessment order. Court's interpretation and reasoning: The Tribunal observed that the AO passed the final assessment order without fully complying with the DRP's directions, particularly on two issues: depreciation on business rights and interest on deemed loans. The AO's refusal to accept DRP directions was premised on pending appeals before the High Court, which does not justify non-compliance with binding DRP directions under the Act. The Tribunal held that the final assessment order was therefore not in conformity with section 144C(13) and was bad in law. Key findings and application: The Tribunal held that since the AO did not frame the final assessment order in complete conformity with the DRP directions, the order is void. The Tribunal quashed the final assessment order on these grounds without adjudicating merits of other issues. Transfer Pricing Adjustments (Grounds 4 to 8) Partial disallowance of depreciation on business rights (Ground 5): The assessee claimed depreciation on business rights acquired from an AE. The DRP, relying on earlier ITAT rulings in the assessee's own case, directed the AO to allow depreciation as per the Act. The AO, however, disallowed depreciation on the ground that the ITAT's order was under appeal before the High Court. The Tribunal noted that the DRP's directions were binding and the AO was required to comply notwithstanding pending appeals. Therefore, the disallowance was held to be unjustified. Notional interest on deemed loans arising from share purchase transactions (Grounds 6 to 8): The AO/TPO recharacterized excess share purchase consideration paid in AYs 2016-17 and 2017-18 as deemed loans and imputed notional interest thereon. However, these adjustments were deleted by the ITAT in the assessee's own case for those years. The DRP accordingly directed that the AO give consequential effect to these ITAT orders. The AO again refused to comply, citing pending High Court appeals. The Tribunal held that non-compliance with DRP directions on this issue was contrary to section 144C(13) and invalidated the addition. Disputing commercial rationale and inflating share price: The AO/TPO's approach to disregard the actual transaction and allege inflated share price was not accepted as it contradicted binding rulings and DRP directions. Conclusion: The Tribunal quashed the TP adjustment of Rs. 11,26,24,233/- made on account of depreciation disallowance and notional interest as these were contrary to binding DRP directions and ITAT rulings. Depreciation on Intangible Assets (Ground 9) Legal framework and precedents: Section 32(1)(ii) of the Act allows depreciation on intangible assets such as know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of similar nature acquired on or after 1 April 1998. The Tribunal referred to multiple coordinate bench decisions of ITAT Mumbai in the assessee's own cases, which held that customer contracts, customer relationships, and non-compete fees qualify as intangible assets eligible for depreciation. Court's reasoning: The Tribunal noted that the assessee claimed depreciation on intangible assets including customer contracts and non-compete fees. The DRP allowed depreciation on a small portion relating to WNS UK based on binding ITAT decisions but upheld disallowance on the balance. The Tribunal, however, relied on subsequent favorable ITAT rulings which were not available to the DRP at the time, holding that the entire depreciation claimed on such intangible assets is allowable. Key findings: The Tribunal held that non-compete fees represent a vested right that is intangible and subject to wear and tear over time, thus qualifying for depreciation. The disallowance was therefore deleted. Deduction under Section 80G of the Act (Ground 10) Legal framework: Section 80G permits deduction for donations made to specified relief funds and charitable institutions. The Companies Act, 2013 mandates CSR expenditure under section 135, which is disallowed as business expenditure under section 37(1) Explanation 2. However, this restriction does not extend to deductions under section 80G unless explicitly provided. Court's interpretation and reasoning: The assessee made donations aggregating Rs. 4.11 crore to charitable institutions and claimed 50% deduction under section 80G, while disallowing the same as CSR expenditure under section 37(1). The AO disallowed the section 80G deduction. The Tribunal relied on a recent coordinate bench decision in Mahyco Monsanto Biotech (India) Pvt. Ltd., which held that CSR expenses are not deductible under section 37(1) but donations eligible under section 80G are allowable subject to conditions. The Tribunal observed that the assessee complied with all formalities including audit and proper banking channels. Conclusion: The Tribunal remanded the matter to the AO to allow deduction under section 80G subject to fulfillment of conditions. Interest under Section 234D and Penalty under Section 270A (Grounds 11 and 12) These grounds were raised but not specifically adjudicated by the Tribunal in the impugned order, likely due to the quashing of the assessment order on substantive grounds and remand on other issues. 3. SIGNIFICANT HOLDINGS "The AO, as per law, was required to pass the final order of assessment ... in conformity with the directions issued by the DRP ... which are binding on him as per section 144C(10) thereof and 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 ... against the direction of the DRP ... We hold that the final assessment order passed by the AO, which is in appeal before us, is bad in law and accordingly the final assessment order framed is hereby quashed." "The addition made on the TP issue by the AO by ignoring the direction of the DRP is in contravention of the provisions of section 144C(13) of the Act ... Therefore, impugned additions on both the issues amount to Rs. 11,26,24,233/- are quashed." "The payment made towards non-compete fee is an intangible depreciable asset ... The right acquired by payment of non-compete fee is definitely intangible asset ... and ... this asset must be held to be subject to depreciation." "CSR expenses which are required to be mandatorily incurred by the assessee-company as per section 135 of the Companies Act are not entitled to deduction under section 37(1) ... However, this Explanation cannot be extended to donations eligible under section 80G ... It can be safely inferred that when the Legislature in particular has provided for only the above referred two specific exceptions in section 80G, then it is the implied intent of the Legislature to permit deduction under section 80G in respect of CSR contributions made to funds/organizations referred to in all other sub-clauses of section 80G." Final determinations:
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