2025 (5) TMI 351 - AT - Income Tax

Assessment against non-existent entity - notice u/s 143(2) issued in the name of company already amalgamated - HELD THAT - It is crystal clear that soon after amalgamation the assessee / appellant company intimated the Ld. AO regarding amalgamation of the company along with copy of order passed by the NCLT but still the Ld. AO issued notice u/s 143(2) for the relevant assessment year in the name of Telenor India Communication Pvt. Ltd. Non est company and for which the Ld. AO was properly intimated well in time. After receiving the notice u/s 143(2) of the Act the assessee / appellant company reiterated the fact of merger before the Ld. AO. It is relevant to mention here also that the TPO while passing order in the name of Telenor India Communication Pvt. Ltd. specifically mentioned in the title of the case regarding fact of merger and also in para no. 3 mentioned that the Telenor India Communication Pvt. Ltd. amalgamated with Bharti Airtel Ltd. with effect from 14.05.2018 and still this relevant fact ignored by the authority and draft order u/s 143(3) of the Act and final assessment order passed in the name of non-existent entity despite frequent intimation. Thus we find that final assessment order passed by the Ld. AO u/s 143(3) of the Act seriously suffers from legal infirmity being framed by the ld. AO against non-existent entity despite proper in time written communication. Assessee appeal allowed.

Summary

The core legal questions considered in these appeals include:

1. Whether the draft assessment order, transfer pricing order, and consequential final assessment order passed in the name of a non-existent entity-post amalgamation-are legally valid or void ab initio, thereby vitiating the entire assessment proceedings.

2. Whether the transfer pricing adjustments made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO), pursuant to the directions of the Dispute Resolution Panel (DRP), are justified and in accordance with the Indian Transfer Pricing (TP) regulations.

3. Whether the AO/TPO erred in the methodology applied for determining the Arm's Length Price (ALP), specifically by applying an aggregation approach instead of a transaction-by-transaction approach, and in rejecting the appellant's economic analysis and choice of tested parties.

4. Whether the AO/TPO wrongly rejected comparable companies proposed by the appellant and included non-comparable companies on an ad hoc basis, thereby improperly determining the ALP.

5. Whether income from other sources was correctly included or excluded in the computation of income, particularly regarding set-off with current year business losses.

6. Whether interest under various sections of the Income Tax Act was correctly levied and computed.

7. Whether penalty under section 270A was rightly imposed given the appellant's conduct and reporting.

Issue-wise Detailed Analysis:

1. Validity of Assessment Proceedings Against a Non-Existent Entity Post-Amalgamation

Legal Framework and Precedents: The Income Tax Act mandates that assessment proceedings be conducted against the correct legal entity. Upon approval of a scheme of amalgamation by the National Company Law Tribunal (NCLT), the amalgamating company ceases to exist by operation of law. Precedents such as the judgments in Vedanta Ltd. and Maruti Suzuki India Ltd. establish that assessment orders passed in the name of a non-existent entity are void ab initio and cannot be saved under provisions like section 292B or rectified under section 154 of the Act.

Court's Interpretation and Reasoning: The Court noted that the appellant company was merged with another entity effective May 14, 2018, pursuant to an NCLT order. Despite timely and repeated intimation to the AO regarding the merger and dissolution of the appellant company, the AO issued notices and passed draft and final assessment orders in the name of the non-existent amalgamating company. The DRP, having limited jurisdiction, did not adjudicate on this issue. The Court relied on the binding precedents to hold that such assessment orders are legally infirm and void ab initio.

Key Evidence and Findings: The appellant submitted the NCLT order sanctioning the amalgamation and letters intimating the AO of the merger. The AO's continued issuance of notices and orders in the name of the dissolved entity despite this information was a critical fact.

Application of Law to Facts: The Court applied the principle that an assessment order must be passed against the correct legal entity. Since the appellant ceased to exist from the appointed date, any order passed in its name was invalid. The Court rejected the argument that the order could be saved as an inadvertent error under section 154 or 292B.

Treatment of Competing Arguments: The Revenue did not effectively counter the appellant's submissions on the merger and the legal effect thereof. The Court emphasized the importance of certainty and consistency in tax proceedings.

Conclusion: The assessment proceedings and all consequential orders passed in the name of the non-existent amalgamating company were held void ab initio and liable to be quashed and set aside.

2. Transfer Pricing Adjustments and Methodology

Legal Framework and Precedents: Transfer Pricing regulations under the Income Tax Act require determination of ALP for international transactions, typically through prescribed methods such as Transactional Net Margin Method (TNMM), Comparable Uncontrolled Price (CUP) method, and others. The choice of tested party and the approach-transaction-by-transaction versus aggregation-must be consistent with the regulations and economic realities.

Court's Interpretation and Reasoning: The appellant challenged the AO/TPO's application of an aggregation approach for determining ALP, arguing that a transaction-by-transaction approach was appropriate and had been supported by detailed economic analysis. The appellant contended that the foreign Associated Enterprises (AEs) were the least complex entities and thus suitable as tested parties, and that the international transactions involving personnel services, business support services, royalty payments, roaming services, interest payments, and expense reimbursements were at arm's length.

Key Evidence and Findings: The appellant submitted detailed benchmarking studies, functional analyses, and application of various TP methods demonstrating arm's length pricing. The AO/TPO rejected these on grounds including improper selection of comparables and aggregation of transactions.

Application of Law to Facts: While the Court acknowledged the appellant's submissions, it did not adjudicate on the merits of these grounds given the primary finding on the invalidity of the assessment order. The Court noted that the DRP's directions and AO's orders were premised on the non-existent entity and therefore could not stand.

Treatment of Competing Arguments: The Revenue relied on DRP directions and AO/TPO findings, asserting the correctness of their methodology and adjustments. The Court, however, deferred detailed analysis of these grounds due to the overriding jurisdictional infirmity.

Conclusion: The Court did not decide on the merits of the transfer pricing adjustments or methodology, as the foundational assessment order was quashed. Hence, these grounds were not adjudicated.

3. Rejection and Selection of Comparable Companies

Legal Framework and Precedents: Transfer Pricing regulations require a rigorous and objective search process for selecting comparable companies. Arbitrary rejection or inclusion of comparables without proper justification amounts to cherry-picking and is impermissible.

Court's Interpretation and Reasoning: The appellant alleged that the AO/TPO rejected functionally comparable companies identified by it, including those filtered out due to persistent losses, and included non-comparable companies without proper search or rationale. The Court recognized these as substantial grounds but did not decide them in view of the primary quashing of the assessment order.

Key Evidence and Findings: The appellant submitted benchmarking reports and functional analyses supporting its choice of comparables. The AO/TPO's rejection was noted to be ad hoc.

Application of Law to Facts: The Court observed that such issues warrant detailed fact-finding and economic analysis, which could not be undertaken as the assessment order itself was invalid.

Treatment of Competing Arguments: The Revenue maintained that their selection was justified, relying on DRP directions. The Court did not resolve this conflict.

Conclusion: No adjudication was made on this issue due to the quashing of the assessment order.

4. Taxability of Income from Other Sources and Set-Off of Business Losses

Legal Framework and Precedents: Income from other sources must be correctly included or excluded in computation of total income, and business losses are allowed to be carried forward or set off as per the Act.

Court's Interpretation and Reasoning: The appellant contended that income from other sources was wrongly included in the computation sheet despite being correctly set off against current year business losses in the return and assessment order. The Court noted this ground but did not adjudicate it in light of the primary finding.

Key Evidence and Findings: The appellant's return and assessment order reflected set-off of losses, but the computation sheet showed inconsistent treatment.

Application of Law to Facts: The Court acknowledged the appellant's contention but did not examine it further.

Treatment of Competing Arguments: Not detailed as the issue was not decided.

Conclusion: Not adjudicated due to quashing of the assessment order.

5. Levy and Computation of Interest and Penalty

Legal Framework and Precedents: Interest under sections 234B, 234D, and 244A, and penalty under section 270A, must be levied and computed in accordance with statutory provisions and only where there is under-reporting or misreporting of income.

Court's Interpretation and Reasoning: The appellant argued that interest was wrongly levied and computed and that penalty was imposed mechanically without considering the absence of under-reporting or misreporting. The Court did not adjudicate these grounds due to the primary quashing of the assessment order.

Key Evidence and Findings: The appellant's submissions on correct interest computation and absence of fault were noted.

Application of Law to Facts: Not examined in detail.

Treatment of Competing Arguments: Not detailed.

Conclusion: Not adjudicated.

Significant Holdings:

"The impugned final assessment order dated 27.05.2022 passed by the learned AO under section 143(3) of the Act against non-existent entity is quite unsustainable in the eye of law and liable to be set aside and quashed as provision of section 292B of the Act, unable to save it being a quashed as it is a jurisdictional legal infirmity."

"Once scheme of amalgamation was approved by NCLT, the amalgamating company came to be dissolved by operation of law."

"An assessment order framed in the name of a non-existent entity cannot be saved or rescued under section 154 or 292B of the Act."

"The power conferred by section 154 would stand restricted to an inadvertent or unintentional error and cannot validate an order inherently flawed or suffering from a patent illegality."

"Certainty, consistency, and uniformity are essential values in tax litigation, and assessment proceedings must respect the legal status of the entity."

The Court's final determination was to allow the appeals and quash the assessment orders passed against the non-existent amalgamating company. Consequently, the other grounds related to transfer pricing adjustments, income computation, interest, and penalty were not adjudicated.