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2019 (9) TMI 262

..... for undertaking a fresh benchmarking altogether afresh - HELD THAT:- TPO in the second round carried out the benchmarking exercise all afresh treating the assessee as KPO service provider as against his earlier view of a BPO service provider in the first round. After passing of the order by the TPO on 21.11.2016, the AO proceeded to straightaway pass the final assessment order u/s.143(3) r.w.s. 144C(13) of the Act on 28-11-2016. It is, ergo, overt that pursuant to the fresh benchmarking done by the TPO in his second order, the AO omitted to pass a draft order which could have been challenged by the assessee before the DRP or the CIT(A). Law enjoins the passing of a draft order after the TPO’s order against which the assessee can raise objection before the DRP before finally coming to the Tribunal as was done in the first round of proceedings. Once the DRP set aside the exercise of benchmarking by the TPO and directed to determine the ALP altogether afresh, the earlier round of the proceedings came to an end and a fresh round of proceedings started with the AO making a reference to the TPO for fresh benchmarking on 7.10.2016. The entire procedure was once again required to be .....

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..... The AO referred the matter of determination of the Arm s Length Price (ALP) of such transactions to the Transfer Pricing Officer (TPO). Vide order dated 18-01-2016, the TPO recommended transfer pricing adjustment of ₹ 5,35,19,469/-. The AO passed the draft order on 04-02-2016 proposing, inter alia, variation in the declared income to the extent recommended by the TPO. The assessee raised objections before the DRP, who vide its order dated 16-09-2016 directed the AO/TPO to carry out fresh search for comparable companies engaged in KPO services providers list as against the original benchmarking done by the authorities by considering the assessee as a BPO service provider. In addition, the DRP also gave certain specific directions qua few comparables as objected to before it. Pursuant to the direction given by the DRP, the AO vide his reference dated 07-10-2016 required the TPO to do a fresh benchmarking. The TPO vide his order dated 21-11-2016 proposed a fresh transfer pricing adjustment of ₹ 5,21,84,250/-. The AO in his final order dated 28-11-2016 has made transfer pricing addition of ₹ 5.21 crore and odd, against which the assessee has come up in appeal before .....

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..... would be relevant to note the language of section 251 of the Act, which deals with the powers of the CIT(A) in disposing appeals. Sub-section (1)(a) provides that in disposing of an appeal against an order of assessment, the Commissioner (Appeals) shall have the power to : confirm, reduce, enhance or annul the assessment. Prior to an amendment to section 251(1) by the Finance Act, 2001 w.e.f. 01-06-2001, the CIT(A) was empowered to : set-aside the assessment and refer the case back to the Assessing Officer for making a fresh assessment in accordance with the directions given by the Commissioner (Appeals) and after making such further inquiry as may be necessary, and the Assessing Officer shall thereupon proceed to make such fresh assessment and determine, where necessary, the amount of tax payable on the basis of such fresh assessment. The hitherto power given to the CIT(A) referring the case back to the AO for making fresh assessment has been taken away by the Finance Act, 2001. The effect of this amendment is that now the CIT(A) can only confirm, reduce, enhance or annul the assessment but cannot restore the matter to the AO for a fresh determination. In the pre-amendment era wh .....

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..... with the comparables. The assessee objected before the DRP qua the comparables chosen by the TPO. The DRP, vide its direction dated 16-09-2016, has held in para 9.2 that Accordingly, the assessee is held to be a KPO service provider engaged in the financial sector, and not a routine ITeS provider, while deciding its comparability with the other companies . Thereafter, it observed that: both the assessee as well as the TPO had carried out search of comparables by treating the assessee as a routine ITeS provider, which is not correct considering that the assessee is a KPO service provider. Due to this error committed, most of the comparables identified by the assessee as well as the TPO are very likely to be rejected by this Panel on grounds of functionality........... The TPO is, therefore, directed to carry out a fresh search for comparable companies who are KPO service providers of the financial sector…. The final list of comparables should be formalized by the TPO after using appropriate filters, but only after giving a reasonable opportunity of being heard to the assessee . It is manifest from the above that the DRP transgressed its power given under sub-section (8) by re .....

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..... Point Business Solutions Ltd. Out of these four comparables, the first one, namely, Informed Technologies Ltd. was the one which was directed by the DRP to be included in the list of comparables. ICRA Online Ltd. was not considered by the TPO earlier as it was a KPO service provider as against the assessee perceived to be a BPO service provider. Pursuant to the direction given by the DRP, the TPO considered ICRA Online Ltd. as comparable. eClerx Ltd., namely, the third comparable was not at all part of any benchmarking in the first round. The TPO considered this company as comparable for the first time and included it in the final tally. The last comparable, namely, Caliber Point Business Solutions Ltd. was dealt with by the DRP in its order by holding that; the assessee as well as the TPO have wrongly classified the assessee as a ITeS provider, instead of KPO service provider. Therefore, the TPO has been directed to carry out a fresh search. If sufficient number of comparables upto 5 or more are available after this fresh search, the TPO should not include this company as a comparable . It is thus palpable that the TPO in the second round carried out the benchmarking exercise all .....

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..... e came up for consideration before the Hon ble jurisdictional High Court in Pr. CIT Vs. Lionbridge Technologies Pvt. Lt. (2019) 260 Taxman 273 (Bom.) in which the Tribunal in the first round restored the matter to the AO on the ground that the DRP failed to deal with the assessee s objections. During the remand proceedings, a reference was made to the TPO. On receipt of the TPO s order, the AO straightaway passed an order u/s.143(3) r.w.s. 144C(13), which action came to be disapproved by the Hon ble High Court. 12. It, therefore, follows that the statutorily mandated procedure must be adhered to by the authorities, non-observance of which renders the assessment order null and void. In view of the fact that the statutorily mandated procedure has not been followed in the instant case in as much as neither any draft order was passed in the second round nor the assessee could raise objection before the DRP, the edifice of the final assessment order, being devoid of a legal bedrock, stands shaked, thereby frustrating the legality of the order. 13. To sum up, the instant assessment is a nullity for two reasons, viz., first for the DRP exceeding its jurisdiction in restoring the matter to .....

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