2015 (1) TMI 1008 - AT - Income Tax

Revision u/s 263 - TPO did not go into the genuineness of the transaction in AY 2006-07 as assessee did not treat the purchase of technical know-how as international transaction in the audit report u/s 92E of the Act - Held that - CIT has observed that the TPO in course of proceeding for AY 2006-07 could not have examined the issue as assessee has not reported such transaction in the audit report but on examining the facts and materials on record and more particularly the order of the TPO for AY 2006-07 it is very much evident that assessee has produced not only its books of account but its entire financial statements relating to FY 2005-06 was available before the TPO. Therefore it cannot be said that the transaction relating to purchase of know-how/DMF could not have been considered by TPO. It is also a fact the AO has completed the assessment after examining the issue and also in terms with TPO s order for AY 2006-07. Only because the TPO in AY 2007-08 takes a different view by that reason alone assessment order cannot be considered to be erroneous and prejudicial to the interests of revenue. Moreover when the consideration paid by assessee to Matrix has been accepted to be genuine in the assessment conducted in case of Matrix which has been confirmed by DRP the same transaction cannot be doubted in case of assessee. An assessment order can be considered to be erroneous and prejudicial to the interests of revenue on the basis of facts and materials available on record as on the date of completion of assessment. In the present case according to ld. CIT himself at the time of completion of assessment AO did not have the benefit of the TPO s and DRP s order for AY 2007-08 which were passed subsequently. That being the case AO having passed the assessment order on the basis of facts and materials available before him only because subsequently TPO in AY 2007-08 held the transaction to be not genuine on that basis alone assessment order cannot be held to be erroneous and prejudicial to the interests of revenue. More so when the TPO in his order for AY 2006-07 has not questioned the genuineness of such transaction. Therefore on considering the totality of facts and circumstances we are of the view that as AO has passed the assessment order after examining all the facts and evidences and after proper application of mind relating to the transaction of know-how and DMF the assessment order cannot be revised u/s 263 of the Act by treating it as erroneous and prejudicial to the interests of revenue. In the aforesaid view of the matter the assumption of jurisdiction u/s 263 of the Act in the present case is neither proper nor justified.- Decided in favour of assessee.

Issues Involved:
1. Validity of the order passed under section 263 of the Income Tax Act, 1961.
2. Examination of the genuineness of the transaction involving the purchase of technical know-how and DMF.
3. Determination of the arm's length price (ALP) for the transaction.
4. Disallowance of depreciation claimed on the intangible assets.
5. Application of section 43(1) read with Explanation 3 of the Income Tax Act.

Detailed Analysis:

1. Validity of the order passed under section 263 of the Income Tax Act, 1961:

The assessee challenged the order dated 26/03/2012 passed by the Commissioner of Income Tax (CIT) under section 263, arguing that it was "bad in law and facts." The CIT had set aside the original assessment order dated 29/12/2009 and directed a re-computation of total income. The Tribunal found that the CIT was influenced by the Transfer Pricing Officer's (TPO) findings for AY 2007-08, which were not available at the time of the original assessment. Consequently, the Tribunal held that the assessment order could not be considered erroneous or prejudicial to the interests of revenue based on subsequent findings.

2. Examination of the genuineness of the transaction involving the purchase of technical know-how and DMF:

The CIT questioned the genuineness of the transaction, noting discrepancies in the valuation and treatment of the purchase of technical know-how and DMF from Matrix Laboratories Ltd. The assessee argued that the transaction was genuine, supported by agreements and documentary evidence, and that the same AO assessed both the assessee and Matrix, accepting the transaction as genuine in Matrix's case. The Tribunal agreed with the assessee, stating that the transaction could not be considered non-genuine in the assessee's case when it was accepted in Matrix's case.

3. Determination of the arm's length price (ALP) for the transaction:

The CIT relied on the TPO's determination for AY 2007-08, which set the ALP for the purchase of technical know-how and DMF at NIL, failing the benefit test. The assessee contended that the TPO had no jurisdiction over transactions between two resident companies, as they do not qualify as "international transactions" under section 92B. The Tribunal supported this view, citing that neither the assessee nor Matrix is a non-resident, making the TPO's determination for AY 2007-08 irrelevant for AY 2006-07.

4. Disallowance of depreciation claimed on the intangible assets:

The CIT disallowed the depreciation claim of Rs. 13,16,54,210, arguing that the valuation of intangible assets at Rs. 105.32 crores was not substantiated. The assessee provided a valuation report during the section 263 proceedings, which was not available during the original assessment. The Tribunal noted that the AO had examined the issue in detail during the original assessment, and the transaction was accepted as genuine in Matrix's case. Therefore, the Tribunal found no basis for disallowing the depreciation claim.

5. Application of section 43(1) read with Explanation 3 of the Income Tax Act:

The CIT argued that the transaction was not at arm's length and that the sole purpose of enhancing the value of intangible assets was to claim higher depreciation. The Tribunal disagreed, stating that the AO had applied his mind and examined the transaction during the original assessment. The Tribunal concluded that the assessment order could not be revised under section 263 based on subsequent findings for a different assessment year.

Conclusion:

The Tribunal set aside the order passed under section 263 by the CIT and restored the original assessment order. The Tribunal found that the AO had properly examined the transaction and applied his mind during the original assessment, and that the CIT's reliance on subsequent findings for a different assessment year was not justified. The assessee's appeal was allowed, and the order of the CIT was declared invalid.

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