2015 (2) TMI 662 - AT - Income Tax

Reopening of assessment - return of income filed by the assessee included international transactions entered with the associated enterprise was not picked up for a scrutiny assessment within the stipulated period - illegality or irregularity in making of a reference to the TPO u/s 92CA - Held that - In the present case, as dealing with assessment year 2007-08 and assessee filed its return of income on 05.11.2007. In terms of clause (ii) to sub-section (2) of section 143 of the Act, as it stood at the relevant point of time, notice u/s 143(2) of the Act in order to subject the return of income to scrutiny assessment, should have been issued within this six months from the end of the relevant assessment year i.e. upto 30.09.2008. There is no dispute that no such notice has been issued within the above stipulated period. A consequence of the aforesaid situation is that the return of income filed by the assessee on 05.11.2007 became final as no scrutiny proceedings were started within the period stipulated in law. The aforesaid position is also reinforced by the CBDT Circular No.549 dated 31.10.1989. As per the CBDT, if, after furnishing return of income, an assessee does not receive a notice u/s 143(2) of the Act from the Department within period stipulated in the proviso to section 143(2) of the Act, it follows that the return filed by the assessee has become final and no scrutiny proceedings should be started in respect of that return. If on the date of making of reference to the TPO, the assessment proceedings u/s 143 of the Act had come to an end and the proceedings for assessment stood terminated, there was no occasion for the Assessing Officer to have made a reference to the TPO for determination of arm's length price of the international transactions in terms of section 92CA of the Act. We have already inferred in the earlier paras that under the provisions of section 92CA of the Act, a reference to the TPO for computation of arm's length price in relation to international transactions is permissible only in the course of the assessment proceedings. Thus it has to be inferred that when the Assessing Officer made reference to the TPO on 14.09.2009 for determination of arm's length price in relation to an international transaction, there was no assessment proceedings pending, and therefore it was an invalid reference. Consequently, the subsequent order passed by the TPO on 29.10.2010 (supra) determining the adjustment of ₹ 2,49,48,811/- to the international transaction is a nullity in law and void ab initio. As a consequence, we conclude by holding that the reasons recorded by the Assessing Officer in the present case do not meet with the requirements of section 147 of the Act and therefore the Assessing Officer had no jurisdiction to issue notice u/s 148 of the Act dated 14.01.2011. As a consequence, the subsequent assessment order passed u/s 143(3) r.w.s. 147 and 144C(13) of the Act is liable to be quashed. We hold so. - Decided in favour of assessee.

Issues Involved:
1. Inappropriate re-opening of the assessment under section 148 of the Act.
2. Transfer Pricing adjustment.
3. Inappropriate calculation of operating margin of comparable companies.
4. Inappropriate calculation of working capital adjustment.
5. Erroneous selection of comparable companies.
6. Benefit of the risk adjustment.
7. Benefit of the variation/reduction of 5 percent from the arithmetic mean.
8. Initiation of penalty proceedings.
9. Levy of interest obligation on account of transfer pricing adjustment.

Detailed Analysis:

1. Inappropriate Re-opening of the Assessment under Section 148 of the Act:
The primary issue raised by the appellant was the jurisdiction assumed by the Assessing Officer (AO) by issuing a notice under section 148 of the Income Tax Act. The appellant argued that the initiation of assessment proceedings by issuance of notice under section 148 was bad in law and therefore, the consequent assessment order was liable to be set aside. The appellant contended that the reopening of the assessment was merely to circumvent the situation arising from the fact that originally no notice was issued under section 143(2) within the prescribed period. The Tribunal found that the reference made to the Transfer Pricing Officer (TPO) on 14.09.2009 was invalid because no assessment proceedings were pending at that time. Consequently, the subsequent order passed by the TPO was void ab initio and could not form the basis for the AO to believe that income had escaped assessment. Hence, the notice issued under section 148 was invalid, and the subsequent assessment order was quashed.

2. Transfer Pricing Adjustment:
The appellant challenged the addition of Rs. 1,75,70,070/- made by the AO on account of the arm's length price of the international transaction of providing IT enabled services. This adjustment was made in conformity with the arm's length price determined by the TPO. However, since the Tribunal quashed the assessment on jurisdictional grounds, this issue was rendered academic and was not adjudicated.

3. Inappropriate Calculation of Operating Margin of Comparable Companies:
The appellant contended that the AO erred in calculating the average operating margin of comparable companies. This issue was also rendered academic due to the quashing of the assessment on jurisdictional grounds.

4. Inappropriate Calculation of Working Capital Adjustment:
The appellant argued that the AO erred in calculating the working capital adjustment by considering sales as the basis for calculation instead of the correct base of operating cost. Additionally, the AO did not consider inventory as part of the working capital of Pentamedia Graphics Limited. This issue was not adjudicated as the assessment was quashed on jurisdictional grounds.

5. Erroneous Selection of Comparable Companies:
The appellant contended that the AO erred in selecting Coral Hub Ltd. as a comparable company. This issue was also rendered academic due to the quashing of the assessment on jurisdictional grounds.

6. Benefit of the Risk Adjustment:
The appellant argued that the AO erred in not granting the risk adjustment. This issue was not adjudicated as the assessment was quashed on jurisdictional grounds.

7. Benefit of the Variation/Reduction of 5 Percent from the Arithmetic Mean:
The appellant contended that the AO erred in not granting the benefit of +/- 5 percent as per the proviso to section 92C(2) of the Act. This issue was rendered academic due to the quashing of the assessment on jurisdictional grounds.

8. Initiation of Penalty Proceedings:
The appellant argued that the AO erred in initiating penalty proceedings under section 271(1)(c) of the Act. This issue was not adjudicated as the assessment was quashed on jurisdictional grounds.

9. Levy of Interest Obligation on Account of Transfer Pricing Adjustment:
The appellant contended that the AO erred in levying interest under section 234B of the Act due to unanticipated adjustments made by the TPO. This issue was rendered academic due to the quashing of the assessment on jurisdictional grounds.

Conclusion:
The Tribunal concluded that the reasons recorded by the AO for issuing the notice under section 148 did not meet the requirements of section 147 of the Act. Therefore, the AO had no jurisdiction to issue the notice, and the subsequent assessment order was quashed. As a result, the remaining grounds of appeal were rendered academic and were not adjudicated. The appeal of the assessee was allowed.

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