2016 (1) TMI 932 - AT - Income Tax

Validity of order passed u/s. 143(3) read with section 144C(13) - Held that - Section 144C(13) provides that the order should have been passed within one month from the end of the month in which such direction is received. In the instant case, the ld. DRP gave directions on 24.09.2014 and as per above referred letter dated 03.11.2015, such directions were received by concerned AO on or before 28.10.2014. Therefore, the final order should have been passed on or before 30.11.2014, but the same has been passed on 30.01.2015, which is clearly beyond the period of limitation as prescribed u/s. 144C of the Act. Therefore, in our considered opinion, the order passed u/s. 143(3) read with section 144C(13) is bad in law ab initio and not sustainable having been passed beyond the period of limitation. Accordingly, the order appealed against is liable to be quashed. Once the final order passed by the AO has been held as invalid on the legal aspect of the case, we do not deem it appropriate to adjudicate upon the other grounds raised before us on merits of the addition. - Decided in favour of assessee.

Issues Involved:
1. Validity of the final order issued under section 143(3) read with section 144C(13) of the Income-tax Act, 1961.
2. Enhancement of income by the Transfer Pricing Officer (TPO) for international related party transactions.
3. Demonstration of motive to shift profits outside India.
4. Use of multiple year/prior years' data for determining arm's length price (ALP).
5. Doctrine of impossibility of performance and use of contemporaneous data.
6. Modification and rejection of comparable companies in Transfer Pricing (TP) documentation.
7. Selection of non-comparable companies for ALP determination.
8. Risk adjustment under Rule 10B(1)(e) for ALP determination.
9. Incorrect computation of operating profit margins.
10. Treatment of "Excess provision written back" as non-operating.
11. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Validity of the Final Order:
The primary issue was the validity of the final order passed by the Assessing Officer (AO) under section 143(3) read with section 144C(13) of the Income-tax Act, 1961. The appellant argued that the final order was invalid as it was passed beyond the due date. The Tribunal found that the directions from the Dispute Resolution Panel (DRP) were received by the AO on or before 28.10.2014, and hence, the final order should have been passed by 30.11.2014. However, it was passed on 30.01.2015, making it beyond the period of limitation. Therefore, the order was deemed "bad in law ab initio" and was quashed.

2. Enhancement of Income by TPO:
The TPO enhanced the income of the assessee by INR 14,155,941, holding that the international related party transactions did not satisfy the arm's length principle. The AO confirmed this adjustment, leading to an addition of INR 9,41,55,941 to the income of the assessee.

3. Demonstration of Motive to Shift Profits:
The appellant contended that the AO and TPO failed to demonstrate that the motive of the assessee was to shift profits outside India by manipulating prices in international transactions. The Tribunal did not adjudicate on this issue due to the quashing of the final order on legal grounds.

4. Use of Multiple Year/Prior Years' Data:
The appellant argued that the AO and TPO disregarded the use of multiple year/prior years' data, which contravenes section 92C of the Act read with Rule 10B and Rule 10D of the Income Tax Rules, 1962.

5. Doctrine of Impossibility of Performance:
The appellant claimed that the AO and TPO disregarded the doctrine of impossibility of performance by not using contemporaneous data for determining the ALP as mandated by section 92D of the Act read with Rule 10D(4) of the Rules.

6. Modification and Rejection of Comparable Companies:
The TPO modified and rejected certain comparables provided by the assessee, selecting seven new comparables instead. The appellant argued that this was done arbitrarily and in contravention of section 92C(3) of the Act read with Rule 10B(2) of the Rules.

7. Selection of Non-Comparable Companies:
The appellant contended that the TPO included companies that were not comparable in terms of functions performed, assets employed, and risks assumed. The companies in question included Accentia Technologies Limited, Cosmic Global Limited, Fortune Infotech Limited, iGate Global Solutions Limited, Infosys BPO Limited, TCS E-serve International Limited, and TCS E-serve Limited.

8. Risk Adjustment:
The appellant argued that the AO and TPO erred in not allowing a risk adjustment under Rule 10B(1)(e) to account for differences in risk profiles between the appellant and comparable companies.

9. Incorrect Computation of Operating Profit Margins:
The appellant claimed that the AO and TPO incorrectly computed the operating profit margins of the selected companies, ignoring the correct computation provided by the assessee.

10. Treatment of "Excess Provision Written Back":
The appellant argued that the AO and TPO erred in treating "Excess provision written back" of INR 40,03,709 as non-operating, instead of considering it as an operational item.

11. Initiation of Penalty Proceedings:
The appellant contended that the AO erred in proposing to initiate penalty proceedings under section 271(1)(c) of the Act, as the facts and provisions of the law did not warrant such initiation.

Conclusion:
The Tribunal quashed the final order passed by the AO as it was beyond the period of limitation prescribed under section 144C of the Act. Consequently, the Tribunal did not adjudicate on the merits of the other grounds raised by the appellant. The appeal of the assessee was allowed, and any stay, if applicable, was vacated.

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