2017 (12) TMI 652 - AT - Income Tax

Validity of assessment against non existent amalgamated company - Held that - In the present case the assessment was framed by the AO on the non-existent amalgamated company, not on the amalgamating company. Therefore, the assessment framed was void ab initio and accordingly the same is quashed. Since, we have quashed the assessment framed by the AO therefore no separate finding is being given on the issues raised in the Departmental appeal. - Decided in favour of assessee.

Issues Involved
1. Rejection of comparables/upward adjustment by the AO/TPO.
2. Deduction under Section 10A of the Income Tax Act.
3. Validity of the assessment order passed on a non-existent (amalgamated) entity.
4. Invoking of Chapter X provisions without profit shifting.
5. Modification of filters/comparables in the transfer pricing study.
6. Selection of companies with high turnover/IP rights as comparables.
7. Selection of functionally different companies as comparables.
8. Selection of a company with an abnormal profit margin.
9. Adjustment on account of difference in working capital/risk assumed.

Detailed Analysis

1. Rejection of Comparables/Upward Adjustment by AO/TPO
The Department contested that the CIT(A) erred in rejecting the comparables/upward adjustment made by the AO/TPO and directed the AO to reject some comparables to bring the Arm’s Length Margin within a 5% range.

2. Deduction under Section 10A of the Income Tax Act
The Department also argued that the CIT(A) erred in allowing a deduction amounting to ?2,28,87,852/- under Section 10A of the Act.

3. Validity of the Assessment Order Passed on a Non-Existent (Amalgamated) Entity
The assessee contended that the CIT(A) upheld the assessment order passed by the AO on a non-existent (amalgamated) entity, Heartland Delhi Transcription & Services Pvt. Ltd. (HDTS), which had amalgamated with Heartland Information and Consultancy Services Pvt. Ltd. (HICS). The assessment order was dated 22.2.2011, while the amalgamation was effective from 25.07.2008, making the assessment void ab initio. The Tribunal referenced several case laws, including CIT vs. Spice Enfotainment Ltd. and Maruti Suzuki India Ltd. vs. DCIT, which supported the view that assessments on non-existent entities are void.

4. Invoking Chapter X Provisions without Profit Shifting
The assessee argued that the CIT(A) erred in upholding the AO's action of invoking Chapter X provisions, without appreciating that there was no profit shifting from India.

5. Modification of Filters/Comparables in Transfer Pricing Study
The assessee contended that the CIT(A) erred in upholding the AO/TPO's order in modifying the filters and comparables set adopted by the assessee in its transfer pricing study.

6. Selection of Companies with High Turnover/IP Rights as Comparables
The CIT(A) upheld the AO/TPO's selection of companies with high turnover and/or intellectual property rights as comparables to the assessee, such as Infosys BPO Limited, Wipro Limited, HCL Comnet Systems & Services Limited, and Aditya Birla Minacs Worldwide Ltd.

7. Selection of Functionally Different Companies as Comparables
The CIT(A) upheld the AO/TPO's selection of functionally different companies as comparables to the assessee, including Bodhtree Consulting Limited, Informed Technologies India Limited, and Apex Knowledge Solutions.

8. Selection of a Company with an Abnormal Profit Margin
The CIT(A) upheld the AO/TPO's selection of a company with an abnormal profit margin, namely, Iservices India Private Limited, as a comparable.

9. Adjustment on Account of Difference in Working Capital/Risk Assumed
The CIT(A) did not allow adjustments on account of differences in working capital and/or risk assumed by the assessee vis-à-vis the comparable companies.

Conclusion
The ITAT quashed the assessment framed by the AO on the non-existent amalgamated company, Heartland Delhi Transcription & Services Pvt. Ltd. (HDTS), deeming it void ab initio. Consequently, the Department's appeal was dismissed, and the assessee's cross-objections were allowed. The Tribunal emphasized that assessments on non-existent entities are jurisdictional defects, not procedural irregularities, and cannot be cured under Section 292B of the Act. The Tribunal did not provide separate findings on other issues raised by the Department due to the quashing of the assessment order.

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