2018 (10) TMI 186 - AT - Income Tax

TPA - ALP adjustment relating to its international transactions in the nature of provision of software services to its associate Eenterprises (AE) - working capital adjustment - Held that - DRP has made it clear that the Assessing Officer would apply SBI s prime lending rate as on 30th June of the relevant previous year as the interest rate qua the issue before us. The Revenue fails to dispute all these intervening developments. As in assessee s own case have also accepted similar working capital adjustment contentions against the Revenue. We therefore restore the instant lis back to the TPO for afresh proceedings qua the instant working capital adjustment to be considered / granted as per law Validity of assessments on account of AO s failure in not issuing sec. 143(2) notice - scrutiny assessment - DCIT/ACIT jurisdiction - Held that - DCIT/ACIT, Circle-II(4), Chennai lacked jurisdiction to issue the sec.143(2) notices. The assessee duly brought on record its objections to this effect before the Assessing Officer in its letter dated 08.10.2014. All this proved to be a futile exercise as the Assessing Officer framed assessment going by the earlier scrutiny notice(s) only and rejected the said jurisdictional plea. Thus all the three impugned assessments are non-est in the eyes of law since the DCIT/ACIT, Circle-11(4), Chennai issuing the section 143(2) notice(s) did not have jurisdiction and the assessing authority in Kolkata did not issue such scrutiny notices. We quash all these three assessments therefore for this precise reason alone - Decided in favour of assessee.

Summary

Issues Involved:
1. Arms Length Price (ALP) adjustment for software services.
2. Denial of working capital adjustment.
3. Validity of assessments due to non-issuance of section 143(2) notice by the competent Assessing Officer.

Issue-wise Detailed Analysis:

1. Arms Length Price (ALP) Adjustment for Software Services:
The assessee challenged the ALP adjustment of ?2,50,45,534/- made by the lower authorities for software services provided to its associate enterprises (AE). The Transfer Pricing Officer (TPO), the Assessing Officer (AO), and the CIT(A) were unanimous in making the ALP adjustment. The assessee argued that the CIT(A) erred in denying the working capital adjustment rebate, which should be allowed as per various tribunal decisions. The assessee provided a chart indicating that the working capital adjustment would result in an arithmetic mean of 9.32% compared to the TPO’s determined 12.25%.

2. Denial of Working Capital Adjustment:
The CIT-DR supported the CIT(A)’s findings that the working capital adjustment proposed by the assessee was an afterthought and not substantiated with evidence. The CIT(A) agreed with the TPO’s rejection of the working capital adjustment, stating that the assessee did not provide specific reasons for the adjustment and that the TPO had rationally excluded companies with extremely high or low turnovers from comparables. The tribunal noted that the issue of working capital adjustment was also present in AY 2014-15, where the DRP directed the AO to compute the adjustment based on specific guidelines. The tribunal restored the issue back to the TPO for fresh proceedings.

3. Validity of Assessments Due to Non-issuance of Section 143(2) Notice:
For the assessment years 2011-12, 2012-13, and 2013-14, the assessee challenged the validity of assessments due to the failure of the AO in issuing section 143(2) notice. The assessee cited various judicial precedents emphasizing the mandatory nature of issuing section 143(2) notice within the prescribed time. The tribunal noted that the regular assessments were framed by the DCIT/ACIT, Circle-14(1), Kolkata, based on notices issued by the DCIT/ACIT, Circle-II(4), Chennai, which lacked jurisdiction. The tribunal concluded that the assessments were non-est in law as the notices were issued by an officer without jurisdiction, and the assessing authority in Kolkata did not issue such notices. Consequently, the tribunal quashed the assessments for these three years.

Conclusion:
The tribunal partly accepted the appeal for AY 2008-09 for statistical purposes, restoring the issue of working capital adjustment back to the TPO. For the assessment years 2011-12, 2012-13, and 2013-14, the tribunal allowed the appeals, quashing the assessments due to the non-issuance of section 143(2) notices by the competent authority. The order was pronounced in the open court on 28th September 2018.