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2021 (1) TMI 156 - AT - Income TaxTP Adjustment - applicability of Section 144C(13) - DRP included Evoke Technologies Limited in the list of comparables and similarly the DRP excluded ICRA Techno Analytics Limited from the list of comparables - HELD THAT - ALP adjustment made by the TPO has been changed on account of these two directions of DRP, however, the Assessing Officer retained the original Transfer Pricing Adjustment in the final assessment order as made in the draft assessment order. Being so, we are not in a position to uphold the order of the Assessing Officer on this count. As provided in the Section 144C(13) of the Act, the final order of the Assessing Officer should be in conformity with the directions given by the DRP. In the present case, while working out the ALP adjustment, he has not followed the direction of the DRP, consequently, the assessment order is bad in law as held by co-ordinate Bench in the case cited above. Accordingly, the assessment framed in this case is quashed and set aside. However we make it clear that, this order would not, in any way, stop the revenue from taking such steps as are available to it in law and the assessee also from contesting the action of the revenue in accordance with the law, if it so desires.
Issues Involved:
1. Conformity of the final assessment order with the directions issued by the Dispute Resolution Panel (DRP). 2. Incorrect margin computation of the appellant. 3. Rejection of the transfer pricing analysis conducted by the appellant and choice of comparables. 4. Incorrect margin computation of the comparables. Issue-wise Detailed Analysis: 1. Conformity of the Final Assessment Order with DRP Directions: The primary issue discussed is whether the final assessment order passed by the Assessing Officer (AO) adhered to the directions issued by the DRP. The appellant contended that the AO’s final order did not conform to the DRP’s directions, which included the inclusion of Evoke Technologies Limited and exclusion of ICRA Techno Analytics Limited from the list of comparables. This non-conformity rendered the final assessment order bad in law as per section 144C(10) r.w.s. 144C(13) of the Income Tax Act, 1961. The Tribunal, referencing similar cases such as Flextronics Technologies (India) Pvt. Ltd. and Software Paradigms Infotech Pvt. Ltd., quashed the final assessment order, reinforcing that the AO must adhere to the DRP's directions. The Tribunal concluded that the assessment order is null and void due to non-conformity with DRP’s directions. 2. Incorrect Margin Computation of the Appellant: The appellant argued that the DRP failed to adjudicate on the objection regarding the segmental margin of the AE segment, which was contrary to the principles of consistency and provisions of Chapter X of the Act. The Transfer Pricing Officer (TPO) erred in rejecting the Net Cost plus Mark-up (NCP) margin computed by the appellant in its transfer pricing study for software services provided to its Associated Enterprises (AEs). The TPO also made a transfer pricing adjustment on the entire revenue without restricting it to the proportion of international transactions, disregarded the segmental approach, and failed to consider significant income from third-party customers. The Tribunal did not adjudicate these grounds in detail due to the primary ground's resolution. 3. Rejection of the Transfer Pricing Analysis Conducted by the Appellant and Choice of Comparables: The appellant contended that the DRP/TPO disregarded the transfer pricing analysis without providing cogent reasons and conducted a fresh benchmarking analysis using non-contemporaneous data. The DRP/TPO arbitrarily rejected functionally comparable companies based on non-availability of financial data, different year endings, employee cost percentage, and export service income percentage. The Tribunal noted that the AO did not follow the DRP’s directions, thus not addressing these specific grounds. 4. Incorrect Margin Computation of the Comparables: The appellant argued that the DRP/TPO incorrectly computed NCP margins of comparable companies by considering financial data from databases and disregarding the annual reports filed by the appellant. This ground was not adjudicated in detail due to the quashing of the final assessment order based on the primary issue. Conclusion: The Tribunal quashed the final assessment order due to its non-conformity with the DRP’s directions, rendering it bad in law. Consequently, the other grounds raised by the appellant were not adjudicated. The Tribunal emphasized that the AO must adhere to the DRP’s directions as mandated by section 144C(13) of the Act. The appeal was partly allowed, and the assessment order was set aside, allowing the revenue to take further steps as per the law.
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