2022 (1) TMI 886 - AT - Income Tax

Validity of Assessment u/s 144C - directions of the DRP ignored - AO has repeated the draft assessment order verbatim - HELD THAT - In the present case, final order of assessment does not incorporate the directions of the DRP and is verbatim repetition of the draft order of assessment. We are of the view that final order of assessment, in conformity with the directions of the DRP, has to be passed within one month from the end of the month in which the directions are issued by the DRP. Since the impugned order is not in conformity with the provisions of section 144C of the Act, the same is to be held as bad in law. We quash the impugned order of assessment. Since the impugned order of assessment is quashed on the ground that the same is not in conformity with the provisions of section 144C of the Act, we are of the view that the other issues raised by the assessee in its grounds of appeal do not require any consideration.

Issues Involved:
1. Legality of the assessment order and directions by the AO/TPO/DRP.
2. Compliance with the directions of the DRP in the final assessment order.
3. Validity of the final assessment order under section 144B of the Act.
4. Treatment of Advertisement, Marketing, and Promotion (AMP) expenses.
5. Characterization of sales promotion expenses as 'international transactions'.
6. Benchmarking of AMP expenses and selection of appropriate method.
7. Adjustment related to outstanding receivables.
8. Addition under section 36(1)(iii) of the Act.
9. Initiation of penalty proceedings under section 271(1)(c) of the Act.

Detailed Analysis:

1. Legality of the Assessment Order and Directions by AO/TPO/DRP:
The assessee challenged the assessment order, arguing it was not in accordance with the law. The Tribunal found that the final assessment order did not incorporate the directions of the DRP and repeated the draft assessment order verbatim. As per section 144C(5) and 144C(13) of the Act, the directions given by the DRP are binding on the Assessing Officer. The Tribunal held that the final assessment order was not in conformity with the provisions of section 144C of the Act and thus was bad in law.

2. Compliance with the Directions of the DRP in the Final Assessment Order:
The Tribunal observed that the final assessment order did not incorporate the directions of the DRP and was a verbatim repetition of the draft order. The Tribunal emphasized that the Assessing Officer was obliged to pass the final order of assessment in accordance with the DRP directions within one month from the end of the month in which the directions were issued. The failure to do so rendered the final assessment order null and void.

3. Validity of the Final Assessment Order under Section 144B of the Act:
The Tribunal noted that the final assessment order dated 18.05.2021 was invalid and void ab initio as it did not follow the procedure laid down under section 144B of the Act. The Tribunal quashed the impugned order of assessment on this ground.

4. Treatment of Advertisement, Marketing, and Promotion (AMP) Expenses:
The assessee contended that the AO/TPO/DRP erred in treating routine selling expenses as non-routine AMP expenses assumed to be incurred solely for brand promotion of the foreign associated enterprise (AE). The Tribunal found that the AO/TPO/DRP had disregarded the nature of the industry and business realities of the assessee. The Tribunal also noted that the determination of selling expenses as non-routine brand promotion expense was in violation of the order of the Hon'ble High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd.

5. Characterization of Sales Promotion Expenses as 'International Transactions':
The Tribunal observed that the AO/TPO/DRP erred in holding that sales promotion expenditure incurred by the assessee in India was an 'international transaction' without demonstrating the existence of any understanding or agreement between the assessee and its AEs requiring excessive spending on brand promotion. The Tribunal found that the AO/TPO/DRP made factually incorrect assumptions and relied on extracts from the assessee's website without examining the facts and documentary evidence submitted by the assessee.

6. Benchmarking of AMP Expenses and Selection of Appropriate Method:
The Tribunal noted that the AO/TPO/DRP erred in applying the Residual Profit Split Method (PSM) as the Most Appropriate Method (MAM) given multiple fallacies in the application of the method. The Tribunal also found that the AO/TPO/DRP resorted to the Bright Line Test (BLT) in order to compute non-routine AMP expenditure, which had been overruled by the Hon'ble High Court. The Tribunal held that in the absence of any supernormal profits vis-a-vis comparable companies, PSM could not be applied to benchmark the alleged transaction of AMP.

7. Adjustment Related to Outstanding Receivables:
The Tribunal found that the AO/TPO/DRP erred in recharacterizing inter-company receivables as unsecured loans in the absence of a statutory provision and benchmarking the same using the Comparable Uncontrolled Price (CUP) Method. The Tribunal directed the AO/TPO/DRP to recompute the interest on receivables applying the interest rate as directed by the Delhi High Court in the case of Cotton Naturals Pvt. Ltd.

8. Addition Under Section 36(1)(iii) of the Act:
The Tribunal noted that the AO had erred in imputing adjustment on account of disallowance of expenses under section 36(1)(iii) of the Act amounting to INR 13,97,914, which was deleted by the DRP. The Tribunal quashed the addition made by the AO on this ground.

9. Initiation of Penalty Proceedings Under Section 271(1)(c) of the Act:
The Tribunal observed that the AO erred in holding that the assessee had furnished inaccurate particulars of income in respect of each item of disallowance/additions and in initiating penalty proceedings under section 271(1)(c) of the Act. The Tribunal quashed the penalty proceedings initiated by the AO.

Conclusion:
The Tribunal quashed the impugned final assessment order and held it as bad in law for not incorporating the directions of the DRP. The Tribunal allowed the appeal of the assessee and rendered the Stay Application infructuous. The Tribunal did not consider the other grounds of appeal raised by the assessee on merits of the addition due to the conclusion that the assessment order was null and void.

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