2024 (2) TMI 879 - AT - Income Tax

Addition proposed in the draft assessment order as TP adjustment - Non following mandatory provisions of Sec. 144C while issuing draft assessment order along with demand notice and penalty notice in the case of the assessee - HELD THAT - On perusal of the draft assessment order it is noticed that assessing officer has categorically mentioned assessed u/s 143(3) r.w.s 144C(1) of the Act and also stated give credit for the taxes paid if any as per system after due verification and tax and interest are as per ITNS 150A with which forms part of the draft assessment order. It is also mentioned to issue demand notice u/s 156 of the Act and penalty proceedings u/s 271(1)(c) of the Act are being initiated separately Facts demonstrate that assessing officer has not followed the mandatory provisions of Sec. 144C of the Act while issuing draft assessment order along with demand notice and penalty notice in the case of the assessee. We have perused the decision of Teleperformance Global Services pvt. Ltd. 2022 (12) TMI 223 - ITAT MUMBAI and Cisco Systems Services B.V. 2023 (3) TMI 416 - KARNATAKA HIGH COURT wherein held that at stage of passing draft assessment order when the ACIT also issued a demand notice procedure followed by the ACIT was contrary to law and said mistake could not be cured u/s 292B of the Act. In the various decisions of the coordinate benches of the ITAT Mumbai on identical issue on similar facts held that in case assessing officer has failed to follow the mandatory procedure laid down u/s 144C of the Act at the stage of passing draft assessment order, then final assessment order passed is null and void as the mistake committed in the draft assessment order is not curable u/s 292B of the Act. Thus we find merit in the submission of the assessee, therefore, we allow the additional ground raised by the assessee and quash the assessment order.

Issues Involved:
1. Adjustment relating to provision of guarantee
2. Adjustment relating to provision of back office services
3. Adjustment relating to interest charged on loan
4. Adjustment relating to notional interest on overdue receivables
5. Disallowance of goodwill
6. General issues including interest and penalty proceedings
7. Validity of the assessment order

Summary:

1. Adjustment relating to provision of guarantee:
The Tribunal addressed the upward adjustment of Rs. 9,34,88,947/- made by the TPO/AO/DRP, which claimed the provision of guarantee by the appellant on behalf of its AE was not at arm's length. The appellant argued that corporate and performance guarantees should not be considered "international transactions" and thus not subject to benchmarking. The TPO/AO/DRP's reliance on generic guarantee fee rates and the imposition of a 3.3% guarantee fee, including a 200 basis points mark-up, was contested. The Tribunal found merit in the appellant's submissions, emphasizing the need for a proper benchmarking methodology.

2. Adjustment relating to provision of back office services:
The Tribunal reviewed the upward adjustment of Rs. 35,34,81,542/- related to the provision of back office services. The appellant contested the rejection of the internal Transactional Net Margin Method (TNMM) and the certified segmental profitability statement. The Tribunal noted that the TPO/AO/DRP erred in combining various transactions for benchmarking purposes and in accepting certain comparable companies. The Tribunal emphasized the need for a more accurate assessment of the arm's length nature of these transactions.

3. Adjustment relating to interest charged on loan:
The Tribunal examined the upward adjustment of Rs. 27,37,607/- related to interest on loans granted to AEs. The appellant argued that the interest received was at arm's length, supported by a robust benchmarking analysis. The TPO/AO/DRP's determination of the arm's length interest rate at LIBOR plus 400 basis points was challenged. The Tribunal found the appellant's arguments persuasive, highlighting the need for a more accurate determination of the arm's length interest rate.

4. Adjustment relating to notional interest on overdue receivables:
The Tribunal considered the upward adjustment of Rs. 57,86,224/- related to notional interest on overdue receivables. The appellant argued that outstanding receivables should not be considered "international transactions" and thus not subject to benchmarking. The TPO/AO/DRP's determination of the arm's length interest rate at LIBOR plus 400 basis points was contested. The Tribunal found merit in the appellant's arguments, emphasizing the need for a more accurate assessment of the arm's length nature of these transactions.

5. Disallowance of goodwill:
The Tribunal reviewed the disallowance of depreciation on goodwill amounting to Rs. 7,272,978/-. The appellant argued that the amount paid for acquisition of commercial rights should be considered as goodwill and thus eligible for depreciation under section 32(1)(ii) of the Income-tax Act, 1961. The Tribunal found merit in the appellant's arguments, emphasizing the need for a more accurate assessment of the nature of the commercial rights acquired.

6. General issues including interest and penalty proceedings:
The Tribunal addressed the imposition of interest under sections 234B and 234C and the initiation of penalty proceedings under section 271(1)(c). The appellant argued that these actions were not justified. The Tribunal found merit in the appellant's arguments, emphasizing the need for a more accurate assessment of the appellant's tax liability and the appropriateness of penalty proceedings.

7. Validity of the assessment order:
The Tribunal considered the validity of the draft assessment order dated 23 March 2016, which was issued along with a notice of demand and a penalty notice. The appellant argued that the assessment order was void ab initio due to non-compliance with the procedure laid down in section 144C of the Income-tax Act, 1961. The Tribunal found merit in the appellant's arguments, citing various judicial precedents, and concluded that the assessment order was null and void.

Conclusion:
The Tribunal allowed the appeal of the assessee, quashing the assessment order and leaving other grounds of appeal open for future adjudication if required. The decision emphasized the importance of following proper procedures and accurately assessing the arm's length nature of transactions.

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