2024 (9) TMI 951 - AT - Income Tax

Validity of income tax proceedings against company in liquidation process - HELD THAT - Apparently, the provisions of section 14 of the Insolvency and Bankruptcy Code, 2016, provides that all these suits or continuation of pending suits or proceedings against the corporate debtor including any judgment or decree or order in any court of law, tribunal, arbitration panel or other authority cannot be passed during the moratorium period. The period of moratorium shall have the effect from the date of such order till the completion of the corporate insolvency resolution process. In the present case, the appeal filed by the assessee is prohibited under section 14 of the Code. As held by the Supreme Court in case of Alchemist Asset Reconstruction Co. Ltd. v. Hotel Gaudavan (P.) Ltd. 2017 (12) TMI 1107 - SUPREME COURT , it has been held that even arbitration proceedings cannot be initiated after imposition of the moratorium u/s 14(1)(a) has come into effect and it is not nice in law and could not have been allowed to continue. Further with respect to the appeals filed by the assessee also cannot be sustained as assessee did not furnish any permission obtained from National company law tribunal as held in Mrs. Jai Rajkumar v. Standic Bank Ghana Ltd. 2019 (1) TMI 1254 - MADRAS HIGH COURT The assessee neither complied by filing proper letter of authority nor sought further time. None of the directors remained present before us. Therefore, the appeal filed by the company in all the three appeals cannot be sustained in absence of any permission from the National company law tribunal or filing of the proper letter of authority by the insolvency resolution professional. In view of this, we dismiss the appeals filed by the assessee with the liberty to Assessee to file these appeals after moratorium period, if Assessee wants to continue with these proceedings, making the respective representative of committee of creditors, IRP. Thus, all the appeals of assessee with respect to these three years are dismissed.

Issues Involved:
1. Determination of total income.
2. Transfer pricing adjustments.
3. Rejection of functional and economic analysis.
4. Acceptance of non-comparable companies.
5. Non-consideration of audited segmental profit and loss account.
6. Incorrect computation of entity-level margin.
7. Economic adjustment.
8. Disallowance of additional depreciation.
9. Disallowance of notional interest expenditure.
10. Non-grant of set-off of brought forward unabsorbed depreciation.
11. Non-grant of credit of self-assessment tax paid.
12. Incorrect levy of interest under section 234A.
13. Levy of interest under section 234B.
14. Excess levy of interest under section 234C.
15. Initiation of penalty proceedings.
16. Transfer pricing adjustment on account of notional interest on outstanding receivables.
17. Outstanding receivables as an international transaction.
18. Recharacterization of accounts receivables into loans.
19. Business practice regarding interest on outstanding receivables.
20. Aggregation of outstanding receivables with principal transaction.
21. Working capital adjustment.
22. Inherent factoring of interest element in pricing goods.

Issue-wise Detailed Analysis:

1. Determination of Total Income:
The assessee contested the determination of its total income at significantly higher amounts than disclosed in the revised returns for the assessment years 2016-17, 2017-18, and 2018-19. The Tribunal noted the discrepancies between the returned income and the assessed income, which stemmed from various transfer pricing adjustments and other disallowances.

2. Transfer Pricing Adjustments:
The Tribunal reviewed the adjustments made under Section 92CA(3) of the Income Tax Act, 1961, concerning the arm's length price of international transactions. The adjustments were substantial, amounting to INR 49,33,80,333, INR 54,92,13,186, and INR 25,37,41,498 for the respective assessment years.

3. Rejection of Functional and Economic Analysis:
The assessee's functional and economic analysis, conducted per the Act and Income-tax Rules, 1962, was rejected by the AO/TPO. The Tribunal examined the grounds for this rejection, which included non-compliance with Rule 10B(1)(e) and the inappropriate selection of the Transactional Net Margin Method (TNMM) as the most appropriate method.

4. Acceptance of Non-comparable Companies:
The Tribunal scrutinized the inclusion of certain companies as comparables without a scientific search process. The companies included were from different segments and industries, which the assessee argued were not comparable in terms of functions performed, assets employed, and risks undertaken.

5. Non-consideration of Audited Segmental Profit and Loss Account:
The Tribunal noted the AO/TPO's refusal to consider the audited segmental profit and loss accounts submitted by the assessee. This refusal was based on previous directions from the Dispute Resolution Panel (DRP) for earlier assessment years, which the Tribunal found to be unjustified without considering the specific facts of the current years.

6. Incorrect Computation of Entity-level Margin:
The Tribunal addressed the incorrect computation of the assessee's net level margin, where other income was considered non-operating. The Tribunal found that the AO/TPO had erred in their calculations, leading to an inflated margin.

7. Economic Adjustment:
The Tribunal discussed the need for appropriate economic adjustments for differences such as working capital employed by the assessee compared to comparable companies. The Tribunal emphasized the importance of such adjustments to ensure a fair comparison.

8. Disallowance of Additional Depreciation:
The Tribunal reviewed the disallowance of 50% of additional depreciation claimed under section 32(1)(iia) of the Act. The Tribunal found that the AO/TPO had not appreciated the clarificatory nature of the amendment to the third proviso to section 32(1) by the Finance Act, 2015.

9. Disallowance of Notional Interest Expenditure:
The Tribunal examined the disallowance of notional interest on the grounds that the assessee provided interest-free loans and advances. The Tribunal noted that sufficient interest-free funds were available, and thus, no disallowance should have been made.

10. Non-grant of Set-off of Brought Forward Unabsorbed Depreciation:
The Tribunal addressed the non-grant of set-off for brought forward unabsorbed depreciation, which the assessee claimed in the returns. The Tribunal found that the AO/TPO had erred in not allowing this set-off.

11. Non-grant of Credit of Self-assessment Tax Paid:
The Tribunal noted the non-grant of credit for self-assessment tax paid by the assessee, amounting to INR 3,93,730. The Tribunal found this to be an error on the part of the AO/TPO.

12. Incorrect Levy of Interest under Section 234A:
The Tribunal reviewed the levy of interest under section 234A, finding that the AO/TPO had not appreciated that the return of income was filed within the specified due date.

13. Levy of Interest under Section 234B:
The Tribunal discussed the grounds for levying interest under section 234B, noting the assessee's objections.

14. Excess Levy of Interest under Section 234C:
The Tribunal addressed the excess levy of interest under section 234C, finding that the AO/TPO had erred in computing interest on income determined under section 143(1) instead of the returned income.

15. Initiation of Penalty Proceedings:
The Tribunal reviewed the initiation of penalty proceedings under sections 274 read with 270A and 271AA of the Act. The Tribunal found that the AO/TPO had initiated these proceedings without sufficient grounds.

16. Transfer Pricing Adjustment on Account of Notional Interest on Outstanding Receivables:
The Tribunal examined the adjustment made for notional interest on outstanding receivables, amounting to INR 25,37,41,498. The Tribunal found that the AO/TPO had erred in treating outstanding receivables as an international transaction under section 92B.

17. Outstanding Receivables as an International Transaction:
The Tribunal discussed the AO/TPO's classification of outstanding receivables as an international transaction, which the assessee argued was not justified under section 92B.

18. Recharacterization of Accounts Receivables into Loans:
The Tribunal addressed the AO/TPO's recharacterization of accounts receivables as loans, finding that this was not judicially permissible.

19. Business Practice Regarding Interest on Outstanding Receivables:
The Tribunal noted that there was no business practice in the assessee's industry to charge interest on outstanding receivables, and thus, no interest adjustment was warranted.

20. Aggregation of Outstanding Receivables with Principal Transaction:
The Tribunal found that the AO/TPO had not appreciated that overdue receivables should be aggregated with the principal transaction of manufacturing and export of finished goods.

21. Working Capital Adjustment:
The Tribunal discussed the need for a working capital adjustment to account for the effect of outstanding receivables on the assessee's net operating margin.

22. Inherent Factoring of Interest Element in Pricing Goods:
The Tribunal noted that the assessee had inherently factored the interest element on outstanding receivables in the pricing of goods sold to AEs, and thus, no separate adjustment was necessary.

Conclusion:
The Tribunal dismissed all three appeals filed by the assessee, citing the moratorium period under the Insolvency and Bankruptcy Code, 2016. The Tribunal granted the assessee the liberty to file fresh appeals after the moratorium period or upon resolution of corporate insolvency. The order was pronounced in the open court on February 26, 2024.

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