2024 (12) TMI 419 - AT - Income Tax

Final assessment order passed by the Ld. AO not as per DRP directions - HELD THAT - As order u/s 144C (5) of DRP contained certain directions with regard to TP adjustment u/s 144C(13). Final order of assessment was to be passed by Ld. AO within one month from the end of the month in which DRP directions were received i.e. 30/11/2014. As the order giving effect from TPO was not received, the Ld. AO passed order dated 27/11/2014 u/s 144C. In the meanwhile, AO received order giving effect dated 27/11/2014 from the TPO on 02/12/2014, so Ld. AO passed order u/s 154/143(3) r.w.s 144C on 04/12/2014. Thus, the Ld. AO had made a technical lapse with regard to section 144C of IT Act. It is a fact that assessment order dated 27/11/2014 was issued within period of limitation i.e., 30/11/2014. After receiving order giving effect dated 27/11/2014, Ld. AO made necessary corrections of Rs. 1,46,24,889/- in place of Rs. 4,18,05,854/- and passed order dated 04/12/2014 u/s 144C. Thus, as per ratio of judgment of M/s S. G. Asia Holdings (India) Pvt. Ltd. s 2019 (8) TMI 661 - SUPREME COURT the issue is remitted back to the file of Learned AO to pass an order incorporating the DRP direction which have been given effect by the TPO. Appeal of Assessee is allowed for statistical purposes.

Issues Involved:

1. Disregard of higher appellate authority's order in the assessee's previous case.
2. Misunderstanding of the business model and operational profile of the assessee.
3. Selection and rejection of comparable companies.
4. Inconsistent approach in accepting/rejecting comparables.
5. Mistake in computing working capital adjusted margins.
6. Incorrect risk profile assessment of the assessee.
7. Determination of price by TPO without necessary circumstances.
8. Non-acceptance of the economic analysis by the assessee.
9. Rejection of multiple-year data for computing ALP.
10. Incorrect application of the proviso to Section 92C(2).
11. Final assessment order not as per DRP directions and barred by limitation.

Detailed Analysis:

1. Disregard of Higher Appellate Authority's Order:
The assessee argued that the DRP/TPO disregarded the order of the ITAT in the assessee's own case for AY 2004-05. The DRP/TPO advocated an approach contrary to the one accepted in previous years, leading to inconsistency in the treatment of comparable companies. This disregard undermines the principle of consistency in tax assessments.

2. Misunderstanding of Business Model:
The assessee contended that the DRP/TPO failed to understand its business model and operational environment, which was confirmed by the DRP in earlier assessments (AY 2007-08 and AY 2008-09). This misunderstanding led to the selection of inappropriate comparables, thereby affecting the computation of the arm's length price (ALP).

3. Selection and Rejection of Comparable Companies:
The DRP/TPO allegedly erred in selecting/rejecting certain comparables without establishing their functional comparability. The assessee argued that a proper functional, asset, and risk analysis was not conducted, which is crucial for accurate transfer pricing assessments.

4. Inconsistent Approach in Accepting/Rejecting Comparables:
The DRP/TPO applied an inconsistent approach by rejecting Rites Limited, which was functionally different, while accepting Apitco Ltd. and WAPCOS Ltd., having similar profiles to Rites Ltd. This inconsistency raises questions about the objectivity and fairness of the selection process.

5. Mistake in Computing Working Capital Adjusted Margins:
The TPO allegedly made a computational error in the working capital adjusted margins of comparable companies. The assessee claimed that this mistake affected the final assessment and required rectification to reflect the true financial position.

6. Incorrect Risk Profile Assessment:
The DRP/TPO was accused of incorrectly assessing the risk profile of the assessee by comparing it with companies bearing substantial entrepreneurial risk. The assessee maintained a "No Risk" status, as all expenses were reimbursed with a markup, irrespective of commercial success. The failure to adjust for risk profile differences was a significant oversight.

7. Determination of Price by TPO Without Necessary Circumstances:
The assessee argued that the circumstances necessitating the determination of price by the TPO, as per Section 92C(3), did not exist. This challenge questions the very basis of the TPO's intervention in the pricing mechanism.

8. Non-Acceptance of Economic Analysis:
The DRP/TPO did not accept the economic analysis conducted by the assessee in accordance with the Income-tax Act and Rules. Instead, they conducted a fresh analysis, leading to a conclusion that the international transaction was not at arm's length, which the assessee contested.

9. Rejection of Multiple-Year Data for Computing ALP:
The DRP/TPO rejected the use of multiple-year data for computing the ALP, opting instead for single-year updated data. The assessee argued that multiple-year data provides a more comprehensive view of financial performance and should have been considered.

10. Incorrect Application of Proviso to Section 92C(2):
The DRP/TPO allegedly failed to correctly apply the proviso to Section 92C(2), denying the benefit of a 5% downward variation in determining the ALP. This misapplication had a direct impact on the tax liability of the assessee.

11. Final Assessment Order Not as Per DRP Directions and Barred by Limitation:
The assessee filed an additional ground claiming that the final assessment order was not in accordance with the DRP directions and was barred by limitation. The order dated 04/12/2014 was allegedly passed after the statutory deadline, rendering it void. The tribunal, referencing past judgments, remanded the issue back to the AO to incorporate DRP directions and comply with statutory requirements.

In conclusion, the tribunal addressed various procedural and substantive issues raised by the assessee, highlighting errors in the assessment process. The matter was remanded to the AO to rectify these errors and ensure compliance with the DRP's directions, thereby safeguarding the procedural integrity of the assessment process.

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