2025 (1) TMI 973 - HC - Income Tax

TP Adjustment - upward adjustment on account of the determination of ALP in respect of the international transaction - AO passed a draft assessment order which included making an upward revision on account of transfer pricing adjustment - petitioner filed an application for rectification of the order passed by the DRP on the ground that it had entered into the APA and its modified return was not considered. HELD THAT - Revenue concedes on instructions that the petitioner s modified return was required to be considered as the petitioner has entered into an APA. He further requests that the matter be remanded to the concerned authorities for deciding afresh. In view of the above the order dated 20.09.2024 passed by the DRP as well as the final assessment order dated 24.10.2024 passed by the AO is set aside. The matter is remanded to the TPO for considering afresh in light of the APA entered into by the petitioner. Additionally we direct that the petitioner s application for rectification dated 08.12.2023 be also considered. We also consider it apposite to observe that as the final assessment order has been set aside there is no question of adjusting any refund against the demand for AY 2020-21 and AY 2021-22 at the present stage.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions addressed in this judgment include:

Whether the petitioner's modified return, submitted pursuant to an Advance Pricing Agreement (APA), should have been considered by the Dispute Resolution Panel (DRP) and the Assessing Officer (AO) during the assessment process.
Whether the final assessment order and the demand notice issued by the AO were valid in light of the APA and the pending rectification application.
Whether the proposed adjustment of the refund due to the petitioner against demands for previous assessment years was justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Consideration of the Modified Return under the APA

Relevant legal framework and precedents: The legal framework involves the provisions of the Income Tax Act, 1961, particularly sections related to Advance Pricing Agreements (APAs) and the powers of the DRP and AO.
Court's interpretation and reasoning: The court noted that the petitioner's modified return, which was necessitated by the APA, was not considered by the DRP. This oversight was acknowledged by the counsel for the Revenue, who agreed that the modified return should have been taken into account.
Key evidence and findings: The petitioner had entered into an APA on 27.03.2024, which required modifications to its return. Despite this, the DRP passed an order without considering the modified return.
Application of law to facts: The court applied the provisions related to APAs and found that the DRP's failure to consider the modified return was a significant procedural oversight.
Treatment of competing arguments: The Revenue conceded that the APA should have been considered, thus aligning with the petitioner's argument.
Conclusions: The court concluded that the DRP's order and the subsequent actions by the AO were flawed due to the non-consideration of the APA-modified return.

Issue 2: Validity of the Final Assessment Order and Demand Notice

Relevant legal framework and precedents: This issue involves the interpretation of sections 143(3), 144C, and 156 of the Income Tax Act, concerning assessment orders and demand notices.
Court's interpretation and reasoning: The court found that the final assessment order dated 24.10.2024 was premised on an incomplete consideration of the petitioner's tax position, as influenced by the APA.
Key evidence and findings: The AO issued a demand notice for Rs. 18,95,88,680/- based on the flawed assessment process, as it did not incorporate the APA's impact.
Application of law to facts: The court determined that the assessment order was not legally sustainable given the procedural errors.
Treatment of competing arguments: The Revenue's concession that the matter should be reconsidered in light of the APA weakened any opposing arguments.
Conclusions: The court set aside the final assessment order and the demand notice, remanding the matter for reconsideration.

Issue 3: Adjustment of Refund Against Previous Demands

Relevant legal framework and precedents: The relevant provisions involve the adjustment of refunds under the Income Tax Act, particularly in the context of pending assessments and demands.
Court's interpretation and reasoning: The court observed that since the final assessment order was set aside, any adjustment of refunds against previous demands was premature and unjustified.
Key evidence and findings: The proposed adjustment related to demands for AY 2020-21 and AY 2021-22, which were contingent on the now-invalidated assessment order.
Application of law to facts: The court applied the principle that without a valid assessment order, there could be no basis for adjusting refunds.
Treatment of competing arguments: The court's decision rendered any competing arguments moot, given the setting aside of the assessment order.
Conclusions: The court concluded that no refund adjustments should occur until a valid assessment is completed.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "In view of the above, the order dated 20.09.2024 passed by the DRP as well as the final assessment order dated 24.10.2024 passed by the AO is set aside. The matter is remanded to the TPO for considering afresh in light of the APA entered into by the petitioner."
Core principles established: The necessity of considering APAs in tax assessments, the procedural correctness of assessment orders, and the invalidity of refund adjustments without a valid assessment.
Final determinations on each issue: The court set aside the DRP's order and the final assessment order, remanding the case for reconsideration with instructions to consider the APA and the pending rectification application. The court also halted any refund adjustments pending a valid reassessment.

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