2017 (12) TMI 997 - AT - Income Tax

Validity of assessment against non existent entity - Held that - As on the date of draft assessment order dated 21.12.2011 and assessment order dated 25.10.2012 passed in JCBML merged with JCBIL, the taxpayer in this case, was not in existence and drew our attention to assessment order dated 25.10.2012 for AY 2008-09 in case of JCBMPL merged with JCBIL w.e.f. 01.04.2009 pursuant to the scheme of amalgamation as approved by Hon ble High Court of Bombay vide its order dated 05.02.2010 and vide orders dated 05.02.2010, 26.02.2010 and 26.02.2010 passed by Hon ble High Court of Delhi. This fact has been duly recorded by ld. DRP in its order dated 21.09.2012, available at page 52 of the paper book. So, on the date of completion of assessment, in case JCBMPL merged with JCBIL w.e.f. 01.04.2009, it was not in existence and was a non-entity. So, we are of the considered view that assessment order itself is a nullity and is not sustainable in the eyes of law.

Issues Involved:
1. Erroneous rejection of the transfer pricing analysis.
2. Rejection of economic adjustments conducted by the appellant.
3. Denial of working capital adjustment to the comparables.
4. Erroneous rejection of Comparable Uncontrolled Price (CUP) data.
5. Erroneous computation of adjustment on the entire service income.
6. Erroneous selection/rejection of comparables for international transactions.
7. Denying the use of multiple year data.
8. Ignoring the tax holiday entitlement under Section 10B.
9. Legality of assessment orders passed on a non-existent entity.

Issue-wise Detailed Analysis:

1. Erroneous Rejection of the Transfer Pricing Analysis:
The appellant contended that the Assessing Officer (AO) and Transfer Pricing Officer (TPO), following the directions of the Dispute Resolution Panel (DRP), erred in rejecting the benchmarking approach adopted in the transfer pricing study. This led to a transfer pricing adjustment of ?9,82,34,197 for the export of components and ?17,098,544 for engineering design services, holding that these transactions did not satisfy the arm's length principle under the Income-tax Act, 1961.

2. Rejection of Economic Adjustments Conducted by the Appellant:
The appellant argued that the DRP/AO/TPO erred in rejecting economic adjustments made to compute the operating profit from the international transaction of export of components. The authorities stated that adjustments are permissible only to comparables and not to the appellant (tested party) as per Rule 10B(1)(e)(iii).

3. Denial of Working Capital Adjustment to the Comparables:
The appellant claimed that the DRP/AO/TPO erred in denying a working capital adjustment to the operating profit margins of the comparables, despite such adjustments being conducted in the Transfer Pricing documentation as per section 92D of the Act and Rule 10D.

4. Erroneous Rejection of Comparable Uncontrolled Price (CUP) Data:
The appellant contended that the DRP/AO/TPO erred in rejecting the CUP data provided for the international transaction of engineering design services to its Associated Enterprises.

5. Erroneous Computation of Adjustment on the Entire Service Income:
The appellant argued that the DRP/AO/TPO erred in computing the adjustment on the entire service income of the Design Engineering Services Segment, amounting to ?67,388,310, whereas the relevant international transaction was only ?52,611,526, and thus should have been computed on a proportionate basis.

6. Erroneous Selection/Rejection of Comparables for International Transactions:
The appellant highlighted errors in:
- Rejecting Onward Technologies Limited as a comparable company despite relevant CUP data being submitted.
- Considering Rolta India Limited as a comparable company, despite it not being functionally comparable.

7. Denying the Use of Multiple Year Data:
The appellant argued that the DRP/AO/TPO erred in considering single-year data for comparables (FY 2007-08) and disregarding multiple-year data, which was used by the appellant in accordance with Rule 10B(4). The appellant had computed the arm's length price for engineering design services based on contemporaneous and multiple-year data and had offered a suo-moto adjustment of ?96,09,029 in its return of income.

8. Ignoring the Tax Holiday Entitlement Under Section 10B:
The appellant contended that the DRP/AO/TPO erred in ignoring that the appellant was entitled to a tax holiday under section 10B of the Act on its profits from Plant I, which negated any motive to derive a tax advantage by manipulating transfer prices.

9. Legality of Assessment Orders Passed on a Non-Existent Entity:
The appellant argued that the draft assessment order dated 21.12.2011 and the final assessment order dated 25.10.2012 were illegal and void-ab-initio as they were passed on an entity (JCB Manufacturing Pvt. Ltd.) that did not exist on the date of passing these orders due to its merger with JCB India Ltd. effective from 01.04.2009, as approved by the High Courts of Bombay and Delhi. This was highlighted in the DRP's order dated 21.09.2012. Consequently, the assessment orders were held to be nullity and not sustainable in law.

Conclusion:
The Tribunal allowed the appellant's appeal for AY 2008-09, dismissed the Revenue's appeal for AY 2009-10, and allowed the appellant's cross-objection for AY 2009-10, holding the assessment orders dated 25.10.2012 and 29.01.2014 as nullity due to being passed on a non-existent entity.

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