Assessment Held Time-Barred as AO Failed to Comply with Mandatory DRP Timeline

Lubrizol Advanced Materials India Pvt. Ltd. Vs Assessment Unit (Income Tax Department) (ITAT Mumbai)

The Income Tax Appellate Tribunal (ITAT), Mumbai, considered the assessee’s appeal against the assessment order dated 30.12.2022 passed under Sections 143(3), 144B and 260 of the Income Tax Act for Assessment Year 2017-18. The assessee primarily challenged the assessment order on the ground that it was barred by limitation under Section 144C(13). Other grounds related to transfer pricing adjustments concerning marketing support services, selection of comparables, benchmarking methodology, and project management services.

Background of the Case

The assessee, engaged in manufacturing Cassia Gum Powder and providing independent marketing support services to its Associated Enterprises (AEs), filed its return declaring a loss of Rs.12.49 crore. The case was selected for scrutiny and referred to the Transfer Pricing Officer (TPO). The TPO proposed transfer pricing adjustments, following which a draft assessment order under Section 144C was issued on 22.04.2021. The assessee filed objections before the Dispute Resolution Panel (DRP) on 29.05.2021.

Before the DRP proceedings concluded, the Assessing Officer passed an assessment order on 28.05.2021. The assessee challenged this order before the Bombay High Court, which, by order dated 29.10.2021, quashed the assessment because it had been passed while the assessee’s objections before the DRP were still pending. Thereafter, the DRP issued its directions on 28.01.2022. The assessee subsequently contended that the final assessment order should have been completed within the period prescribed under Section 144C(13).

Assessee’s Contentions

The assessee argued that:

• The final assessment order dated 30.12.2022 was passed beyond the limitation prescribed under Section 144C(13).
• After receiving the DRP’s directions dated 28.01.2022, the Assessing Officer was required to complete the assessment within one month from the end of the month in which those directions were received.
• The assessee had also written to the Assessing Officer on 30.03.2022, requesting that the assessment order be passed in accordance with the statutory timeline.
• Reliance was placed on the Tribunal’s decision in Adobe Systems India Pvt. Ltd. in support of the limitation argument.

Revenue’s Stand

The Revenue submitted that the TPO had issued a notice on 31.01.2022 seeking additional details from the assessee, which were furnished on 02.02.2022. According to the Revenue, this process affected the limitation period and therefore the final assessment order could not be treated as time-barred.

Tribunal’s Findings

The Tribunal noted that the TPO had proposed an upward transfer pricing adjustment of Rs.5.60 crore, which the DRP enhanced to Rs.6.57 crore. However, before examining the transfer pricing issues, it considered the legal challenge regarding limitation.

The Tribunal observed that the Bombay High Court had already quashed the earlier assessment order dated 28.05.2021, after which the DRP issued fresh directions on 28.01.2022. The final assessment order was ultimately passed on 30.12.2022, although, according to the Tribunal, it ought to have been passed within one month from the end of the month in which the DRP’s directions were received, as required by Section 144C(13).

Referring to the language of Section 144C(13), the Tribunal held that the provision mandates that the Assessing Officer complete the assessment within the prescribed period and specifically states that no further opportunity of hearing is required before passing the final assessment order. The Tribunal observed that this reflected the legislature’s intention of strict compliance with the statutory timeline.

The Tribunal sought clarification regarding the date on which the Assessing Officer received the DRP’s directions. The assessee produced proof showing that the directions were received on 31.01.2022. Based on this, the Tribunal concluded that the final assessment order had been passed beyond the period prescribed under Section 144C(13). It rejected the Revenue’s contention that the TPO’s request for additional information justified the delay, holding that such circumstances did not constitute a valid reason for extending the statutory limitation.

Final Decision

The Tribunal held that the assessment order dated 30.12.2022 was barred by limitation, declared it void ab initio, and allowed the assessee’s legal ground. Since the assessment itself was held to be invalid, all remaining grounds concerning transfer pricing adjustments, comparables, benchmarking methodology, and project management services were treated as academic and were not adjudicated. Accordingly, the assessee’s appeal was allowed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal has been filed by the assessee, challenging the assessment order dated 30.12.2022 passed u/s. 143(3) r.w.s. 260 and section 144B of the Income Tax Act, 1961 (‘the Act’) on the ground that the same is barred by limitation along with other ground and relevant to Assessment Year (‘A.Y.’ for short) 2017-18.

2. The assessee has challenged the following grounds of appeal:

1. On the facts and in the circumstances of the case and in the law, the impugned order dated 30.12.2022 passed by Assessment Unit, Income tax department (learned A.O.) under section 143(3) read with section 260 and section 144B of the Act, is barred by limitation, since impugned order is passed /issued beyond the maximum time limit prescribed under section 144C(13) of the act. Hence the assessment order is liable to be quashed/annulled as barred by limitation.

2. Without prejudice to ground 1, on facts and circumstances of the case and in law, Deputy Commissioner of Income tax (Transfer Pricing)-3(1)(1) (‘Learned TPO’) erred in proposing upward adjustment amounting to Rs.5,60,10,321 to total income of Appellant in respect of international transaction of provision of Marketing Support Services (‘MSS’) and further the learned Dispute Resolution Panel – 1, Mumbai (‘DRP’) erred in confirming/enhancing the adjustments to Rs.6,57,04,938/-.

3. Without prejudice to ground 1, on facts and circumstances of the case and in law, the ld. DRP erred in confirming the action of learned TPO of rejecting the benchmarking analysis using Transaction Net Margin Method (‘TNMM’) conducted by Appellant, based on the comparable companies selected by Appellant thereby making an addition of Rs.6,57,04,938 of the alleged difference in the arm’s length price of the ‘international transaction of provision of Marketing Support Services (‘MSS’).

4. Without prejudice to ground 1, on facts and circumstances of the case and in law, the learned DRP erred in confirming the action of TPO by selecting the following companies as comparable to the Appellant in determining the arm’s length price of the international transactions –

i. Focus Suilts Solutions & Services Ltd.

ii. Majestic Research Services & Solutions Pvt. Ltd.

5. Without prejudice to ground 1, on facts and circumstances of the cse and in law,the learned DRP erred in determining the arm’s length price of the international transaction by upholding the rejection of all comparable companies selected by the Appellant. The Appellant submits that the following companies should be considered as comparable in determining the arm’s length price of the international transactions –

i. Goldmine Advertising Limited

ii. MCI Mangement India Private Limited

iii. Killick Agencies & Marketing Limited

iv. Pressman Advertising Limited

v. Kestone Integrated Marketing Servics Private Limited

vi. Marketing Communications & Advertising Limited

vii. I Media Corp Limited

6. Without prejudice to ground 1, 4 and 5, on facts and circumstances ofteh case and in law, the learned TPO erred in arbitrarily selecting three companies with high margin to benchmark the international transaction of MSS merely on the premise that the companies were forming part of the accept-reject matrix of the Appellant thereby resorting to cherry picking of comparable companies and the learned DRP further erred in upholding/confirming the action of the learned TPO.

7. Without prejudice to ground 1, on the facts and circumstances of the case and in the law, the learned TPO /DRP has erred in not appreciating the fact that the benchmarking approach adopted by the Appellant for the provision of MSS in preceding assessment years are consistently followed by appellant and accepted by department in earlier year.

8. Without prejudice to ground 1, on the facts and circumstances of the case and in the law, the learned TPO/DRP has erred in making adjustment of Rs.58,027 on project management services provided by the Associaed Enterprise (“AE”) to the Appellant pursuant to inter­company agreement.

3. The brief facts are that the assessee is engaged in manufacturing of Cassia Gum Powder in its plant located at Sabli near Vadodra. The assessee company has its office at Mumbai to support its AEs in providing independent marketing support services in India. The assessee filed its return of income declaring loss of Rs.12,49,12,114/-. The assessee’s case was selected for scrutiny and was referred to the Transfer Pricing Officer (‘TPO’ for short) for transfer pricing assessment and the assessment order dated 28.05.2021 was passed u/s. 143(3) r.w.s. 144C(3) r.w.s. 144B of the Act where the A.O. determined the total loss at Rs.6,06,41,197/-, pursuant to the TPO order u/s. 92CA(3) of the Act dated 29.01.2021 where the TPO proposed the transfer pricing adjustment. The draft assessment order u/s. 144C of the Act dated 22.04.2021 was passed for which the assessee had filed objection against the upward adjustment proposed in the draft assessment order before the Hon’ble DRP on 29.05.2021. The ld.DRP disposed of the objection raised by the assessee and the final assessment order u/s. 143(3) r.w.s. 144C and 144B of the Act was passed. The assessee challenged the assessment order passed by the A.O. by a writ petition before the Hon’ble Bombay High Court on the ground that the assessment order was passed before the expiry of the time period granted for filing of the objection to the ld. DRP. The Hon’ble Bombay High Court vide order dated 29.10.2021 quashed the assessment order dated 28.05.2021 passed by the NFAC on the ground that while application filed by the assessee was pending before the ld. DRP, the ld.A.O. passed the assessment order dated 28.05.2021. Pursuant to this, the Hon’ble DRP passed the direction dated 28.01.2022. The ld. TPO vide notice dated 31.01.2022 sought for certain details from the assessee which were furnished by the assessee vide its submission dated 02.02.2022. It is observed that the assessee has contended that the A.O. as per the provision of section 144C(13) of the Act was required to complete the assessment and the assessment within one month from the end of the month in which the DRP’s direction is received and had raised a ground that the assessment order is barred by limitation.

4. The learned Authorised Representative (‘ld. AR’ for short) had raised the jurisdictional ground that the final assessment order dated 30.12.2022 was passed by the ld. A.O. beyond the maximum time limit prescribed u/s. 144C(13) of the Act for which reason the assessment order was to be held invalid. The ld. AR had brought our attention to the assessee’s submission dated 30.03.2022 requesting the ld. A.O. to pass the assessment order giving effect to the direction issued by the Hon’ble DRP received on 28.01.2022. The ld. AR further contended that inspite of the assessee’s request to the ld. A.O. to pass the assessment order within the limitation period prescribed under the provisions of the Act, the impugned assessment order was passed only on 30.12.2022 which is beyond the prescribed limitation period. The ld. AR relied on the decision of the Tribunal in the case of Adobe Systems India P. Ltd. vs. DCIT (in ITA No. 928/Del/2022 for A.Y. 2017-18 vide order dated 16.06.2022).

5. The learned Departmental Representative (‘ld.DR’ for short), on the other hand, controverted the said facts and stated that as the ld. TPO vide notice dated 31.01.2022 had sought for certain details from the assessee which was furnished vide assessee’s submission dated 02.02.2022 and for that reason the limitation period will not fall on 28.02.2022. The ld. DR relied on the decision of the lower authorities.

6. We have heard the rival submissions and perused the materials available on record. It is observed that the assessee has entered into various international transactions with its AE’s which was challenged by the ld. A.O./TPO. It is observed that the assessee has been providing independent marketing services to its AE’s and has undertaken various international transactions during the year under consideration. The ld. A.O/TPO proposed an upward adjustment of Rs.5,60,10,321/- to the total income of the assessee in respect of the said international transaction pertaining to the marketing support services and determined the ALP accordingly. The ld. Transfer Pricing Officer (‘TPO’ for short) rejected the bench marking analysis adopted by the assessee by applying TNMM method and also rejected the comparable companies considered by the assessee. The assessee had raised its objection before the Hon’ble DRP which had confirmed the action of the ld. A.O/TPO and proposed an enhanced adjustment of Rs.6,57,04,938/-.

7. The assessee is in appeal before us, challenging the final assessment order dated 30.12.2022 passed by the ld. A.O. in pursuant to the direction of the Hon’ble DRP. It is also observed that the assessee has challenged the assessment order dated 28.05.2021 before the Hon’ble Jurisdictional High Court on the ground that the impugned assessment order was passed before the expiry of the time period granted for filing objection before the Hon’ble DRP and the Hon’ble High Court vide order dated 29.10.2021 quashed the impugned assessment order on the said ground. Subsequent to this event, the Hon’ble DRP passed its direction dated 28.01.2022 and the same was received by the assessee on 28.01.2022. The assessee vide its submission dated 30.03.2022 had sought for the details from the ld. A.O. as to whether or not the assessment order has been passed. It isobserved that the final assessment order was then passed by the ld. A.O. on 30.12.2022 which according to the provision of section 144C(13) ought to have been passed on or before 28.02.2022, i.e., within one month from the end of the month in which DRP directions is received. In this factual background, it is observed that the assessee has raised a legal ground in ground no. 1 challenging the impugned assessment order as being time barred as per the provisions of section 144C(13) of the Act. The ld. DR had stated that since the TPO had sought for certain details from the assessee and only after the perusal of the said details the impugned assessment order was passed. This according to us was not a justifiable cause for the delay in passing the assessment order within the period of limitation prescribed u/s. 144C(13) of the Act. It is trite to extract the provision of section 144C(13) of the Act for ease of reference:

Reference to dispute resolution panel.

144C (13) Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153 or section 153B, the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received.

8. From the above it is clear that the statute has mandated that the ld. A.O. shall pass the assessment order within one month from the end of the month in which the ld. DRP directions is received. This provision is mandatory which has placed strict adherence to the ld. A.O. to pass the assessment order even without providing any further opportunity of being heard to the assessee which further implies strict compliance of the said provision. The bench had sought for clarification from the ld. counsels as to the date of receipt of ld. DRP’s direction by the ld. A.O. and the ld. AR had submitted the proof of receipt which is found to be on 31.01.2022.

9. From the above observation, it is observed that the ld. A.O. has passed the assessment order beyond the time period prescribed under the provisions of the Act. We, therefore, are inclined to hold the assessment order to be time barred and thereby holding it to be void-ab-initio. Ground no. 1 raised by the assessee is allowed. As we have held the assessment order to be null and void, the other grounds of appeal raised by the assessee becomes academic in nature.

10. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open court on25.10.2023.