Basware Corporation India Vs DCIT (ITAT Chandigarh)
Summary: ITAT Chandigarh allowed both appeals of Basware Corporation India and quashed the assessment framed under Section 143(3) read with Section 144C(13), holding that an Assessing Officer cannot pass a final assessment merely as a formality without implementing the binding directions of the Dispute Resolution Panel. The connected appeal challenged the consequential rectification order passed under Section 154. The Tribunal first condoned a delay of 133 days in ITA No. 1289/Chd/2019 after accepting that the delay arose from a bona fide, inadvertent and unintentional mistake and was supported by the material placed on record.
The assessee’s principal challenge was that the final assessment order dated 31.10.2016 had been passed without giving effect to the binding DRP directions within the period prescribed under Section 144C(13). The underlying dispute involved a transfer-pricing adjustment of ₹53,69,199 in respect of the assessee’s international transaction concerning provision of IT enabled services to its associated enterprise. The assessee also challenged the selection of comparables, computation of margins, risk adjustment and denial of the ±5% range, but the Tribunal ultimately disposed of the matter on the fundamental jurisdictional issue.
The draft assessment order had been prepared on 10.03.2016 and the matter thereafter went before the DRP. The DRP issued its directions on 23.09.2016. Under Section 144C(13), the assessment in conformity with those directions was required to be completed within one month from the end of the month in which the directions were received. Among other things, the DRP directed that working-capital adjustment be allowed and that the TPO compute it in accordance with the methodology specified in the DRP order.
The Tribunal found that the AO was fully conscious that the DRP had issued directions, but proceeded to frame the final assessment without complying with them because the concerned TPO had failed to give effect to those directions within the stipulated period. ITAT strongly rejected this course. It held that the assessment order had “no sanctity of law” and was “nothing but a waste paper.” An AO could not pass an incomplete assessment merely to meet limitation and leave it open for later rectification after receiving the TPO’s consequential order. Such a procedure would effectively keep the statutory limitation period open indefinitely, which was not the mandate of the statute.
Accordingly, the assessment order passed under Section 143(3) read with Section 144C was quashed. The Tribunal further held that the consequential Section 154 rectification order was also null and void. Both appeals of the assessee were therefore allowed.
FULL TEXT OF THE ORDER OF ITAT CHANDIGARH
Both the present appeals have been filed by the assessee and are relevant to the same assessment year i.e., AY 2012-13. ITA No. 1289/CHD/2019 has been preferred by the assessee against the order dated 31.10.2016 of the Assessing Officer passed u/s 144C(13) read with section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) in pursuance of the directions of the Dispute Resolution Panel (DRP). ITA No. 123/CHD/2017 is against the order dated 10.11.2016 of the Assessing Officer passed u/s 154 of the Income Tax Act in pursuance of the directions of the Dispute Resolution Panel (DRP).
ITA No . 1289/Chd/2019
2. The appeal in ITA No. 1289/Chd/2019 is barred by limitation period of 133 days. The Ld. Counsel for the assessee has filed an application seeking the condonation of delay wherein, detailed explanation has been furnished about the reasons because of which the appeal could not be filed within the time prescribed. It has been submitted in the application that the order of the assessment dated 31.10.2016 passed u/s 144C(13) r.w.s. 143(3) of the Act was never communicated to the assessee, rather, the same was communicated on the request of the Authorized Representative of the assessee vide letter dated 4.3.2019, a copy of the letter is also placed on record. That the assessee finally received the aforesaid order on 18.3.2019 and thereafter the assessee filed an appeal against the order of the Assessing Officer before the Tribunal on 13.01.2017. Further, that under the bonafide belief that an order u/s 154 is an extension of the order passed u/s 143(3) r/w 144C(13) and, thus, an appeal should be filed against an order passed u/s 154 of the Act, the assessee filed the appeal against section 154 order on 13.1.2017 i.e. within the period of limitation. It has been further submitted that the delay in filing the appeal (ITA No. 1289/Chd/2019) by the assessee was not deliberate or intentional as the assessee was prevented by sufficient cause from filing the present appeal. Therefore, it has been prayed that the delay of 133 days occurred in filing the present appeal, which is unintentional should be condoned.
3. We find that the averments made in the application has been corroborated and supported by the evidence and copy of the letter dated 4.3.2019 (Annexure 1). Since the delay caused in filing the appeal i.e. ITA No. 1289/Chd/2019 seems to be out of bonafide, inadvertent and unintentional mistake, hence, in our view, the interest of justice will be well served if the delay in filing the present appeal is condoned. We order accordingly.
4. The assessee in this appeal has taken following grounds:
“The following grounds of objection are independent of, and without prejudice to one another:
“1. The Ld. Assessing Officer (‘Ld. AO’) erred in passing the final assessment order dated 31.10.2016 u/s 143(3) r/w 144C of the Act, without giving effect to the binding directions of the Learned Dispute |Resolution Panel (‘Ld. DRP’) within a period of one month as stipulated u/s 144C(13) of the Act and is therefore, bad and illegal in law and liable to be quashed
2. The Assessment Order passed by the Ld. AO in pursuance of the directions issued by the Ld. DRP is a vitiated order as the Ld. DRP erred in confirming the arbitrary transfer pricing adjustment made by the Ld. AO/Ld. Transfer Pricing Officer (‘Ld. TPO’) to the International Transaction pertaining to provision of IT enabled services (‘ITeS segment’) entered into by the Appellant with its Associated Enterprise (‘AE’)
3. The Ld TPO/Ld AO and Ld. DRP erred in enhancing the income of the Appellant by Rs.53,69,199 holding that the international transaction pertaining to its provision of IT enabled services (‘ITeS segment’) does not satisfy the arm’s length principle envisaged under the Act and in doing so have grossly erred in:
3.1 the Ld. TPO/ Ld. AO erred in not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present cases
3.2 disregarding the ALP as determined by the Appellant in the Transfer Pricing (‘TP’)documentation (also referred to as TP Study’ or TP Report’) maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 (‘Rules’);
3.3 rejecting, without reason, the quantitative and qualitative screens/filters applied and set of comparables arrived at by the Appellant, following a detailed and robust search methodology carried out in the TP Study, and proceeding to arrive at the fresh comparables set by applying certain arbitrarily selected filters and arriving at his own comparables set instead;
3.4 including high-profit making companies in the final comparables’ set for benchmarking a low risk captive unit such as the Appellant (disregarding judicial pronouncements on the issue), thus demonstrating an intention to arrive at a pre-formulated opinion with the single-minded intention of making an addition to the returned income of the Appellant;
3.5 erroneously including certain functionally dissimilar companies that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed and excluding certain comparable companies on arbitrary/frivolous grounds;
3.6 not considering the correct computation of the Return on Total Operating Cost (‘ROTC’) of certain companies used as comparable in ITes segments of the Appellant;
3.7 ignoring the business/ commercial reality that since the Appellant is remunerated on an arm’s length cost plus basis, i.e. it is compensated for all its operating costs plus a pre- agreed mark-up based on a benchmarking analysis, the Appellant undertakes minimal business risks as against comparable companies that are full-fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the Appellant on account of this fact; and entrepreneurs, any by allowing a risk adjustment to the Appellant on account of this fact; and
3.8 not allowing the Appeallant the benefit of the +/- 5% range available to the appeallant as per the proviso to section 92C(2) of the Act; and
3.9 disregarding judicial pronouncements in India in undertaking the TP adjustment.
4. The Ld. AO/Hon’ble DRP has erred both on facts and in law in charging interest under section 234B and 234D of the Act.”
5. At the outset, the Ld.Counsel for the assessee has submitted that the order of the AO in this case is void abinitio as the same has been passed in violation of the provisions of section 144C (13) of the Act. The Ld. Counsel for the assessee has submitted that in this case since the issue of transfer pricing was involved, a draft order was prepared by the AO on 10.3.2016, thereafter the matter was referred to the Dispute Resolution Panel (DRP). The Ld.DRP issued necessary directions for framing order vide order dated 23.9.2016 as per the provisions of section 144C(13) of the Act. The assessment order as per the directions of the DRP was to be framed within one month from the end of the month in which such directions were received as provided u/s 144C(13) of the Act. The relevant provision of section 144C of the Act for the sake of reference are reproduced as under:
“144C . The assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee.”
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“(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.”
6. The Ld. Counsel for the assessee has further invited our attention to the last paragraph of the impugned assessment order which for the sake is reproduced as under:
“The Hon’ble DRP was of the view that the average of opening and closing balance of the inventories and of trade receivable/payable, trade debtors/creditors, for the relevant year might be adopted which might broadly give the representative level of working capital over the year.
Thus, the Hon’ble DRP directed that working capital adjustment is allowed, but the TPO was directed to compute the same as per the directions given in the order of the DRP, as attached as Annexure-A.”
7. A perusal of the above part of the order of the AO reveals that the AO had failed to frame the assessment order as per the directions of the DRP. The AO fully conscious of the fact that the DRP had issued directions, however, noted that the concerned Transfer Pricing Officer i.e. DCIT since had failed to comply with the directiuons within stipulated period, he, therefore, framed the impugned assessment order without complying with the directions of the DRP. Hence, the order passed by the Assessing Officer had no sanctity of law and was nothing but a waste paper. The AO observed that when any order from TPO would be received after passing of the impugned assessment order, the impugned assessment order would be rectified. This type of action is neither recognized, nor justifiable in the eyes of law. Only because the concerned TPO had failed to follow the directions of the DRP and failed to frame assessment order as per statutory provisions, that does not entitle the AO to frame the assessment order, for the sake of formality and leave the issue open so as to get it rectified as and when the order from the TPO as per directions of DRP will be received and thereby opening the limitation period to frame the assessment order for indefinite period, which, in our view, is not mandate of the Statute.
The assessment order passed by the Assessing Officer u/s 143(3) r.w.s. 144C is, therefore, quashed.
ITA No. 123/Chd/2017 :
8. Since we have already held that the order passed by the Assessing Officer u/s 144C read with section 143(3) was not void ab initio, hence, the consequent rectification order passed u/s 154 of the Act is also null and void.
In the result, both the appeals are allowed.
Order pronounced in the Open Court on 27.11.2019.
