ITAT Delhi Remands Assessment for Non-Compliance with DRP Directions

Hitachi Astemo Haryana Private Ltd. Vs DCIT (ITAT Delhi)

Summary: This appeal by the assessee was directed against the order of the Assessing Officer dated 30.03.2022 pursuant to the directions issued by the Dispute Resolution Panel (DRP) for Assessment Year 2018-19. The assessee challenged the final assessment order, principally contending that it was bad in law and void because it did not conform to the binding directions of the DRP.

The Transfer Pricing Officer (TPO) had passed an order under Section 92CA(3) of the Income-tax Act, 1961 on 27.07.2021, suggesting an upward adjustment in the Arm’s Length Price (ALP) of international transactions. The Assessing Officer thereafter passed a draft assessment order under Section 144C on 18.09.2021 incorporating the TPO’s recommendations. The assessee filed objections before the DRP, which passed its order under Section 144C(5) on 23.02.2022 and issued certain directions concerning the transfer pricing adjustments.

Under Section 144C(13), the final assessment order was required to be passed within one month from the end of the month in which the DRP’s directions were received, i.e. by 31.03.2022. The AO passed the final assessment order on 30.03.2022. However, the DRP directions had not been incorporated because the TPO’s order giving effect to those directions had not been received by the AO when the assessment order was passed. The AO stated that the necessary modification would subsequently be made by rectification after receipt of the TPO’s order.

The assessee pressed the legal ground challenging the assessment order. It relied on several Tribunal decisions and the Karnataka High Court decision in Pr.CIT vs. M/s. Flextronics Technologies (India) Pvt. Ltd. The Revenue, on the other hand, relied upon decisions of the Delhi High Court and Madras High Court, submitting that similar procedural defaults had resulted in the final assessment order and demand notice being set aside and the proceedings being restored to the DRP/AO level rather than the entire proceedings being quashed.

The Tribunal held that the decisions of the jurisdictional Delhi High Court were binding upon it and examined the issue with reference to those decisions. It noted that in the cited Delhi High Court cases, assessment orders passed without incorporating the DRP’s directions had been set aside and the matters remitted to the DRP so that the scheme of Section 144C could be followed.

Following the binding jurisdictional High Court decisions, the Tribunal remitted the issue to the file of the AO with a direction to pass an order incorporating the DRP’s directions which had been given effect by the TPO. Since the matter was remanded for giving effect to the DRP/TPO directions, the Tribunal held that adjudication of the other grounds was not required at that stage. The appeal was accordingly allowed for statistical purposes.

Background and Assessment Proceedings

The assessee, Hitachi Astemo Haryana Private Limited, formerly Showa India Private Limited, filed the appeal against the final assessment order passed pursuant to the DRP’s directions for Assessment Year 2018-19.

The TPO passed an order under Section 92CA(3) of the Income-tax Act, 1961 on 27.07.2021 and suggested an upward adjustment in the ALP of international transactions. The AO incorporated the TPO’s recommendations in the draft assessment order passed under Section 144C on 18.09.2021.

The assessee thereafter filed objections before the DRP. The DRP passed an order under Section 144C(5) on 23.02.2022 and issued directions relating to the transfer pricing adjustments.

Final Assessment Order

As stated in the order, Section 144C(13) required the final assessment order to be passed within one month from the end of the month in which the DRP’s directions were received. The AO therefore passed the final assessment order on 30.03.2022.

However, the DRP’s directions were not incorporated into that assessment order. The order giving effect to the DRP’s directions was to be passed by the TPO. Although the TPO’s order giving effect to the DRP directions was also dated 30.03.2022, it had not been received by the AO when the final assessment order was passed.

The AO consequently passed the final assessment order subject to the modified TPO order and stated that the necessary modification relating to the transfer pricing adjustment would be made through a rectification order after receipt of the TPO order.

Assessee’s Legal Grounds

At the outset, the assessee’s counsel pressed the legal grounds. The principal legal contention was that the final assessment order was bad in law and void because it did not conform to the binding directions of the DRP.

The assessee also raised grounds concerning incorporation of DRP directions through a rectification order, the timing of the reference to the TPO, compliance with DRP directions, the DRP’s direction concerning a speaking order, selection of comparable agreements, computation of tax demand, determination of ALP using the Comparable Uncontrolled Price (CUP) method, selection of comparable agreements and penalty proceedings under Section 270A.

Authorities Relied Upon by the Assessee

In support of its legal contention, the assessee relied upon the following Tribunal decisions and the decision of the Karnataka High Court as recorded in the order:

• Flextronics Technologies (India) Private Ltd. vs. ACIT: IT (TP) A No.832/Bang/2017;
• Software Paradigms Infotech (P.) Ltd. vs. ACIT (2018) 89 taxmann.com 339 (Bangalore – Trib.);
• M/s. Global One India Pvt. Ltd. vs. DCIT: IT A No.1980/Del/2014;
• M/s. Olympus Medical Systems Pvt. Ltd. vs. ACIT: ITA No.873/Del/2021;
• Yokogawa India Ltd. vs. ACIT: ITA (TP) A No.1715 & 692/Bang/2016 & MP.No.136/Bang/2021;
• July Systems & Technologies Pvt. Ltd. vs. DCIT: IT (TP) A.No.368/Bang/2016; and
• Pr.CIT vs. M/s. Flextronics Technologies (India) Pvt. Ltd. in ITA No.332 of 2019, order dated 9th January 2023.

Revenue’s Submissions

The learned Departmental Representative relied upon decisions of the jurisdictional Delhi High Court and the Madras High Court. It was submitted that the facts of the present case and those cases were similar because the AO had passed the assessment orders without incorporating the DRP’s directions.

The Revenue submitted that in those cases the High Courts had not quashed the entire proceedings. Instead, the final assessment order and demand notice were set aside and the proceedings were restored to the level of the DRP/AO. According to the Revenue’s submission, the assessment orders passed without incorporating DRP directions involved a technical or procedural default which could be cured by restoring the proceedings and permitting a fresh assessment order after incorporating the DRP’s directions.

Authorities Relied Upon by the Revenue

The Revenue relied upon the following cases as recorded in the Tribunal’s order:

• Anand NVH Products Pvt. Ltd. vs. National E Assessment Centre ANR dated 06.08.2021 – WP (C) 7936/Del/2021;
• Fiber Home India vs. National E Assessment Centre ANR 15.12.2021 – WP (C) 11609/2021;
• SRF Ltd. vs. National E Assessment Centre and ANR WP (C) 6484/2021; and
• Ford India Pvt. Ltd. vs. National E Assessment Centre – WP (C) 12701/2021.

Tribunal’s Findings

The Tribunal heard both parties and considered the records and the cited authorities. It observed that the assessee had relied upon Tribunal decisions and one Karnataka High Court decision, while the Revenue had relied upon decisions of the jurisdictional Delhi High Court and one decision of the Madras High Court.

The Tribunal held that the jurisdictional High Court was binding upon it. It therefore adjudicated the issue with reference to the Delhi High Court decisions relied upon by the Revenue, noting that the facts were similar.

Effect of Non-Incorporation of DRP Directions

The Tribunal noted that in Anand NVH Products Pvt. Ltd., the assessment order had been passed under Sections 143(3) and 144C without waiting for the DRP’s decision. The Delhi High Court had set aside the final assessment order along with the demand notice and restored the matter to the level of the DRP.

In SRF Ltd., the final assessment order had been passed without incorporating the DRP’s directions. The Delhi High Court had quashed the final assessment order and demand notice and remitted the matter to the DRP for consideration under Section 144C. It had thereafter directed that the assessment order be passed in accordance with the procedure stipulated under Sections 144B(1) and 144C.

In Fibrehome India Pvt. Ltd., the final assessment order had also been passed without incorporating the DRP’s directions. The Delhi High Court had remitted the matter to the DRP keeping in view the scheme of Section 144C and had referred, among others, to its decisions in Anand NVH Products Pvt. Ltd. and SRF Ltd.

Remand to Assessing Officer

On consideration of the jurisdictional High Court decisions, the Tribunal recorded that where the final assessment order had been passed without incorporating the DRP’s directions, the matter had been remanded to the DRP by the High Court to give effect to the scheme of Section 144C.

The Tribunal held that the cited jurisdictional High Court decisions were binding upon it. Following those decisions, it remitted the issue to the file of the AO.

The AO was directed to pass an order incorporating the DRP’s directions which had been given effect by the TPO.

Other Grounds Not Adjudicated

Since the matter had been remanded to the AO for giving effect to the directions of the DRP/TPO, the Tribunal held that adjudication of the other grounds at that stage was not required.

Final Decision

The appeal filed by the assessee was allowed for statistical purposes.

The issue was remitted to the AO with a direction to pass an order incorporating the DRP’s directions as given effect by the TPO.

Cases Discussed

• Pr.CIT vs. M/s. Flextronics Technologies (India) Pvt. Ltd. — ITA No.332 of 2019, order dated 9th January 2023 — Karnataka High Court
• Anand NVH Products Pvt. Ltd. vs. National E Assessment Centre ANR — WP (C) 7936/Del/2021, dated 06.08.2021 — Delhi High Court
• Fiber Home India vs. National E Assessment Centre ANR — WP (C) 11609/2021, 15.12.2021 — Delhi High Court.
• SRF Ltd. vs. National E Assessment Centre and ANR — WP (C) 6484/2021 — Delhi High Court
• Ford India Pvt. Ltd. vs. National E Assessment Centre — WP (C) 12701/2021 — Madras High Court
• Flextronics Technologies (India) Private Ltd. vs. ACIT — IT (TP) A No.832/Bang/2017
• Software Paradigms Infotech (P.) Ltd. vs. ACIT — (2018) 89 taxmann.com 339 (Bangalore – Trib.)
• M/s. Global One India Pvt. Ltd. vs. DCIT — IT A No.1980/Del/2014
• M/s. Olympus Medical Systems Pvt. Ltd. vs. ACIT — ITA No.873/Del/2021
• Yokogawa India Ltd. vs. ACIT — ITA (TP) A No.1715 & 692/Bang/2016 & MP.No.136/Bang/2021.
• July Systems & Technologies Pvt. Ltd. vs. DCIT — IT (TP) A.No.368/Bang/2016

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal by the assessee is directed against the order of the Assessing Officer dated 30.03.2022 pursuant to the directions issued by the DRP for the assessment year 2018-19.

2. Grounds of appeal taken by the assessee read as under:-

“Hitachi Astemo Haryana Private Limited (formerly Showa India Private Limited) (hereinafter referred to as ‘Hitachi Astemo or ‘Appellant’) craves leave to prefer an appeal against the order passed by the National Faceless Assessment Centre, Delhi [hereinafter referred to as “NFAC” or “AO”] pursuant to directions issued by the Hon’ble Dispute Resolution Panel [hereinafter referred to as ‘DRP’] under Section 143(3) read with Section 144C(13) and Section 1448 of the Income-tax Act, 1961 (hereinafter referred to as the ‘Act’) on the following grounds 1 On the facts and circumstances of the case, the final assessment order is bad in law and void as it does not conform to binding directions of Id. DRP.

2. On facts and circumstances of the case and in law, DRP directions cannot be incorporated in the assessment order by passing a rectification order. Further, in the present case this is sought to be rectified after the due date prescribed in law for passing the final order

3. On the facts and circumstances of the case and in law, reference to Ld TPO by the Ld AO was not made within the prescribed timeline and consequently, the assessment order is invalid.

4. Without prejudice to the above, on facts and circumstances of the case and in law, the Ld. AO has erred by not following the directions of the DRP and by not providing a finding on the issue of reference made to Id TPO as time barred.

5. On facts and circumstances of the case, the DRP direction is bad in law for setting aside the matter to the TPO to pass a speaking order in violation of Section 144C(8) of the Act.

6. Without prejudice to the above, on facts and circumstances of the case and in law, the Ld. TPO has erred by not following the directions of the DRP and by not passing a speaking order on selection of comparable agreements.

7. Without prejudice to any of the other contentions, the AO has erred in incorrectly computing tax demand of INR 4,13,89,010 in the final assessment order.

8. Without prejudice to any of the other contentions, the Ld. AO/NFAC//TPO/DRP has erred in law and on facts and circumstances of the case by rejecting the economic analysis conducted by the Appellant in accordance with the provisions of the Act read with the Income Tax Rules, 1962, for determination of the Arm’s length price using Comparable Uncontrolled Price (‘CUP’) method as the most appropriate method.

9. Without prejudice to any of the grounds, the Ld. AO/NFAC//TPO/DRP has erred in law and on facts by selecting comparable agreements based on inconsistent, inappropriate and unreasonable criteria.

GROUNDS PERTAINING TO PENALTY PROCEEDINGS

10. That on acts and In laws, the Ld AO!. FAC / TPO / DRP erred in holding that the Appellant has furnished Inaccurate particulars of income in respect of each item of disallowance/ additions and in initiating penalty proceedings under section 270A of the Act.”

3. At the outset, ld. Counsel of the assessee pressed legal grounds taken. The legal ground is that the final assessment order is bad in law and void as it does not conform to binding directions of ld. DRP.

4. Briefly stated, in this case, the TPO passed an order under section 92CA(3) of Income-tax Act, 1961 (for short ‘the Act’) vide order dated 27.07.2021. In this order, the TPO suggested upward adjustment in the Arm’s Length Price (ALP) of international transactions. The AO passed draft assessment order under section 144C of the Act on 18.09.2021 incorporating TPO’s recommendations. The assessee filed its objections before the ld. DRP and the DRP passed an order under section 144C(5) of the Act on 23.02.2022. In the DRP order, certain directions were issued with regard to the TP adjustments made. In accordance with the provisions of section 144C(13) of the Act, the final order of the assessment has to be passed by the AO within one month from the end of the month in which DRP’s directions are received i.e. by 31.03.2022. The AO passed the order on 30.03.2022. In this order of the assessment, the DRP’s directions could not be complied with as the order giving effect of the TPO was not received by the AO at the time of the passing of the order. AO in his final assessment order commented that DRP’s directions to the TPO/AO has to be given effect by the TPO and the same was communicated to the TPO requesting to pass order giving effect of DRP’s order dated 23.02.2022. Though the order giving effect of DRP’s direction passed by the TPO is also dated 30.03.2022, the same was not received by the AO. AO could not incorporate the same in the assessment order. However, he passed the order subject to the modified order of the TPO which is yet to be passed and the necessary modification with regard TP adjustment which would be made by passing rectification order on receipt of the TPO order in due course. Thus, in the above facts, it is emanating that the final assessment order is without incorporating of DRP’s directions. As stated above, the reason is that DRP has given certain directions which were to be given effect by the TPO. The AO till passing the final assessment order has not received the order giving effect by the TPO. In this regard, stating that such an order passed by the AO is not legal in the eyes of law, ld. Counsel of the assessee has placed reliance on the following Tribunal orders and also on the Hon’ble Karnataka High Court in the case of Pr.CIT vs. M/s. Flextronics Technologies (India) Pvt. Ltd. in ITA No.332 of 2019 order dated 9th January 2023:-

(i) Flextronics Technologies (India) Private Ltd. vs. ACIT: IT (TP) A No.832/Bang/2017;

(ii) Software Paradigms Infotech (P.) Ltd. vs. ACIT (2018) 89 taxmann.com 339 (Bangalore – Trib.);

(iii) M/s. Global One India Pvt. Ltd. vs. DCIT: IT A No.1980/Del/2014;

(iv) M/s. Olympus Medical Systems Pvt. Ltd. vs. ACIT: ITA No.873/Del/2021;

(v) Yokogawa India Ltd. vs. ACIT: ITA (TP) A No.1715 & 692/Bang/2016 & MP.No.136/Bang/2021; and

(vi) July Systems & Technologies Pvt. Ltd. vs. DCIT: IT (TP) A.No.368/Bang/2016.

5. Per contra, ld. DR for the Revenue relied upon the orders of the Hon’ble jurisdictional High Court of Delhi and decision of Hon’ble Madras High Court as under:-

(i) Anand NVH Products Pvt. Ltd. vs. National E Assessment Centre ANR dated 06.08.2021 – WP (C) 7936/Del/2021;

(ii) Fiber Home India vs. National E Assessment Centre ANR 15.12.2021 – WP (C) 11609/2021;

(iii) SRF Ltd. vs. National E Assessment Centre and ANR WP (C) 6484/2021; and

(iv) Ford India Pvt. Ltd. vs. National E Assessment Centre – WP (C) 12701/2021.

5.1 Referring to these case laws, ld. DR for the Revenue has submitted that the facts of the present case and the case laws cited are similar. AO in these cases passed the order without incorporating the DRP’s direction. In all the above cases, the Hon’ble High Courts did not quash the entire proceedings and only the final assessment order along with the demand notice were set aside and proceedings restored to the level of DRP/AO. He reiterated that even though the assessment orders have been passed without incorporating the DRP’s directions and in complete violation of mandatory procedure u/s 144C of the Act, but still the Hon’ble jurisdictional High Court did not treat it as fatal error which cannot be corrected. Ld. DR for the Revenue further pleaded that from the orders of Hon’ble High Court, it can be inferred that the Hon’ble High Court treated it as technical/ procedural default and to cure the same, restored the proceedings at the level of DRP and given Department, the opportunity to pass a fresh assessment order after incorporating the DRP’s directions.

6. We have heard both the parties and perused the records. We have given very thoughtful consideration to the above submissions and case laws. We find that the ld. Counsel of the assessee relied upon the Tribunal decisions and one decision from Hon’ble Karnataka High Court (supra). On the other hand, ld. DR for the Revenue has relied upon three case laws from Hon’ble jurisdictional High Court and one decision from Hon’ble Madras High Court. We find that Hon’ble jurisdictional High Court is binding on the Tribunal, hence we adjudicate this issue with reference to the orders of the Hon’ble jurisdictional High Court referred above, as the facts are similar.

7. In the case of Anand NVH Products Pvt. Ltd. (supra), we noted that assessment order has been passed under section 143(3) read with section 144C of the Act without waiting for the decision of the DRP. Hon’ble High Court in that case set aside the final assessment order along with notice of demand and restored the matter to the level of DRP. 7.1 In the case of SRF Ltd. (supra), the final assessment order was passed without incorporating the DRP’s directions. Hon’ble High Court, in such a situation, quashed the final assessment order and the demand of notice and remitted the matter to DRP for consideration under section 144C of the Act. Thereafter, it was directed that the assessment order shall be passed in accordance with the procedure stipulated under section 144B(1) as well as section 144(C) of the Act. 7.2 In the case of Fibrehome India Pvt. Ltd. (supra) also, the final assessment order was passed without incorporating the directions of the DRP. In that case also, Hon’ble jurisdictional High Court remitted the matter to DRP keeping in view of the scheme of section 144C of the Act. In this decision, Hon’ble jurisdictional High Court inter alia referred to the decisions of Hon’ble jurisdictional High Court in the cases of Anand NVH Products Pvt. Ltd. and SRF Ltd. (supra).

8. Thus, from the above reading of Hon’ble jurisdictional High Court decisions, it is emanating that in the final assessment order passed without incorporating the DRP’s directions, the matter has been remanded to the DRP by the Hon’ble High Court to give effect to the scheme of section 144C of the Act. The above case laws are binding upon us. Hence, following the same, we remit the issue to the file of AO. AO shall pass an order incorporating DRP’s directions which has been given effect by the TPO.

9. Since we have remanded the matter to the AO to give effect to the directions of the DRP/TPO, adjudication of other grounds at this juncture is not required.

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

Order pronounced in the open court on this 23rd day of November, 2023.