Kronos Solutions India Private Limited vs Dy. CIT

“1.

That on the facts and circumstances of the case and in law, the order passed by the Ld. AO under Section 143(3) read with section 144C(13) of the Act is bad in law and liable to be quashed to the extent it confirms the additions/ disallowances made in the assessment order.

2.

That the Ld. AO/Ld. TPO/Ld. DRP erred in enhancing the income of the Appellant by INR 2,72,37,829/- pertaining to back-office support service segment that do not satisfy the arm's length price ("ALP") envisaged under the Act and in doing so, have grossly erred in:

2.1

erroneously rejecting the economic analysis undertaken by the Appellant in the Transfer Pricing ("TP") documentation maintained by it in terms of section 92D of the Act read with Rule 100 of the Income-tax Rules, 1962 ("Rules");

2.2

erroneously including certain functionally dissimilar companies that are full-fledged risk-taking entrepreneurs, high profit-making companies and companies with high turnover,

2.3

erroneously excluding certain comparable companies selected by the Appellant in TP documentation on arbitrary/ frivolous grounds,

2.4

erroneously including certain companies selected by the Appellant in the TP study which are either failing the filters applied by the Ld. TPO or are functionally dissimilar to the Appellant's back-office support segment; and

2.5

disregarding judicial pronouncements in India while undertaking TP adjustment.

3.

That the Ld. AO has erred in charging interest under section 234B and 234C of the Act.

4.

That the Ld. AO also erred in proposing to initiate penalty proceedings under section 270A of the Act mechanically on the additions made.

The other grounds are without prejudice to each other.

The Appellant craves leave to alter, amend or withdraw all or any objections herein or add any further grounds as may be considered necessary either before or during the hearing.”

“144C. Reference to dispute resolution panel.

(1)

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.

(2)

On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt by him of the draft order-

(a)

file his acceptance of the variations to the Assessing Officer; or

(b)

file his objections, if any, to such variation with,-

(i)

the Dispute Resolution Panel; and

(ii)

the Assessing Officer.

(3)

The Assessing Officer shall complete the assessment on the basis of the draft order, if-

(a)

the assessee intimates to the Assessing Officer the acceptance of the variation; or

(b)

no objections are received within the period specified in sub-section (2).

(4)

The Assessing officer shall, notwithstanding anything contained in section 153, pass the assessment order under sub-section (3) within one month from the end of the month in which,-

(a)

the acceptance is received; or

(b)

the period of filing of objections under sub-section (2) expires.

(5)

The Dispute Resolution Panel shall, in a case where any objection is received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment.

(6)

The Dispute Resolution Panel shall issue the directions referred to in sub-section (5), after considering the following, namely:-

(a)

draft order;

(b)

objections filed by the assessee;

(c)

evidence furnished by the assessee;

(d)

report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority;

(e)

records relating to the draft order;

(f)

evidence collected by, or caused to be collected by, it; and

(g)

result of any enquiry made by, or caused to be made by, it.

(7)

The Dispute Resolution Panel may, before issuing any directions referred to in sub-section (5),-

(a)

make such further enquiry, as it thinks fit; or

(b)

cause any further enquiry to be made by any income-tax authority and report the result of the same to it.

(8)

The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order.

(9)

If the members of the Dispute Resolution Panel differ in opinion on any point, the point shall be decided according to the opinion of the majority of the members.

(10)

Every direction issued by the Dispute Resolution Panel shall be binding on the Assessing Officer.

(11)

No direction under sub-section (5) shall be issued unless an opportunity of being heard is given to the assessee and the Assessing Officer on such directions which are prejudicial to the interest of the assessee or the interest of the revenue, respectively.

(12)

No direction under sub-section (5) shall be issued after nine months from the end of the month in which the draft order is forwarded to the eligible assessee.

(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, 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.

(14)

The Board may make rules for the purposes of the efficient functioning of the Dispute Resolution Panel and expeditious disposal of the objections filed under sub-section (2) by the eligible assessee.

(15)

For the purposes of this section,-

(a)

"Dispute Resolution Panel" means a collegium comprising of three Commissioners of income-tax constituted by the Board for this purpose;

(b)

"eligible assessee" means,-

(i)

any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of section 92-CA; and

(ii)

any foreign company.’

“3.

We note that an identical question has been answered by us in W.P.(C) 15381 of 2022 titled as "Louis Dreyfus Company India Private Limited vs. Deputy Commissioner of Income Tax Circle 13(1), Delhi & Ors." in favour of the assessee / petitioner. While dealing with this question, we had observed as follows:-

"14.

The determination which the AO makes in the first instance is recognized to be a draft of the proposed order of assessment by virtue of section 144C(1) of the Act. If the assessee be aggrieved by the proposed order of assessment, it is entitled to file objections before the DRP in accordance with Section 144C(2) of the Act. The power of the AO to complete the assessment on the basis of the draft order stands interdicted in case objections have come to be preferred within the 30 day period as contemplated in Section 144C(2) of the Act. It is the DRP which thereafter proceeds to decide the objections and frame directions to enable the AO to complete the assessment in accordance with Section 144C(5) of the Act.

15.

In terms of sub-section (13) of Section 144C of the Act, the AO is mandated to complete the assessment "in conformity with the directions" as framed by the DRP. That very provision commands the AO to complete the assessment within one month from the end of the month in which such a direction is received.

16.

This is evident from Section 144C of the Act which is extracted herein below:-……..

17.

As is manifest from a reading of sub-section (13) of Section 144C of the Act, the AO is not accorded any discretion in the framing of an order of assessment once directions have come to be framed by the DRP. In fact, the provision requires the AO to frame an order of assessment in conformity with those directions and without providing any further opportunity of hearing to the assessee. This principle of law has been affirmed by the Bombay High Court in the aforenoted paragraphs of Vodafone Idea and in Shell India Markets Private Limited v. Additional Commissioner of Income Tax Officer, National Faceless Assessment Centre & Ors. The relevant paragraph of the decision in Shell India are extracted hereinbelow:

"10.

Sub-section (13) of Section 144C, therefore, is very clear inasmuch as the Assessing Officer shall, upon receipt of the directions issued under sub-section (5), in conformity with the directions, complete the assessment within one month from the end of the month in which such direction is received, Sub-section (13) also provides that the Assessing Officer can complete the assessment without providing any further opportunity of being heard to the assessee. This means that the moment the Assessing Officer receives the directions under sub-section (5), he has to straightaway complete the assessment and he does not even have to hear the assessee. The Assessing Officer shall simply comply with the directions received from the DRP within one month from the end of the month in which such direction is received."

18.

In this backdrop, we note that both the judgments of the Bombay High Court in Shell India and Vodafone Idea construe the time lines as provided in Section 144C to be mandatory in character. In our considered opinion, this interpretation is in accord with the intent behind insertion of that provision and the bare text and spirit of that section. Thus, we accord our approval to the interpretation as set out in the aforenoted decisions of the Bombay High Court.

19.

Further, the procedure of assessment as provided under Section 144C does not envisage or contemplate the interdiction or involvement of the TPO once a directive has been framed by the DRP. The role of the TPO comes to an end once an order as contemplated under Section 92 CA(4) of the Act has come to be framed and remitted to the AO. There was thus no occasion for the TPO having resumed proceedings post the passing of the direction by the DRP on 20 June 2022.

20.

Undisputedly, the directive of the DRP came to be uploaded on the ITBA portal on 24 June 2022. It is additionally stated to have been dispatched through Speed Post to the third respondent (TPO) and the fourth respondent (Additional/Joint/Deputy/Assistant Commissioner of Income Tax, National Faceless Assessment Centre, New Delhi) on 27 June 2022. It is thereafter that the TPO appears to have passed the order dated 25 July 2022. XXX XXX XXX

22.

It is thus manifest that as per the provisions of E-as, 2019, all orders, notices and decisions have to be necessarily uploaded on the ITBA portal and as part of the larger faceless assessment regime which now holds the field. The uploading of the directive of the DRP on the ITBA portal would thus constitute valid and sufficient service and the period of limitation as prescribed in Section 144C(13) of the Act would be liable to be computed bearing that crucial date in mind. Once the aforesaid position becomes clear, it is evident that the order of assessment, if at all could have been framed lastly by 31 July 2022. There has thus been an abject failure on the part of the first respondent to comply with the mandatory timelines as incorporated in the aforenoted provisions. Accordingly, the writ petition is liable to be allowed and the impugned order of assessment and the consequential penalty proceedings are thus liable to be set aside on this short score alone."

4.

We, consequently, find no merit in the instant appeal and the same shall stand dismissed.”

“20.

Section 144C of the Act is a self contained provision which carves out a separate class of assessees, i.e.. 'eligible assessee Section 144C of the Act was inserted in the Finance Act of 2009 and came into effect from 1 October 2009. In the notes on clauses to the Finance Bill. 2009 (Budget 2009-2010), the reason for insertion of Section 144C is given as under:

"The subjects of transfer pricing audit and the taxation of foreign company are at nascent stage in India. Often the Assessing Officers and Transfer Pricing Officers tend to take a conservative view. The correction of such view take very long time with the existing appellate structure.

With a view to provide speedy disposal, it is proposed to amend the Income-tax Act so as to create an alternative dispute resolution mechanism within the income-tax department and accordingly, section 144C has been proposed to be inserted so as to provide inter alia the Dispute Resolution Panel as an alternative dispute resolution mechanism."

21.

Thus, if the provisions of Section 144C as mandated by the Statute are not strictly adhered the entire object of providing for an alternate redressal mechanism in the form of DRP stand defeated. That is not the intention of the legislature when the provision was introduced in the Act. Section 144C(10) of the Act provide that the directions of DRP are binding on the AO. By failing to pass any order in terms of the provision, the AO cannot be permitted to defeat the entire exercise and render the same futile. When a Statute prescribes the power to do a certain thing in a certain way, then the thing must be done in that way and other methods of performance are forbidden. Once the statute has prescribed a limitation period for passing the final order, it is expected that the internal procedure of the department should mould itself to give meaning to and act in aid of the provision. Any procedural defect (there is none in this case) in the internal mechanism of the working of E-assessment Scheme, cannot operate against the interest of assessee. Hence, the FAO cannot be believed that the DRP direction was received by him only on 23rd August 2023 despite being uploaded on the ITBA portal on 25th March 2021. The failure on the part of department to follow the procedure under Section 144C of the Act is not merely a procedural irregularity, but is an illegality and vitiates the entire proceeding.

22.

In a decision in the matter of Turner International India Private Limited v. Deputy Commissioner of Income Tax, Circle-25(2), New Delhi, the Delhi High Court has held that the question "whether the final assessment order stands vitiated for failure to adhere to the mandatory requirements of Section 144C of the Act?", is no longer res integra and any order passed contrary to Section 144C of the Act cannot be sustained.

23.

In a decision cited by Mr. Mistri in the matter of Shell India Markets (P) Ltd. (supra), this Court has also held as follows:

"10.

Sub-section (13) of Section 144C, therefore, is very clear inasmuch as the Assessing Officer shall, upon receipt of the directions issued under Sub-section (5), in conformity with the directions, complete the assessment within one month from the end of the month in which such direction is received. Sub-section (13) also provides that the Assessing Officer can complete the assessment without providing any further opportunity of being heard to the assessee. This means that the moment the Assessing Officer receives the directions under Sub-section (5), he has to straightaway complete the assessment and he does not even have to hear the assessee. The Assessing Officer shall simply comply with the directions received from the DRP within one month from the end of the month in which such directions is received."

24.

In view of the aforesaid discussion, we have no hesitation in holding that the assessment order dated 31" August 2023 passed by FAO two years after the DRP directions, is time barred and cannot be sustained. Consequently, the ROI as filed has to be accepted. Petitioner is entitled to receive the refund together with interest, in accordance with law. The procedure to be completed within 30 days of this order being unloaded. This would, however, not preclude revenue, should the need arise, from reopening the assessment by following due process and in accordance with law.

"A. that this Hon'ble Court be pleased to issue a Writ of Mandamus or any other writ in the nature of Mandamus, order or direction under Article 226 of the Constitution of India calling for the records of the case so as to examine the failure of Respondent Nos. 1 and 2 to give refund of tax paid by the Petitioner for the assessment year 2016-2017 which is in excess of legitimate tax due on the returned income of the Petitioner and directing Respondent Nos. 1 and 2 to forthwith grant the refund for the assessment year 2016-2017 along with the applicable rate of interest."

“6.

The interpretation of sub-section 13 of Section 144C takes center stage in the adjudication of this dispute. The said sub-section is set out below:

"(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."

From the above provision, it is evident that the specified time limit is one month from the end of the month in which directions are received. It is also clear that the time limit should be computed from the date of receipt of directions issued under sub-section (5) thereof. Sub-section (5) of Section 144C deals with the issuance of directions by the DRP. The admitted position is that the DRP issued directions on 16.06.2022 and this fact is borne out by examining the proceedings of the DRP, which is contained at page Nos. 122 to 130 of the typed set of papers. The said proceedings also record that the copy of the directions of the DRP is being forwarded to the assessee, the assessing officer and the TPO. The assessing officer referred to therein is the National Faceless Assessment Centre, Delhi. The petitioner has placed on record a communication from the Secretary and ACIT to the DRP. The said communication states that the assessing officer in the captioned case is the National Faceless Assessment Centre, Delhi and that a scanned copy of the proceedings was uploaded to the National Faceless Assessment Centre on 17.06.2022.

7.

From the above discussion, the conclusion that emerges is that the directions of the DRP were forwarded to the assessing officer, i.e. National Faceless Assessment Centre, Delhi by uploading the same on 17.06.2022. Although learned senior standing counsel contends that the jurisdictional assessing officer received the directions only on 17.03.2023, for purposes of sub-section (13) of Section 144C, the date of receipt should be reckoned as B COREY date of receipt by the National Faceless Assessment Centre on 17.06.2022. The internal arrangement by which the assessment proceedings relating to the petitioner were purportedly transferred so as to ensure that the proceedings are not barred by limitation is not material for this purpose. Indeed, as contended by learned counsel for the petitioner, the communication dated 12.04.2022 from the PCCIT of the National Faceless Assessment Centre seeking approval for transfer so as to complete assessment within the period of limitation underscores the fact that the income tax authorities were mindful of the fact that assessment would be barred by limitation unless such assessment is proceeded with and completed expeditiously.

8.

All that remains is to examine whether the assessment proceedings would be barred by limitation if computed from the end of June 2022. If so computed, the period of one month expired on 31.07.2022, whereas the assessment order came to be issued on 25.03.2023. Hence, the assessment order was issued beyond the time limit specified in sub-section (13) of Section 144C. By taking into account not only statutory prescription but also the interpretation thereof by the Division Bench of this Court in Roca and that of the Division Bench of the Delhi High Court in Louis Dreyfus, 1 conclude that the assessment order cannot be sustained.

9.

In view of the conclusion that the assessment proceedings are barred by limitation, it is unnecessary to examine as to whether the assessing officer was duly authorized to exercise jurisdiction either under the WhatsApp message issued on 13.04.2022 or upon the physical file being signed on 21.04.2022.”

10.

“We have heard rival submissions in the light of facts of the case, evidence placed on record and judicial citations relied upon. Ground of appeal no.1 is general in nature and hence bereft of any meritorious adjudication. Coming to grounds of appeal Nos. 2 to 6 whereby the assessee has challenged procedural irregularities in giving effect proceedings and thus arguing that the AO dated 18.05.2023 is barred by limitations, we find considerable force in the arguments put forth by the assessee. Facts on records indicate that the DRP Bangalore had given its directions on 01.12.2022. Within the meanings of section 144C(13) it was incumbent on the AO to have passed his order on or before 31.01.2023. The DR could not controvert the said timeline by placing any evidence suggesting different service dates upon the AO. The Law prescribed u/s.144C(13) unequivocally postulates that pursuant to the receipt of directions in a calendar month, the AO is mandated to pass his final order before the end of following calendar month. Statutory stipulations prescribed in 144C(13) do not make any difference as to whether a set aside assessments would be given different timelines. The argument of CIT(DR) have accordingly been found to be not in consonance with statutory regulations governing the matter.

11.

The case law relied upon by the assessee of 18/05/2023 Adobe system supra supports its case. Accordingly, the order u/s 143(3) r.w.s 144C r.w.s 92CA r.w.s 254 of the Income Tax Act dated 18.05.2023 is held to be barred by limitation and hence quashed. The grounds of appeal numbers 2-6 thus stands allowed.

12.

Since the appeal was heard primarily on the grounds concerning the assessment order dated 18/05/2023 being barred by time limitation within meanings of section 144C(13) of the Act and the same stands allowed and decided in favour of assessee, the ground of appeal number 7 regarding non conformity to time lines u/s 153 (3) has become infructuous in nature. Similarly, the grounds of appeal numbers 8-13 on merits were never argued by the assessee. These grounds raised by the assessee are not adjudicated being consequently found academic in nature.

13.

As regards the ground of appeal number 14 regarding failure of the AO to give assessee credit for taxes paid on regular assessment of Rs.35,48,580/-, the matter is restored to the file of AO with directions to give the assessee credit of all taxes paid on regular assessment, as per law.”