2020 (3) TMI 1420 - AT - Income Tax

Tribunal quashes assessment based on invalid report, deeming it bad in law. Reassessment proceedings void.

Nomura Research Institute Financial Technologies India Private Limited. Versus DCIT, Circle-2 (2), Kolkata.

The Tribunal upheld the view that the reassessment based on the Transfer Pricing Officer's invalid report was deemed bad in law. Consequently, the final ... Reopening of assessment u/s 147 - adjustment to ALP - AO could not have made any transfer pricing adjustments in the absence of a reference u/s 92CA after assumption of jurisdiction u/s 147 - AO had information, in the form of a report by the TPO, determining that the Arm’s Length Price of the international transactions, of the assessee had with its associate enterprise calls for adjustment - HELD THAT:- TPO order is non-est in law. DRP also held that after re-opening the assessment u/s 147 a fresh reference has not been made to the TPO. Hence the adjustment made without a valid reference to the TPO for determination of ALP of the international transaction cannot be sustained. We agree with these findings. TPO has acted without jurisdiction as there was no valid and continuing reference. The reference made on 08.09.2015 gets terminated or infructuous after passing of the final assessment order u/s 143(3) of the Act on 31.08.2016. A T.P. report is not a material found as in the case of Pooran Mal Etc [1973 (12) TMI 2 - SUPREME COURT]. It is a report which has no legal validity. An adjustment made based on this report is also bad in law. Directions of the DRP are binding of the AO u/s 144(13) - final assessment order dated 16.05.2019 should have incorporated the finding of the DRP as directed in the order of the DRP. When the DRP has held that the re-opening of the assessment is bad in law, the AO, in our view, has no other alternative but to drop the assessment proceedings on the ground that re-opening of assessment has been held as bad in law. As the AO has not followed the binding directions of the DRP, we have to quash the final assessment order dated as bad in law. We uphold the view of the DRP that the re-opening of assessment based on a TPO report which is a nullity is bad in law. Hence, we quash the final assessment order passed by the AO u/s 143(3) r.w.s. 144C as bad in law. - Appeal of assessee allowed. Issues Involved:1. Validity of the Assessing Officer's (AO) final order dated May 16, 2019.2. Competence of the Transfer Pricing Officer's (TPO) reference and order.3. Jurisdiction of the AO in initiating proceedings under section 147.4. Transfer Pricing adjustments without a valid reference under section 92CA.5. Assessment of total income by the AO.Detailed Analysis:1. Validity of the AO's Final Order:The assessee argued that the AO's final order dated May 16, 2019, is a nullity. The final assessment order passed on August 31, 2016, did not incorporate the TPO's report as the TPO issued the notice on January 6, 2017, after the final order. The reassessment proceedings initiated on February 26, 2018, were based on the TPO's report, which was not valid since it was issued after the final assessment order. The Dispute Resolution Panel (DRP) held that the final assessment order passed on August 31, 2016, was in compliance with CBDT's instruction No. 3/2016, making the reference to the TPO on September 8, 2015, null and void. Consequently, the TPO's order dated October 27, 2017, could not be used for reassessment without a fresh reference.2. Competence of the TPO's Reference and Order:The TPO's reference was made on September 8, 2015, but the final assessment order was passed on August 31, 2016, without waiting for the TPO's order. The TPO issued a notice on January 6, 2017, and passed the order on October 27, 2017, making an upward adjustment. The DRP concluded that the TPO could not initiate proceedings after the AO passed the final order, rendering the TPO's order non-est in law. Any adjustment based on this invalid TPO order is also invalid.3. Jurisdiction of the AO in Initiating Proceedings Under Section 147:The AO initiated reassessment proceedings on February 26, 2018, based on the TPO's report. The assessee argued that the TPO's report, being invalid, could not form the basis for reassessment. The DRP supported this view, stating that the TPO's order dated October 27, 2017, was invalid, and hence, the reassessment proceedings based on it were also invalid. The DRP emphasized that without a valid reference to the TPO for reassessment, the adjustment made was unsustainable.4. Transfer Pricing Adjustments Without a Valid Reference Under Section 92CA:The AO made transfer pricing adjustments based on the TPO's order, which was issued without a valid reference. The DRP held that the reference made on September 8, 2015, became infructuous after the final assessment order on August 31, 2016. Therefore, any adjustment based on the TPO's order dated October 27, 2017, was invalid. The Tribunal upheld this view, stating that the TPO acted without jurisdiction, and the adjustment made based on the TPO's invalid report was bad in law.5. Assessment of Total Income by the AO:The AO assessed the total income of the assessee at INR 9,40,36,160, incorporating the transfer pricing adjustment proposed by the TPO. The assessee argued that this assessment was invalid as it was based on an invalid TPO order. The Tribunal agreed, stating that the final assessment order should have incorporated the DRP's findings. As the AO did not follow the DRP's binding directions, the final assessment order dated May 16, 2019, was quashed as bad in law.Conclusion:The Tribunal upheld the DRP's view that the reassessment based on the TPO's invalid report was bad in law and quashed the final assessment order dated May 16, 2019. The appeal of the assessee was allowed, and the reassessment proceedings were declared void ab initio.