2022 (10) TMI 413 - AT - Income Tax

Tribunal allows appeal, cancels Transfer Pricing adjustment, remands income issues, upholds assessment order

M/s. VMware Software India Private Limited Versus The Deputy Commissioner of Income-tax, Circle 7 (1) (2) Bangalore.

The appeal was partly allowed, with the Tribunal deleting the Transfer Pricing (TP) adjustment of Rs.26,85,43,457 due to non-conformity with DRP ... Transfer pricing - Validity of the final assessment order passed u/s 144C(13) - Period of limitation - HELD THAT:- The date in CPC’s records is the date on which the computation is fed onto it. In the present case, the screenshot of order processing on AST dated 13.03.2017 is in the assessment records. The screenshot of rectification to the online order processing on AST dated 30.03.2017 is also in the assessment records. The system automatically calculates section 234A, 234B and 244A interest. The reference point of calculation of interest is 5th March, 2017. As a result, the computation will be different from the computation in the manual order. In most of the cases, the date of order as per the manual order is different from the date of order as per CPC till 2018. Only since initiation of e-assessment in the year 2018, the full order is uploaded in the new system with ITBA (ITBA replaced the earlier AST). In the instant case, the manual final assessment order is dated 24.01.2017. The final assessment order has dispatch seal also. There is nothing on record to show that the final assessment order has not been dispatched on the said date. The demand was uploaded to CPC portal on 13.03.2017, so the CPC shows the date as the date of order. The CPC will always show the date on which the demand is fed into. The entire order is not uploaded, but only the demand was uploaded in the CPC. For the aforesaid reasons, we reject grounds 1 to 3 raised by the assessee. DRP directed the TPO to recompute the margins of the assessee as well as the comparables to its SWD and ITE service segments after treating such foreign exchange gain / loss as operating in nature - A bare perusal of the adjustment proposed in the draft assessment order, and the adjustment that has ultimately been incorporated in the final assessment order are one and the same. Thus, it is wholly apparent that the final assessment order is, to the extent, not in conformity with the DRP’s directions and is, therefore, illegal. As per section 144C(10) of the I.T.Act, every directions issued by the DRP is binding on the A.O. Further, section 144C(13) of the I.T.Act mandates that the A.O. shall complete the assessment in conformity with the directions issued by the DRP. Since the TP adjustment made in the final assessment order is not in conformity with the DRP’s directions, the final assessment order is, to this extent, bad in law and thus unsustainable. Therefore, we delete the TP adjustment made in the final assessment order, which is not in conformity with the DRP’s directions. In taking the above view, we are fortified by the judicial pronouncements referred supra at para 10. Since we have deleted the TP adjustment incorporated in the final assessment order, the specific grounds with regard to TP adjustment on merits is not adjudicated. Addition of suppressed income relatable to the difference in the assessee’s revenues as per the invoices raised by it vis-àvis its financial statements - action of the AO in making an addition which was enhanced pursuant to the DRP’s directions - HELD THAT:- As per reconciliation, it is only on account where the audit adjustments were made, i.e., in order to reverse the excess revenue to the extent overstated. A similar issue was examined by the A.O. during the course of assessment proceedings, for the immediately succeeding assessment year, i.e., A.Y. 2013-2014. AO accepted the assessee’s aforesaid submissions on the issue and accordingly made no addition to its returned income in the final assessment order for assessment year 2013-2014. Therefore, we direct the AO to take into account the reconciliation of revenue as per the invoices vis-à-vis the financial statement and take a decision after affording a reasonable opportunity of hearing to the assessee. Therefore, grounds 4 and 5 are allowed for statistical purposes. Nature of expenditure - expenses incurred for purchase of monitors and desktops, software, computer accessories and spare parts - revenue v/s capital expenditure - HELD THAT:- After hearing the rival submissions, we direct the A.O. to examine whether the assessee is entitled to depreciation on the expenditure disallowed in past years as capital expenditure. It is ordered accordingly. Issues Involved:1. Validity of the impugned final assessment order.2. Transfer pricing (TP) adjustment of Rs.26,85,43,457.3. Addition of Rs.7,62,39,388 as alleged suppressed income.4. Non-grant of depreciation on certain expenses incurred in earlier years and held to be capital in nature.Issue-Wise Detailed Analysis:1. Validity of the Impugned Final Assessment Order:The appellant contended that the final assessment order dated 24.01.2017 was not passed within the time limit prescribed under section 144C(13) of the Income-tax Act, making it void ab initio. It was argued that the order was received on 03.10.2017 and that the demand from CPC was dated 13.03.2017. The Tribunal, after examining the assessment records, found that the order was dispatched on 24.01.2017 itself and the delay in demand upload to CPC did not invalidate the order. Thus, grounds 1 to 3 raised by the assessee were rejected.2. Transfer Pricing (TP) Adjustment:The appellant challenged the TP adjustment of Rs.26,85,43,457 made by the TPO. The DRP had directed the TPO to recompute margins after treating foreign exchange gain/loss as operating in nature and to exclude certain companies from the comparables. However, the final assessment order did not reflect these changes, maintaining the TP adjustment at Rs.26,85,43,457. The Tribunal found this non-conformity with the DRP's directions to be illegal and unsustainable, leading to the deletion of the TP adjustment.3. Addition of Rs.7,62,39,388 as Alleged Suppressed Income:The AO had added Rs.7,62,39,388 to the assessee's income, alleging it represented suppressed income due to differences between invoices and financial statements. The appellant explained that this discrepancy arose from audit adjustments related to service tax credit, VAT refund, and foreign exchange fluctuations. The Tribunal noted that a similar issue was resolved in favor of the assessee in the subsequent assessment year (2013-2014). Therefore, the AO was directed to consider the reconciliation provided by the assessee and decide accordingly, allowing grounds 4 and 5 for statistical purposes.4. Non-grant of Depreciation on Certain Expenses:The appellant argued that certain expenses disallowed as capital expenditure in previous years should be eligible for depreciation. The Tribunal directed the AO to examine the claim and allow depreciation if the expenses were indeed disallowed as capital expenditure in past assessments. Thus, ground 6 was allowed for statistical purposes.Conclusion:The appeal was partly allowed, with the Tribunal deleting the TP adjustment due to non-conformity with DRP directions and remanding the issues of alleged suppressed income and depreciation on capital expenditure for further examination by the AO. The validity of the final assessment order was upheld.