2023 (11) TMI 994 - AT - Income Tax

AO cannot deviate from TPO's determination without justification when computing Arm's Length Price under Section 92CA(4)

SAC Finance Company limited Versus ACIT, Circle International Taxation 3 (1) (2), New Delhi.

The ITAT Delhi ruled in favor of the assessee regarding a TP adjustment dispute. The AO made an addition for short term capital gain by adopting a ... TP Adjustment - Assessment u/s 144C - addition on account of short term capital gain calculated by the AO adopting a different sale consideration as against declared by the assessee - Allegation of violation of natural justice as AO exceeded his jurisdiction by not following the finding of the TPO as well as the direction of the learned DRP as AO interpolated his own figure of sale consideration which is not justified - whether the AO is bound by the order of TPO passed u/s 92CA(3) even in the situation when the material evidence was not brought on record by the assessee in T.P. proceedings? HELD THAT:- It is stated that the fair market value (FMV) was computed as per DCF methodology and was duly supported by a valuation report obtained from an independent Chartered Accountant. AO substituted the sale consideration on the basis of the sale of shares of Wormhole by the assessee in the next financial year i.e. F.Y. 2017-18. The assessee claimed before the ld. DRP that the total assets of Wormhole also included the assets (situated outside India) other than investment in Orbgen and, therefore, the AO grossly erred in deriving the value of shares of Orbgen on the assumption that 100% value is relatable to its investment in Orbgen. There is no dispute that the ld. TPO did not propose any adjustment. As per Section 92CA(4) of the Act, the AO is required to compute the Arm’s Length Price in conformity with the ALP so determined by the TPO. But in the present case, the AO deviated from the order of TPO. Such deviation is not permissible under law in the light of the statutory provisions and judicial pronouncements as relied by the assessee in its written submissions - See M/S. CUSHMAN AND WAKEFIELD (INDIA) PVT. LTD. [2014 (5) TMI 897 - DELHI HIGH COURT] Thus where TPO has not proposed any adjustment and valuation has been adopted by the AO without verifying the true and correct facts qua the assets, we are unable to sustain such erroneous finding both on legality and facts. The grounds raised by the assessee are allowed. Issues Involved:1. Jurisdiction of the Assessing Officer (AO) in deviating from the Transfer Pricing Officer (TPO) findings.2. AO's failure to follow Dispute Resolution Panel (DRP) directions.3. Rejection of financials of Wormhole Technology (Singapore) Private Limited.4. Substitution of sale consideration without statutory basis.5. Denial of relief for stamp duty expenses.6. Levying of interest under section 234B.7. Initiation of penalty proceedings under section 270A.Summary:1. Jurisdiction of the AO:The AO exceeded his jurisdiction by not following the TPO's findings and the DRP's directions. The AO substituted his own figure of sale consideration, which is not justified. As per Section 92CA(4) of the Income-tax Act, 1961, the AO is required to compute the total income in conformity with the arm's-length price determined by the TPO. The AO's deviation from the TPO's order is not permissible under law, as supported by judicial pronouncements like Cushman & Wakefield (P.) Ltd. v. ACIT.2. AO's Failure to Follow DRP Directions:The AO did not abide by the DRP's binding directions to verify the claim that the entire value of Wormhole is not derived from its investments in Orbgen Technologies Private Limited. The DRP had directed the AO to exclude the value relating to other investments in the determination of full value of consideration and to compute capital gains in accordance with Section 48 of the Act.3. Rejection of Financials of Wormhole:The AO erred in rejecting the financials of Wormhole for the period ending March 31, 2018, alleging that they pertain to the next financial year and are not relevant for the assessment year in question. The financial statements submitted included values for both FY 2016-17 and FY 2017-18, substantiating that Wormhole holds other assets amounting to USD 2,993,060.4. Substitution of Sale Consideration:The AO substituted the sale consideration without giving reference to any provision or section of the Act. The Act does not embody provisions for substitution of sale consideration for the subject year, as Section 50CA, which provides such power, was inserted by the Finance Act, 2017, effective from AY 2018-19.5. Denial of Relief for Stamp Duty Expenses:The AO did not provide relief for expenses of INR 489,969 borne by the assessee in relation to stamp duty on the acquisition of shares. As per judicial principles, any cost incurred to acquire an asset can be considered as its cost of acquisition.6. Levying of Interest Under Section 234B:The AO erred in levying interest under section 234B of the Act.7. Initiation of Penalty Proceedings Under Section 270A:The AO mechanically initiated penalty proceedings under section 270A of the Act based on the additions/disallowances made.Conclusion:The AO's actions were found to be erroneous and contrary to law, leading to the appeal being allowed in favor of the assessee. The AO's deviation from the TPO's findings and DRP's directions, along with the rejection of financials and substitution of sale consideration without statutory basis, were not sustained. The grounds raised by the assessee were allowed, and the appeal was decided in their favor.