Assessment order under section 144C barred by limitation despite Revenue's arguments on set-aside timelines

ITAT Chennai held that an assessment order passed under section 144C read with section 92CA was barred by limitation. The court ruled that section 144C(13) mandates the Assessing Officer to pass the final order before the end of the calendar month following receipt of directions, with no different timelines for set-aside assessments. The Revenue's arguments were found inconsistent with statutory regulations. Relying on Adobe Systems precedent, the tribunal quashed the assessment order dated 18.05.2023 as time-barred and allowed the assessee's appeal.

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The core legal questions considered by the Tribunal in this appeal are as follows:

1. Whether the assessment order dated 18.05.2023 passed under sections 143(3) read with 144C, 92CA, and 254 of the Income Tax Act is barred by limitation under section 144C(13) of the Act.

2. Whether the timelines prescribed under section 153(3) of the Income Tax Act apply to the assessment order passed in the present case, particularly considering the order is a set-aside case under section 254.

3. Whether the Assessing Officer (AO) erred in making transfer pricing adjustments by rejecting functionally comparable companies and adopting a single comparable without proper application of filters and adjustments.

4. Whether the AO failed to give credit to the assessee for taxes paid on a regular assessment amounting to Rs.35,48,580/-.

Issue 1: Limitation under Section 144C(13) for Passing Assessment Order

The relevant legal framework is section 144C(13) of the Income Tax Act, which mandates that the AO must pass an assessment order complying with the directions of the Dispute Resolution Panel (DRP) within one month from the end of the month in which such directions are received. The assessee contended that the DRP passed its directions on 01.12.2022, and thus the AO was required to pass the order by 31.01.2023. However, the AO passed a draft order on 27.02.2023 and the final order on 18.05.2023, which is beyond the prescribed timeline.

In support of this contention, the assessee relied on judicial precedents, notably the ITAT Delhi bench decision in the case involving M/s. Adobe Systems India Pvt. Ltd., which held that an order passed beyond the prescribed time limit under section 144C(13) is void ab initio and liable to be quashed. The Tribunal in that case emphasized that the time limit is mandatory and cannot be extended by any subsequent actions such as giving effect to the DRP directions by the Transfer Pricing Officer (TPO).

The Revenue argued that since the present case involved a set-aside assessment under section 254, the timeline under section 144C(13) would not apply. However, the Tribunal rejected this argument, holding that the statutory language of section 144C(13) does not differentiate between original and set-aside assessments. The AO is required to comply with the time limits irrespective of the nature of the order.

The Tribunal found that the AO had no evidence to dispute the date of receipt of the DRP directions and that the final order was clearly passed beyond the statutory timeline. Consequently, the AO's order dated 18.05.2023 was held to be barred by limitation and quashed.

Issue 2: Applicability of Section 153(3) Timelines

The assessee alternatively argued that under section 153(3), which prescribes a nine-month period for passing an assessment order in certain cases, the AO was required to pass the order on or before 31.12.2020 following the Tribunal's order dated 20.09.2019. The impugned order dated 18.05.2023 was thus argued to be barred by limitation under this provision as well.

The Tribunal, however, considered this ground infructuous because the primary contention under section 144C(13) was allowed, rendering further consideration unnecessary. The Tribunal did not adjudicate on the merits of the applicability of section 153(3) timelines in this case.

Issue 3: Merits of Transfer Pricing Adjustments

The assessee contended that the AO erred in rejecting functionally comparable companies and adopting a single comparable for determining the Arm's Length Price (ALP). The assessee further argued that the AO made erroneous computations of operating margins and failed to make correct working capital and risk adjustments.

However, these grounds were not argued before the Tribunal and were consequently not adjudicated. The Tribunal noted that since the assessment order was quashed on limitation grounds, the merits of these contentions became academic and were left undecided.

Issue 4: Credit for Taxes Paid on Regular Assessment

The assessee raised a ground that the AO failed to give credit for taxes paid amounting to Rs.35,48,580/- on a regular assessment. The Tribunal found merit in this contention and restored the matter to the file of the AO with directions to give the assessee credit for all taxes paid on regular assessment as per law.

Significant Holdings

The Tribunal held unequivocally that:

"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."

It further held that:

"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."

On the issue of credit for taxes paid, the Tribunal directed:

"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."

The Tribunal's final determination was to allow the appeal on grounds relating to limitation under section 144C(13) and direct quashing of the impugned assessment order dated 18.05.2023. Grounds relating to merits of transfer pricing adjustments were left undecided as academic. The direction to the AO to give credit for taxes paid was upheld.

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