Assessment orders quashed for exceeding statutory time limit under section 144C(13) after DRP directions

ITAT Chennai quashed final assessment orders for AY 2017-18 and AY 2018-19 as they were passed beyond the statutory time limit under section 144C(13). The AO was required to pass final assessment orders within one month from receiving DRP directions but failed to comply. For AY 2017-18, DRP directions received on 03.06.2022 required order by 31.07.2022, but AO passed it on 02.01.2023. For AY 2018-19, directions received on 30.06.2022 required order by 31.07.2022, but passed on 30.12.2022. Both orders were time-barred and quashed. Assessee's appeal allowed.

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Issues Involved:
1. General Ground
2. Jurisdictional Grounds
3. Grounds on Merits - Transfer Pricing
4. Grounds on Merits - Corporate Tax

Summary:

I. General Ground:
The lower authorities erred in passing orders which suffer from legal defects such as being passed in violation of principles of natural justice and the provisions of the Income Tax Act, 1961 ("the Act") and is devoid of merits and are contrary to facts on record and applicable law and has been completed without adequate inquiries and as such is liable to be quashed.

II. Jurisdictional Grounds:

2. Validity of Directions Issued by the DRP:
The directions issued by the Dispute Resolution Panel (DRP) u/s 144C(5) of the Act are invalid and void-ab-initio due to the absence of a mandatory system-generated Document Identification Number (DIN) on the body of the directions, contravening Circular No.19 of 2019 issued by the Central Board of Direct Taxes. Therefore, these directions are liable to be quashed and held as never to have been issued.

3. Validity of the Final Assessment Order:
The final assessment order dated 02.01.2023, passed pursuant to the invalid directions issued u/s 144C(5) of the Act, is illegal, bad in law, null and void, and liable to be quashed. Additionally, the order is barred by limitation as it was passed beyond the time limit prescribed u/s 144C(13) of the Act. Furthermore, the order is in violation of the mandatory provisions of section 1446 of the Act and is not authenticated in the prescribed manner, making it invalid, without jurisdiction, illegal, and contrary to the provisions of the Act.

III. Grounds on Merits - Transfer Pricing:

4. Upward Adjustment towards AMP Expenses for Brand-Building:
The lower authorities erred in not following the order of the Jurisdictional bench of the Tribunal in the Appellant's own case for AY 2012-13. They made an upward TP adjustment of INR 263.52 Crores towards alleged brand-building activities undertaken by the Appellant for its AEs, based on conjectures and surmises without tangible evidence. The authorities also erred in alleging that the Appellant rendered brand-building services to its AE without establishing that such services were actually rendered or that the Appellant incurred AMP expenditure for the benefit of its AEs pursuant to an underlying agreement/arrangement. Furthermore, the authorities adopted an arbitrary approach of treating an ad-hoc amount of INR 483.24 Crores towards the promotion of the AE's brand.

IV. Grounds on Merits - Corporate Tax:

5. Disallowance of Payments in Relation to Expatriates:
The lower authorities erred in disallowing payments made by the Appellant to Renault Nissan Global Management S.A. (RNGM) amounting to INR 7.50 Crores u/s 40(a)(i) of the Act. They failed to appreciate that disallowance under section 40(a)(i) is not sustainable for the portion of the payment pertaining to the management fee, on which taxes were duly withheld by the Appellant u/s 195 of the Act. Additionally, the authorities erred in concluding that the payment partakes the nature of fees for technical services (FTS) and in not appreciating that the portion of the payment pertaining to reimbursement of social security benefits (SSB) is outside the purview of FTS. They also erred in holding that there is no employer-employee relationship between the Appellant and expatriates and in recharacterizing the payment to RNGM.

Final Judgment:
The Tribunal found that the final assessment orders passed by the AO for AY 2017-18 and AY 2018-19 were barred by limitation as they were passed beyond the prescribed time limit u/s 144C(13) of the Act. Consequently, the final assessment orders for both assessment years were quashed. As a result, the various grounds challenging the additions made by the AO towards TP adjustment became academic in nature and were dismissed as infructuous. Appeals filed by the assessee for both assessment years were allowed.

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