Assessment order quashed for non-compliance with section 144C(13) and failure to follow DRP directions

The ITAT Delhi quashed the final assessment order passed under section 143(3) read with section 144C(13) for non-compliance with statutory provisions. The Assessing Officer failed to follow DRP directions and did not pass any rectification order despite the TPO issuing an order to give effect to transfer pricing adjustments post-DRP directions. The tribunal held this constituted gross violation of law by the jurisdictional Assessing Officer. Revenue's argument that it was merely a mistake was rejected as no corrective action was taken within reasonable time. The assessment order was quashed for being contrary to statutory provisions.

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Issues Involved:
1. Adjustment to the total income on account of the difference in the arm's length price (ALP) of international related party transactions.
2. Jurisdictional issue regarding the final assessment order's conformity with the DRP directions.
3. Erroneous adjustments related to specific international transactions.
4. Corporate tax calculation errors.
5. Interest and penalty issues.

Detailed Analysis:

1. Adjustment to the Total Income on Account of the Difference in ALP:
The Revenue erred in making an adjustment of INR 2,24,36,553/- to the total income of the assessee due to the difference in the arm's length price (ALP) of its international related party transactions under Section 92CA(4) of the Income Tax Act. This adjustment included:
- Payment of shared service charges, holding fees, and ERP fees (INR 18,552,925).
- Provision of back-office support services (INR 1,887,166).
- Payment of sourcing fee, purchase & sale of software (INR 1,996,462).

2. Jurisdictional Issue:
The assessee contended that the final assessment order dated 28 July 2022 did not conform to the DRP directions dated 3 June 2022, violating Section 144C(10) read with Section 144C(13) of the Act. The Tribunal observed that the TPO had initially proposed adjustments totaling INR 2,24,36,553/-, which the DRP reduced to INR 1,85,52,925/- for intra-group services. However, the final assessment order sustained the original adjustments, indicating non-compliance with the DRP's directions. The Tribunal relied on the Bombay High Court's decision in Hexaware Technologies Ltd. vs. ACIT, emphasizing that non-compliance with statutory provisions renders the assessment order invalid and bad in law. Consequently, the Tribunal quashed the final assessment order.

3. Erroneous Adjustments Related to Specific International Transactions:
- Payment of Shared Service Charges, Holding Fees, and ERP Fees: The Revenue rejected the economic analysis and arbitrarily selected the Comparable Uncontrolled Price (CUP) method without establishing comparable uncontrolled transactions, thus violating Section 92C of the Act read with Rule 10 of the Income Tax Rules.
- Provision of Back-Office Support Services: The Revenue included companies not comparable to the assessee in terms of functions, assets, and risks, rejected comparable companies selected by the assessee, and incorrectly computed the profit level indicator (PLI). Additionally, the TPO did not allow risk adjustment under Rule 10B(1)(e).
- Payment of Sourcing Fee, Purchase, and Sale of Software: Similar errors were noted as in the back-office support services, including the inclusion of non-comparable companies and incorrect computation of PLI.

4. Corporate Tax Calculation Errors:
The AO erred in computing the tax liability by considering TDS credit of INR 1,66,68,496/- instead of INR 1,69,80,644/- and by not allowing a deduction of INR 15,14,475/- under Section 80G already claimed by the assessee.

5. Interest and Penalty Issues:
The AO erred in levying interest under Sections 234B and 234C and in initiating penalty proceedings under Section 270A in the final assessment order.

Conclusion:
The Tribunal allowed the appeal partly, quashing the final assessment order on jurisdictional grounds due to non-compliance with the DRP's directions. Other grounds raised by the assessee were not adjudicated at this stage.

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