ITAT announces DRP guidelines Due to a missing DIN, invalid
Fact and issue of the case
This appeal of assessee is against the final assessment DIN & order No. ITBA/AST/S/143(3)/2021-22/1039177855(1) dated 28.01.2022 passed u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] by the DCIT, Central Circle 3(1), Bangalore for the assessment year 2017-18.
The assessee is engaged in software development agencies, Information Technology enabled Services (ITES) and BPO service provider. It filed return of income on 30.11.2017 declaring total loss of Rs.81,97,22,588 after setting off of income and book profits admitted by the assessee was Rs.191.40 crores. Subsequently the case was selected for scrutiny and statutory notices were issued to the assessee. The case was referred to the TPO vide order dated 25.1.2021 proposed a transfer pricing (TP) adjustment of Rs.2,70,90,67,556 in respect of the international transactions, which was incorporated in the draft assessment order along with other corporate tax additions made by the AO. On objections filed by the assessee, the ld. DRP issued its directions on 30.12.2021. Consequently final assessment order was passed by the AO on 28.1.2022 against which the assessee is in appeal before the Tribunal on the following grounds:-
On the facts and in the circumstances of the case and in law, the assessment order framed under section 143(3) read with section 144C( 13) of the Income-tax Act, 1961 (‘the Act’) passed by the Learned Assessing officer (‘Learned AO’) dated 28 January 2022 incorporating directions of the Hon’ble Dispute Resolution Panel – 2 (‘Hon’ble DRP’) dated 30 December 2021 to the extent prejudicial to the Appellant, is bad in law, contrary to the facts and circumstances of the case and is liable to be quashed.
On facts and in the circumstances of the case and in law, the Hon’ble DRP/ Learned AO/ Learned TPO erred in making an upward adjustment / addition on account of:
Transfer Pricing adjustment on account of provision of software development and support services to its Associated Enterprises (‘AEs’) amounting to Rs. 267,20,51,914 2.2 Transfer Pricing adjustment on account of Advertisement, marketing and promotion (‘AMP’) expenses amounting to Rs. INR 22,03,14,960 2.3 Direct tax addition on account of waiver of Royalty income on intellectual property licensed by the Appellant to Practo Pte Ltd (Singapore) amounting to Rs. INR 25,00,157
a) Grounds relating to Transfer pricing matters:
i) Provision of software development and support services
On the facts and in the circumstances of the case and in law, the Hon’ble DRP/ Learned AO/ Learned TPO erred in making an upward adjustment of Rs 267,20,51,914/- in respect of international transaction of provision of software development and support services provided by the Appellant to its Associated Enterprises.
On the facts and in the circumstances of the case and in law the Hon’ble DRP/ Learned AO/ Learned TPO erred in rejecting the segmental provided by the Appellant in the TP documentation on the reasoning that the expenses in the non-AE segment is disproportionately high, which remains unsubstantiated, without appreciating that the Appellant has explained in detail during the course of both TP as well as DRP proceedings, reasoning for such
On the facts and in the circumstances of the case and in law the Hon’ble DRP/ Learned AO/ Learned TPO erred in not providing specific adjudication on the audited segmental financial filed by the Appellant vide additional evidence petition on 17 November 2021 with the Hon’ble DRP.
On the facts and in the circumstances of the case and in law the Hon’ble DRP/ Learned AO/ Learned TPO further erred in:
Rejecting the transfer pricing (‘TP’) documentation maintained by the Appellant under Section 92D of the Act, in good faith and with due diligence;
Rejecting the filters selected by the Appellant as captured in the TP documentation and adopting certain addition filters which are not in accordance with the jurisprudence laid down by various appellate forums;
Application of related party transaction (‘RPT’) filter by applying an inappropriate interpretation of computing the filter and thereby accepting Persistent Systems Ltd as comparable companies to the SWD services segment of the Appellant, though they fail the RPT filter.
Observation of the court
In the decision of Dy. CIT v. Sunita Finlease Ltd.  11 taxmann.com 24 1/330 ITR 491 (Chattisgarh) it was held by the Hon’ble High Court of Chhattisgarh in para 16 that the administrative Instruction No. 9/2004 issued by the Central Board of Direct Taxes is binding on administrative officer in view of the statutory provision contained in section 143(2), which provides for limitation of 12 months for issuance of notice under section 143(2). While giving its finding, the Hon’ble High Court of Chhattisgarh placed reliance on the decisions in the case of UCO Bank (supra) and Nayana P. Dedhia (supra).
Hon’ble jurisdictional High Court of Calcutta in the case of Amal Kumar Ghosh v. Asstt. CIT  45 taxmann.com 482/225 Taxman 229 (Mag.)/361 ITR 458 dealt with the issue relating to CBDT circular which according to the Department cannot defeat the provisions of law. While giving its observations and finding on the issue, the Hon’ble Court referred to the decision of Hon’ble Chhattisgarh High Court in the case of Sunita Finlease Ltd. (supra), which are as under:
We have considered the rival submissions advanced by the learned Advocates. Even assuming that the intention of CBDT was to restrict the time for selection of the cases for scrutiny within a period of three months, it cannot be said that the selection in this case was made within the aforesaid period. Admittedly, the return was filed on 29th October, 2004 and the case was selected for scrutiny on 6th July, 2005. It may be pointed out that Mrs. Gutgutia was, in fact, reiterating the views taken by the learned Tribunal which we also quoted above. By any process of reasoning, it was not open for the learned Tribunal to come to a finding that the department acted within the four corners of Circulars No. 9 and 10 issued by CBDT. The circulars were evidently violated. The circulars are binding upon the department under section 119 of the I.T. Act.
Gutgutia, learned Advocate submitted that the circulars are not meant for the purpose of permitting the unscrupulous assessees from evading tax. Even assuming, that to be so, it cannot be said that the department, which is State, can be permitted to selectively apply the standards set by themselves for their own conduct. If this type of deviation is permitted, the consequences will be that floodgate of corruption will be opened which it is not desirable to encourage. When the department has set down a standard for itself, the department is bound by that standard and cannot act with discrimination. In case, it does that, the act of the department is bound to be struck down under article 14 of the Constitution. In the facts of the case, it is not necessary for us to decide whether the intention of CBDT was to restrict the period of issuance of notice from the date of filing the return laid down under section 14 3(2) of the I.T. Act.
Considering the facts on record, perusal of the impugned order, submissions made by the Ld. Counsel and the department, CBDT circular and the judicial precedents including that of Hon’ble Supreme Court and the jurisdictional High Court of Calcutta, we are inclined to adjudicate on the additional ground in favour of the assessee by holding that the order passed by the Ld. CIT(E) is invalid and deemed to have never been issued as it fails to mention DIN in its body by adhering to the CBDT circular no. 19 of 2019. Accordingly, additional ground taken by the assessee is allowed. Having so held on the legal issue raised by the assessee in the additional ground, the grounds relating to the merits of the case requires no adjudication. Accordingly, the appeal of the assessee is allowed in terms of above observations and findings.’
We further notice that a similar view is being taken by the Delhi Bench of the ITAT in the case Brandix Mauritius Holdings Ltd., v. Dy. CIT [IT Appeal No. 1542/Delhi/2020, dated 19-9- 2022]. 11. In assessee’s case there is no dispute about the fact that the order dated 31-10-2019 has been issued manually. The circular is very clear that generating the DIN by separate intimation is allowed to be done to regularise the manual order (Para 5 of the circular) provided the manual order is issued in accordance with the procedure as contained in Para 3. On perusal of the order u/s. 92CA, it is noted that the order neither contains the DIN in the body of the order, nor contains the fact in the specific format as stated in Para 3 that the communication is issued manually without a DIN after obtaining the necessary approvals. Therefore we are of considered view that the order dated 31-10-2019 is not in conformity with Para 2 and Para 3 of the CBDT circular.
In view of these discussions and respectfully following the decision of the Kolkata and Delhi Benches of the Tribunal, we hold that the orders passed u/s. 92CA dated 3 1-10-2019 is invalid and shall be deemed to have never been issued as per Para 4 of the CBDT circular as the order is not conformity with Para 2 and Para 3. Accordingly the TP adjustment made through an invalid order is also rendered invalid and deleted.
We notice that the DRP has held that the order dated 3 1-10- 2019 which was issued without DIN is made good by the order dated 1-11-2019 which is issued without DIN since the contents of both the orders are same. We are unable to appreciate this decision of the DRP, since there is no provision in the Act to issue two order u/s. 92CA and the order issued subsequent cannot be taken to substitute the earlier order. If the order dated 1-11- 2019 is taken as the valid order for subsequent proceedings since it is issued with a DIN, then the issue of the order being barred by limitation should be considered. In this regard we notice that the coordinate bench of the Tribunal in the case of Sap Lab’s India (P.) Ltd. (supra) has considered the issue of time limit for passing the order u/s.92CA and held that the order should be passed before sixty days prior to the date on which the period of limitation referred to in section 153 and in this regard the Hon’ble Tribunal had relied on the decision of the coordinate bench in the case of Swiss Re Global Business Solution India (P.) Ltd. v. Dy. CIT  138 taxmann.com 418 (Bang. – Trib.).
Respectfully following the above order of the Tribunal, since the DIN was not mentioned in DRP order dated 30.12.2021 which was mandatory as per CBDT Circular No.19 (supra) & in view of the facts noted above in regard to communications done with the assessee, we hold that the DRP directions dated 30.12.2021 is invalid in the eyes of law and shall be deemed to have never been issued as per Para 4 of the CBDT circular as the order is not conformity with Para 2 and Para 3. Accordingly the DRP order dated 30.12.2021 is held to be null and void ab initio and quashed. Thus, the additional grounds No. 24 & 25 raised by the assessee on the legal issue are allowed.
Since the legal issue No. 24 & 25 raised by the assessee is allowed, the other grounds of appeal on merits are left open.
In the result, the appeal by the assessee is allowed.
Pronounced in the open court on this 16th day of June, 2023.
In the result, appeal of the assessee is allowed and ruled in favour of the assessee
Read the full order from herePracto-Technologies-Pvt.-Ltd.-Vs-DCIT-ITAT-Bangalore2