ITAT Mumbai Scraps Rs. 72.85 Crore TP Adjustment and Clarifies MAT Computation in Merger Scenario

1. Background and Procedural History

The decision in Indus Valley Partners (India) Private Limited Vs DCIT (ITAT Mumbai) pertains to Assessment Year 2021-22 and challenges the final assessment order dated 22.10.2024 passed under Section 143(3) read with Sections 144C(13) and 144B of the Income Tax Act 1961.

The assessment followed:

  • A draft assessment order dated 22.12.2023 under Section 144C(1)
  • A Transfer Pricing Officer (TPO) order dated 28.10.2023 under Section 92CA(3)
  • Dispute Resolution Panel (DRP)-1, Mumbai directions dated 30.09.2024 under Section 144C(5)

The assessee, Indus Valley Partners (India) Private Limited, was engaged in:

  • Software development
  • Sale of software licences
  • Related IT and support services, primarily to clients in the United States

A significant corporate event impacted the return position: the assessee merged with Indus Infotech Private Limited with effect from 01.10.2020 pursuant to NCLT order dated 18.10.2022, and the merged entity continued under the name Indus Valley Partners (India) Private Limited.

1.1 Returns Filed and Key Figures

The assessee originally filed its return of income on 14.03.2022, declaring:

  • Total income (normal provisions): Rs. 29,12,86,816/-
  • Book profit under Section 115JB: Rs. 54,37,16,690/-

Subsequently, following the NCLT-approved merger, a modified return under Section 170A was furnished on 30.04.2023 for the period 01.04.2020 to 30.09.2020, declaring:

  • Total income: Rs. 8,62,98,740/-
  • Book profit under MAT: Rs. 11,33,68,895/-

In the final assessment order dated 22.10.2024, the Assessing Officer (AO):

  • Made a transfer pricing adjustment of Rs. 72,85,37,845/-
  • Determined total income at Rs. 1,01,98,24,661/-
  • Computed deemed book profit under Section 115JB at Rs. 1,27,97,21,971/-

The proposed disallowance of Stock Appreciation Rights (SAR) expenditure of Rs. 58,17,750/- was ultimately dropped by the AO in line with the DRP’s direction.

The assessee carried the matter to the ITAT, raising multiple grounds, broadly revolving around:

  • Non-recognition of the Section 170A modified return
  • Incorrect MAT computation under Section 115JB
  • Legality and merits of transfer pricing adjustments aggregating to Rs. 72,85,37,845/-
  • Ancillary computational and interest/penalty issues

The Tribunal handled each cluster of issues separately.

2. Treatment of Modified Return under Section 170A (Ground No. 1)

2.1 Assessee’s Contention

The assessee argued that:

  • The AO wrongly used the original return (total income of Rs. 29,12,86,816/-) as the starting point for computation.
  • A valid modified return under Section 170A dated 30.04.2023, post-merger and restricted to the period 01.04.2020 to 30.09.2020, was on record, declaring Rs. 8,62,98,740/- as total income.
  • The merger with Indus Infotech Private Limited with effect from 01.10.2020 pursuant to the NCLT order dated 18.10.2022 is expressly acknowledged in the assessment and TPO records.
  • Intimations of the amalgamation were made to the jurisdictional AOs and CBDT vide letters dated 28.02.2023.

The assessee had also raised an additional objection before the DRP to direct consideration of the modified return. The DRP, however, declined to entertain it on the ground that it was not a “variation” under Section 144C(1) and hence outside its scope.

2.2 Tribunal’s View on Section 170A

The Tribunal examined the statutory framework of Section 170A, which governs business reorganisation scenarios where:

  • A return under Section 139 was already filed before the order of reorganisation, and
  • A successor can file a modified return within six months from the end of the month in which the order is passed, in accordance with and limited to the order of reorganisation.

The ITAT noted:

  • The merger and its effective date (01.10.2020) are expressly recorded in the draft assessment order and in the TPO’s findings.
  • The TPO has himself limited his examination to the period 01.04.2020 to 30.09.2020 based on the merger and business existence facts.
  • In such circumstances, ignoring a properly filed modified return purely for procedural reasons is inconsistent with the scheme of Section 170A.

The Tribunal held that:

A valid modified return filed pursuant to a business reorganisation order must be examined and given effect to, subject to statutory conditions, particularly as to timeliness and scope being confined to the reorganisation.

2.3 Direction to AO

The issue was remanded to the AO with clear directions:

  1. Verify whether the modified return under Section 170A:

    • Was filed on 30.04.2023;
    • Falls within the prescribed six-month time window; and
    • Is limited to giving effect to the NCLT merger order dated 18.10.2022.

  2. If valid, the AO shall:

    • Treat Rs. 8,62,98,740/- as the returned income instead of Rs. 29,12,86,816/-; and
    • Recompute total income, subject to such transfer pricing and other adjustments as may survive the Tribunal’s decision.

  3. The AO must provide adequate opportunity of hearing and pass a speaking order on this specific issue.

Accordingly, Ground No. 1 was allowed for statistical purposes.

3. MAT Computation and Impact of TP Adjustment under Section 115JB (Ground No. 2)

3.1 MAT Based on Modified Return

The assessee highlighted that:

  • The modified return disclosed book profit of Rs. 11,33,68,895/- for the six-month period, while the AO continued with the original figure of Rs. 54,37,16,690/-.
  • Once the modified return under Section 170A is accepted, the MAT computation under Section 115JB must also proceed from that modified figure for the relevant period.