2025 (5) TMI 442 - HC - Income Tax

Validity of order of assessment passed u/s 143(3) - AO obligation u/s 144C(1) to forward a draft of the proposed assessment order to the petitioner - HELD THAT - As per Section 144C of the Act 1961 the Assessing Officer is bound to forward a draft of the proposed order of assessment to the eligible assessee if he proposed to make any variations which are prejudicial to the interest of such assessee. The eligible assessee has been defined u/s 144C(15) of the Act 1961 which means any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the TPO passed under sub-section (3) of Section 92-CA and any non-resident not being a company or any foreign company. The matter was remanded to the TPO to pass a fresh order u/s 92C (3) of the Act 1961. Once the order has been passed by the TPO in accordance with the provisions the petitioner becomes the eligible assessee and would come within the framework of Section 144C and the AO would have to pass a fresh order in terms of Section 144C. According to the order passed by the TPO if any variations are made by the Assessing Officer on the said basis he would have to compulsorily and necessarily pass a draft assessment order and forward it to the eligible assessee as the word used in Section 144C(1) of the Act 1961 is shall . One such a proposed draft is forwarded to the eligible assessee the procedure as laid down under Section 144C of the Act 1961 would commence and would necessarily require to be completed accordingly. However it appears that upon remand of the matter the Assessing Officer has proceeded to pass an order finally in terms of Section 143(3) of the Act 1961 without considering the provisions of Section 144C of the Act 1961. The order therefore is not sustainable in law.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court are:

(a) Whether the Assessing Officer was obligated under Section 144C(1) of the Income Tax Act, 1961, to forward a draft of the proposed assessment order to the petitioner after the remand order by the Income Tax Appellate Tribunal (ITAT) and before passing the final assessment order under Section 143(3) for AY 2008-2009;

(b) Whether the failure to provide the draft assessment order to the petitioner as mandated by Section 144C of the Act renders the final assessment order invalid and unsustainable;

(c) The scope and applicability of Section 144C of the Act, 1961, particularly in the context of remand orders directing fresh proceedings by the Transfer Pricing Officer (TPO); and

(d) The interpretation of the procedural requirements under Section 144C in light of relevant judicial precedents, including the binding nature of such provisions on the Assessing Officer.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a) and (b): Obligation to forward draft assessment order under Section 144C(1) post-remand and consequences of non-compliance

Relevant legal framework and precedents: Section 144C(1) of the Income Tax Act, 1961, mandates that the Assessing Officer must forward a draft of the proposed assessment order to the eligible assessee if any variation prejudicial to the assessee's interest is proposed. The term "eligible assessee" is defined in Section 144C(15) to include persons affected by variations consequent to the TPO's order under Section 92CA(3). The procedure under Section 144C is mandatory and binding.

Judicial precedents relied upon include the Delhi High Court ruling in JCB India Ltd. & Ors. v. Deputy Commissioner of Income Tax & Ors., affirmed by the Supreme Court, and the Bombay High Court decision in Exxon Mobil Company (P) Ltd. v. Deputy Commissioner of Income Tax, which underscore the mandatory nature of Section 144C and the necessity of providing the draft assessment order to the assessee before finalization.

Court's interpretation and reasoning: The Court noted that after the ITAT remand directing the TPO to select fresh comparables and pass a fresh order under Section 92CA(3), the petitioner became an eligible assessee under Section 144C. Consequently, any variation proposed by the Assessing Officer had to be communicated via a draft assessment order as per the statutory mandate. The Court emphasized the use of the word "shall" in Section 144C(1), indicating a mandatory obligation.

The Court found that the Assessing Officer, after the remand, proceeded directly to pass the final assessment order under Section 143(3) without forwarding the draft order to the petitioner, thereby violating the procedural safeguards and statutory requirements under Section 144C.

Key evidence and findings: The ITAT's remand order explicitly required the TPO to carry out fresh selection of comparables and compute adjustments accordingly, with a direction to provide the assessee sufficient opportunity of hearing. The TPO complied by passing a fresh order. However, the Assessing Officer failed to follow the Section 144C procedure thereafter.

Application of law to facts: Given the remand and fresh TPO order, the petitioner clearly qualified as an eligible assessee under Section 144C(15). The Assessing Officer's failure to forward the draft assessment order before finalizing the assessment was a breach of the mandatory procedure, rendering the final order legally unsustainable.

Treatment of competing arguments: The respondents contended that since a draft assessment order had been forwarded initially before the first round of litigation, there was no requirement to send it again after remand, as the remand was only to pass a final order. The Court rejected this argument, holding that the remand resulted in a fresh TPO order which triggered the Section 144C procedure anew, requiring the Assessing Officer to forward a fresh draft assessment order to the eligible assessee.

Conclusions: The Court concluded that the Assessing Officer was bound to comply with Section 144C after the remand and fresh TPO order. The failure to do so vitiated the assessment order dated 10.12.2018.

Issue (c): Scope and applicability of Section 144C post-remand by ITAT

Relevant legal framework and precedents: Section 144C is designed to provide a mechanism for dispute resolution by requiring the Assessing Officer to communicate proposed variations to the assessee and allowing for representation before finalizing the assessment. The ITAT's remand order directing the TPO to pass a fresh order under Section 92CA(3) effectively resets the assessment process in respect of transfer pricing adjustments.

Court's interpretation and reasoning: The Court observed that the remand order by the ITAT necessitated fresh proceedings by the TPO and Assessing Officer. This fresh order by the TPO created a new scenario where the assessee became an eligible assessee for the purposes of Section 144C. The procedural safeguards under Section 144C, including forwarding the draft assessment order, therefore applied afresh.

Application of law to facts: The petitioner's status as an eligible assessee was triggered by the fresh TPO order post-remand, mandating compliance with Section 144C. The Assessing Officer's failure to adhere to this procedural requirement was inconsistent with the statutory scheme.

Issue (d): Interpretation of procedural requirements under Section 144C in light of judicial precedents

Relevant legal framework and precedents: The Court relied on authoritative rulings from the Delhi and Bombay High Courts, as well as the Supreme Court's affirmation of the Delhi High Court decision in JCB India Ltd., which clarified that the provisions of Section 144C are mandatory and non-compliance results in invalidation of the assessment order.

Court's interpretation and reasoning: The Court reiterated that the use of the word "shall" in Section 144C(1) imposes a mandatory duty on the Assessing Officer to forward the draft assessment order to the eligible assessee before finalization. The procedural safeguards are integral to the statutory scheme and cannot be bypassed even in cases involving remand or fresh proceedings.

Treatment of competing arguments: The Court rejected the respondents' contention that the initial forwarding of the draft order before the first round of litigation sufficed, emphasizing that fresh proceedings post-remand require fresh compliance with Section 144C.

Conclusions: The Court held that the procedural requirements of Section 144C must be strictly followed in all cases where variations prejudicial to the assessee are proposed, including after remand and fresh TPO orders.

3. SIGNIFICANT HOLDINGS

The Court held:

"As per Section 144C of the Act, 1961, the Assessing Officer is bound to forward a draft of the proposed order of assessment to the eligible assessee, if he proposed to make any variations which are prejudicial to the interest of such assessee... According to the order passed by the TPO, if any variations are made by the Assessing Officer on the said basis, he would have to compulsorily and necessarily pass a draft assessment order and forward it to the eligible assessee as the word used in Section 144C(1) of the Act, 1961, is 'shall'."

"However, it appears that upon remand of the matter, the Assessing Officer has proceeded to pass an order finally in terms of Section 143(3) of the Act, 1961 without considering the provisions of Section 144C of the Act, 1961. The order, therefore, is not sustainable in law."

Core principles established include:

- The mandatory nature of Section 144C(1) requiring the Assessing Officer to forward a draft assessment order to the eligible assessee whenever variations prejudicial to the assessee's interest are proposed;

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