2025 (7) TMI 450 - HC - Income Tax

Mandatory procedure u/s 144C - effect of remand by ITAT to AO/TPO to consider the issues afresh - What ifassessment order is passed without a draft assessment order? - HELD THAT - ITAT had not only remitted the issue regarding selection of most appropriate method but also had given liberty to assessee to raise any other grounds in support of its claim. Thus by this remand ITAT had directed AO/TPO to consider all issues afresh. Therefore in effect the earlier draft assessment order ceased to exist. On fresh consideration if AO makes a variation which is prejudicial to the interest of assessee the procedure provided in Section 144C(1) of the Act would take effect. AO therefore is bound to forward draft assessment order to enable the assessee to either accept the variations or file its objections to the variations with DRP and AO. In our view it would make no difference whether variation was made by AO at the first instance or pursuant to a remand by ITAT as regards the requirement to follow the procedure prescribed under Section 144C of the Act. Any other interpretation would be opposed to the consistent view taken by the Courts with regard to the interpretation of these provisions. In a similar case where the tribunal had set aside the Transfer Pricing adjustments and remanded the matter to AO/TPO for de novo consideration the Bombay High Court in CWT India Limited s case 2023 (9) TMI 438 - BOMBAY HIGH COURT in which one of us was a member held that the failure to forward the draft assessment order would render the assessment order invalid. We are of the considered view that the remand by ITAT to AO/TPO to consider the issues afresh would not dispense with the mandatory procedure under Section 144C of the Act since the variation on the reconsideration by AO is prejudicial to the interest of the assessee. Therefore the statement of counsel for Revenue that draft assessment order need not be passed cannot be countenanced. It is well settled that where the assessment order is passed without a draft assessment order it would be vitiated as it is not a mere irregularity but is an incurable illegality. WP allowed.

Summary

The core legal questions considered in this judgment revolve around the procedural compliance requirements under Section 144C of the Income Tax Act, 1961, particularly in the context of reassessment or reconsideration of transfer pricing adjustments following a remand by the Income Tax Appellate Tribunal (ITAT). The principal issues are:

(a) Whether the Assessing Officer (AO) was required to issue a draft assessment order under Section 144C(1) of the Act before passing the final assessment order dated 01.11.2018, which was pursuant to the remand by the ITAT.

(b) Whether the failure to issue such a draft assessment order renders the final assessment order invalid or without jurisdiction.

(c) The scope and effect of the ITAT remand on the procedural requirements under Section 144C of the Act, specifically whether the remand dispenses with the necessity of issuing a draft assessment order.

(d) The rights of the assessee to have their objections heard by the Dispute Resolution Panel (DRP) when variations prejudicial to their interest are proposed, especially after remand proceedings.

Issue-wise Detailed Analysis

1. Requirement of Issuing Draft Assessment Order under Section 144C(1) after ITAT Remand

The legal framework mandates that when the AO proposes any variation prejudicial to the assessee's interest, a draft assessment order must be forwarded to the assessee under Section 144C(1) of the Income Tax Act. This procedure allows the assessee to file objections before the DRP and AO, thereby ensuring adherence to principles of natural justice.

The Court examined the remand order by the ITAT, which directed the AO/TPO to reconsider the transfer pricing adjustments afresh, including the application of the appropriate method for determining the Arm's Length Price and to examine whether the associated enterprises derived any benefit or markup. The ITAT also expressly granted liberty to the assessee to raise any other grounds in support of their claim, effectively requiring a de novo consideration of the issues.

The Court reasoned that since the ITAT remand required fresh consideration of the issues, the earlier draft assessment order ceased to exist. Therefore, any fresh variation prejudicial to the assessee's interest must be preceded by issuance of a draft assessment order under Section 144C(1). The Court held that the procedural requirement to issue a draft order is mandatory and cannot be bypassed merely because the proceedings are pursuant to a remand.

Reliance was placed on precedents including the Bombay High Court's decision in a similar transfer pricing context, where failure to issue a draft assessment order post-remand was held to render the final assessment order invalid. The Court cited the judgment which stated:

"...the failure to pass a draft assessment order under Section 144C(1) of the Act would result in rendering the final assessment as one without jurisdiction."

Additionally, the Court referred to the Delhi High Court's ruling in JCB India Ltd., which held that the requirement to issue a draft assessment order applies equally after remand by the ITAT, and that the AO cannot straightway pass a final order without following this mandatory procedure.

2. Validity of the Final Assessment Order Passed Without Draft Assessment Order

The Court analyzed the submissions by the Revenue that the failure to issue a draft assessment order was not fatal and that the assessee had alternative remedies by way of appeal. The Court rejected this contention, emphasizing that the failure to issue a draft order is not a mere procedural irregularity but an incurable illegality that vitiates the entire assessment order.

The Court further clarified that Section 292B of the Act, which protects certain proceedings from being invalidated due to procedural errors, does not apply where there is a lack of jurisdiction or a fundamental breach of statutory procedure such as failure to issue a draft assessment order.

In support, the Court referred to authoritative decisions which held that passing an assessment order without issuing a draft order under Section 144C(1) is illegal and without jurisdiction, thereby mandating quashing of such orders.

3. Effect of ITAT Remand on the Procedure under Section 144C

The Court considered the Revenue's argument that since the ITAT did not set aside the entire assessment but only remanded a specific issue, the AO was not required to issue a fresh draft assessment order under Section 144C. The Court rejected this view, emphasizing the unambiguous language of Section 144C(1) which mandates issuance of the draft order after receipt of the TPO's report, regardless of whether the proceedings are initial or pursuant to remand.

The Court observed that the ITAT's remand called for a fresh examination of the transfer pricing adjustment and expressly allowed the assessee to raise all grounds afresh, which effectively nullified the earlier draft assessment order. Consequently, the AO was bound to comply with the statutory procedure afresh, including issuance of a draft assessment order and opportunity to the assessee to file objections before the DRP.

4. Assessee's Right to be Heard and Principles of Natural Justice

The Court underscored that the procedure under Section 144C is designed to safeguard the assessee's right to be heard and to ensure fair adjudication. The draft assessment order serves as a crucial step enabling the assessee to respond to proposed variations and seek redressal through the DRP mechanism.

The Court held that non-compliance with this procedure effectively deprives the assessee of this right, thereby violating principles of natural justice and rendering the assessment order liable to be quashed.

Conclusions

The Court concluded that the AO's failure to issue a draft assessment order under Section 144C(1) before passing the final assessment order dated 01.11.2018, which was pursuant to the ITAT remand, was a fundamental procedural lapse. Such failure rendered the assessment order invalid and without jurisdiction.

The Court allowed the writ appeal, quashed the impugned order dismissing the writ petition, and consequently set aside the assessment order dated 01.11.2018.

Significant Holdings

The Court's crucial legal reasoning includes the following verbatim excerpts:

"...the remand by ITAT to AO/TPO to consider the issues afresh, would not dispense with the mandatory procedure under Section 144C of the Act, since the variation on the reconsideration by AO is prejudicial to the interest of the assessee. Therefore, the statement of counsel for Revenue that draft assessment order need not be passed cannot be countenanced."

"...the failure to pass a draft assessment order under Section 144C(1) of the Act would result in rendering the final assessment as one without jurisdiction."

"Careful perusal of the above provision, as rightly pointed out by the Petitioner, the draft order is mandatory under Section 144C of the Income Tax Act. An Assessing Officer, at the first instance, forward a draft proposed order of assessment, enabling the assessee to accept the variations to the Assessing Officer or file his objections, if any, with the Disputes Resolution Panel and the Assessing Officer. Thus, the procedure of passing of draft assessment order provides a right to an assessee to file his objections before the Disputes Resolution Panel and the Assessing Officer for vindicating his grievances and redress the same."

The core principles established are:

• The procedure under Section 144C(1) is mandatory and must be scrupulously followed whenever the AO proposes a variation prejudicial to the assessee's interest, including after remand by the ITAT.
• Failure to issue a draft assessment order before finalizing the assessment order is not a mere irregularity but an incurable illegality, rendering the assessment order without jurisdiction.
• The ITAT remand for fresh consideration nullifies the earlier draft assessment order and requires fresh compliance with Section 144C procedures.
• The assessee's right to be heard through the DRP mechanism is a fundamental aspect of the assessment process under transfer pricing provisions.

Accordingly, the final determination was that the assessment order dated 01.11.2018 was quashed for non-compliance with the mandatory procedure under Section 144C(1) of the Income Tax Act.