TMI Blog2018 (6) TMI 1106X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the Act. Since AO has not passed the order in compliance to the provisions of Section 144C, the order passed by AO is bad in law and accordingly, the same is annulled - Decided in favour of assessee - I.T.A. No. 971/HYD/2017 - - - Dated:- 20-6-2018 - SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER For Assessee : Shri C.S. Subrahmanyam Shri V. Siva Kumar, ARs For Revenue : Shri Ashok Kumar Kardam, DR ORDER PER B. RAMAKOTAIAH, A.M. This is an appeal by Assessee against the order of the Assessing Officer (AO) u/s. 143(3) r.w.s. 144C(13) r.w.s. 254 of the Income Tax Act [Act], dated 31-03-2017. The issue in this appeal is whether the order passed by AO is valid in the eyes of law and the addition made by AO, invoking the Transfer Pricing provisions is correct or not? 2. Briefly stated, assessee-company is engaged in the business of manufacture and sale of bulk drugs and intermediates. As assessee has transactions with Associated Enterprise [AE], a reference was made to the Transfer Pricing Officer [TPO], who has proposed originally an adjustment of ₹ 19.36 Crores under the TP provisions. When assessee raised objecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ket in which the material is intended to be used or the tax payer s cost in producing such product + a 50%A markup, whichever is lower and if no comparable product is available, the purchaser s price shall be the taxpayer s cost + a 50% markup. Therefore, they held that the assessee has an assured return of 20% on cost and hence the under utilization of capacity has no impact on the PLI of the assessee. Further, with regard to the depreciation adjustment , it was held by the DRP that the depreciation debited to the P L account of the assessee is not abnormal as compared to the depreciation debited to P L account in earlier years and further that in TNMM method, a broad comparison at entity level is made and each and every expenditure cannot be compared with the companies in the basket of comparables and the depreciation being a fixed cost which the assessee has to recover from the AE as a contract manufacturer, it becomes a part of the cost of the assessee and a separate adjustment is not required as a contract manufacturer. Thus, it seen that the adjustments have been denied on the ground that the assessee is a contract manufacturer and hence the price charged to the purchaser inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such costs unallocated were not examined either by the TPO or the DRP and neither are the details filed before us. Consequently, TPO has to examine and consider to what extent the claim can be allowed. The AO/TPO are accordingly directed to re-compute the ALP after allowing the above adjustments after due verification. Therefore, Grounds No.2 and sub-grounds there under are treated as allowed and the issue of recomputation of the ALP only in accordance with the above directions is remitted to the file of the AO/TPO . 3.1. Inspite of specific directions to consider the issues, the TPO has repeated his original order as confirmed by the DRP in the original proceedings and AO has passed the impugned order making the same amount as addition. 4. It was the contention, apart from the merits of the addition, that AO erred in issuing final assessment order u/s. 143(3) instead of draft assessment order as per Section 144C. Assessee has raised as many as nine grounds, but Ground No. 7 is the primary ground raised on the jurisdiction of AO in passing final assessment order instead of draft assessment order. 5. It was the contention of Ld. Counsel that AO should have issued a draft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requires the Assessing Officer to pass a draft assessment order after receipt of the report from the TPO. There is nothing in the wording of section 144C(1) which would indicate that this requirement of passing a draft assessment order does not arise where the exercise had been undertaken by the TPO on remand to it, of the said issue, by the Tribunal. [Para 17] It was then contended by revenue that the assessment order passed by the Assessing Officer should not be declared to be invalid because of the failure to first pass a draft assessment order under section 144C. In this regard, reference is made to section 292B. [Para 18] As already noted, the final assessment order of the Assessing Officer stood vitiated not on account of mere irregularity but since it was an incurable illegality, section 292B would not protect such an order. [Para 19] In view of above, it is held that the impugned final assessment order is without jurisdiction on account of the failure, by the Assessing Officer, to first pass a draft assessment order and thereafter, subject to the objections filed before the DRP and the orders of the DRP, to pass the final assessment order. [Para 25] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the said additions, by way of draft assessment order. The demand does not get crystallized in draft assessment order. Undoubtedly, the Assessing Officer had issued covering letter where it says that it is draft assessment order but in spirit, it had finalized the assessment, wherein the demand was crystallized and demand notice was issued to the assessee. The Assessing Officer has not followed the correct procedure as provided in the Statute and has passed final assessment order without passing draft assessment order which is against the provisions of the Act and hence, the same is invalid in law. [Para 11] ] 10.1. Respectfully following the above principle and coordinate bench decision, we have no hesitation to hold that AO has not complied with the provisions of Section 144C which is mandatory in all such cases, where TPO proposes variation in the income and loss returned which is prejudicial to the interest of assessee. Only after complying with the conditions laid down in Section 144C, AO is empowered to pass order u/s. 143(3) r.w.s. 144C. Even in the remand proceedings also AO is bound to follow the provisions of the Act. Since AO has not passed the order in complian ..... X X X X Extracts X X X X X X X X Extracts X X X X
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