TMI Blog2021 (7) TMI 1208X X X X Extracts X X X X X X X X Extracts X X X X ..... roposed order of assessment to Petitioner, as there was a proposed variation prejudicial to the interest of the assessee. This important step has been completely omitted by the Respondent taking away a very necessary right of Petitioner to file objections to the proposed variation with the DRP and the Assessing Officer, which in our view, strikes to the root of the procedure contemplated by Section 144C. Failure on the part of the AO to follow the procedure u/s 144C(1) is not a merely procedural or inadvertent error, but a breach of a mandatory provision. We are also not impressed with the arguments of the Revenue that the AO was under pressure of two charges, as there were timelines to adhere to, since the said timelines from time to time have been extended, the most recent one being to 30th September, 2021. The Revenue ought to have appreciated that the requirement under Section 144C(1) to first pass a draft Assessment Order and to provide a copy thereof to the assessee is a mandatory requirement which gave substantive right to the assessee to object to any variation, that is prejudicial to it. In this case, the order under Section 92CA (3) of the IT Act, proposed to make a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent Year 2017-2018. 2. Petitioner is an Indian Company, incorporated under the Companies Act, 1956. It is submitted that Petitioner is a part of SHL Group, United Kingdom and primarily a trading entity that provides SHL products (psychometric test), assessment, consultancy and training services ( SHL Solutions ) to clients in India in various industries. 3. Petitioner had filed return of income on 30th March, 2018 declaring a total income of ₹ 1,01,31,750/-. Petitioner s case is that during the Assessment Year 2017-2018, Petitioner had entered into an international transaction with its Associated Enterprise (the AE ), whereby it was granted a license to market, distribute and deliver the SHL Solutions to clients in India from its AE, for which Petitioner made payments towards Support Services Charges incurred by the AE. It is submitted that alongwith the return of income filed for the said year, in view of the various international transactions with the AEs, Form 3CEB was filed alongwith the return of income. Petitioner s case was selected under the Computer Assisted Scrutiny Scheme (CASS), pursuant to which, on 5th September, 2018 a notice was issued under Section 143 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT Act to the Assessing Officer providing guidance to enable completion of the assessment, which directions are binding upon the assessee under Section 144C(10) of the IT Act. He submits that the Assessing Officer has to pass the final Assessment Order under Section 143(3) read with Section 144(13) of the IT Act, in conformity with the directions issued by the DRP and that Respondent No.2 is not authorised to pass any final order without the directions of the DRP. 7. It is submitted on behalf of Petitioner that in view of the provisions of Section 144C(1) of the IT Act, Respondent No.2 is firstly required to pass a draft Assessment Order and not directly pass a final Assessment Order. 8. Learned Senior Counsel submits that these provisions are mandatory and not merely directory. He submits that an order passed contrary to the provisions of Section 144C of the IT Act and a failure to follow the binding procedure laid down therein would render the order without jurisdiction and thereby void ab initio and ought to be quashed. 9. He also submits that action on the part of the Assessing Officer, in not following the mandatory procedure laid down by the IT Act, is a jurisdiction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt opportunity was given to the assessee company for rebuttal of the proposed addition of ₹ 10,74,54,337/- as suggested by the TPO vide his order passed u/s 92CA(3) dated 29/01/2021, through a show-cause notice, dated 10/03/2021. Assessee s submission was perused and considered. Submission of the assessee was found not acceptable. Accordingly, order was passed as discussed above and delivered to the assessee along with notice of demand u/s 156 and penalty notice u/s 274 rws 270A of the act. In nutshell, order cannot be said an invalid one because the sum and substance of the order regarding addition is in a strong footing and cannot be challenged. The procedural lapse is a rectifiable mistake without altering the crux of the case. 26. With reference to para 26 of the petition, I say that, assessee preferred to file writ petition as it found no way to move before DRP in its case. It is submitted here remedial action may be directed by the Hon ble High court in the light of judgement given by the Apex court on 19/11/2010 in the case of ITO vs M Pirai Choodi 334 ITR 262 SC . In this case observations of the Supreme Court in this regard are as follows: . We are of the vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assistance, we have perused the papers and proceedings in the matter. 18. Facts not being in dispute, the questions that arise for our consideration are (i) whether the provisions contained in Section 144C(1) of the IT Act are mandatory or directory and (ii) whether there has been a mere procedural error on the part of the Assessing Officer in passing the final Assessment Order without passing a draft Assessment Order, as required under Section 144C(1) of the IT Act or has there been a jurisdictional error, which strikes to the root of the entire proceedings. 19. Before proceeding further, it would be useful to set forth Section 144C of the IT Act as under :- Reference to dispute resolution panel. 144C. (1) The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation which is prejudicial to the interest of such assessee. (2) On receipt of the draft order, the eligible assessee shall, within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve included the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee. (9) If the members of the Dispute Resolution Panel differ in opinion on any point, the point shall be decided according to the opinion of the majority of the members. (10) Every direction issued by the Dispute Resolution Panel shall be binding on the Assessing Officer. (11) No direction under sub-section (5) shall be issued unless an opportunity of being heard is given to the assessee and the Assessing Officer on such directions which are prejudicial to the interest of the assessee or the interest of the revenue, respectively. (12) No direction under sub-section (5) shall be issued after nine months from the end of the month in which the draft order is forwarded to the eligible assessee. (13) Upon receipt of the directions issued under subsection (5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153 or section 153B, the assessment without providing any further opportunity of bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be considered by the Andhra Pradesh High Court in the case of M/s. Zuari Cement Limited Vs. The Assistant Commissioner of Income Tax, Circle 2(1), Tirupathi (Andhra Pradesh High Court) (supra). This was a case where the Transfer Pricing Officer had passed an order under Section 92CA(3) of the IT Act recommending a Transfer Pricing Adjustment, which was forwarded to the Petitioner. The Respondent -Assessing Officer, after receiving the order of the TPO and after examining the information furnished by the Petitioner therein, passed the Assessment Order dated 23rd December, 2011 under Section 143(3) of the IT Act raising a demand of ₹ 27,40,71,913/- and a demand notice for the said amount was issued under Section 156 of the IT Act. The Petitioner submitted a letter dated 20th January, 2012 raising objections to the said assessment order contending that the provisions of Section 144C of the IT Act were not followed before passing the order. The Andhra Pradesh High Court, after considering the provisions of Section 144C(1) of the IT Act, held that provisions of Section 144C are mandatory as the Assessing Officer under Section 144C(1) is mandated to first pass a draft assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not directory. 22. The question whether failure to give an opportunity of fling objections to Petitioner under Section 144C (2) would be a mere procedural error or a jurisdictional error came to be considered by the Gujarat High Court in case of Commissioner of Income Tax, Vadodara-2 Vs. C-Sam (India) (P.) Limited (supra) wherein while deciding the question of law in an appeal, it was held that the procedure laid down under Section 144C of the Act is not merely procedural as the provision to first pass a draft order and provide a copy thereof to the assessee is a mandatory requirement and gives substantive rights to the assessee to object to any additions before they are made and such objections have to be considered not by the Assessing Officer but by the DRP. Once DRP gives direction under Section 144C(5) of the IT Act, Assessing Officer has to pass the Assessment Order in terms of such directions without giving any further hearing to the assessee, which means the same would also bind the assessee, subject to, of course, to the challenge to the order of the Assessing Officer before the Tribunal. Nevertheless, at the stage of assessment, there is no remedy against the dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer, the directions of the DRP under sub-section (5) of Section 144C would bind even the assessee. He may of course challenge the order of the Assessing Officer before the Tribunal and take up all contentions. Nevertheless at the stage of assessment, he has no remedy against the directions issued by the DRP under sub-section (5). All these provisions amply demonstrate that the legislature desired to give an important opportunity to an assessee who is likely to be subjected to upward revision of income on the basis of transfer pricing mechanism. Such opportunity cannot be taken away by treating it as purely procedural in nature. 23. This Court, in the case of International Air Transport Association Vs. Deputy Commissioner of Income Tax Ors. (supra), while considering a similar situation held as under :- 5. However, it is pertinent to note that the order dated 7th October, 2015 of the DRP in paragraph (3) thereof records that There is no dispute that the assessee is a foreign company . This position is undisputed even before us. Therefore, in view of Section 144C(15) of the Act which defines eligible assessee to whom Section 144C(1) of the Act applies to inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g a draft assessment order under Section 144C(1), even in the case of remand of proceedings and that such an omission is not a mere irregularity, but an incurable illegality, which cannot be saved by Section 292B of the IT Act. Paragraphs 17, 18, 19 and 20 of the said decision are relevant and the same are quoted as under :- 17. The Court is unable to agree with the submissions made on behalf of the Revenue by Mr. Jain. Section 144C (1) of the Act is unambiguous. It requires the AO 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 ITAT. 18. It was then contended by Mr. Jain that the assessment order passed by the AO should not be declared to be invalid because of the failure to first pass a draft assessment order under Section 144C of the Act. In this regard, reference is made to Section 292B of the Act. 19. As already noted, the final assessment order of the AO stood vitiated not on account of mere irregula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see. This important step has been completely omitted by the Respondent taking away a very necessary right of Petitioner to file objections to the proposed variation with the DRP and the Assessing Officer, which in our view, strikes to the root of the procedure contemplated by Section 144C. 27. Applying the aforesaid principles to the facts of this case, we are of the view that the failure on the part of the Assessing Officer to follow the procedure under Section 144C(1) is not a merely procedural or inadvertent error, but a breach of a mandatory provision. We are also not impressed with the arguments of the Revenue that the Assessing Officer was under pressure of two charges, as there were timelines to adhere to, since the said timelines from time to time have been extended, the most recent one being to 30th September, 2021. The Revenue ought to have appreciated that the requirement under Section 144C(1) to first pass a draft Assessment Order and to provide a copy thereof to the assessee is a mandatory requirement which gave substantive right to the assessee to object to any variation, that is prejudicial to it. In this case, the order under Section 92CA (3) of the IT Act, propo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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