2022 (1) TMI 1363 - AT - Income Tax

Validity of Assessment u/s 144C - mandatory for the AO to pass Draft Assessment Order in accordance with the procedure laid down - intent of the AO while passing the draft assessment order - HELD THAT In the present case, the Ld.AO passed the draft assessment order u/s. 143(3) r.w.s. 144C (13) of the Act on 23.03.2016 which is accompanied with demand notice issued u/s. 156 of the Act dated 23.03.2016 and it is also noticed that in the draft assessment order itself, the AO recorded the statement as Demand notice issued accordingly. Penalty proceedings u/s. 271(1)(c) are initiated separately for the additions made. Being so, it is observed that the draft assessment order passed by the AO is without following the due process of law as enumerated in the judgment in the case of Vijay Television 2014 (6) TMI 540 - MADRAS HIGH COURT Since the order passed by the AO is without following the due process of law and it cannot survive in the eyes of law, accordingly we quash the impugned assessment order before us - Decided in favour of assessee.

Issues Involved:

1. Consideration of foreign currency expenditure as 'reimbursements' not chargeable to tax.
2. Classification of technical services as a mix of high-end and low-end services.
3. Negative working capital adjustment for a captive service provider.
4. Acceptance/rejection of comparable companies based on unreasonable criteria.
5. Computation of operating margins of comparable companies.
6. Application of higher threshold for turnover filter.
7. Computation of arm's length price without 5% benefit under section 92C.
8. Adjustments for differences in risk profiles between the appellant and comparables.
9. Rejection of comparable companies based on export sales, employee cost, and related party transactions criteria.
10. Use of only FY 2011-12 data for determining arm's length margin/price.
11. Rejection of the filter for research and development expenses and advertising, marketing, and distribution expenses.
12. Reference to TPO without recording necessity or expediency.
13. Use of information under section 133(6).
14. Non-provision of Minimum Alternate Tax credit.
15. Restriction of TDS credit.
16. Validity of draft assessment order and issuance of demand notice and penalty proceedings.

Issue-wise Detailed Analysis:

1. Foreign Currency Expenditure as 'Reimbursements':
The appellant contended that foreign currency expenditure related to the recharge of international assignee costs should be considered as 'reimbursements' and not income chargeable to tax. The tribunal did not explicitly address this issue in the final judgment, as the primary focus was on the procedural validity of the assessment order.

2. Classification of Technical Services:
The appellant argued against the conclusion that the technical services provided were a mix of high-end and low-end services. The tribunal did not delve into this issue due to the procedural flaw found in the assessment order.

3. Negative Working Capital Adjustment:
The appellant contested the negative working capital adjustment, asserting it was a captive service provider without working capital risk. This issue was not specifically addressed in the final judgment due to the procedural invalidity of the assessment order.

4. Comparability Criteria for Companies:
The appellant challenged the acceptance/rejection of certain companies based on unreasonable comparability criteria. The tribunal did not address this issue on merits, given the procedural defect in the assessment order.

5. Operating Margins of Comparable Companies:
The appellant disputed the computation of operating margins for some comparable companies. This issue was not analyzed due to the procedural flaw in the assessment order.

6. Turnover Filter Threshold:
The appellant argued for a higher threshold while applying the turnover filter. This issue was not examined due to the procedural invalidity of the assessment order.

7. Arm's Length Price Computation:
The appellant contended that the arm's length price was computed without giving the benefit of 5% under the proviso to section 92C. The tribunal did not address this issue on merits due to the procedural defect in the assessment order.

8. Adjustments for Risk Profile Differences:
The appellant argued for suitable adjustments to account for differences in the risk profile compared to comparables. This issue was not addressed due to the procedural flaw in the assessment order.

9. Rejection of Comparable Companies:
The appellant contested the rejection of certain comparable companies based on export sales, employee cost, and related party transactions criteria. The tribunal did not analyze this issue on merits due to the procedural invalidity of the assessment order.

10. Use of FY 2011-12 Data:
The appellant argued against using only FY 2011-12 data for determining the arm's length margin/price. This issue was not examined due to the procedural defect in the assessment order.

11. Research and Development and Advertising Expenses Filters:
The appellant contended against the rejection of filters for research and development expenses and advertising, marketing, and distribution expenses. This issue was not addressed due to the procedural flaw in the assessment order.

12. Reference to TPO:
The appellant argued that the reference to the TPO was made without recording the necessity or expediency as required under section 92CA(1). This issue was not analyzed due to the procedural invalidity of the assessment order.

13. Use of Information under Section 133(6):
The appellant contested the use of information by exercising powers under section 133(6). This issue was not addressed due to the procedural flaw in the assessment order.

14. Minimum Alternate Tax Credit:
The appellant argued that the AO did not provide credit for Minimum Alternate Tax while computing the total tax payable. This issue was not examined due to the procedural defect in the assessment order.

15. TDS Credit Restriction:
The appellant contested the restriction of TDS credit to INR 18,74,81,464 against INR 19,36,50,171 claimed. This issue was not addressed due to the procedural invalidity of the assessment order.

16. Validity of Draft Assessment Order:
The tribunal found that the draft assessment order issued by the AO was accompanied by a demand notice and initiated penalty proceedings, contrary to the procedure prescribed under section 144C. Citing various judgments, including those from the Madras High Court and other tribunals, the tribunal held that the AO's actions were contrary to the mandatory procedure, rendering the assessment order null and void. Consequently, the tribunal quashed the assessment order and refrained from addressing other grounds of appeal.

Conclusion:
The tribunal quashed the assessment order due to procedural invalidity in issuing the draft assessment order along with a demand notice and initiating penalty proceedings. All other issues raised by the appellant were left open and not adjudicated on merits. The appeal by the assessee was allowed.

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