2023 (2) TMI 1294 - AT - Income Tax

Validity of assessment order u/s 144C (1) without passing the draft assessment order - HELD THAT - The Hon ble Bombay High Court in the case of Exxon Mobil Company (P.) Ltd. 2022 (4) TMI 1556 - BOMBAY HIGH COURT in a recent decision reiterated the legal requirement of passing draft assessment order in proceeding u/s 144C of the Act arising out of remand from the Tribunal. The Hon ble High Court held that where Tribunal remanded the matter to give effect to transfer pricing issue, assessee s case would be eligible u/s 144C of the Act and the AO was required to pass draft assessment order before issuance of final assessment order. Similar view was taken in the case of Turner International India (P.) Ltd. 2017 (5) TMI 991 - DELHI HIGH COURT held that failure of AO to adhere to mandatory requirement of section 144C (1) of the Act, where the final assessment order has been passed without draft assessment order, such final assessment order shall be invalid. AO was required to adjudicate the issue of amount received under International Sales and Marketing Agreement afresh in line with the directions of the Tribunal. It was incumbent upon the AO to follow the procedure laid down u/s 144C of the Act, i.e. to first pass the draft assessment order. In the facts of the case and the decisions referred above, we hold that assessment order passed by AO without passing draft assessment order is invalid and unsustainable, ergo, the same is liable to be quashed. We hold and direct accordingly.

Summary

Issues Involved:
1. Validity of the assessment order without passing a draft assessment order.
2. Compliance with section 144C of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

Validity of the assessment order without passing a draft assessment order:
The assessee challenged the validity of the assessment order dated December 29, 2016, on the grounds that it was passed without issuing a draft assessment order, which is a mandatory requirement under section 144C of the Income Tax Act, 1961. The assessee argued that this procedural lapse rendered the assessment order "bad in law and void ab initio." The Tribunal found merit in the assessee's contention, noting that no fresh document was required to adjudicate this additional ground. The Tribunal admitted the additional ground for adjudication on merits.

Compliance with section 144C of the Income Tax Act, 1961:
The Tribunal examined whether the Assessing Officer (AO) complied with the procedural requirements of section 144C, which mandates the issuance of a draft assessment order before the final assessment order. The assessee, a non-resident company incorporated in the Netherlands and engaged in the business of operating hotels worldwide, had previously been involved in litigation concerning the nature of receipts from International Sales and Marketing as royalty/fee for technical services. The Tribunal had earlier restored the matter to the AO with specific directions to consider the assessee's plea of mutuality. However, the AO directly passed the final assessment order without issuing a draft assessment order, which the Tribunal found to be in violation of section 144C.

The Department argued that the assessment order was valid as it was passed to give effect to the directions of the Tribunal and the CIT(A), and therefore, a draft assessment order was not required. However, the Tribunal, relying on precedents such as Dimension Data Asia Pacific PTE Ltd. Vs. DCIT, Exxon Mobil Company (P.) Ltd. Vs. DCIT, and Turner International India (P.) Ltd. Vs. DCIT, rejected this contention. The Tribunal held that even in remand proceedings, the AO is required to pass a draft assessment order under section 144C.

The Tribunal emphasized that the special procedure under section 144C is mandatory for foreign companies where the AO proposes to assess by making a variation in the returned income. The failure to issue a draft assessment order rendered the final assessment order invalid and unsustainable. Consequently, the Tribunal quashed the assessment order dated December 29, 2016.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the assessment order was invalid due to non-compliance with the mandatory requirement of issuing a draft assessment order under section 144C. The grounds raised on the merits of the addition became academic and were left open. The order was pronounced in the open court on February 20, 2023.