2017 (5) TMI 991 - HC - Income Tax

Validity of assessment - Non-compliance with the mandatory provision contained in Section 144C(1) requiring the AO to first frame draft assessment orders - Held that - The failure by the AO to adhere to the mandatory requirement of Section 144C (1) of the Act and first pass a draft assessment order would result in invalidation of the final assessment order and the consequent demand notices and penalty proceedings. For the aforementioned reasons the final assessment orders dated 31st March 2015 passed by the AO for AYs 2007-08 and 2008-09 the consequential demand notices issued by the AO and the initiation of penalty proceedings are hereby set aside. - Decided in favour of assessee.

Summary

Issues:
Challenge to Assessment Orders for AY 2007-08 and AY 2008-09; Non-compliance with Section 144C(1) of the Income Tax Act.

Analysis:
The petitioner challenged the Assessment Orders passed by the Assessing Officer (AO) for AY 2007-08 and AY 2008-09, along with the accompanying Demand Notices. The petitioner, a subsidiary of a broadcasting company, engaged in sub-distribution of distribution rights and sale of advertisement inventory on satellite channels. The AO referred international transactions to the Transfer Pricing Officer (TPO), who passed orders for both AYs related to the Distribution Activity segment. The Dispute Resolution Panel (DRP) and the Income Tax Appellate Tribunal (ITAT) were involved in the process.

The ITAT observed that neither the petitioner nor the TPO considered appropriate comparables for determining the arms length price (ALP), leading to a remand for a fresh transfer pricing study. Subsequently, the TPO proposed upward adjustments to the petitioner's total income for both AYs. The AO passed final Assessment Orders confirming these additions, which were challenged on the grounds of non-compliance with Section 144C(1) of the Act, requiring the AO to first frame draft assessment orders.

Referring to legal precedents, including the Zuari Cement case, the court emphasized that failure to pass a draft assessment order under Section 144C(1) renders the final assessment order void and unenforceable. The court cited the Vijay Television case, where even a corrigendum issued after the final assessment order was deemed impermissible. Relying on previous judgments, including ESPN Star Sports and International Air Transport Association cases, the court reiterated the invalidation of final assessment orders due to non-compliance with mandatory provisions.

The Revenue's argument that the defect was curable and the matter could be restored for the petitioner to pursue before the DRP was rejected by the court. The court held that failure to pass a draft assessment order invalidated the final assessment order, demand notices, and penalty proceedings. Consequently, the court set aside the final assessment orders, demand notices, and penalty proceedings for both AYs, ruling in favor of the petitioner and allowing the petitions with no order as to costs.