2019 (8) TMI 763 - AT - Income Tax

Effect of non-passing draft assessment order u/s 144C(1) - Transfer pricing adjustment - AO instead of passing draft assessment order, issued final assessment order along with demand notice upward TP adjustment was made u/s 92CA(3) by TPO - HELD THAT - The Hon ble Bombay High Court in Pr.CIT Vs. Lionbridge Technologies (P.) Ltd. ( 2018 (12) TMI 764 - BOMBAY HIGH COURT ) have laid down the proposition that in terms of section 144C(1), the AO is to first pass a draft assessment order which is subject to challenge, by way of representation to the DRP. It is only after DRP disposes of representation, that AO passes a final order in terms of directions of DRP and such final order is appealable to the Tribunal. Applying the said proposition to the facts of present case and mainly relying on the proposition that mere consent of parties does not bestow the jurisdiction, where the order is beyond jurisdiction. We hold that even if assessee had accepted addition to be made on account of transfer pricing adjustment, during assessment proceedings, would not bestow the jurisdiction upon the AO and final assessment order passed in the case cannot be upheld in law, in the absence of AO passing draft assessment order, which is envisaged as per section 144C(1). Accordingly, we hold that assessment order passed in the case is without jurisdiction and bad in law. Similar issue of AO having passed final assessment order u/s 143(3) making certain adjustments to assessee s arm's length price without processing draft assessment order, the Tribunal in Soktas India (P.) Ltd. Vs. ACIT ( 2017 (2) TMI 1001 - ITAT PUNE ) it was held that the said order being against provisions of section 144C. In view of our setting aside the assessment order passed in the case u/s 143(3), the grounds of appeal raised by assessee on merits and the grounds of appeal raised by Revenue become academic in nature and the same are dismissed. - Decided against revenue

Summary

Issues:
Cross appeals filed by assessee and Revenue against order of CIT(A)-2, Nashik, dated 13.03.2015 relating to assessment year 2009-10 under section 143(3) r.w.s. 147 of the Income-tax Act, 1961.

Issue 1: Additional Ground of Appeal
The additional ground of appeal raised by the assessee questions the Assessing Officer's failure to follow the mandatory provisions of section 144C of the Act, specifically regarding the absence of a draft assessment order despite an upward TP adjustment made by the Transfer Pricing Officer (TPO) under section 92CA(3) of the Act.

Analysis: The issue revolves around whether the Assessing Officer's failure to issue a draft assessment order, as required by section 144C(1) of the Act, renders the subsequent assessment order illegal. The assessee argued that the omission of the draft order violates jurisdictional requirements, citing relevant legal precedents from the Hon'ble Bombay High Court and Pune Bench of the Tribunal. The contention was admitted for adjudication based on its legal nature.

Issue 2: Draft Assessment Order Requirement
The main issue is whether, upon receiving the TPO's order proposing an upward adjustment, the Assessing Officer was obligated to issue a draft assessment order before finalizing the assessment.

Analysis: Section 144C(1) of the Act mandates the Assessing Officer to forward a draft assessment order to the eligible assessee before making any prejudicial variations in income. The failure to adhere to this procedure was deemed a violation of jurisdictional requirements. The judgment extensively discusses the necessity of a draft order as per the Act's scheme and legal precedents, emphasizing the importance of following due process in assessment proceedings.

Conclusion:
The judgment concluded that the Assessing Officer's failure to pass a draft assessment order before finalizing the assessment, despite the acceptance of the TP adjustment by the assessee, rendered the assessment order without jurisdiction and invalid in law. The decision was based on the legal requirement of issuing a draft order under section 144C(1) of the Act, as highlighted by relevant judicial decisions. The appeal of the assessee was allowed, and that of the Revenue was dismissed, ultimately setting aside the assessment order under section 143(3) of the Act.