2019 (9) TMI 262 - AT - Income Tax

Non-passing of separate draft order pursuant to restoration by the Dispute Resolution Panel (DRP) - non- adhering statutorily mandated procedure - Order of DRP restoring the matter to the AO/TPO for undertaking a fresh benchmarking altogether afresh - HELD THAT - TPO in the second round carried out the benchmarking exercise all afresh treating the assessee as KPO service provider as against his earlier view of a BPO service provider in the first round. After passing of the order by the TPO on 21.11.2016, the AO proceeded to straightaway pass the final assessment order u/s.143(3) r.w.s. 144C(13) of the Act on 28-11-2016. It is, ergo, overt that pursuant to the fresh benchmarking done by the TPO in his second order, the AO omitted to pass a draft order which could have been challenged by the assessee before the DRP or the CIT(A). Law enjoins the passing of a draft order after the TPO s order against which the assessee can raise objection before the DRP before finally coming to the Tribunal as was done in the first round of proceedings. Once the DRP set aside the exercise of benchmarking by the TPO and directed to determine the ALP altogether afresh, the earlier round of the proceedings came to an end and a fresh round of proceedings started with the AO making a reference to the TPO for fresh benchmarking on 7.10.2016. The entire procedure was once again required to be adhered to starting with the passing of the order by the TPO; passing of the draft order; objections to be raised by the assessee before the DRP; and passing of a final assessment order. AO in the second round, on receipt of the order from the TPO, proceeded to pass a final assessment order, thereby omitting to pass a draft order and eventually denying the assessee an opportunity to raise objections before the DRP as enshrined under sub-section (4) of section 144C of the Act. Statutorily mandated procedure must be adhered to by the authorities, non-observance of which renders the assessment order null and void. As statutorily mandated procedure has not been followed in the instant case in as much as neither any draft order was passed in the second round nor the assessee could raise objection before the DRP, the edifice of the final assessment order, being devoid of a legal bedrock, stands shaked, thereby frustrating the legality of the order. Instant assessment is a nullity for two reasons, viz., first for the DRP exceeding its jurisdiction in restoring the matter to the AO/TPO for undertaking a fresh benchmarking altogether afresh; and two, the AO not following the statutorily prescribed procedure of first passing a draft order and snatching away a forum from the assessee for assailing the variation in the income pursuant to the order of the TPO before approaching the Tribunal. Ex consequenti, we set aside the impugned order as null and void. Thus declaring the assessment order as a nullity - Decided in favour of assessee

Summary

Issues Involved:
1. Non-passing of a separate draft order pursuant to restoration by the Dispute Resolution Panel (DRP).
2. Jurisdiction of the DRP in restoring the matter for fresh benchmarking.
3. Statutory procedure adherence by the Assessing Officer (AO) and Transfer Pricing Officer (TPO).

Issue-wise Detailed Analysis:

1. Non-passing of a Separate Draft Order Pursuant to Restoration by the DRP:
The primary legal issue raised is the failure of the AO to pass a separate draft order following the DRP's direction for fresh benchmarking. The assessee argued that this procedural lapse vitiated the assessment. Section 144C of the Income-tax Act, 1961, mandates the AO to forward a draft order to the eligible assessee if any variation in income is proposed. The assessee can then either accept the variations or file objections with the DRP. The AO must complete the assessment based on the draft order if no objections are received. The DRP's directions are binding, and the AO must complete the assessment in conformity with these directions without providing further hearing to the assessee. The Tribunal noted that the AO failed to pass a draft order after the TPO's fresh benchmarking, which denied the assessee an opportunity to raise objections before the DRP, thus violating the statutory procedure.

2. Jurisdiction of the DRP in Restoring the Matter for Fresh Benchmarking:
The DRP's role is confined to confirming, reducing, or enhancing the variations proposed in the draft order. It is explicitly prohibited from setting aside any proposed variation or issuing directions for further enquiry and passing of the assessment order. In this case, the DRP directed the AO/TPO to carry out a fresh search for comparable companies, effectively changing the foundation of the assessee from a BPO service provider to a KPO service provider. This direction exceeded the DRP's jurisdiction as it amounted to a de novo determination of the Arm’s Length Price (ALP), which is not within the DRP's powers.

3. Statutory Procedure Adherence by the AO and TPO:
The statutory scheme under section 144C requires the passing of a draft order after the TPO's order, against which the assessee can raise objections before the DRP. The AO must then pass the final assessment order in conformity with the DRP's directions. In this case, after the DRP's direction for fresh benchmarking, the TPO recomputed the ALP, and the AO directly passed the final assessment order without issuing a draft order. This omission denied the assessee the opportunity to object to the variations, violating the procedural requirements. The Tribunal cited precedents, including the Madras High Court's decision in Vijay Television (P) Ltd. and the Bombay High Court's decision in Pr. CIT Vs. Lionbridge Technologies Pvt. Ltd., which held that failure to follow the mandatory procedures renders the assessment order null and void.

Conclusion:
The Tribunal concluded that the assessment order was null and void due to two reasons: the DRP exceeding its jurisdiction by restoring the matter for fresh benchmarking and the AO's failure to follow the statutory procedure by not passing a draft order. Consequently, the Tribunal set aside the impugned order and allowed the appeal, declaring the assessment as a nullity. The Tribunal did not address the merits of the additions due to the procedural invalidity of the assessment order.

Order Pronouncement:
The order was pronounced in the Open Court on 04th September, 2019.