2016 (4) TMI 45 - HC - Income Tax

Validity of assessment order passed by the AO - Dispute Resolution Panel (DRP) declared that the AO lacked jurisdiction to deal with an issue - AO nevertheless proceeded to pass a final assessment order in the teeth of the order of the DRP. - Eligible assessee in terms of Section 144C(15)(b) - Matter was referred to Transfer Pricing Officer ( TPO ) for determination of the arm s length price ( ALP ) - Held that - In the first place the Court would like to observe that this is an instance of blatant disregard by the AO of the order of the DRP notwithstanding that the DRP had categorically held that the two Petitioners do not satisfy the conditions of an eligible assessee in terms of Section 144 (15) (b) (ii) of the Act. As already noticed under Section 144C(10) of the Act the AO had no option but to comply with the order of the DRP. Even if no direction was issued by the DRP under Section 144C (5) of the Act, the fact that the DRP held that both the Petitioners were not eligible Assessees could not have been ignored by the AO. It appears to the Court that it is plain that under Section 144C, the AO should have proceeded to pass an order under Section 143 (3) of the Act. Instead the AO confirmed the draft assessment order passed under Section 144C (1) of the Act. This, therefore, vitiated the entire exercise. The Court has no hesitation in holding that the final assessment order dated 28th January 2015 is without jurisdiction and null and void. The draft assessment order dated 28th March 2014, having been passed in respect of entities which were not eligible assessees , is also held to be invalid. An assessment order passed by the AO which is contrary to the mandatory requirement of Section 144C of the Act, is entirely without jurisdiction. Thus the draft assessment order dated 28th March 2014 and the final assessment order dated 28th January 2015 passed by the AO are held to be void ab initio and quashed on that basis. The orders consequential thereto also do not survive.

Issues Involved:
1. Jurisdiction of the Assessing Officer (AO) to pass a final assessment order contrary to the Dispute Resolution Panel (DRP) order.
2. Status of the Petitioners as 'eligible assessee' under Section 144C of the Income Tax Act.
3. Compliance with Section 144C (10) and (13) of the Income Tax Act by the AO.
4. Validity of the final assessment orders passed by the AO.
5. Appropriate legal remedy for the Petitioners.

Issue-wise Detailed Analysis:

1. Jurisdiction of the AO to Pass a Final Assessment Order Contrary to the DRP Order:
The core issue revolves around whether the AO had the jurisdiction to pass a final assessment order despite the DRP's determination that the Petitioners were not 'eligible assessees' under Section 144C (15) (b) of the Income Tax Act. The DRP had explicitly stated that it did not have jurisdiction over the Petitioners and declined to issue any directions. The AO, however, proceeded to pass final assessment orders, disregarding the DRP's findings. This action was deemed a blatant disregard of the DRP's order, which was binding on the AO under Section 144C (10) of the Act.

2. Status of the Petitioners as 'Eligible Assessee' under Section 144C of the Income Tax Act:
The Petitioners, ESPN Star Sports and ESS Distribution, contended that they were not 'eligible assessees' as defined under Section 144C (15) (b) of the Act. The DRP concurred with this view, stating that since the Transfer Pricing Officer (TPO) had proposed no variation in the returned income and the Petitioners were not foreign companies, they did not qualify as 'eligible assessees'. Consequently, the DRP dismissed the proceedings in limine, asserting its lack of jurisdiction.

3. Compliance with Section 144C (10) and (13) of the Income Tax Act by the AO:
Section 144C (10) mandates that the AO must comply with the DRP's directions. Section 144C (13) further stipulates that the AO shall complete the assessment in conformity with the DRP's directions. The AO's failure to adhere to these provisions by passing a final assessment order contrary to the DRP's determination was a clear violation of the statutory requirements. The AO's justification that the DRP's order was invalid was not acceptable, as the DRP is a superior authority, and its orders are binding on the AO.

4. Validity of the Final Assessment Orders Passed by the AO:
The final assessment orders dated 28th January 2015 were held to be without jurisdiction and null and void. The draft assessment orders dated 28th March 2014 were also deemed invalid, as they were passed in respect of entities that were not 'eligible assessees'. The Court emphasized that the AO should have proceeded under Section 143 (3) of the Act instead of confirming the draft assessment orders under Section 144C (1).

5. Appropriate Legal Remedy for the Petitioners:
The Petitioners approached the High Court under Article 226 of the Constitution of India, challenging the final assessment orders. The Court noted that the Petitioners were justified in seeking this remedy, given that the final assessment orders were contrary to the DRP's binding order. The Court set aside the final assessment orders and directed that the draft assessment order, the DRP's order, and the final assessment order be placed before the concerned Commissioner for appropriate action. The Court also clarified that it had not expressed any opinion on the validity of the proceedings against the Petitioners under Section 147/148 of the Act, leaving those issues open for determination by the appropriate authority.

Conclusion:
The High Court allowed the writ petitions, quashing the draft assessment order dated 28th March 2014 and the final assessment order dated 28th January 2015 as void ab initio. The orders consequential thereto were also invalidated. The Court highlighted the importance of judicial discipline and adherence to the statutory provisions, emphasizing that the AO's actions in this case were a clear disregard of the legal framework established under Section 144C of the Income Tax Act.

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