2020 (6) TMI 53 - AT - Income Tax

Validity of assessment u/s 144C - Non passing draft Assessment Order - TP Adjustment - excessive Advertisement, Marketing and Promotion Expenditure (AMP) for development of the brand owned by its foreign AE, therefore such excessive AMP expenditure would amount to international transaction - Penalty u/s 271(1)(c) - whether AO has passed the final assessment order instead of a draft assessment order? - HELD THAT - As per Section 144C of the Act, it is mandatory for the Assessing Officer to pass draft Assessment Order. But instead of that, the Assessing Officer vide order dated 18.10.2019 merely captioned the final Assessment Order as Draft Assessment Order along with issuance of notices under Section 156 and 274 read with Section 271(1)(c) of the Act which means a final Assessment order u/s 144C was passed without following the mandatory provisions of Section 144C. Final Assessment order passed in remand proceedings without passing a draft Assessment order is in violation of Section 144C of the Act and is therefore null and void. The Ld. DR could not bring any case law on contrary to these decisions. In fact, the statute itself gives a mandatory direction to the Assessing Officer under Section 144C that in the first instance the Assessing Officer should forward the draft of the proposed order of assessment. When the Tribunal remanded back the matter for fresh determination, it has set aside the earlier Assessment and hence the Assessing Officer has to conduct a fresh Assessment as per the mandate of Section 144C. Thus, the Assessment order itself is bad in law and void ab initio, hence quashed. Appeals of the assessee are allowed.

Issues Involved:
1. Validity of the assessment orders passed by the Assessing Officer (AO) without following the mandatory provisions of Section 144C of the Income Tax Act.
2. Whether the excessive Advertisement, Marketing, and Promotion (AMP) expenditure incurred by the assessee constitutes an international transaction.
3. Methodology used by the Transfer Pricing Officer (TPO) for benchmarking the alleged international transaction related to AMP expenditure.
4. Specific adjustments made by the AO/TPO regarding AMP expenditure on substantive and protective bases.
5. Applicability of interest levied under Sections 234B and 234C of the Income Tax Act.

Detailed Analysis:

Issue 1: Validity of the Assessment Orders
The Tribunal emphasized that the AO must follow the mandatory provisions of Section 144C of the Income Tax Act, which requires the issuance of a draft assessment order before passing a final assessment order. The AO in this case issued what was titled a "draft assessment order" but included notices under Sections 156 and 274, effectively making it a final assessment order. This procedural lapse rendered the assessment orders for both AY 2012-13 and AY 2015-16 null and void. The Tribunal relied on several precedents, including decisions from the Hon'ble Delhi High Court and the Hon'ble Supreme Court, confirming that non-compliance with Section 144C mandates quashing the assessment order.

Issue 2: AMP Expenditure as an International Transaction
The Tribunal noted that the TPO characterized the AMP expenditure incurred by the assessee for brand development as an international transaction. This characterization was contested by the assessee, who argued that there was no agreement or understanding with the Associated Enterprise (AE) for such expenditure. The Tribunal remanded the matter to the TPO to determine whether the AMP expenditure constituted an international transaction, following the judgments of the jurisdictional High Court.

Issue 3: Benchmarking Methodology for AMP Expenditure
The TPO used both the Cost Plus Method (CPM) on a substantive basis and the Bright Line Test (BLT) on a protective basis to benchmark the AMP expenditure. The Tribunal had earlier directed the TPO to use an aggregated approach following the AMP intensity method. However, the TPO reiterated the use of CPM and BLT in the second round of proceedings. The Tribunal found that the TPO did not adhere to the directions properly, leading to further complications in the assessment.

Issue 4: Specific Adjustments by AO/TPO
The AO/TPO made significant adjustments to the assessee’s income based on the AMP expenditure. For AY 2012-13, the TPO made adjustments of INR 51,89,69,687 on a substantive basis and INR 1,21,37,90,558 on a protective basis. For AY 2015-16, the adjustments were INR 1,59,39,195 on a substantive basis and INR 1,18,49,05,211 on a protective basis. The Tribunal noted that the AO did not follow the DRP's directions accurately, particularly regarding the use of the AMP intensity method and the exclusion of sales-related expenses.

Issue 5: Interest Under Sections 234B and 234C
The assessee also contested the interest levied under Sections 234B and 234C of the Income Tax Act. However, since the assessment orders were quashed due to procedural lapses, the Tribunal did not delve into the merits of this issue.

Conclusion:
The Tribunal quashed the assessment orders for AY 2012-13 and AY 2015-16 due to the AO's failure to issue proper draft assessment orders as mandated by Section 144C of the Income Tax Act. Consequently, the other grounds of appeal related to the merits of the adjustments and the characterization of AMP expenditure as an international transaction were rendered moot. The appeals were allowed in favor of the assessee.

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