2023 (2) TMI 693 - AT - Income Tax

Assessement u/s 144C - notice of demand issued at the stage of draft order - HELD THAT - Since the A.O in the present case had issued notice of demand at the stage of draft order which actually ought to have been done at the stage of passing a final order thereby assigning finality to the assessment at the stage of draft order itself. We hold that the resultant final assessment order actually got vitiated in the eyes of law and hence cannot stand. The A.O wanted the assessee to treat the order as the draft assessment order. Then he should not have issued demand notice and penalty notice to the assessee and even when he had issued he should have withdrawn them i.e. the said demand notice and penalty notice which in fact he had not done. Demand notice and the penalty notice are issued only after the final assessment is completed. Therefore the A.O violated the provisions of section 144C - Accordingly we set aside the assessment order declaring it null and void. The legal ground raised by the assessee is answered in favour of the assessee and against the revenue.

Issues Involved:

1. Validity of the draft assessment order issued by the National Faceless Assessment Centre (NaFAC) without following section 144C of the Income Tax Act, 1961.
2. Jurisdiction of the Assistant Commissioner of Income Tax (ACIT) in passing the final assessment order under section 144B.
3. Transfer Pricing (TP) adjustment related to interest on External Commercial Borrowing (ECB).
4. Rejection of alternate benchmarking analysis conducted by the appellant.
5. Initiation of penalty proceedings under Section 274 read with Section 270 of the Act.

Issue-Wise Detailed Analysis:

1. Validity of the Draft Assessment Order:

The appellant contested that the NaFAC issued a draft assessment order dated 29 June 2021 without adhering to the mandate of section 144C of the Income Tax Act, 1961, and issued a notice of demand under section 156 along with the draft assessment order. The appellant argued that this procedural lapse rendered the draft assessment order null and void, making the assessment proceedings non-est and invalid. The Tribunal agreed, noting that section 144C mandates the issuance of a draft assessment order to allow the assessee to file objections before the Dispute Resolution Panel (DRP). The Tribunal found that the issuance of a demand notice and penalty proceedings along with the draft order indicated that the Assessing Officer (AO) treated the draft order as final, violating the statutory procedure. Consequently, the Tribunal declared the draft assessment order and subsequent proceedings null and void.

2. Jurisdiction of the ACIT:

The appellant claimed that the ACIT lacked jurisdiction to pass the final assessment order under section 144B, rendering it null and void. The Tribunal, having already found the draft assessment order invalid, did not need to delve deeply into this issue as the invalidity of the draft order itself nullified the final assessment order.

3. Transfer Pricing Adjustment:

The appellant challenged the TP adjustment of INR 75,00,000 related to interest on ECB, arguing that the ACIT and DRP erred in rejecting the appellant's benchmarking analysis and allowing only a marginal spread of 25 basis points over the SBI Base Rate. The Tribunal did not address the merits of this issue, as the invalidity of the draft assessment order rendered the final assessment order and its contents, including the TP adjustment, void.

4. Rejection of Alternate Benchmarking Analysis:

The appellant argued that the ACIT and DRP wrongly rejected the alternate benchmarking analysis based on the normal lending rates of various banks in India during the relevant period. As with the TP adjustment, the Tribunal did not address this issue on merits due to the invalidity of the draft assessment order.

5. Initiation of Penalty Proceedings:

The appellant contended that the initiation of penalty proceedings under Section 274 read with Section 270 of the Act was erroneous. The Tribunal noted that the issuance of a penalty notice along with the draft assessment order was procedurally incorrect. Since the draft assessment order was declared null and void, the penalty proceedings initiated based on it were also invalid.

Conclusion:

The Tribunal concluded that the draft assessment order issued by the NaFAC was invalid due to procedural lapses, specifically the issuance of a demand notice and penalty proceedings along with the draft order, which violated section 144C of the Income Tax Act, 1961. Consequently, the final assessment order and all related proceedings, including TP adjustments and penalty initiation, were declared null and void. The appeal was partly allowed in favor of the assessee, with all other grounds on merits dismissed as infructuous.

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