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TMI Blog2020 (3) TMI 1420X X X X Extracts X X X X X X X X Extracts X X X X ..... REME COURT] . It is a report which has no legal validity. An adjustment made based on this report is also bad in law. Directions of the DRP are binding of the AO u/s 144(13) - final assessment order dated 16.05.2019 should have incorporated the finding of the DRP as directed in the order of the DRP. When the DRP has held that the re-opening of the assessment is bad in law, the AO, in our view, has no other alternative but to drop the assessment proceedings on the ground that re-opening of assessment has been held as bad in law. As the AO has not followed the binding directions of the DRP, we have to quash the final assessment order dated as bad in law. We uphold the view of the DRP that the re-opening of assessment based on a TPO report which is a nullity is bad in law. Hence, we quash the final assessment order passed by the AO u/s 143(3) r.w.s. 144C as bad in law. - Appeal of assessee allowed. - I.T.A. No. 1548/Kol/2019 - - - Dated:- 13-3-2020 - SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SHRI S.S. GODARA, JUDICIAL MEMBER For the Appellant : Sh. J.P. Khaitan, Sr. Adv. Sh. Pratyush Jhunjhunwala, Adv. For the Respondent : Sh. Vijay Shankar, CIT(DR) ORDE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otice dated 6th January 2017 from the Transfer Pricing Officer (herein after referred as or Ld. TPO ) under section 92CA(2) read with section 92D of the Act initiating transfer pricing proceedings. In response to the said notice, the Assessee vide letter dated 14 February 2017 submitted that the final assessment order was already passed by the Ld. AO and hence TP proceeding was invalid and should be dropped. However, the Ld. TPO disregarded the submission and continued with the TP proceedings. The Ld. TPO also issued show cause notice (SCN) dated 23 October 2017 where the Ld. TPO has proposed adjustment to the international transaction. The Assessee responded to the SCN vide submission dated 26 October 2017. Later, the Ld. TPO passed the transfer pricing order (referred to as T.P. order) dated 27 October 2017 under section 92CA(3) of the Act making an upward adjustment of INR 5,08,27,823. Subsequently, a notice dated 26 February 2018 under section 148 of the Act was issued by the Ld. AO initiating the re-assessment proceedings for the captioned AY. The Ld. AO, upon request, also issued the reasons for initiating re-assessment proceedings which mentioned that transfer prici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order dated 2.08.2018 passed u/s 143(3)/147 r.w.s. 144C. The crux of the issue is that the case was initially selected for limited scrutiny under CASS. Reference was made to the TPO with due approval on 8.09.2015. However, the final order was passed on 31.08.2016, without waiting for the TPO order. This assessment order did not have even a hint of the TP reference made on 8.09.2015. The TPO apparently was not aware about the final order already passed and continued with his process and passed the TPO order on 27.10.2017. Even the first notice from the TPO was issued to the assessee on 6.01.2017, when the final order was already passed by the AO on 31.08.2016 and as such, no TP proceedings could legally be proceeded with after 31.08.2016. iii. After the TP order dated 27.10.2017 was received by the AO, he reopened the case u/s 147/148 on 26.02.2018 (4 months after the TP order) after approval of PCIT. This was because there were no proceedings pending before the AO to incorporate the TPO order. No further TP reference was made after the issue of the notice for reopening the case. In such a situation, the TPO order dated 27.10.2017 could not have been incorporated in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment as per the above directions. The AO shall incorporate the reason given by the DRP in respect of various objections at the appropriate places in the body of the final order. AO shall also place a copy of the DRP Directions as Annexure to the Final Order. (Emphasis our) 5. The AO thereafter passed the final order determining the total income of the assessee at ₹9,40,36,160/- inter alia making Transfer Pricing Adjustment of ₹5,08,27,823/- of an international transaction after determining the ALP based on the order of the TPO. 6. The ld. Sr. Advocate arguing for the assessee submits that the assessment is bad in law for the following reasons: a) The case was taken up for scrutiny through CASS on non-TP risk parameters. Thus reference to TPO to determine ALP of an international transaction by the AO is beyond jurisdiction and hence invalid. Reliance is placed on instruction no. 7 of 2014 (F.No.225/229/2014-ITA.II). He referred to para 4 of this instruction and submitted that the procedure prescribed therein for approval was not obtained. 7. Original reference was made to the TPO on 08.09.2015 and that the final assessment order was passed on 31.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for comprehensive scrutiny then the AO has to take certain approvals from higher authorities and pointed out that the Board has issued another instruction no. 3/2003 dated 20.05.2003 mandating the AO to refer to the TPO, for determination of ALP, in all cases where the assessee has international transaction with AE valued above ₹5 crores and submitted that this instruction No. 3/2003 dated 20.05.2003 supersedes all other instructions and when the assessee has entered into an international transaction with an AE, the value of which is above ₹5 crores, the AO has to necessarily refer the transaction to the TPO for determination of ALP and hence it is wrong to argue that the AO has acted beyond jurisdiction. 12. The ld. DR referred to the dates and events and submitted that the instruction dated 26.09.2014 relied upon by the assessee does not apply to the facts of the case as reference to the TPO was made on 08.09.2015 based on Instruction No. 3/2003 dated 20.05.2003. 13. The ld. DR also argued that the assessment order passed was a valid order. In reply the ld. Sr. Advocate relied on the certain case laws, which will be considered by us as and if required, for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed by the Assessee without prejudice to the fact that TP proceeding was invalid. @ Pg 233 of PB 27 October 2017 TP order passed with an upward adjustment of INR 5,08,27,823/- @ Pg 297 of PB 26 February 2018 Reassessment proceedings initiated by the AO by issuing notice u/s 148 @ Pg 326 of PB 3 May 2018 Reasons for initiating reassessment proceedings provided by the AO @Pg 327 of PB 2 August 2018 Draft assessment order passed by the AO with an adjustment of INR 5,08,27,823/- @ Pg 346 of PB 30 August 2018 Objections filed by the Assessee against such draft order with the Hon ble DRP @ Pg 353 of PB 31 August 2018 Copy of DRP objections filed with the AO 22 April 2019 DRP direction issued @ Pg 467 of PB 16 May 2019 Final Assessment order u/s 143(3)/147 r.w.s 144C @ Pg 475 of PB 16. The DRP on page 7 held as follows: iv. It is also observed that it is mentioned in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding of the DRP as directed in the order of the DRP. When the DRP has held that the re-opening of the assessment is bad in law, the AO, in our view, has no other alternative but to drop the assessment proceedings on the ground that re-opening of assessment has been held as bad in law. As the AO has not followed the binding directions of the DRP, we have to quash the final assessment order dated 16.05.2019 as bad in law. 19. This Bench of the Tribunal in the case of M/s. Labvantage Solution Pvt. Ltd. Vs. DCIT (supra) under identical circumstances held as follows: 5. We find that the Learned AO having realized his mistake of not selecting the case for scrutiny sought to remain silent after receiving the Learned TPO s order dated 28.1.2014. We find that notice u/s 143(2) was also issued and served on the assessee in the reassessment proceedings. We find that in the reassessment proceedings, no fresh reference was made to the Learned TPO u/s 92CA(1) of the Act by the Learned AO. We hold that the action of using the old TPO order passed u/s 92CA(3) as an information for forming his opinion of reason to believe that income has escaped assessment within the meaning of section 147 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formation of belief to have reason to believe on the part of the ld AO that income had escaped assessment within the meaning of section 147 of the Act. Hence we hold that no addition in the sum of Rs. 2,43,53,752/- towards adjustment to ALP could be made in the reassessment. Once this addition goes, then the very root of the reassessment proceedings also vanishes and no other addition could be made thereon. Accordingly, the entire reassessment proceedings deserve to be quashed in the facts and circumstances of the case. 2.5. In view of our above conclusion, we allow the ground no. 1 raised by the assessee by declaring that the reassessment order of the ld AO is bad in law and void ab initio. In view of this decision, the adjudication of other grounds becomes infructuous and hence no decision is given on the merits of the additions and on other grounds raised by the assessee. 20. Consistent with the view taken therein, we uphold the view of the DRP that the re-opening of assessment based on a TPO report which is a nullity is bad in law. Hence, we quash the final assessment order passed by the AO u/s 143(3) r.w.s. 144C of the Act on 16.05.2019 as bad in law. 21. In the res ..... X X X X Extracts X X X X X X X X Extracts X X X X
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