35. Sections 144C(1), 156 and 271(1)(c) – International transactions – A. Ys. 2007-08 and 2008-09 – Transfer pricing – Arm’s length price – Scope of section 144C(1) – Issuance of draft assessment orders by AO mandatory – Condition not fulfilled – Assessment orders, consequent demand notices and penalty proceedings invalid

Turner International India Pvt. Ltd. vs. Dy. CIT; 398 ITR 177 (Del):

The assessee was a wholly owned subsidiary of T engaged in the business of sub-distribution of distribution rights and sale of advertisement inventory on satellite delivered channels. For A. Ys. 2007-08 and 2008-09, the Assessing Officer made a reference u/s. 92CA of the Act, to the Transfer Pricing Officer (TPO) who passed separate orders in respect of the distribution activity segment. On that basis, the Assessing Officer passed orders. The Dispute Resolution Panel (DRP) concurred with the orders of the TPO and the final orders were passed by the Assessing Officer. The Tribunal held that neither the assessee nor the TPO had considered the appropriate comparables and therefore, the determination of the arm’s length price (ALP) was not justifiable. It set aside the orders of the DRP and remanded the matter to the Assessing Officer for undertaking a transfer pricing study afresh and accordingly make the assessments. The TPO issued fresh notices u/s. 92CA(2) and passed separate orders proposing upward adjustments. Subsequently, the Assessing Officer passed orders in respect of both assessment years confirming the additions proposed by the TPO. He also issued demand notices u/s. 156 and notices u/s. 271(1)(c) initiating penalty proceedings.

The assessee filed writ petitions and challenged the assessment orders, demand notices u/s. 156 and the notices u/s. 271(1)(c). The assessee contended that there was non-compliance with the provisions of section 144C(1) which required the Assessing Officer to first issue draft assessment orders.

The Delhi High Court allowed the writ petitions and held as under:

“i)   The legal position is unambiguous. The failure by the Assessing Officer to adhere to the mandatory requirement of section 144C(1) and first pass draft assessment orders would result in invalidation of the final assessment orders and the consequent demand notices and penalty proceedings.

ii)   The final assessment orders dated 31/03/2015 passed by the Assessing Officer for the A. Ys. 2007-08 and 2008-09, the consequent demand notices issued by the Assessing Officer and the initiation of penalty proceedings are hereby set aside.”