31 Transfer pricing – Computation of arm’s length price – Section 92C, r.w.s. 144C – A. Ys. 2007-08 and 2008-09 – Failure of Assessing Officer to adhere to mandatory requirement of section 144C(1) and first pass a draft assessment order would result in invalidation of final assessment order and consequent demand notices and penalty proceedings

Turner International India (P.) Ltd. vs. ACIT; [2017] 82
taxmann.com 125 (Delhi):

For the A. Y. 2007-08, the assessee petitioner filed its
return on 31^st October 2007, declaring its income at Rs.
10,69,43,491/-. This was later revised on 31^st March, 2009 to claim
a higher TDS. As far as A. Y. 2008-09 is concerned, the Petitioner filed a
return of income on 30^th September, 2008 declaring its income at Rs.
35,04,23,465/-. In respect of both the returns, since there were international
transactions involving the Assessee, a reference was made by the AO to the
Transfer Pricing Officer (‘TPO’). In respect of both the A.Ys., two separate
orders were passed by the TPO on 29^th October, 2010 (in respect of
AY 2007-08) and 17^th October, 2011 (in respect of AY 2008-09), in
respect of the Distribution Activity segment. On the basis of the above orders
of the TPO, draft Assessment Orders were passed by the AO. These were objected
to by the Petitioner before the Dispute Resolution Panel (‘DRP’). After the DRP
concurred with the TPO, final assessment orders were passed by the AO. These
were appealed against by the Petitioner before the ITAT. By a common order
dated 14^th January 2013, in both the appeals pertaining to the two
A. Ys., the ITAT observed that neither the Petitioner nor the TPO had taken
into consideration appropriate comparables and, therefore, the determination of
arms length price (‘ALP’) was not justifiable. While setting aside the order of
the DRP, the ITAT remanded the matters to the AO for undertaking a transfer
pricing study afresh and framing an assessment in accordance with law.

Following the above order of the ITAT, fresh notices were
sent on 2^nd August, 2013 by the TPO to the Petitioner u/s. 92CA(2)
of the Act, 1961. Two separate orders were passed by the TPO on 30^th
January, 2015 proposing an upward adjustment to the total income of the
Petitioner for each of the A. Ys. Pursuant to the above order, the AO on 31^st
March, 2015 passed final Assessment Orders in respect of both A.Ys. u/ss.
254/143(3)/144C(13)r.w.s. 92CA(4) of the Act confirming the additions as
proposed by the TPO. Accompanying the aforementioned final Assessment Orders
were notices of demand u/s. 156 of the Act and notices u/s. 271(1)(c) of the
Act initiating penalty proceedings.

The assessee filed writ petitions challenging the said orders
and the penalty proceedings. The Delhi High Court allowed the writ petition and
held as under:

“i)   The short ground on
which the aforementioned final assessment orders and the consequent demand
notices have been challenged is that there was non-compliance with the
mandatory provision contained in section 144C(1) of the Act requiring the AO to
first frame draft assessment orders. The question whether the final assessment
order stands vitiated for failure to adhere to the mandatory requirements of
first passing draft assessment order in terms of Section 144C(1) of the Act is
no longer res intregra. There is a long series of decisions to which reference
would be made presently. In Zuari Cement Ltd. vs. ACIT (decision dated
21^st February, 2013 in WP(C) No.5557/2012), the Division Bench (DB)
of the Andhra Pradesh High Court categorically held that the failure to pass a
draft assessment order u/s. 144C (1) of the Act would result in rendering the
final assessment order “without jurisdiction, null and void and
unenforceable.” In that case, the consequent demand notice was also set
aside. The decision of the Andhra Pradesh High Court was affirmed by the
Supreme Court by the dismissal of the Revenue’s SLP (C) [CC No. 16694/2013] on
27^th September, 2013.

ii)   In Vijay
Television (P) Ltd. vs. Dispute Resolution Panel [2014] 369 ITR 113/225 Taxman
35/46 taxmann.com 100 (Mad.), a similar question arose. There, the Revenue
sought to rectify a mistake by issuing a corrigendum after the final assessment
order was passed. Consequently, not only the final assessment order but also
the corrigendum issued thereafter was challenged. Following the decision of the
Andhra Pradesh High Court in Zuari Cement Ltd.’s case (supra) and a
number of other decisions, the Madras High Court in Vijay Television (P) Ltd.
case(supra) quashed the final order of the AO and the demand notice.
Interestingly, even as regards the corrigendum issued, the Madras High Court
held that it was beyond the time permissible for issuance of such corrigendum
and, therefore, it could not be sustained in law.

iii)   Recently, this
Court in ESPN Star Sports Mauritius S.N.C. ET Compagnie vs. Union of India
[2016] 388 ITR 383/241 Taxman 38/68 taxmann.com 377, following the decision
of the Andhra Pradesh High Court in Zuari Cement Ltd.’s case (supra),
the Madras High Court in Vijay Television (P) Ltd. (supra) as well as
the Bombay High Court in International Air Transport Association vs. Dy. CIT
[2016] 241 Taxman 249/68 taxmann.com 246, came to the same conclusion.

iv)  Mr. Dileep Shivpuri,
learned counsel for the Revenue sought to contend that the failure to adhere to
the mandatory requirement of issuing a draft assessment order u/s. 144C (1) of
the Act would, at best, be a curable defect. According to him, the matter must
be restored to the AO to pass a draft assessment order and for the Petitioner,
thereafter, to pursue the matter before the DRP. The Court is unable to accept
the above submission. The legal position as explained in the above decisions is
unambiguous. The failure by the AO to adhere to the mandatory requirement of
section 144C (1) of the Act and first pass a draft assessment order would
result in invalidation of the final assessment order and the consequent demand
notices and penalty proceedings.