36. Section 144C and CBDT Circulars No. 5 of 2010 dated 03/06/2010 and Circular No. 9 of 2013 dated 19/11/2013- International transactions – A. Y. 2009-10 – Transfer pricing – Arm’s length price – Assessment order – Procedure to be followed – Issuance of draft assessment orders by AO mandatory – Failure to do so – Not mere procedural error – Failure makes assessment order invalid – Circular clarifying that requirement u/s. 144C applies to all orders passed after 01/10/2009 irrespective of A. Y. – Department not entitled to rely on earlier circular saying provision applicable for A. Y. 2010-11 onwards

CIT vs. C-Sam (India) Pvt. Ltd.; 398 ITR 182 (Guj):

For the A. Y. 2009-10, upon a scrutiny
assessment and applying transfer pricing on account of assessee’s international
transactions with associated persons against the nil returned income, the
Assessing Officer computed the assessee’s income at Rs. 2.86 crores making
various additions and deletions according to the order of the Transfer Pricing
Officer (TPO). In appeal before the Commissioner (Appeals) the assessee
challenged the validity of the assessment order and the additions on the ground
that the procedure laid down u/s. 144C of the Income-tax Act, 1961, was not
followed by the Assessing Officer. The Commissioner (Appeal) allowed the
assessee’s claim and quashed the assessment order passed u/s. 143(3) of the Act
without complying with the requirement of section 144C(1) of the Act. The
Tribunal dismissed the Department’s appeal and confirmed the order of the
Commissioner (Appeal).

On appeal by the Revenue, The Gujarat High
Court upheld the decision of the Tribunal and held as under:

“i)   The
procedure laid down in section 144C of the Act, is mandatory. Before the
Assessing Officer can make variations in the returned income of an eligible
assessee, section 144C(1) lays down the procedure to be followed
notwithstanding anything to the contrary contained in the Act. This non
obstante clause thus gives an overriding effect to the procedure. When an
Assessing Officer proposes to make variations in the returned income declared
by an eligible assessee he has to first pass a draft order, provide a copy
thereof to the assessee and only thereupon the assessee could exercise his
valuable right to raise objections before the Dispute Resolution Panel (DRP) on
any of the proposed variations. In addition to giving such opportunity to an
assessee, the decision of the DRP is made binding on the Assessing Officer. It
is therefore not possible to say that such requirement is merely procedural.
The requirement is mandatory and gives substantive rights to the assessee to
object to any additions before they are made and such objections have to be
considered not by the Assessing Officer but by the DRP. The legislative desire
is to give an important opportunity to an assessee who is likely to be
subjected to upward revision of income on the basis of transfer pricing
mechanism. Such opportunity cannot be taken away by treating it purely
procedural in nature.

ii)   Circular dated June 3,
2010 was an explanatory circular issued by the Finance Ministry in which it was
provided that the amendments (which include section 144C of the Act) are made
applicable w.e.f. October 1, 2009 and will accordingly apply in relation to A.
Y. 2010-11 and subsequent years. In the clarificatory circular dated November
19, 2013, it was provided that section 144C would apply to any order which is
being passed after October 1, 2009 irrespective of the assessment year. The
latter circular clarified what all along was the correct position in law.
Section 144C(1) itself in no uncertain terms provides that the Assessing
Officer shall forward a draft order to the eligible assessee, if he proposes to
make any variation in the income or loss which is prejudicial to the interest
of the assessee on or after October 1, 2009. The statute was thus clear,
permitted no ambiguity and required a procedure to be followed in case of any
variation which the Assessing Officer proposed to make after October 1, 2009.
The earlier circular dated June 3, 2010 did not lay down the correct criteria
in this regard.

iii)   The upward revision was
made in the income of the assessee on the basis of the order of the TPO and was
done without following the mandatory procedure laid down u/s. 144C. When the
statute permitted no ambiguity and required the procedure to be followed in
case of any variation which the Assessing Officer proposed to make after
October 1, 2009 the assessee could not be made to suffer on account of any
inadvertent error which ran contrary to the statutory provisions.

iv)  No question of law arises.
Tax appeal is therefore dismissed.”