42 Section 144C – International transactions – Assessment – A. Y. 2009-10 – Draft assessment order – Final assessment order giving effect to directions of DRP – AO not entitled to introduce new disallowance not contemplated in draft assessment order

CIT vs. Sanmina SCI India P. Ltd.; 398 ITR 645 (Mad):

Pursuant to a reference u/s. 92CA(1) of the Act, an order of transfer pricing determining the arm’s length price (ALP) of international transactions was passed by the Transfer Pricing Officer (TPO) culminating in an order of draft assessment u/s. 143(3) r.w.s. 144C(1) of the Act. The assessee filed objections before the Dispute Resolution Penal (DRP) against the draft assessment order. The DRP issued directions in relation to the transfer pricing adjustment as well as claim to relief u/s. 10A of the Act. Effect was given to the directions of the DRP. While doing so the Assessing Officer introduced a new disallowance not contemplated in the draft order of assessment being the aggregation of income or loss from variations, sources under the same head of income prior to allowance of relief u/s. 10A and since the aggregation resulted in a loss, he did not allow relief u/s. 10A of an amount of Rs. 2.98 crore. The returned loss of an amount of Rs. 19,14,03,268 was thus reduced to the extent of deduction u/s. 10A of an amount of Rs. 2.98 crore. The Tribunal set aside the adjustment effected by the Assessing Officer in relation to treatment of brought forward losses prior to allowance of deduction u/s. 10A of the Act. The Department was directed to grant deduction prior to effecting adjustment of brought forward losses.

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

“i)  The scheme of section 144C would be wholly violated if the Assessing Officer takes it upon himself to include in the final order of assessment additions, disallowances or variations that do not form part of the order of draft assessment. The powers of an Assessing Officer u/s. 144C(13) have clearly been limited to giving consequence to the directions of the DRP and cannot extend any further. Any attempt by the Assessing Officer to delve beyond would result in great prejudice to an assessee in the light of the express stipulation that no opportunity is to be provided and an interpretation to further such a conclusion would be wholly unacceptable and contrary to law.

ii)  Acceptance of the proposition advanced by the Department would amount to giving leave to the Assessing Officer to pass more than one order of assessment in the course of a single proceeding, which was not envisaged in the scheme of the Act. Subsequent assessments either rectifying, revising or reopening the original assessment were permitted by exercising specified powers under different statutory provisions. The order of draft assessment u/s. 144C(1) was for all intents and purposes is an order of original assessment though in draft form.

iii)  The order of Tribunal to this effect was right in law and called for no interference. The variation in the order of final assessment relating to the priority of set off of losses was purely misconceived and was in excess of jurisdiction by the Assessing Officer in terms of section 144C(13) of the Act.”