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Income Tax Appellate Tribunal, BENGALURU “C” BENCH, BENGALURU
M/s. Alpha Elsec Defence & vs DCIT, Circle 1(1)(1) Aerospace Systems Pvt. Ltd. 2nd Floor, BMTC Building 9, Interface, Accolade 80ft Road, Koramangala Service Road, HAL 2nd Stage Bangalore 560095 Bangalore 560008 PAN – AAECA7856M (Appellant) (Respondent) Assessee by: Shri S. Ramasubramanian, CA Revenue by: Ms. Neera Malhotra, CIT-DR Date of hearing: 06.02.2023 Date of pronouncement: 08.02.2023 O R D E R Per: George George K., J.M. This appeal at the instance of the assessee is directed against the order of the CIT(A) -1, Bangalore dated 22.02.2019. The relevant assessment year is 2010-11.
The brief facts of the case are that the assessee is a private limited company engaged in the business of manufacturing, assembly and testing of Opto-Electronic Equipments. For the assessment year 2010-11 the return of income was filed on 27.09.2010 declaring loss of Rs.9,60,93,512/-. The assessment was selected for scrutiny and notice under Section 143(2) of the Income Tax Act, 1961 (the Act) was issued. During the assessment proceedings it was noticed that the assessee company had entered into Alpha Elsec Defence & Aerospace Systems Pvt. Ld. international transactions with its associated enterprises (AE’s) and the matter was referred to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the said international transactions. The TPO passed order under Section 92CA of the Act on 31.10.2014 proposing a transfer pricing adjustment of Rs.12,57,52,333/- to the arm’s length price. Pursuant to the TPO’s order, draft assessment order under Section 143(3) r.w.s. 144C of the Act was passed on 17.02.2014. The assessee filed its objections before the Dispute Resolution Panel (DRP) against the draft assessment order. The DRP, vide its directions dated 25.11.2014, disposed off the objections of the assessee. The DRP excluded 6 comparables out of the 10 comparables selected by the TPO and confirmed functional comparability of remaining 4 comparables. Pursuant to the DRP directions, the final assessment order dated 30.12.2014 was passed, wherein the transfer pricing adjustment was reduced to Rs.8.89,42,012/- from Rs.12,57,52,333/- proposed in the draft assessment order.
Aggrieved by the final assessment order dated 30.12.2014, both Revenue and assessee filed appeals before the Tribunal. The Tribunal vide its order dated 27.11.2015 in IT(TP)A No. 249/Bang/2015 and IT(TP)A No. 175/Bang/2015 held that TNMM is the most appropriate method for determining arm’s length price. Further, with regard to the assessee’s objections towards four comparables selected by the TPO and endorsed by the DRP, the Tribunal confirmed one comparable, namely Spel Semiconductor Ltd. as correctly taken and set aside the issue of comparability of three companies to the file of the TPO for verification and decide afresh as per law. The Tribunal also allowed the assessee as well as the TPO to carry out fresh search and bring comparable companies for the purpose of determining the arm’s length price. The Revenue’s appeal regarding comparability of six companies was dismissed by the Tribunal.
Alpha Elsec Defence & Aerospace Systems Pvt. Ld.
Subsequent to the Tribunal’s order, the TPO passed order under Section 92CA r.w.s. 254 of the Act on 29.09.2016 wherein the TPO selected two companies as final comparables. One of the comparables was Spel Semiconductor Ltd. which was confirmed by the Tribunal in its order dated 27.11.2015. One more comparable, namely Continental Device India Ltd. was selected out of the remaining three comparables and thus the arm’s length price was determined on the basis of two comparables. Pursuant to the order giving effect to the TPO’s order the final assessment order was passed on 22.11.2016 u/s. 143(3) r.w.s. 254 of the Act.
Aggrieved by the final assessment order dated 22.11.2016, the assessee filed an appeal before the first appellate authority. The CIT(A) dismissed the appeal of the assessee vide the impugned order dated 22.02.2019.
Aggrieved by the order of the CIT(A) assessee has filed the present appeal. The assessee has raised three grounds in its original grounds of appeal and also filed four additional grounds vide its application dated 31.12.2019. The learned A.R., during the course of hearing, submitted that the additional grounds are purely legal grounds and same can be decided on the basis of the facts on record. It was submitted that, since no new or fresh facts are required to be brought on record to decide the additional grounds same may be admitted for adjudication of the issue raised therein. In this context the learned A.R. relied on the judgements of the Hon'ble Apex Court in the case of Jute Corporation of India Ltd. vs. CIT (1991) 187 ITR 688 (SC) and CIT vs. National Thermal Power Corporation 229 ITR 383.
The learned D.R. submitted that the assessee has not raised the issue agitated in additional ground Nos. 1 & 2 before the CIT(A). Hence the additional grounds should not be admitted. Ground Nos. 1 & 2 raised in the additional grounds read as under: - Alpha Elsec Defence & Aerospace Systems Pvt. Ld. “1. That the order of the assessment dt. 22.11.2016 passed by the Assessing Officer is void-ab-initio as the mandatory provisions of Sec. 144C of the Income-tax Act 1961 (Act) have not been complied with. 2. That the learned Assessing Officer erred in law and on fact in passing the final assessment order u/s 143(3) without passing a draft assessing order as required u/s 144C of the Act.”
We find that the additional grounds raised are purely legal in nature and can be decided based on the facts on record. Therefore, by placing reliance on the judgement of Hon'ble Apex Court in the case of CIT vs. National Thermal Power Corporation and Jute Corporation of India (supra), we admit the above two additional grounds for adjudication. The learned A.R. submitted that since no draft assessment order was passed pursuant to ITAT order, the assessee was precluded from raising objections before the DRP. In such circumstances it was submitted, since the mandatory conditions prescribed under Section 144C of the Act have not been followed, the order of assessment dated 22.11.2016 passed by the AO is void ab-initio. In this context the learned A.R. relied on the following judicial pronouncements: -
Principal Commissioner of Income Tax vs. Andrew Telecommunication Pvt. Ltd. reported (2020) 423 ITR 503 (Bom) 2. Principal Commissioner of Income Tax vs. Appollo Tyres Ltd. reported in (2022) 449 ITR 398 (Ker) 3. Inatech India Pvt. Ltd. in IT(TP)A No. 214/Bang/2018 order dated 30.04.2019 4. Fosroc Chemicals (India) Pvt. Ltd. vs. DCIT in IT(TP)A No. 87/Bang/20016 order dated 17.10.2016 9. The learned D.R., on the other hand, submitted that the facts of the case cited by the learned A.R. is different from the case in hand since in the referred cases the entire assessment order was set aside by the ITAT whereas in the instant case only certain points were set aside.
Alpha Elsec Defence & Aerospace Systems Pvt. Ld.
We have heard the rival contentions and perused the material on record. The issue raised in additional ground Nos. 1 & 2 is that the final assessment order dated 22.11.2016 has been passed in violation of Section 144C(1) of the Act is as much as it was not preceded by the draft assessment order. The above issue is no longer res-integra. The Hon'ble Kerala High Court in the case of PCT vs. Appollo Tyres (supra) has held that requirement of redoing the same procedure under Section 144C of the Act on a remand to the AO is mandatory and an omission in following the procedure was held to be incurable defect. The Hon'ble High Court has placed reliance on the judgement of the Hon'ble Delhi High Court in the case of Nokia India (P.) Ltd. vs. Addl. CIT and the Special Leave Petition filed against the said judgement in SLP (Civil) Diary No. 7302/2018 (Addl. CIT vs. Nokia India P. Ltd. reported in (2018) 405 ITR (St.) 7(SC). The relevant finding of the Hon'ble Kerala High Court in case of Appollo Tyres (supra) reads as follows: - “10. The requirement of redoing the same procedure upon remand the Assessing Officer under section 144C is held to be mandatory and omission in following the procedure is held to be an incurable defect. The Revenue does not dispute the omissions pointed out in this behalf by the Tribunal. The filing of appeal before the Commissioner of Income-tax (Appeals) cannot be treated as a waiver of an objection available to the assessee in this behalf under section 144C etc. Section 253(1)(d) provides for appeal only when order has been made under section 143(3) read with section 144C of the Act. Annexure E order is an order made under section 143(3) of the Act and not a final revised assessment order made in compliance with the directions issued by the Dispute Resolution Panel. The assessee, hence was justified in moving the Commissioner of Income-tax (Appeals). This court has difficulty in accepting the argument of the Revenue to sustain the order in annexure E. The arguments have been confined to the points considered above and we are of the view that the Tribunal has correctly considered the objections of the assessee against annexure E order and recorded the findings which resulted in the order under appeal. The order of Tribunal is to be understood in the background of what is considered by the Assessing Officer in annexure E and what was not the subject matter before the Assessing Officer, upon the remand in the first round of litigation cannot and Alpha Elsec Defence & Aerospace Systems Pvt. Ld. could not be understood as made by the Tribunal. We are in agreement with the argument of Mr. Joseph Markos that annexure E is limited only to the issues remitted by the Tribunal in annexure D order dated November 21, 2014.
11. For the above reasons and the discussion the questions are answered in favour of the assessee and against the Revenue.”
Similar view has been held by the Hon'ble Bombay High Court in the case of PCIT vs. Andrew Telecommunication Pvt. Ltd. (supra). The relevant findings of the Hon'ble High Court reads as under: - “17. In the case of International Air Transport Association, the Division Bench of this court has held that the order passed by the Assessing Officer without there being any draft assessment order is illegal and without jurisdiction. The same view has been reiterated in the case of Zuari Cement Ltd. v. Asst. CIT W.P. (C) No. 5557 of 2012, dated February 21, 2013 (AP) by the Division Bench of the Andhra Pradesh High Court which also held that the failure to pass a draft assessment order under section 144C(1) of the Act would result in rendering the final assessment as one without juris- diction. This position of law is settled.
18. Now to consider whether after remand, it was necessary to issue a draft assessment order. Firstly, the issuance of a draft assessment order is not an empty formality. When a draft assessment order is passed and copy is given to the assessee, the assessee can raise objections before the Dispute Resolution Panel on any of the proposed variations. There is a right given to the assessee to object, and to have the objections considered not by the Assessing Officer, but by the Dispute Resolution Panel.
The Tribunal, by order dated October 1, 2012, set aside the entire exercise and the matter was relegated to the Assessing Officer. Once the matter was sent back to be decided afresh it went back to the stage of section 144C(1) of the Act. Since the Tribunal set aside the proceedings on the ground of violation of principles of natural justice, the first exercise was void and without jurisdiction. Therefore, nothing remained on the record, including the draft assessment order. Therefore, issuance of a draft assessment order was necessary. We do not find from the scheme of section 144C that if the proceedings were to be started afresh on remand, the draft assessment order is not required to be given. Non-issuance of the draft assessment order has thus vitiated the final assessment order.
Alpha Elsec Defence & Aerospace Systems Pvt. Ld.
In the case of JCB India, the Division Bench of the Delhi High Court in identical circumstances has held that after the remand on facts, the draft assessment order was necessary.”
The Bangalore Bench of the Tribunal in the case of Fosroc Chemicals (India) Pvt. Ltd. (supra) and Inatech India Pvt. Ltd. (supra) had also taken a similar view by following the judgement of the Hon'ble Andhra Pradesh High Court in the case of Zuari Cement Ltd. vs. ACIT in Writ Petition (C) No. 5557 of 2012 dated 21.02.2013 and the judgement of the Hon'ble Madras High Court in the case of Vijay Television Pvt. Ltd. vs. Dispute Resolution Panel, Chennai reported in 369 ITR 113 (Mad.). The learned D.R. had contended that the above judicial pronouncements cited supra are distinguishable since in the referred cases the entire assessment order was set aside by the ITAT wherein in the instant case only the comparability of three companies has been set aside by the ITAT. We find this contention of the learned D.R. to be factually incorrect. The ITAT in its order of remand dated 27.11.2015 had allowed the AO as well as the TPO to carry out fresh search and bring comparable companies for the purpose of determining the ALP. The relevant findings of the ITAT in this regard reads as follows: - “16. Since most of the comparables which were selected by the TPO are found to be non-comparable and some of the companies are now set aside for fresh verification, therefore, if in remand proceedings the TPO find that original comparables selected by the TPO are not functionally comparable or good comparable for the purpose of ALP, then the assessee as well as the TPO are free to carry out the fresh search and bring the comparables companies for the purpose of determining the ALP.”
From the above directions of the ITAT it is clear that the entire exercise of determining the ALP of the international transactions has been restored to the TPO. Moreover, in the case of PCIT vs. Appollo Tyres (case considered by the Hon'ble Kerala High Court) ITAT had only allowed the appeal in part and remanded the matter to the AO for statistical purposes for fresh assessment of issues referred to the AO (refer para 3 at page 4 of the High Court judgement).
Alpha Elsec Defence & Aerospace Systems Pvt. Ld.
Moreover the Hon'ble Delhi High Court in the case of JCB India Ltd. vs. DCIT reported in (2017) 398 ITR 189 (Del) had rejected the contention of the Revenue that since assessment itself was not cancelled by ITAT or completely set aside, there is no necessity to pass the draft assessment order in the set aside proceedings. The submission of the learned Additional Solicitor General of India before the Hon'ble Delhi High Court (refer para 16) read as follows: “16. In response, Mr. Sanjay Jain, learned Additional Solicitor General of India appearing for the Revenue, submitted that there was an efficacious alternative remedy available to the Petitioner to file appeals against the impugned final assessment order passed by the AO. It is denied that it was mandatory on the part of the AO to pass a draft assessment order since this was a second round before the TPO pursuant to remand by the ITAT. Moreover, it was not as if the ITAT had set aside the entire assessment order of the AO. The setting aside was only in respect of the transfer pricing adjustment and that too with a specific direction to the AO for determining the arm's length price “after considering fresh comparables.” Since the assessment itself was not cancelled by the ITAT or completely set aside, it is the provisions of Section 153(3)(ii) of the Act which would apply. Mr. Jain submitted that the requirement of passing a draft assessment order under Section 144C was only in the first instance and not after the remand by the ITAT.” (emphasis supplied) 15. The above contention of learned Additional Solicitor General of India (identical to the submission of learned D.R. in this case) was rejected by the Hon'ble Delhi High Court by observing as under: - “17. The Court is unable to agree with the submissions made on behalf of the Revenue by Mr. Jain. Section 144C(1) of the Act is unambiguous. It requires the AO to pass a draft assessment order after receipt of the report from the TPO. There is nothing in the wording of Section 144C(1) which would indicate that this requirement or passing a draft assessment order does not arise where the exercise had been undertaken by the TPO on remand to it, of the said issue, by the ITAT.”
Therefore the final assessment order dated 22.11.2016 is bad in law since it was not preceded by a draft assessment order. Had a draft assessment Alpha Elsec Defence & Aerospace Systems Pvt. Ld. order been passed the assessee would have got an opportunity to file objections before the DRP and in the instant case since draft assessment order has not been passed the assessee was precluded from filing objections before the DRP. Since the final assessment order dated 22.11.2016 has been passed by the AO not in compliance with the mandatory provisions of section 144C of the Act the said order is void ab-initio in light of the judicial pronouncements cited supra.
Since we have quashed the assessment order dated 22.11.2016 as void ab-initio, the other grounds and the additional grounds are not adjudicated and are left open. It is ordered accordingly.
In the result, the appeal filed by the assessee is partly allowed. Dictated and pronounced in the open Court on 8th February, 2023.