M/S. CAPSTONE SECURITIES ANALYSIS PVT LTD,,PUNE vs. DEPUTY COMMISSIONER OF INCOME TAX,, PUNE

PER R.S.SYAL, VP :

This appeal by the assessee is directed against the final assessment order dated 28-11-2016 passed by the Assessing Officer (AO) u/s.143(3) r.w.s.144C(13) of the Income-tax Act, 1961 (hereinafter called ‘the Act’) in relation to the assessment year 2012-13.

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of separate draft order pursuant to restoration by the Dispute

Resolution Panel (DRP).

assessee filed its return declaring total income of Rs.1,68,43,110/-.

Certain international transactions were reported by the assessee in

Form No. 3CEB. The AO referred the matter of determination of

the Arm’s Length Price (ALP) of such transactions to the Transfer

Pricing Officer (TPO). Vide order dated 18-01-2016, the TPO

recommended transfer pricing adjustment of Rs.5,35,19,469/-. The

AO passed the draft order on 04-02-2016 proposing, inter alia,

variation in the declared income to the extent recommended by the

TPO. The assessee raised objections before the DRP, who vide its

order dated 16-09-2016 directed the AO/TPO to carry out fresh

search for comparable companies engaged in KPO services

providers list as against the original benchmarking done by the

authorities by considering the assessee as a BPO service provider.

In addition, the DRP also gave certain specific directions qua few

comparables as objected to before it. Pursuant to the direction given

by the DRP, the AO vide his reference dated 07-10-2016 required

the TPO to do a fresh benchmarking. The TPO vide his order dated

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21-11-2016 proposed a fresh transfer pricing adjustment of

Rs.5,21,84,250/-. The AO in his final order dated 28-11-2016 has

made transfer pricing addition of Rs.5.21 crore and odd, against

which the assessee has come up in appeal before the Tribunal.

material on record. The legal argument put forth on behalf of the

assessee is that the procedure adopted by the authorities below in

not passing draft order pursuant to the direction given by the DRP

has vitiated the assessment. This argument can be better appreciated

by having an insight into the provisions of section 144C of the Act

with the caption “Reference to Dispute Resolution Panel”. Sub-

section (1) of section 144C states that: “The Assessing Officer shall,

notwithstanding anything to the contrary contained in this Act, in

the first instance, forward a draft of the proposed order of

assessment (hereafter in this section referred to as the draft order) to

the eligible assessee if he proposes to make, on or after the 1st day

of October, 2009, any variation in the income or loss returned which

is prejudicial to the interest of such assessee.’ Sub-section (2) of

section 144C states that the assessee shall either file his acceptance

to the AO on the variations proposed in the draft order or file his

objections, if any, with the DRP. In case, the assessee accepts the

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variation in the draft order or no objections are received within 30

days, then sub-section (3) states that: `The Assessing Officer shall

complete the assessment on the basis of the draft order’. In case, the

assessee does not agree with the draft order, it can, inter alia, raise

objections before the DRP, which shall issue directions under sub-

section (5) of section 144C. Upon receipt of the directions from the

DRP, the AO completes the assessment under sub-section (13) in

conformity with the directions given by the DRP.

(8) which states that the DRP “may confirm, reduce or enhance the

variations proposed in draft order so, however, that it shall not set

aside any proposed variation or issue any direction under sub-

section (5) for further enquiry and passing of the assessment order.’

It is manifest from the prescription of sub-section (8) that the DRP

has been empowered to confirm, reduce or enhance the variations

proposed in draft order. There is specific prohibition contained in

the provision to the effect that the DRP cannot set-aside any

proposed variation or issue any direction for further enquiry and

passing of the assessment order.

section 251 of the Act, which deals with the powers of the CIT(A)

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in disposing appeals. Sub-section (1)(a) provides that in disposing

of an appeal against an order of assessment, the Commissioner

(Appeals) shall have the power to : `confirm, reduce, enhance or

annul the assessment.’ Prior to an amendment to section 251(1) by

the Finance Act, 2001 w.e.f. 01-06-2001, the CIT(A) was

empowered to : `set-aside the assessment and refer the case back to

the Assessing Officer for making a fresh assessment in accordance

with the directions given by the Commissioner (Appeals) and after

making such further inquiry as may be necessary, and the Assessing

Officer shall thereupon proceed to make such fresh assessment and

determine, where necessary, the amount of tax payable on the basis

of such fresh assessment.’ The hitherto power given to the CIT(A)

referring the case back to the AO for making fresh assessment has

been taken away by the Finance Act, 2001. The effect of this

amendment is that now the CIT(A) can only confirm, reduce,

enhance or annul the assessment but cannot restore the matter to the

AO for a fresh determination. In the pre-amendment era when the

CIT(A) could restore the matter to the AO, the AO was obliged to

pass a separate order which was further appealable to the first

appellate authority before moving the Tribunal. In the post-

amendment period, the power of the CIT(A) to restore has been

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taken away and now the assessee or the Revenue can directly

approach the Tribunal. The reason for the amendment is to erode

delay in the process of completion of assessment.

juxtaposition to section 251(1), it can be easily ascertained that

there is a great similarity between the two. Both the Authorities

operate between the AO and the Tribunal. Purpose behind giving

one more Authority to the assessee in the shape of the DRP or the

CIT(A) before coming to the Tribunal is to ensure that the

assessment order passed by the AO is properly scrutinized and

vetted by the lower authorities. Once the assessment order has been

examined by them finally, the AO in the case of section 251(1) has

nothing to do except for filing an appeal before the Tribunal, if

aggrieved; and in the case of section 144C(8) to perform the ritual

of passing a final assessment order in conformity with the direction

given by the DRP even without hearing the assessee as has been

provided in sub-section (13), which states that: `Upon receipt of the

directions issued under sub-section (5), the Assessing Officer shall,

in conformity with the directions, complete…. the assessment

without providing any further opportunity of being heard to the

assessee, within one month from the end of the month in which such

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direction is received.’ Once the order is passed by the CIT(A) or

the DRP, it paves the way for the assessee to directly knock at the

door of the Tribunal. Further, in line with the existing bar placed on

the power given to the CIT(A), the DRP under sub-section (8) is

also debarred from setting aside any proposed variation or issue any

direction under sub-section (5) for further enquiry and passing of

the assessment order. In other words, the DRP, similar to the

current powers of the CIT(A) u/s.251(1), can confirm, reduce or

enhance the variations but in no case set-aside the issue for a fresh

redo.

TPO in his first order dated 18-01-2016 treated the assessee as a

BPO service provider and accordingly dealt with the comparables.

The assessee objected before the DRP qua the comparables chosen

by the TPO. The DRP, vide its direction dated 16-09-2016, has

held in para 9.2 that “Accordingly, the assessee is held to be a KPO

service provider engaged in the financial sector, and not a routine

ITeS provider, while deciding its comparability with the other

companies”. Thereafter, it observed that: “both the assessee as well

as the TPO had carried out search of comparables by treating the

assessee as a routine ITeS provider, which is not correct considering

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that the assessee is a KPO service provider. Due to this error

committed, most of the comparables identified by the assessee as

well as the TPO are very likely to be rejected by this Panel on

grounds of functionality........... The TPO is, therefore, directed to

carry out a fresh search for comparable companies who are KPO

service providers of the financial sector…. The final list of

comparables should be formalized by the TPO after using

appropriate filters, but only after giving a reasonable opportunity of

being heard to the assessee”. It is manifest from the above that the

DRP transgressed its power given under sub-section (8) by restoring

the matter to the AO/TPO for carrying out a fresh benchmarking

exercise of the international transaction changing the very

foundation of the assessee, being, a KPO service provider as against

the BPO service provider treated by the TPO in the first round. It is

not a case of a limited direction given by the DRP to exclude or

include particular comparable(s) after first adjudicating itself on the

comparability or carry out some amendment in the calculation of the

PLI as per its own version. Au contraire, it is a case of direction of

the DRP to the AO/TPO for doing a de novo determination of the

ALP, which is expressly prohibited under the Act.

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which delineates that a draft order passed under sub-section (1) is

only a tentative order. In case variations to the income in the draft

order are accepted by the assessee or no objections are received

within 30 days, the AO completes the assessment under section

144C(3) on the basis of draft order and the matter ends. In case the

assessee objects to the variations in the income as proposed in the

draft order and approaches the DRP, the final assessment order is

passed by the AO u/s.144C (13) giving effect to the directions given

by the DRP under sub-section (5). In case the assessee seeks to take

the route of seeking redressal of its grievances through the channel

of CIT(A), in that case, again the AO has to pass a separate

assessment order, which is obviously distinct from the draft order.

So, it is only on the finalization of the variation in the income as per

the draft order, to the extent specified in the provision, that the AO

is obliged to pass an assessment order, either under sub-section (3)

or (13) of section 144C of the Act. Thus it follows that, irrespective

of the course of action followed by the assessee, whether or not

accepting the variation in the draft order or choosing the route of the

DRP or the CIT(A), passing of a draft order is a sine qua non for

passing the final assessment order.

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the direction of the DRP, the AO made a reference to the TPO for

carrying out a fresh benchmarking. The TPO vide his second order

dated 21-11-2016 recomputed the ALP by considering 4 companies

as comparable, viz., Informed Technologies Ltd., ICRA Online

Ltd., eClerx Ltd. and Caliber Point Business Solutions Ltd. Out of

these four comparables, the first one, namely, Informed

Technologies Ltd. was the one which was directed by the DRP to be

included in the list of comparables. ICRA Online Ltd. was not

considered by the TPO earlier as it was a KPO service provider as

against the assessee perceived to be a BPO service provider.

Pursuant to the direction given by the DRP, the TPO considered

ICRA Online Ltd. as comparable. eClerx Ltd., namely, the third

comparable was not at all part of any benchmarking in the first

round. The TPO considered this company as comparable for the

first time and included it in the final tally. The last comparable,

namely, Caliber Point Business Solutions Ltd. was dealt with by

the DRP in its order by holding that; “the assessee as well as the

TPO have wrongly classified the assessee as a ITeS provider,

instead of KPO service provider. Therefore, the TPO has been

directed to carry out a fresh search. If sufficient number of

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comparables upto 5 or more are available after this fresh search, the

TPO should not include this company as a comparable”. It is thus

palpable that the TPO in the second round carried out the

benchmarking exercise all afresh treating the assessee as KPO

service provider as against his earlier view of a BPO service

provider in the first round. After passing of the order by the TPO

on 21.11.2016, the AO proceeded to straightaway pass the final

assessment order u/s.143(3) r.w.s. 144C(13) of the Act on

28-11-2016. It is, ergo, overt that pursuant to the fresh

benchmarking done by the TPO in his second order, the AO omitted

to pass a draft order which could have been challenged by the

assessee before the DRP or the CIT(A). While considering the

provisions of section 144C (supra), we have noticed that the law

enjoins the passing of a draft order after the TPO’s order against

which the assessee can raise objection before the DRP before finally

coming to the Tribunal as was done in the first round of

proceedings. Once the DRP set aside the exercise of benchmarking

by the TPO and directed to determine the ALP altogether afresh, the

earlier round of the proceedings came to an end and a fresh round of

proceedings started with the AO making a reference to the TPO for

fresh benchmarking on 7.10.2016. The entire procedure was once

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again required to be adhered to starting with the passing of the order

by the TPO; passing of the draft order; objections to be raised by

the assessee before the DRP; and passing of a final assessment

order. However, the AO in the second round, on receipt of the order

from the TPO, proceeded to pass a final assessment order, thereby

omitting to pass a draft order and eventually denying the assessee an

opportunity to raise objections before the DRP as enshrined under

sub-section (4) of section 144C of the Act.

Vs. DRP (2014) 369 ITR 113 (Mad.) was confronted with a situation

similar to which is instantly prevailing inasmuch as the AO in that

case, pursuant to the order of the TPO, passed a final assessment

order instead of a draft order. A question arose as to whether the

order so passed could be treated as a valid order. Accepting the

contention of the assessee, the Hon’ble High Court set aside the

order passed by the AO by observing that: “where there was

omission on the part of the AO to follow the mandatory procedures

prescribed in the Act, such omission cannot be termed as a mere

procedural irregularity and it cannot be cured”. Resultantly, the

assessment order was quashed. Almost similar issue came up for

consideration before the Hon’ble jurisdictional High Court in Pr.

13 ITA No.251/PUN/2017 M/s. Capstone Securities Analysis Pvt. Ltd.,

CIT Vs. Lionbridge Technologies Pvt. Lt. (2019) 260 Taxman 273

(Bom.) in which the Tribunal in the first round restored the matter to

the AO on the ground that the DRP failed to deal with the assessee’s

objections. During the remand proceedings, a reference was made to

the TPO. On receipt of the TPO’s order, the AO straightaway

passed an order u/s.143(3) r.w.s. 144C(13), which action came to be

disapproved by the Hon’ble High Court.

must be adhered to by the authorities, non-observance of which

renders the assessment order null and void. In view of the fact that

the statutorily mandated procedure has not been followed in the

instant case in as much as neither any draft order was passed in the

second round nor the assessee could raise objection before the DRP,

the edifice of the final assessment order, being devoid of a legal

bedrock, stands shaked, thereby frustrating the legality of the order.

viz., first for the DRP exceeding its jurisdiction in restoring the

matter to the AO/TPO for undertaking a fresh benchmarking

altogether afresh; and two, the AO not following the statutorily

prescribed procedure of first passing a draft order and snatching

away a forum from the assessee for assailing the variation in the

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income pursuant to the order of the TPO before approaching the

Tribunal. Ex consequenti, we set aside the impugned order as null

and void.

nullity, there is no need to go into the grounds raised by the assessee

challenging the merits of the additions.

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; �दनांक Dated : 04th September, 2019 सतीश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत आदेश आदेश आदेश अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. 3. The CIT(A)-13, Pune 4. The Pr.CIT-V, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे 5. “सी” / DR ‘C’, ITAT, Pune; 6. गाड� फाईल / Guard file. आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

ITA No.251/PUN/2017 M/s. Capstone Securities Analysis Pvt. Ltd.,

Date 1. Draft dictated on 03-09-2019 Sr.PS 2. Draft placed before author 03-09-2019 Sr.PS 3. Draft proposed & placed JM before the second member 4. Draft discussed/approved JM by Second Member. 5. Approved Draft comes to Sr.PS the Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order.

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