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Income Tax Appellate Tribunal, “C” BENCH, PUNE
Before: SHRI R.S.SYAL, VP & SHRI PARTHA SARATHI CHAUDHURY, JM
आदेश / ORDER PER PARTHA SARATHI CHAUDHURY, JM :
This appeal (ITA No.714/PUN/2011) preferred by the Revenue and cross objection (CO.No.41/PUN/2011) preferred by the assessee emanates from the order of the Ld. Commissioner of Income Tax (Appeals), Aurangabad dated 21.02.2011 for the assessment year 2005-06 as per the grounds of appeal on record.
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The appeal (ITA No.546/PUN/2014) preferred by the assessee emanates from the order of the Ld. Dispute Resolution Panel (DRP) dated 27.12.2013 for assessment year 2009-10 as per the grounds of appeal on record.
These cases were heard together. Since issues common, facts are similar, these cases are being disposed of vide this consolidated order. First we would adjudicate the issues raised in ITA No.714/PUN/2011 and CO. No.41/PUN/2011 in respect of assessment year 2005-06.
ITA No.714/PUN/2011 (By Revenue) CO. No.41/PUN/2011 (By Assessee) A.Y.2005-06
At the time of hearing, the Ld. AR of the assessee appraised the Bench that in the Revenue’s appeal in ITA No.714/PUN/2011 and Cross Objection No.41/PUN/2011 by the assessee relates to mainly two grounds. First one is regarding “Capacity Utilization Adjustment” and second relates to the “Comparables”.
3.1 That with regard to the issue of “Capacity Utilization Adjustment”, the Ld. AR of the assessee submitted that the Ld. Commissioner of Income Tax(Appeals) has allowed such “Capacity Utilization Adjustment”. However, the Ld. AR prayed for suitable directions from the Bench that this “Capacity Utilization Adjustment” should be done in accordance with the directions given by the Co-ordinate Bench of the Tribunal, Pune in assessee’s own case in ITA No.154/PUN/2011 for assessment year 2004-05 decided on 10.06.2019. If this is done then with respect to the issue “Comparables” even if the Revenue’s appeal is allowed meaning thereby upholding the Transfer
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Pricing Officer’s (TPO) order that would not make any impact on the assessee. The Ld. AR of the assessee further stated that if this proposition is accepted, the Cross Objection filed by the assessee becomes academic in nature.
The Ld. DR did not raise any objections with regard to the submissions made by the Ld. AR of the assessee.
That coming to the facts of the case on record regarding issue of “Capacity Utilization Adjustment”, the assessee has submitted that its capacity utilization during financial year 2004-05 was only 49.53% as compared to the average 69.41% capacity utilization of its comparables. Due to the under-utilization of the capacity, the fixed cost of the assessee have been absorbed by less number of units, thus lowering the net profit by Rs.299,357,652/- (i.e. 28.65% of the total fixed cost of Rs.1,044,878,367/-). The assessee thereafter, proposed an adjustment to be made to the operating profit for the amount of under absorption of fixed costs.
With respect to the observation made by the ACIT-TP, the assessee submitted that underutilization of capacity directly impacts profitability of the assessee in open market conditions. Towards this, the assessee referred to the CRISIL Automobile Industry report which is on record. Further, the Ld. AR of the assessee before the Ld. Commissioner of Income Tax (Appeals) on the issue submitted as follows:
“10.3 Further, learned Authorized Representative has during the course of submissions has also brought to my notice the recent ruling in the case of Global Vantedge (P) Ltd. Vs. DCIT 2010-TIOL-24-ITAT- DEL wherein the CIT(A) has held as follows: “5.4.4. Proceeding to the next issue, regarding claim of appellant for giving suitable adjustment on account of idle capacity and that
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they were in start up phase, I have considered the submissions of the appellant and looking to the fact that the remaining 6 comparables were established entities accordingly, adjustment needs to be made while doing the comparability analysis. Normally wherever an entity is established it always carried some surplus capacity vis a vis present/ projected business operations. Looking into the IT industries which were in booming stage, I hold that a surplus capacity to the extent of 1/3rd of the existing capacity is treated as normal in this industry in anticipation of future growth in business. Hence, an adjustment to the profitability of the comparables should be made to the extent of 33.33%. This is also in accordance with the provisions of Rule 10B92) which states that condition prevailing in the market in the tested party and comparables operates have to be considered while judging comparability of an international transaction with an uncontrolled transaction.” 10.4 Further, the Hon‟ble ITAT in the above case confirmed the findings of the CIT(A) in Para 19 of the said ruling which reads as under: “….Since both the parties have not been able to controvert the findings recorded by the Ld. CIT(A) or point out any material to enable us to take a view other than view taken by the Ld. CIT(A), we are inclined to uphold the order of ld. CIT(A) on the point of determination of Arms Length Price in respect of the transactions entered into by the assessee with its associate enterprises, namely RCS Centre Corp. Therefore, the order of Ld. CIT(A) is upheld and the grounds raised by the assessee as well as by the Revenue on this issue are rejected……..” 10.5 The aforesaid view has also reaffirmed the views of the Hon‟ble Pune ITAT in the case of E-Gain Communications Pvt. Ltd. 118 TTJ 354 wherein it has been observed as under: “41. The learned DR had also raised some objection to the revised margin of profit shown by the taxpayer by taking lower rate of depreciation. This objection in our opinion is without any substance. The depreciation is required to be worked out under the Indian Companies Act and as provided in the Schedule thereto. Depreciation cannot be computed as per American rules applicable to the parent company. Therefore, Mr. Ostwal was correct in adjusting margin of profit of the taxpayer.”
Thus, the Hon‟ble ITAT, Pune has also allowed adjustments made by the appellant to its profitability to account for difference and ensure comparability of the entities being compared. 10.6 The appellant has contended that capacity utilization has been a significant contributor to lower margins for the year, this was substantiated by placing before me the comparative analysis vis a vis subsequent years which demonstrated that with increase in the capacity utilization in FY 2004-05, the profits in FY 2004-05 increased and similarly with further increase in capacity utilization in FY 2005-06, the profitability has further improved in FY 2005-06. This substantiated the Appellant‟s claim that there is a direct correlation between profitability and the capacity utilization.”
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The Ld. Commissioner of Income Tax (Appeals) after considering the submissions of the assessee and facts of the case has held as under:
“10.7 Further, I have also considered the recent decision relied upon by the Appellant in the case of Global Vantedge Pvt. Ltd.(supra.) Wherein the Hon‟ble ITAT has confirmed the findings of the CIT(Appeals) holding as under: “5.4.4 Proceeding to the next issue, regarding claim of appellant for giving suitable adjustment on account of idle capacity and that they were in start up phase, I have considered the submissions of the appellant and looking to the fact that the remaining 6 comparables were established entities accordingly, adjustment needs to be made while doing the comparability analysis…..”
10.8. Further, even the transfer pricing regulation [Rule 10(B)(2) and Rule 10(B)(3)] prescribe that in order to make comparability meaningful and the conditions prevailing in the market in which the tested party and comparables operates have to be considered while judging comparability of an international transaction with an uncontrolled transaction and suitable adjustments have to be made to eliminate the material effects of such differences. In view of the above discussion, I believe that adjustments have to be carried out for the purpose of comparability analysis and accordingly, this ground of appeal is allowed.”
We have perused the case records and heard the rival contentions. On analysis of the facts on records specially the findings of the Ld. Commissioner of Income Tax(Appeals), it is observed that this ground has been allowed to the assessee. That further as referred before us by the Ld. AR of the assessee in ITA No.154/PUN/2011 & CO No.34/PUN/2011 in assessee’s own case for the assessment year 2004-05 on the same issue, the Revenue has contested this ground against the order of the Ld. Commissioner of Income Tax (Appeals) directing the Assessing Officer/TPO to allow “Capacity Utilization Adjustment” to which the Co-ordinate Bench of the Tribunal, Pune has held as under:
“19…………… The assessee is in second year of operation and has pointed out that it has only utilized 33% of the total capacity whereas the comparables have on an average utilized 50 to 70% of the total capacity and hence, the margins of the comparables need to be adjusted accordingly.
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The Hon‟ble Bombay High Court in CIT Vs. Petro Araldite (P) Ltd. (supra) had held that while computing the Arm‟s Length Price wherein adjustments need to be made in the hands of the comparables and where there was difference in level of capacity utilization of assessee and level of capacity utilization of the comparables, the adjustment would be required to be made to provide margins of the comparables in terms of Rule 10B(1)(e)(iii) of the Income Tax Rules. Similar is the proposition laid down by the Pune Bench of the Tribunal in Tasty Bite Eatables Ltd. Vs. ACIT (supra.) and Vishay Components Pvt. Ltd. Vs. ACIT (supra.) 21. The Delhi Bench of the Tribunal in DCIT Vs. Class India Pvt. Ltd. has laid down the procedure for computing capacity utilization adjustment under the TNM method. Hence, we hold that the said procedure be applied by the Assessing Officer/ Transfer Pricing Officer to work out the adjustment on account of capacity utilization. We direct accordingly. The Grounds of appeal No.5 and 6 by the Revenue are thus dismissed….”
Respectfully, following the decision of the Co-ordinate Bench of the Tribunal as referred herein above, we set aside this issue to the file of the Assessing Officer/ Transfer Pricing Officer and direct that the procedure led out in the order of the Tribunal be applied in working out the adjustment on account of capacity utilization.
The next issue relates to the inclusion of three comparables i.e. (i) Force Motors Limited (ii) Hindustan Motors Limited and (iii) Kerala Automobiles Limited by the Ld. Commissioner of Income Tax (Appeals). That in fact the assessee has taken five comparables. Apart from three comparables herein above referred, the assessee had taken two other comparables i.e. Mahindra & Mahindra Limited and Tata Motors Limited. The TPO had excluded three comparables i.e. Force Motors Limited, Hindustan Motors Limited and Kerala Automobiles Limited from the final list of comparables and only included two comparables i.e. Mahindra & Mahindra Limited and Tata Motors Limited in the final list of comparables. The Ld. Commissioner of Income Tax(Appeals) thereafter, directed in his order for inclusion of three comparables i.e. Force
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Motors Limited, Hindustan Motors Limited and Kerala Automobiles Limited which were excluded by the TPO.
We have perused the case records and heard the rival contentions. We observe that the TPO in his order has given detailed reasoning why he has excluded the three comparables i.e. Force Motors Limited, Hindustan Motors Limited and Kerala Automobiles Limited from the final list of comparables with that of the assessee. Similarly, the Ld. Commissioner of Income Tax(Appeals) in his order has given detailed findings with regard to the inclusion of these three comparables to the set of final comparables with that of the assessee. However, the submissions of the Ld. AR at the very outset that regarding “Capacity Utilization Adjustment”, if the directions of the assessee’s own case is followed by the Assessing Officer/ TPO while making such adjustment then even if the three comparables that have been included by the Ld. Commissioner of Income Tax(Appeals), is excluded and if only two comparables are taken Mahindra & Mahindra Limited and Tata Motors Limited then also there will be no impact on the assessee. We have already examined and directed regarding issue of capacity utilization to be done by the TPO/AO after following the decision of the Co-ordinate Bench of the Tribunal, Pune in assessee’s own case. Therefore, that issue is set aside to the file of Assessing Officer/ TPO. In view of the matter, we upheld the TPO’s observation in excluding three comparables i.e. Force Motors Limited, Hindustan Motors Limited and Kerala Automobiles Limited and accepting only Mahindra & Mahindra Limited and Tata Motors Limited.
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Therefore, the appeal of the Revenue in ITA No.714/PUN/2011 is partly allowed for statistical purposes and cross objection No.41/PUN/2011 of the assessee therefore becomes academic in nature.
ITA No.546/PUN/2014 ( By Assessee) A.Y.2009-10
In ITA No.546/PUN/2014, the assessee has preferred additional grounds of appeal which are as follows:
“1. The appellant company submits that on the facts and circumstances of the case and in law, the assessment order dated 12th March, 2013 issued by the learned Assessing Officer is bad in law and void ab initio as the same has been passed in violation of Section 144C of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟). 2. The appellant company submits that the learned Assessing Officer erred in issuing the notice of demand u/s.156 and penalty notice u/s.274 r.w.s 271(1)(c) along with the assessment order dated 12th March, 2013 instead of draft assessment order and hence, since the procedure laid down in section 144C was not followed by the learned AO, the assessment order passed be held invalid in law. 3. Without prejudice to the above additional grounds of appeal, the appellant company submits that the adjustment on account of working capital ought to have been granted while computing margins of the comparables. The appellant submits that the additional grounds raised are legal in nature and as all the facts are on record, the assessee requested for admission of the above ground.”
At the time hearing, the Ld. AR of the assessee vehemently argued that he would first address the additional grounds at the very outset, since these are legal ground which goes into the root of the matter. The assessee in these legal grounds has challenged the assessment order dated 12.03.2013 as bad in law and void ab initio since it was passed in violation of Section 144C of the Act. The Ld. AR demonstrated that the assessment order dated 12.03.2013 was draft assessment order which is evident from the very
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heading of the order. Along with this draft assessment order, the Assessing Officer had issued notice of demand u/s.156 of the Act and penalty notice u/s.274 r.w.s.271(1)(c) of the Act and therefore, procedure laid down in Section 144C of the Act has not been followed. The provision of Section 144C spells out that on receipt of the draft order, the eligible assessee shall within thirty days of the receipt by him of the draft assessment order, file his acceptance of the variations to the Assessing Officer or file his objections, if any, to such variation with the DRP. Thereafter, the Assessing Officer shall complete the assessment order on the basis of draft order.
13.1 In the present case, the contention of the Ld. AR is that along with draft order itself, notice of demand and penalty notice being issued is therefore in contravention to this provision. The Ld. AR has placed reliance on the order of the Co-ordinate Bench of the Tribunal, Pune in ITA No.566/PUN/2015 for assessment year 2010-11 in the case of DCIT, Circle- 10, Pune Vs. Rehau Polymers (P) Ltd., 85 taxmann.com 23 ( Pune-Trib.) wherein the facts were as follows:
“7. Briefly, in the facts of the case, the assessee had filed the return of income declaring total income of Rs.1,77,77,012/-. The case of assessee was selected for scrutiny. The first issue which arises in the present appeal is against notice issued under section 143(2) of the Act. However, without going into the merits of the said issue, we find that the Assessing Officer had made reference under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO) to determine the arm's length price of international transactions undertaken by the assessee. The TPO vide order passed under section 92CA(3) of the Act dated 24.01.2014 applied CUP method and determined the arm's length price of international transactions of payment of service fees at Nil as against Rs.3,45,55,434/- determined by the assessee. The Assessing Officer passed the draft assessment order under section 143(3) r.w.s. 144C(1) of the Act dated 22.03.2014 and assessed the income at Rs.9,65,31,058/- on account of adjustment made as per order under section 92CA(3) of the Act and various other additions. The Assessing Officer vide para 11 observed that the income was assessed under section 143(3) r.w.s. 144C(1) of the Act at Rs.9.65 crores. He also directed charging of interest under sections 234A, 234B, 234C and 234D of the Act, as applicable. He further directed Issue Order, demand notice along with
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ITNS-150, issue notice under section 271(1)(c) of the Act. He further held that the order was a proposed / draft order of assessment passed under section 143(3) r.w.s. 144C(1) of the Act and he further held that the assessee shall within 30 days of the receipt of this draft order file acceptance of variations to the undersigned or file its objections against such variations with the Dispute Resolution Panel under intimation to the undersigned. The assessee filed objections before the DRP and the Assessing Officer also issued final assessment order under section 143(3) r.w.s. 144C(13) of the Act, dated 27.02.2015.”
That on these facts, the Ld. AR had put forth the following arguments:
“8. The learned Authorized Representative for the assessee has pointed out that the draft assessment order passed in the case of assessee is actually not a draft assessment order since the demand notice along with ITNS-150 had been issued and also notice under section 274 r.w.s. 271(1)(c) of the Act was issued for initiation of penalty proceedings. He fairly admitted that though the Assessing Officer had in the said order said that it is a proposed / draft assessment order but in actual fact, it was assessment order passed by the Assessing Officer determining the demand payable in the case of assessee and has also initiated penalty proceedings under section 271(1)(c) of the Act by issue of notice under section 274 of the Act. The learned Authorized Representative for the assessee pointed out that the issue raised in the present appeal is squarely covered by the order of Tribunal in Soktas India (P) Ltd. Vs. ACIT (2017) 77 taxmann.com 19 (Pune – Trib.)”
The Ld. DR on the other hand, referred to the noting of the Assessing Officer and relied on the same.
That on the issue, the Co-ordinate Bench of the Tribunal, Pune has held as follows:
“10. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is in relation to the draft assessment order passed by the Assessing Officer under section 143(3) r.w.s. 144C(1) of the Act. After receipt of the order under section 92CA(3) of the Act from the TPO, the Assessing Officer was supposed to issue draft assessment order proposing to make the addition. However, the Assessing Officer called the said order to be draft assessment order but assessed income in the hands of assessee and further issued demand notice along ITNS-150, after charging interest under sections 234A, 234B & 234C, etc. He also initiated penalty proceedings under section 271(1)(c) of the Act. Undoubtedly, the assessee on understanding that the same was draft assessment order, made objections to the DRP, who gave certain directions and thereafter, the Assessing Officer passed an order under section 143(3) r.w.s. 144C(13) of the Act. However, in order
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to adjudicate the issue raised, we need to make reference to the provisions of section 144C of the Act. 11. We find that similar issue of assessment to be framed under section 143(3) r.w.s. 144C of the Act arose before the Pune Bench of Tribunal in Soktas India (P) Ltd. Vs. ACIT (supra).
The Tribunal after noting the facts that the Assessing Officer had passed the order under section 143(3) r.w.s 92CA(3) and 144C of the Act and had also issued demand notice under section 156 of the Act and had also issued notice under section 274 r.w.s. 271(1)(c) of the Act. However, the covering letter said that it was draft assessment order, against which the assessee was either to file objections before the DRP or accept the same. The assessee filed the objections before the DRP, who dismissed the same on the surmise that the order passed by the Assessing Officer was final assessment order, since the Assessing Officer had also issued the demand notice and had also issued show cause notice under section 274 r.w.s. 271(1)(c) of the Act for levy of penalty. In view of the said facts, the Tribunal observed as under:-
“6. We have heard the rival contentions and perused the record. Briefly, in the facts of the case, the Assessing Officer had made reference to the TPO vis-à-vis to determine the arm's length price of international transaction entered into by the assessee with its associate enterprises. The TPO vide order dated 28.01.2014 under section 92CA(3) of the Act had proposed the adjustment to arm's length price of international transaction and had passed the said order. The Assessing Officer on receipt of said order passed order under section 143(3) r.w.s. 92C(4) and 144C of the Act. The said order of Assessing Officer was forwarded to the assessee along with letter dated 28.02.2014, wherein the Assessing Officer categorically said that the draft assessment order was being forwarded for necessary action at the end of assessee. It was clearly mentioned in the said letter that on receipt of draft order, the assessee may within 30 days of the receipt of draft order either file acceptance of variation as proposed in the order or file objections to the variation to the DRP or to the undersigned. However, the Assessing Officer also issued demand notice under section 156 of the Act dated 28.02.2014 and also issued notice under section 274 r.w.s. 271 of the Act. The assessee on understanding that it was draft assessment order filed objections before the DRP on 07.04.2014 i.e. within the time allowed under the Statute. However, the said objections of assessee were not considered by the DRP and the same were rejected on the surmise that the order passed by the Assessing Officer was final assessment order since the Assessing Officer had also issued demand notice under section 156 of the Act and show cause notice under section 274 r.w.s. 271 of the Act for levy of penalty. The DRP observed that since the assessment order passed by the Assessing Officer was final assessment order, it did not have any jurisdiction to issue any directions on such final assessment order. After receiving the DRP‟s order, the assessee
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filed an application before the Assessing Officer for necessary action. The Assessing Officer in reply, vide letter dated 30.01.2015 stated that the DRP had clearly mentioned that the order passed on 28.02.2014 was final order and not draft order, so the Assessing Officer does not have any jurisdiction over the case. 7. In order to adjudicate the issue, reference needs to be made to the provisions of section 144C of the Act. Under the provisions of section 144C of the Act, it is provided that where the Assessing Officer proposes to make, on or after 01.10.2009, any variation in the income or loss returned, which is prejudicial to the interest of assessee, then the Assessing Officer shall in the first instance forward the draft of the proposed order of assessment to the eligible assessee. Under sub-section (2) of section 144C of the Act on receipt of the draft order, the eligible assessee shall within 30 days of the receipt, file his acceptance of the variation to the Assessing Officer or file his objections, if any, to such variation with the Dispute Resolution Panel and the Assessing Officer. Under sub-section (3) of section 144C of the Act, the Assessing Officer shall complete the assessment on the basis of draft order if the assessee intimates to the Assessing Officer the acceptance of the variation or no objections are received within period specified in sub-section (2) of section 144C of the Act. Thereafter, the Assessing Officer is empowered to pass the assessment order within one month from the end of month, in which the acceptance is received or the period of filing objections under sub-section (2) of section 144C of the Act expires. Under sub-section (5) of section 144C of the Act, it is provided that the Dispute Resolution Panel shall in case where objection is received under sub-section (2) issue such directions as it thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment. Upon receipt of the said directions, the Assessing Officer shall in conformity with the same, complete the assessment without providing any further opportunity of being hearing to the assessee within one month from the end of the month in which such direction is received, notwithstanding anything to the contrary contained in section 153 or 153B of the Act, as per sub-section (13) to section 144C of the Act. In view of the provisions of section 144C of the Act impliedly where the TPO proposes any variation in the income or loss returned by the assessee, which is prejudicial to the interest of assessee, the Assessing Officer shall in the first instance forward the draft of the proposed assessment order to the assessee and thereafter, if no objections are received and / or the assessee files his acceptance to the variation to the Assessing Officer, then the Assessing Officer is empowered to complete the assessment within one month from the end of the month thereof. In case, the assessee files his objection before the DRP and where the said Panel issues directions as it thinks fit, then the Assessing Officer on receipt of such directions shall complete the assessment in conformity with such directions. In view of the said provisions
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of the Act, the compliance to section 144C of the Act is mandatory in all such cases, where the TPO proposes variation in the income or loss returned, which is prejudicial to the interests of assessee. Only after complying with the conditions laid down in section 144C of the Act, the Assessing Officer is empowered to pass the order under section 143(3) r.w.s. 144C of the Act completing the assessment on such enhanced income or variation in the loss returned by the assessee. 8. The Hon‟ble Madras High Court in the case of Vijay Television Writ Petition Nos.1526 and 1527 of 2014 & M.P. Nos.1 and 1 of 2014, it was held that non-passing of draft assessment order after adjustment made by the TPO renders proceedings null & void by observing as under:- “Under Section 144C(1) of the Act, with effect from 1st October 2009, the Assessing Officer has to mandatorily issue a draft assessment order if there is a proposed variation to the return which are prejudicial to the eligible assessee. The fact that the petitioner is an eligible assessee is not in dispute. While so, under section 144C(2) of the Act, the eligible assessee has the option, either to accept the variation or to file their objections before the DRP and such option has to be exercised within 30 days. On such objections filed by the assessee, the DRP shall issue appropriate direction for the guidance of the Assessing Officer under section 144C(5) of the Act. It is only thereafter, the AO is bound to pass a final order of assessment in compliance with the directions issued by the DRP under section 144C(3) of the Act. In the present case, without following the above mandatory procedure, the AO has passed the order of assessment on 26.03.2013 and subsequently issued a corrigendum on 15.04.2014 to rectify the mistake committed in passing the final order of assessment inter alia to treat it as a draft assessment order. This course of action adopted by the second respondent is contrary to the mandatory provisions contained in the Act and the corrigendum issued by the AO could not cure the defect. The very fact that the Assessing Officer has signed the order of assessment and also assessed the amount payable by the assessee has become complete and it cannot be simply treated as a draft assessment order or it can be rectified by issuing the corrigendum. In fact, pursuant to the order of assessment under section 143C, demand was also made for payment of the amount and such demand has not been withdrawn by the second respondent even after issuing the corrigendum. Even as per the website of the department, the demand made to the petitioner company continues till date and therefore, the final order as well as the the corrigendum issued by the second respondent are vitiated
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by errors apparent on the face of the record and they are legally not sustainable.” 9. The similar issue had arisen before the Pune Bench of Tribunal in Agfa India Pvt. Ltd. Vs. ACIT in ITA Nos.341/PN/2014 and 1072/PN/2014, relating to assessment year 2008-09, order dated 28.10.2015 and reference was made to the decision of the Hon‟ble High Court of Andhra Pradesh at Hyderabad in M/s. Zuari Cements Ltd. Vs. ACIT in WP No.5557/2012, vide judgment dated 21.02.2013 and the Hon‟ble Supreme Court in ACIT Vs. M/s. Zuari Cement Ltd. vide Special Leave Petition CC No.16694/2013, judgment dated 27.09.2013 and it was held as under:- “20. The Hon‟ble High Court of Andhra Pradesh at Hyderabad in M/s. Zuari Cements Ltd. Vs. ACIT (supra) on similar issue where after receipt of the order passed by the TPO under section 92CA(3) of the Act, the Assessing Officer had passed the assessment order under section 143(3) of the Act raising a demand of Rs.27,40,71,913/- without giving an opportunity to the assessee under section 144C of the Act, observed that where the Assessing Officer proposes to make on or after 01.10.2009, any variation in the income or loss returned by the assessee, then notwithstanding to the contrary contained in the Act, he shall first pass the draft assessment order, forward the same to the assessee and after assessee files his objections, if any, the Assessing Officer shall complete the assessment within one month, in view of the provisions of section 144C of the Act. It was further observed that the assessee is also given an option to file an objection before the DRP, in which the latter can issue directions for the guidance of Assessing Officer to enable him to complete assessment. Where the Assessing Officer accepted the variation submitted by the TPO without giving the petitioner any opportunity to object to it and pass the assessment order, it was held by the Hon‟ble High Court of A.P that the impugned order of assessment was clearly contrary to section 144C of the Act and was without jurisdiction, null and void. The objection of the Revenue that the Circular No.5/2010 of the CBDT which laid down that the provisions of section 144C of the Act shall not apply for the assessment year 2008-09 and would only apply from assessment year 2010-11 and later years was held to be not tenable where the language of sub-section (1) of section 144C of the Act referred to the cutoff date of 01.10.2009 indicates the intention of Legislature to make it applicable. The Hon‟ble High Court of A.P further held that the Circular No.5/2010 issued by the CBDT stating that section 144C(1) of the Act would apply only from assessment year 2010-11 and subsequent years and not from assessment year 2008-09 was contrary to the expressed language of the section and the said view of the Revenue was held to be not acceptable. The Hon‟ble High Court of A.P thereafter held that the impugned order of assessment dated
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23.12.2011 passed by the respondent was contrary to the mandatory provisions of section 144C of the Act is declared as one without jurisdiction, null and void and unenforceable. The Hon‟ble High Court of Andhra Pradesh held as under:- “In this view of the matter we are of the view that the impugned order of assessment dt. 23.12.2011 passed by the respondent is contrary to the mandatory provisions of S.144C of the Act and is passed in violation thereof. Therefore, it is declared as one without jurisdiction, null and void and unenforceable. Consequently, the demand notice dated 23.12.2011 issued by the respondent is set aside.” 21. The Hon‟ble Supreme Court (supra) in ACIT Vs. Zuari Cements Ltd. (supra) had dismissed the Special Leave Petition filed by the Department upon hearing the Counsel. The learned Authorized Representative for the assessee contended that since the said Special Leave Petition was dismissed after hearing the Counsel and the view taken by the Hon‟ble High Court of Andhra Pradesh at Hyderabad has been approved by the Apex Court and any order contradicting the conditions laid down in section 144C of the Act is null and void and unenforceable in law. 22. Further, the Delhi Bench of Tribunal in the case of Capsugel Healthcare Limited in ITA No.1356/Del/2012, vide order dated 30.09.2014 have upheld the similar view that “Failure to pass draft assessment order after TPO‟s order renders proceedings void. Show cause notice cannot be quoted with draft assessment order”. 10. Further, the Hon‟ble Bombay High Court in International Air Transport Association Vs. DCIT (supra) have also down the similar proposition and held as under:- “4. The Petitioner had consequent to the assessment order dated 23rd March 2015 filed its objection in terms of Section 144C(2) of the Act to the Dispute Resolution Panel (“DRP”). By an order dated 7th October, 2015, the DRP refused to pass any direction on the objections because the objections had been filed in respect of a final order under Section 143(3) of the Act and not in respect of the draft assessment order passed under Section 144C(1) of the Act. The order dated 7th October, 2015 of the DRP holds that its jurisdiction is only to entertain objections with regard to draft assessment order passed under Section 144C(1) of the Act. 5. However, it is pertinent to note that the order dated 7th October, 2015 of the DRP in paragraph (3) thereof records that “There is no dispute that the assessee is a foreign company”. This position is undisputed even before us. Therefore, in view of Section 144C(15) of the Act which defines eligible assessee to whom Section 144C(1) of the Act applies to inter alia mean any foreign company. Therefore, a draft assessment order under
17 ITA No.714 /PUN/2011 Co. No.41/PUN/2011 ITA No.546/PUN/2014 A.Ys.2005-06 & 2009-10
Section 144C(1) of the Act is mandated before the Assessing Officer passes a final order under Section 143(3) of the Act in case of eligible assessee. An draft assessment order passed under Section 144C(1) of the Act bestows certain rights upon an eligible assessee such as to approach the DRP with its objections to such a draft assessment order. This is for the reason that an eligible assessee‟s grievance can be addressed before a final assessment order is passed and appellate proceedings invoked by it. However, these special rights made available to eligible assessee under Section 144C of the Act are rendered futile, if directly a final order under Section 143(3) of the Act is passed without being preceded by draft assessment order. 6. In the above view, the assessment order dated 23rd March, 2015 passed by the Assessing Officer for the assessment year 2012-13 is completely without jurisdiction. This is so as it has not been preceded by a draft assessment order. Hence, the foundational/basic order viz. the assessment order dated 23rd March, 2015 is set aside and quashed as being without jurisdiction. Consequent orders passed on rectification application as well as on penalty are also quashed and set aside being unsustainable.” 11. The learned Authorized Representative for the assessee has placed reliance on the ratio laid down by the International Air Transport Association Vs. DCIT (supra) and the Hon‟ble Madras High Court in the case of Vijay Television Writ Petition Nos.1526 and 1527 of 2014 & M.P. Nos.1 and 1 of 2014 vis-à-vis. Whereas the learned Departmental Representative for the Revenue strongly opposed and pointed out that the Assessing Officer has sent the draft assessment order wherein the letter clearly says that it is draft assessment order. He pointed out that the DRP had mis- interpreted and the issue may be sent back to the file of DRP. He also pointed out that the facts before the Hon‟ble Bombay High Court were different and the said proposition is not applicable. We find no merit in the plea of learned Departmental Representative for the Revenue. The Assessing Officer passed the order on 28.02.2014 along with which it also issued the demand notice and show cause notice for levy of penalty. In other words, the Assessing Officer has crystallized the demand in the case of assessee. Whereas, as per the provisions of the Act where the Assessing Officer proposes to vary the income in the hands of assessee, there was requirement to issue show cause notice to the assessee to the said additions, by way of draft assessment order. The demand does not get crystallized in draft assessment order. Undoubtedly, the Assessing Officer had issued covering letter where it says that it is draft assessment order but in spirit, it had finalized the assessment, wherein the demand was crystallized and demand notice was issued to the assessee. The Assessing Officer has not followed the correct procedure as provided in the Statute and has passed final assessment order without passing
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draft assessment order which is against the provisions of the Act and hence, the same is invalid in law. Reliance is placed on the ratio laid down by the Hon‟ble Bombay High Court in International Air Transport Association Vs. DCIT (supra) and the Hon‟ble Madras High Court in Vijay Television Pvt. Ltd. Vs. DRP & Others (supra) and the Hon‟ble High Court of Andhra Pradesh in M/s. Zuari Cements Ltd. Vs. ACIT (supra). We hold that the assessment order passed in the case is invalid and the same is set aside. Since we have decided the preliminary issue in favour of assessee, the other grounds of appeal against the additions made become academic and the same are dismissed. 13. The facts before us are similar to the facts before the Tribunal in Soktas India (P) Ltd. Vs. ACIT (supra). In the facts of present case also, the demand got crystallized on passing of the draft assessment order, wherein the Assessing Officer had issued demand notice in ITNS-150 and had also initiated penalty proceedings. Undoubtedly, the said assessment was framed as draft assessment but in actual fact, the Assessing Officer had made the assessment in the hands of assessee by not only assessing the income but also determining the demand payable. In the case of draft assessment order, proposed additions are to be made and the assessee is show caused either to accept the same or file the objections before the DRP. However, in the present facts, there was not a proposal for making addition but final assessment order was passed. Undoubtedly, the Assessing Officer said that he is passing draft assessment order and the assessee was also at liberty to file the objections before the DRP or accept the same, but in actual fact, the order passed by the Assessing Officer was complete assessment order which is not envisaged under section 143(3) r.w.s. 144C of the Act. Accordingly, we hold that draft assessment order passed in the case is invalid in law. Thus, the Cross Objection No.2 raised by the assessee is allowed. Since we hold the assessment order to be invalid in law, then all the other issues become academic in nature….”
We have perused the case records and heard the rival contentions. We have also considered the judicial pronouncement placed before us. The issue is clearly identifiable and is covered in favour of the assessee by the decision of the Co-ordinate Bench of the Tribunal, Pune as herein above referred.
Respectfully, following the same, we hold the draft assessment order to be bad in law and void ab initio and thereby allow the additional ground of appeal.
Since the legal ground has been answered in favour of the assessee, all other grounds in this appeal becomes academic in nature.
19 ITA No.714 /PUN/2011 Co. No.41/PUN/2011 ITA No.546/PUN/2014 A.Ys.2005-06 & 2009-10
In the result, appeal of the assessee in ITA No.546/PUN/2014 for the assessment year 2009-10 is allowed.
In combined result, appeal of the Revenue in ITA No.714/PUN/2011 is partly allowed for statistical purpose and cross objection of the assessee in CO. No.41/PUN/2011 becomes academic in nature and appeal of the assessee in ITA No.546/PUN/2014 is allowed.
Order pronounced on 02nd day of July, 2019.
Sd/- Sd/- R.S.SYAL PARTHA SARATHI CHAUDHURY VICE PRESIDENT JUDICIAL MEMBER ऩुणे / Pune; ददनाांक / Dated : 02nd July, 2019. SB आदेश की प्रनिलऱपप अग्रेपषि / Copy of the Order forwarded to : अऩीऱाथी / The Appellant. 1. प्रत्यथी / The Respondent. 2. 3. The CIT (Appeals), Aurangabad. 4. The CIT, Aurangabad. , आयकर अऩीऱीय अधधकरण, “सी” बेंच, 5. ववभागीय प्रतततनधध ऩुणे / DR, ITAT, “C” Bench, Pune. गार्ड फ़ाइऱ / Guard File. 6.
// True Copy //
आदेशानुसार / BY ORDER,
तनजी सधचव / Private Secretary आयकर अऩीऱीय अधधकरण, ऩुणे / ITAT, Pune.
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Date 1 Draft dictated on 01.07.2019 Sr.PS/PS 2 Draft placed before author 01.07.2019 Sr.PS/PS 3 Draft proposed and placed JM/AM before the second Member 4 Draft discussed/approved by AM/JM second Member 5 Approved draft comes to the Sr.PS/PS Sr. PS/PS 6 Kept for pronouncement on Sr.PS/PS 7 Date of uploading of order Sr.PS/PS 8 File sent to Bench Clerk Sr.PS/PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R 11 Date of dispatch of order