Loading judgment…
Facts
The assessee, Midea India Pvt. Ltd., filed an appeal against the directions of the Dispute Resolution Panel (DRP). The Assessing Officer (AO) passed a final assessment order without considering the DRP's directions, despite the AO being bound by them under Section 144C(10) of the Income Tax Act. The AO had previously made additions based on Transfer Pricing Officer's (TPO) adjustments, which the DRP had directed to be re-worked.
Held
The Tribunal held that the AO's failure to comply with the binding directions of the DRP, as mandated by Section 144C(10) and (13) of the Income Tax Act, rendered the final assessment order invalid. The Tribunal followed a coordinate bench's decision in a similar case, quashing the final assessment order.
Key Issues
Whether the final assessment order passed by the AO is liable to be quashed for non-compliance with the binding directions of the DRP under Section 144C(10) and (13) of the Income Tax Act.
Sections Cited
144C(1), 144C(10), 144C(13), 143(3), 144B, 92CA(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI “H” BENCH: NEW DELHI
Before: SHRI YOGESH KUMAR U.S & SHRI MANISH AGARWAL
Year : 2021-22] Midea India Pvt.Ltd. vs Assessment Unit, Income Unit No.-517-522, 5th Floor, Tax Department BPTP Park Centra, Sector- (Jurisdictional Assessing 30, Gurugram-122001 Officer: DCIT, Circle-1(1), PAN-AAKCM8743R Gurgaon, Haryana APPELLANT RESPONDENT Assessee by Shri Deepak Chopra, Adv. Shri Ashish Sharda, Adv. & Shri Ankkul Gupta, CA Revenue by Shri S.K.Jhadav, CIT DR Date of Hearing 19.01.2026 Date of Pronouncement 10.04.2026 ORDER
PER MANISH AGARWAL, AM :
The captioned appeal is filed by assessee against the directions of Dispute Resolution Panel (“DRP”) dated 07.08.2024 on the objections filed by the assessee against the draft assessment order dated 29.11.2023 passed u/s 144C(1) of the Income Tax Act, 1961 (“the Act”) pertaining to assessment year 2021-22.
Brief facts of the case are that the assessee is a domestic company and subsidiary of Midea Electric Trading (Singapore) Pte.Ltd. who is holding 99.99% shares of the assessee. The assessee is engaged in the business of manufacturing and selling of domestic appliances, wholesale trading of electric parts and other services.
The return of income was e-filed on 13.03.2022, declaring NIL income and loss of INR 24,82,46,516/- was carried over to next year. Since there were international transactions with the Associated Enterprises (“AEs”), the matter was selected for scrutiny under CASS and a reference was made to the Transfer Pricing Officer (“TPO”) for determination of Arm’s Length Price (“ALP”) of the international transactions. The TPO vide order dated 26.12.2022 has made the adjustment under trading segment of international transactions of INR 13,35,00,268/-. Thereafter, the AO passed the draft assessment order dated 29.11.2023 proposed the addition to the extent of adjustments in ALP of INR 13,35,00,268/- to the total income of the assessee.
Aggrieved by the said order, the assessee filed objections before Ld. DRP wherein Ld. DRP disposed off all the objections by partly accepted the contention of the assessee and direct the AO/TPO to re-work out the adjustment of ALP of international transactions. Thereafter, AO/TPO has passed the order giving effect dated 20.09.2024 and on the same day without considering the said order of giving effect to the directions of Ld. DRP, AO passed the final assessment order vide order dated 20.09.2024 u/s 143(3)/144C r.w.s. 144B of the Act by making the additions as proposed in the draft assessment order.
Aggrieved by the said order, the assessee is in appeal before the Tribunal.
Ground of appeal Nos.1 & 3 raised by the assessee are general in nature, need no separate adjudication hence, dismissed.
In Ground of appeal No.2, the assessee has challenged the final 6. assessment order passed in violation to the directions given by Ld. DRP and therefore, it is requested that the same be quashed.
Before us, Ld.AR for the assessee submits that final assessment order was passed on 20.09.2024 however, the directions given by Ld. DRP have not been considered in the said order. Ld. AR submits that since statutory provisions have not been followed and the directions given by Ld. DRP which are binding in nature as per section 144C(10) of the Act therefore, the final assessment order was passed u/s 144C(13) is deserves to be quashed. For this, reliance is placed on the judgment of Co-ordinate Bench in the case of Comparex India (P.) Ltd. vs ITO reported in [2024] 166 taxmann.com 720 dated 09.09.2024 (Del. Trib.).
On the other hand, Ld. CIT DR for the Revenue supported the orders of the lower authorities and submits that order giving effect was passed though on the very same but few minutes after the order passed by the AO u/s 144C(13) and therefore, AO has not taken into consideration the effect to the direction given by Ld. DRP. He therefore, requested to set aside the matter to the file of AO for re-consideration of the directions given by Ld. DRP as followed in the order giving effect.
Heard the contentions of both the parties and perused the material available on record. At the outset, it is seen that AO has passed the order u/s 144C(13) without following the directions given by Ld. DRP which are binding in nature and thus, is a violation of statutory provisions of the Act. It is further observed that NFAC vide letter dated 12.08.2024 issued after the directions given by Ld. DRP, asked the assessee to file all the details as per the directions of Ld. DRP. Once the notice is issued after the order of Ld. DRP by the AO/TPO, NFAC, Delhi, it cannot be said that the AO was not aware of any such directions or of the pending proceedings for giving effect to the directions given by Ld. DRP. However, the AO proceeded to complete the assessment u/s 144C(13) of the Act without waiting for the order giving to such directions. Sub-section 10 of section 144C of the Act provides that “Every direction issued by the Dispute Resolution Panel shall be binding on the Assessing Officer.” Further Sub-section (13) of section 144C is reproduced as under:- 144C. …………… (13) “Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153, 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 direction is received.”
The conjoint reading of sub-section (10) and (13) of section 144C of the Act would make it clear that no order under sub- section (13) could be passed without the conformity with the directions given by Ld. DRP as per sub-section (5) of section 144C of the Act. Further, sub-section (10) made such directions binding on the AO. In the instant case, AO while passing the assessment order u/s 144C(13) had not followed such directions given by Ld. DRP and has made the additions of the adjustments in ALP as proposed in the draft assessment order against which the assessee has already filed the objections before Ld. DRP and Ld. DRP had issued the directions. It is also observed that as against the total addition of INR 13,35,00,268/- made by the TPO in the order passed u/s 92CA(3) of the Act, as proposed in the draft assessment order, as per the directions of Ld. DRP, such adjustments got reduced to INR 10,27,89,884/- in the order giving effect dated 20.09.2024 placed before us. The Co-ordinate Bench of Tribunal in the case of Comparex India (P.) Ltd. vs ITO (supra) under identical facts wherein the final assessment order u/s 144C(13) was passed without following directions of Ld. DRP and till date, no rectification order was passed which fact is identical to the facts of the present case as till date, no rectification order u/s 154 is passed by the AO to modify the ALP adjustment in terms of order giving effect of directions of Ld. DRP. The relevant observations of the Co-ordinate Bench as contained in paras 12 & 13 are as under:- 12. “Considered the rival submissions and material placed on record. We observed from the record that TPO passed order proposing TP adjustments in three segments of the international transactions and the same was incorporated in draft assessment order and after giving an opportunity to the assessee, draft assessment was finalized and sent to the assessee. Assessee raised objections before the ld. DRP and ld. DRP sustained the TP adjustments in one of the segments, namely, intra group services of Rs.1,85,52,925/- and deleted the TP adjustments in back office support services and payment of sourcing fees etc. In fact, ld. DRP sustained the TP adjustments relating to intra group services and TPO in his order dated 27.07.2022 following the directions of ld. DRP and restricted the TP adjustment only to the extent of intra group services to the extent of Rs.185,52,925/-. We observed that the final assessment order was passed by jurisdictional
AO u/s 143(3) read with section 144C of the Act dated 28.07.2022 not considering the OGE passed by the TPO and directions of ld. DRP. Assessee is in appeal before us raising the relevant grounds and heavily relying on the decision of Hon’ble Bombay High Court in the case of Hexaware Technologies Ltd. (supra). At the same time, we observed that ld. DR for the Revenue objected to the grounds raised by the assessee and submitted that the order passed by the Assessing Officer is only mistaken belief considering the directions passed by the ld. DRP on intra group services and he heavily relied on the case laws submitted by him to pray that the relevant assessment order be remitted back to Assessing Officer for proper rectification. After considering various case laws relied by the ld. DR, we observed that they are distinguishable to the facts of the case and not relevant for the issues raised by the assessee. At the same time, we observed that in the case of Hexaware Technologies Ltd. (supra), Hon’ble Bombay High Court has dealt with the issue of section 148/148A and section 151A of the Act. Ld. DR for the Revenue relied on the decision of Hon’ble Supreme Court in the case of Ashish Agarwal (supra). The facts involved in this case are issue of reassessment proceeding notices issued by the Revenue approximately 90000 u/s 148 of the Act, so in order to protect the rights of the Revenue as well as respective assessees and for public exchequer, the same was remitted back to Assessing Officer to pass relevant orders u/s 148A(d) of the Act. Since the issue involved in this case is completely different than the facts on record, we observed from the decision of Hon’ble Bombay High Court in the case of Hexaware Technologies Ltd. (supra). The Hon’ble High Court observed as under :-
36. With respect to the arguments of the Revenue, i.e., the notification dated 29th March 2022 provides that the Scheme so framed is applicable only ‘to the extent’ provided in Section 144B of the Act and Section 144B of the Act does not refer to issuance of notice under Section 148 of the Act and hence, the notice cannot be issued by the FAO as per the said Scheme, we express our view as follows:- Section 151A of the Act itself contemplates formulation of Scheme for both assessment, reassessment or recomputation under Section 147 as well as for issuance of notice under Section 148 of the Act. Therefore, the Scheme framed by the CBDT, which covers both the aforesaid aspect of the provisions of Section 151A of the Act cannot be said to be applicable only for one aspect, i.e., proceedings post the issue of notice under Section 148 of the Act being assessment, reassessment or recomputation under Section 147 of the Act and inapplicable to the issuance of notice under Section 148 of the Act. The Scheme is clearly applicable for issuance of notice under Section 148 of the Act and accordingly, it is only the FAO which can issue the notice under Section 148 of the Act and not the JAO. The argument advanced by respondent would render clause 3(b) of the Scheme otiose and to be ignored or contravened, as according to respondent, even though the Scheme specifically provides for issuance of notice under Section 148 of the Act in a faceless manner, no notice is required to be issued under Section 148 of the Act in a faceless manner. In such a situation, not only clause 3(b) but also the first two lines below clause 3(b) would be otiose, as it deals with the aspect of issuance of notice under Section 148 of the Act. Respondents, being an authority subordinate to the CBDT, cannot argue that the Scheme framed by the CBDT, and which has been laid before both House of Parliament is partly otiose and inapplicable. The argument advanced by respondent expressly makes clause 3(b) otiose and impliedly makes the whole Scheme otiose. If clause 3(b) of the Scheme is not applicable, then only clause 3(a) of the Scheme remains. What is covered in clause 3(a) of the Scheme is already provided in Section 144B(1) of the Act, which Section provides for faceless assessment, and covers assessment, reassessment or recomputation under Section 147 of the Act. Therefore, if Revenue’s arguments are to be accepted, there is no purpose of framing a Scheme only for clause 3(a) which is in any event already covered under faceless assessment regime in Section 144B of the Act. The argument of respondent, therefore, renders the whole Scheme redundant. An argument which renders the whole Scheme otiose cannot be accepted as correct interpretation of the Scheme. The phrase “to the extent provided in Section 144B of the Act” in the Scheme is with reference to only making assessment or reassessment or total income or loss of assessee. Therefore, for the purposes of making assessment or reassessment, the provisions of Section 144B of the Act would be applicable as no such manner for reassessment is separately provided in the Scheme. For issuing notice, the term “to the extent provided in Section 144B of the Act” is not relevant. The Scheme provides that the notice under Section 148 of the Act, shall be issued through automated allocation, in accordance with risk management strategy formulated by the Board as referred to in Section 148 of the Act and in a faceless manner. Therefore, “to the extent provided in Section 144B of the Act” does not go with issuance of notice and is applicable only with reference to assessment or reassessment. The phrase “to the extent provided in Section 144B of the Act” would mean that the restriction provided in Section 144B of the Act, such as keeping the International Tax Jurisdiction or Central Circle Jurisdiction out of the ambit of Section 144B of the Act would also apply under the Scheme.
Further the exceptions provided in sub-section (7) and (8) of Section 144B of the Act would also be applicable to the Scheme.
When an authority acts contrary to law, the said act of the Authority is required to be quashed and set aside as invalid and bad in law and the person seeking to quash such an action is not required to establish prejudice from the said Act. An act which is done by an authority contrary to the provisions of the statue, itself causes prejudice to assessee. All assessees are entitled to be assessed as per law and by following the procedure prescribed by law. Therefore, when the Income Tax Authority proposes to take action against an assessee without following the due process of law, the said action itself results in a prejudice to assessee. Therefore, there is no question of petitioner having to prove further prejudice before arguing the invalidity of the notice. 38 With respect to the Office Memorandum dated 20th February 2023, the said Office Memorandum merely contains the comments of the Revenue issued with the approval of Member (L&S) CBDT and the said Office Memorandum is not in the nature of a guideline or instruction issued under Section 119 of the Act so as to have any binding effect on the Revenue. Moreover, the arguments advanced by the Revenue on the said Office Memorandum dated 20th February 2023 is clearly contrary to the provisions of the Act as well as the Scheme dated 29th March 2022 and the same are dealt with as under – (i) It is erroneously stated in paragraph 3 of the Office Memorandum that "The scheme clearly lays down that the issuance of notice under section 148 of the Act has to be through automation in accordance with the risk management strategy referred to in section 148 of the Act." The issuance of notice is not through automation but through “automated allocation”. The term “automated allocation” is defined in clause 2(1)(b) of the said Scheme to mean random allocation of cases to Assessing Officers. Therefore, it is clear that the Assessing Officer are randomly selected to handle a case and it is not merely a case where notice is sought to be issued through automation. (ii) It is further erroneously stated in paragraph 3 of the Office Memorandum that "To this end, as provided in the section 148 of the Act, the Directorate of Systems randomly selects a number of cases based on the criteria of Risk Management Strategy." The term ‘randomly’ is further used at numerous other places in the Office Memorandum with respect to selection of cases for consideration/issuance of notice under Section 148 of the Act. Respondent is clearly incorrect in its understanding of the said Scheme as the reference to random in the said Scheme is reference to selection of Assessing Officer at random and not selection of Section 148 cases as random. If the cases for issuance of notice under Section 148 of the Act are selected based on criteria of the risk management strategy, then, obviously, the same are not randomly selected. The term ‘randomly’ by definition mean something which is chosen by chance rather than according to a plan. Therefore, if the cases are chosen based on risk management strategy, they certainly cannot be said to be random. The Computer/System cannot select cases on random but selection can be based on certain well defined criteria. Hence, the argument of respondents is clearly unsustainable. If the case of respondent is that the applicability of Section 148 of the Act is on random basis, then the provision of Section 148 itself would become contrary to Article 14 of the Constitution of India as being arbitrary and unreasonable. Randomly selecting cases for reopening without there being any basis or criteria would mean that the section is applied by the Revenue in an arbitrary and unreasonable manner. The word ‘random’ is used in clause 2(1)(b) of the said Scheme in the definition of “automated allocation”. “Automated allocation” is defined in the said clause to mean “an algorithm for randomised allocation of cases…..”. The term ‘random’, in our view, has been used in the context of assigning the case to a random Assessing Officer, i.e., an Assessing Officer would be randomly chosen by the system to handle a particular case. The term ‘random’ is not used for selection of case for issuance of notice under Section 148 as has been alleged by the Revenue in the Office Memorandum. Further, in paragraph 3.2 of the Office Memorandum, with respect to the reassessment proceedings, the reference to ‘random allocation’ has correctly been made as random allocation of cases to the Assessment Units by the National Faceless Assessment Centre. When random allocation is with reference to officer for reassessment then the same would equally apply for issuance of notice under Section 148 of the Act. (iii) The conclusion at the bottom of page 2 in paragraph 3 of the Office Memorandum that "Therefore, as provided in the scheme the notice under section 148 of the Act is issued on automated allocation of cases to the Assessing Officer based on the risk management criteria" is also factually incorrect and on the basis of incorrect interpretation of the Scheme. Clause 2(1)(b) of the Scheme defined ‘automated allocation’ to mean ‘an algorithm for randomised allocation of cases by using suitable technological tools, including artificial intelligence and machine learning, with a view to optimise the use of resources’. The said definition does not provide that the automated allocation of case to the Assessing Officer is based on the risk management criteria. The reference to risk management criteria in clause 3 of the Scheme is to the effect that the notice under Section 148 of the Act should be in accordance with the risk management strategy formulated
by the board which is in accordance with Explanation 1 to Section 148 of the Act. In our view, the Revenue is misinterpreting the Scheme, perhaps to cover its deficiency of not following the Scheme for issuing notice under Section 148 of the Act. (iv) In paragraph 3.1 of the Office Memorandum, it is stated that the case is selected prior to issuance of notice are decided on the basis of an algorithm as per risk management strategy and are, therefore, randomly selected. It is further stated that these cases are ‘flagged’ to the JAO by the Directorate of Systems and the JAO does not have any control over the process. It is further stated that the JAO has no way of predicting or determining beforehand whether the case will be ‘flagged’ by the system. The contention of the Revenue is that only cases which are ‘flagged’ by the system as per the risk management strategy formulated by CBDT can be considered by the Assessing Officer for reopening, however, in clause (i) in the Explanation 1 to Section 148 of the Act, the term "flagged" has been deleted by the Finance Act, 2022, with effect from 1st April 2022. In any case, whether only cases which are flagged can be reopened or not is not relevant to decide the scope of the Scheme framed under Section 151A of the Act, which required the notice under Section 148 of the Act to be issued on the basis of random allocation and in a faceless manner. (v) The Revenue has wrongly contended in paragraph 3.1 of the Office Memorandum that "Therefore, whether JAO or NFAC should issue such notice is decided by administration keeping in mind the end result of natural justice to the assessees as well as completion of required procedure in a reasonable time." In our opinion, there is no such power given to the administration under either Section 151A of the Act or under the said Scheme. The Scheme is clear and categorical that notice under Section 148 of the Act shall be issued through automated allocation and in a faceless manner. Therefore, the argument of the Revenue is clearly contrary to the provisions of the Scheme. (vi) In paragraph 3.3 of the Office Memorandum, it is again erroneously stated that "Here it is pertinent to note that the said notification does not state whether the notices to be issued by the NFAC or the Jurisdictional Assessing Officer ("JAO")……It states that issuance of notice under section 148 of the Act shall be through automated allocation in accordance with the risk management strategy and that the assessment shall be in faceless manner to the extent provided in section 144B of the Act." The Scheme is categoric as stated aforesaid that the notice under Section 148 of the Act shall be issued through automated allocation and in a faceless manner. The Scheme clearly provides that the notice under Section 148 of the Act is required to be issued by NFAC and not the JAO. Further, unlike as canvassed by Revenue that only the assessment shall be in faceless manner, the Scheme is very clear that both the issuance of notice and assessment shall be in faceless manner. (vii) In paragraph 5 of the Office Memorandum, a completely unsustainable and illogical submission has been made that Section 151A of the Act takes into account that procedures may be modified under the Act or laid out taking into account the technological feasibility at the time. Reading the said Scheme along with Section 151A of the Act makes it clear that neither the Section or the Scheme speak about the detailed specifics of the procedure to be followed therein. This argument of the Revenue is clearly contrary to the Scheme as the Scheme is very specific to provide, inter alia, that the issuance of notice under Section 148 of the Act shall be through automated location and in a faceless manner. Therefore, the Scheme is mandatory and provides the specification as to how the notice has to be issued. Further the argument of the Revenue that Section 151A of the Act takes into account that the procedure may be modified under the Act is without appreciating that if the procedure is required to be modified then the same would require modification of the notified Scheme. It is not open to the Revenue to refuse to follow the Scheme as the Scheme is clearly mandatory and is required to be followed by all Assessing Officers. (viii) The argument of the Revenue in paragraph 5.1 of the Office Memorandum that the Section and Scheme have left it to the administration to device and modify procedures with time while remaining confined to the principles laid down in the said Section and Scheme, is without appreciating that one of the main principles laid down in the Scheme is that the notice under Section 148 of the Act is required to be issued through automated allocation and in a faceless manner. There is no leeway given on the said aspect and, therefore, there is no question of the administration to device and modify procedures with respect to the issuance of notice.
With reference to the decision of the Hon’ble Calcutta High Court in Triton Overseas Private Limited (Supra), the Hon’ble Calcutta High Court has passed the order without considering the Scheme dated 29th March 2022 as the said Scheme is not referred to in the order. Therefore, the said judgment cannot be treated as a precedent or relied upon to decide the jurisdiction of the Assessing Officer to issue notice under Section 148 of the Act. The Hon’ble Calcutta High Court has referred to an Office Memorandum dated 20th February 2023 being F No.370153/7/2023 TPL which has been dealt with above. Therefore, no reliance can be placed on the said Office Memorandum to justify that the JAO has jurisdiction to issue notice under Section 148 of the Act. Further the Hon’ble Telangana High Court in the case of Kankanala Ravindra Reddy vs. Income Tax Officer 14 has held that in view of the provisions of Section 151A of the Act read with the Scheme dated 29th March 2022 the notices issued by the JAOs are invalid and bad in law. We are also of the same view.”
From the above decision, Hon’ble High Court insisted that when an authority acts contrary to law, the said act of the authority is required to be quashed and set aside as invalid and bad in law and they have also opined that an action is not required to establish prejudice to the assessee. Therefore, in the present case also, while passing the final assessment order, the Assessing Officer (jurisdictional Assessing Officer) has not followed the directions of ld. DRP as per section 144C (13) of the Act and further we observed that the relevant Assessing Officer has not taken any step to pass a rectification order till now. We further observed that the TPO has passed OGE order to give effect TP adjustments after DRP directions and this is consequently part of the assessment records and Assessing Officer no doubt made a mistake which has led to not following of statutory provisions and not followed it up for making it proper which is in line with the provisions of section 144C of the Act. This is gross violation on the part of the jurisdictional Assessing Officer and ld. DR for the Revenue vehemently argued that it is a mistake. If it is a mistake, the Department should have acted upon to rectify the mistake within reasonable time. In this case, no records were shown to make such efforts taken by the officer. It is clearly violation of law which deserves to be acted upon and the action of the Assessing Officer is contrary to the provisions of the Act and contrary to the law. For the purpose of any subsequent proceedings, what is relevant is the final assessment order for all purposes including the collection of tax. The assessment order so passed by the Assessing Officer deserves to be quashed. Accordingly, ground no.3 and additional ground no.16 raised by the assessee is allowed.”
As observed above, facts of the present case are identical with the facts in the case of Comparex India (P.) Ltd. vs ITO (supra), thus by respectfully following the aforesaid judgement of the coordinate bench of Tribunal, we hold that final assessment order passed u/s 144C(13) without following the direction of Ld. DRP is serious violation of binding provisions of Act and therefore, the final assessment order so passed is hereby, quashed. Accordingly, Ground of appeal No.2 raised by the assessee is allowed.
Since we have quashed the final assessment order by allowing the Ground of appeal No.2 raised by the assessee, the other Grounds of appeal taken on merits of the additions are not adjudicated.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open Court on 10.04.2026.
Sd/- Sd/- (YOGESH KUMAR U.S) (MANISH AGARWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Date:-10.04.2026 *Amit Kumar, Sr.P.S*