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Income Tax Appellate Tribunal, “K” Bench, Mumbai
Before: Shri M.Balaganesh & Shri Ravish Sood
O R D E R PER BENCH: The present appeals filed by the assessee are directed against the respective orders passed by the CIT(A)-56, Mumbai for A.Y. 2004-05, 2006-07, 2007-08 and 2008-09, dated 31.01.2018, which in turn arises from the respective orders passed by the A.O under Sec. 143(3) r.w.s 92CA r.w.s 254 of the Income Tax Act, 1961 (for short ‘I.T. Act’) for the aforementioned years. As a common issue is involved in the aforementioned appeals, therefore, the same are being taken up and disposed off by way of a consolidated order. We shall first advert to the appeal filed by the assessee for A.Y. 2004-05. The assessee P a g e | 2 to 2722/Mum/2018 AYs. 2004-05, 2006-07 to 2008-09 KSB Limited (earlier known as KSB Pumps Limited) Vs. Assistant Commissioner of Income Tax (LTU)-2 assailing the order of the CIT(A) has raised before us the following grounds of appeal:
“Based on the facts and circumstances of the case, KSB Limited (earlier known as “KSB Pumps Limited”) (hereinafter referred to as the Appellant') respectfully craves leave to prefer an appeal under section 253(1)(a) of the Income-tax Act, 1961 (hereinafter referred to as 'Act'), against the order dated 31st January, 2018 (received by the Appellant on 05th March, 2018) passed by the Commissioner of Income Tax (Appeals) - 56 (hereinafter referred to as the „Hon‟ble CIT(A)‟) under section 250(7) of the Act, on the following grounds , which are independent of and without prejudice to each other. On the facts and in the circumstances of the case and in law, the Hon‟ble CIT(A) and consequentially the learned Assessing Officer (hereinafter referred to as the 'learned AO‟)/ learned Transfer Pricing Officer (hereinafter referred to as the 'learned TPO') have: 1. erred in making an addition to the total income of the Appellant on account of transfer pricing adjustment of INR 63,60,732 in respect of its international transactions pertaining to payment of commission to its Associated Enterprise ('AE'); 2. erred in not following the order of the Hon‟ble Tribunal, and thereby exceeding his jurisdiction in remand proceeding and hence entire order should be quashed; 3. erred in not accepting the fresh benchmarking analysis undertaken by the Assessee applying Comparable Uncontrolled Price ('CUP') as the most appropriate method for benchmarking international transaction of payment of commission using external comparable data, as directed by Hon‟ble ITAT, while remanding the matter; 4. erred in rejecting the use of AE as the tested party for the purpose of benchmarking the international transaction pertaining to payment of commission, without appreciating the present facts and without providing any cogent reasons for the same; 5. erred in applying certain inappropriate filters for rejection of comparable agreements selected by the Assessee while benchmarking the transaction of payment of commission as per the direction of the Hon‟ble ITAT; 6. erred in not appropriately applying the principles of CUP method for the purpose of determination of ALP of the international transaction of payment of commission wherein considered the internal group transfer pricing policy, which is controlled transaction, for benchmarking the international transaction of payment of commission: 7. erred in rejecting comparable agreements identified by the Appellant in the fresh benchmarking analysis conducted by Appellant with respect of international transaction pertaining to payment of commission;
8. Without prejudice to above, erred in not considering the fact that the Central Government of India has approved the agreement with respect to appointment of Singapore AE as the sole selling agent i.e commission to be paid for availing such services, thereby, such approval would constitute CUP and thereby satisfying arm's length principle; 9. erred in directly passing the final assessment order under section 143(3) of the Act, without passing the draft assessment order as applicable in case of Assessee being 'eligible Assessee' as per section 144C(1) of the Act, thereby entire order which not in consonance of the Act should be quashed; P a g e | 3 to 2722/Mum/2018 AYs. 2004-05, 2006-07 to 2008-09 KSB Limited (earlier known as KSB Pumps Limited) Vs. Assistant Commissioner of Income Tax (LTU)-2 10. erred on the facts and in circumstances of the case and in law by levying interest under section 234B of the Act, without considering the fact that the addition on account of transfer pricing is due to the difference of opinion and as at the due date of payment of advance tax by no means the Appellant could have estimated such adjustments and consequential tax on such adjustment; 11. erred on the facts and in circumstances of the case and in law by proposing to levy interest under section 234C; 12. erred on the facts and in circumstances of the case and in law by proposing to levy interest under section 234D; 13. erred in initiating penalty proceedings u/s 271(1)(c) of the Act. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal
, at any time before or at, the time of hearing of the appeal, so as to enable the Honourable Income Tax Appellate Tribunal to decide this appeal according to law. Each of the above ground of appeal is independent and without prejudice to the other grounds of appeal preferred by the Appellant.”
2. Briefly stated, the assessee which is engaged in the business of manufacturing and sale of pumps and valves had filed its return of income for A.Y. 2004-05 on 30.10.2004, declaring total income of Rs. 29,40,89,523/-. Subsequently, the assessee had filed a revised return of income on 30.03.2005 declaring an income of Rs.30,37,37,152/-. Thereafter, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the I.T. Act.
During the course of the original assessment proceedings the A.O made a reference to the Transfer Pricing Officer (for short ‘TPO’) under Sec. 92CA(1) of the I.T Act. In the course of the proceedings it was observed by the TPO that the assessee had entered into 14 international transactions, which as per the T.P study report were claimed as being at arm’s length. It was observed by the TPO that the assessee had not separately considered the international transactions and had benchmarked the same by adopting the ‘Transactional Net Margin Method’ (for short ‘TNMM’). The TPO except for the international transaction of payment of commission by the assessee to its ‘Associate Enterprise’ (for short ‘AE’) in Singapore, namely M/s KSB Singapore (Asia Pacific) Pte. Ltd., accepted the remaining international transactions of the assessee. It was observed by the TPO, P a g e | 4 to 2722/Mum/2018 AYs. 2004-05, 2006-07 to 2008-09 KSB Limited (earlier known as KSB Pumps Limited) Vs. Assistant Commissioner of Income Tax (LTU)-2 that the assessee had claimed to have paid commission @ 12.50% of the sales to its AE. As the aforesaid AE of the assessee viz. M/s KSB Singapore (Asia Pacific) Pte. Ltd. was receiving commission @ 10% from the other group concerns, therefore, the TPO called upon the assessee to explain as to why the extra payment of 2.50% of commission may not be disallowed. In reply, the assessee tried to impress upon the A.O that the commission paid to its AE was justified for certain reasons viz. (i) that, the products of the assessee were more complex then the products of the other group concerns which were marketed by the AE; (ii) that, the AE of the assessee had to carry out detailed discussions with the customers of the assessee who were based in various countries, as a result whereof, the AE had to put in additional sale efforts; (iii) that, the AE was the sole selling agent of the assessee since the year 1979; (iv) that, the commission @ 12.50% was being paid by the assessee to the AE since 1987, and the same had always been accepted; and (v) that, due to the efforts of the AE there was a phenomenal increase in the turnover which had risen from Rs.5.59 lacs in the year 1986 to Rs. 31.78 crores in the year 2004. However, the TPO after deliberating on the contentions that were advanced by the assessee was not persuaded to accept the same, and restricted the commission paid by the assessee to its AE to10% and proposed an addition of Rs. 63,60,732/-.
The A.O after receiving the order of the TPO under Sec. 92CA(3), dated 05.12.2006 passed the assessment order under Sec.143(3), dated 19.12.2006, and after inter alia making the aforesaid transfer pricing adjustment of Rs.63,60,732/- assessed its income at Rs. 32,11,78,870/-. 5. Aggrieved, the assessee carried the matter in appeal before the CIT(A). It was submitted by the assessee that the TPO had neither P a g e | 5 to 2722/Mum/2018 AYs. 2004-05, 2006-07 to 2008-09 KSB Limited (earlier known as KSB Pumps Limited) Vs. Assistant Commissioner of Income Tax (LTU)-2 brought on record any comparable transaction that was entered into by the assessee or by its AE with an unrelated party, nor any such transaction outside the KSB group. It was the claim of the assessee, that in the absence of a comparable uncontrolled transaction, CUP method was neither available nor could be applied. Accordingly, it was submitted by the assessee that the only method which could be applied was TNMM at entity level. Further, it was submitted by the assessee that as per TNMM method all transactions of the assessee were at arm’s length. The CIT(A) after deliberating on the contentions advanced by the assessee observed, that the TPO had sought to invoke internal CUP method which however was inherently flouted as he had referred to a controlled transaction. Further, it was noticed by the CIT(A) that the assessee had benchmarked its commission payment under TNMM by selecting safe comparables, as per which the ratio of return of the assets employed by the assessee i.e @ 14.09% was better than the result of each of the comparable companies whose average margin hovered around 10%. Accordingly, the CIT(A) rejected the CUP method that was adopted by the TPO for two reasons viz. (i) that, no valid CUP existed as a controlled transaction was used as reference point; and (ii) that, it was not established that the extent of services provided to other group concerns by the AE at Singapore was the same as that provided to the assessee. On the basis of his aforesaid observations the CIT(A) deleted the TP adjustment of Rs.63,60,732/-.
The revenue being aggrieved with the order of the CIT(A) carried the matter in appeal before the Tribunal. The Tribunal after deliberating on the facts of the case observed, that as the international transactions carried out by the assessee did not match with each other, therefore, a common method could not have been applied to compute the ALP of the said transactions. It was observed by the Tribunal that the most appropriate method to compute ALP in respect P a g e | 6 to 2722/Mum/2018 AYs. 2004-05, 2006-07 to 2008-09 KSB Limited (earlier known as KSB Pumps Limited) Vs. Assistant Commissioner of Income Tax (LTU)-2 of commission paid by the assessee was CUP method. However, the Tribunal was not persuaded to accept the manner in which the TPO had applied the CUP method by referring to controlled transactions. On the basis of the aforesaid deliberations the Tribunal restored the matter to the file of the A.O, with a direction to provide the assessee a reasonable opportunity to support its case in respect of ALP of commission payment. Further, the assessee was given a liberty to file a fresh TP study report for the aforesaid transaction. It was observed by the Tribunal, that in case the assessee dispensed with the requirement of furnishing a fresh TP study report, then the A.O at his discretion given in the provisions of law may refer the matter to the TPO and re-adjudicate the matter afresh.
In the course of the set aside proceedings, the assessee undertook a secondary analysis using external CUP as the most appropriate method and selected 8 comparable agreements with the arithmetic mean of the commission rate of 13.41%. As the assessee was paying commission @ 12.5% of the value of export sales, which was lower than the aforesaid arms length rate, therefore, the said transaction was claimed to be at arm’s length. However, on a reference made by the A.O, the TPO in his revised order rejected the benchmarking study undertaken by the assessee after considering external CUP as the most appropriate method. Rather, the TPO benchmarked the transaction using the group transfer pricing policy, and vide his order passed under Sec.92CA(3), dated 18.01.2016 once again worked out the transfer pricing adjustment of Rs.63,60,732/- with respect to the commission paid by the assessee to its AE.
The A.O after receiving the order passed by the TPO under Sec.92CA(3), dated 18.01.2016, passed a final assessment order dated 23.03.2016, therein incorporating the adjustment made by the TPO.
P a g e | 7 to 2722/Mum/2018 AYs. 2004-05, 2006-07 to 2008-09 KSB Limited (earlier known as KSB Pumps Limited) Vs. Assistant Commissioner of Income Tax (LTU)-2 9. Aggrieved, the assessee carried the matter in appeal before the CIT(A). Before the CIT(A), the assessee inter alia assailed the validity of the assessment order passed by the A.O under Sec.143(3) r.w.s 92CA(3) r.w.s 254, dated 23.03.2016, on the ground that the A.O had framed the assessment without passing a draft assessment order as required under Sec. 144C of the I.T Act. It was the claim of the assessee, that pursuant to the transfer pricing adjustment made by the TPO under Sec. 92CA(3), the assessee as per Sec. 144C(1) r.w.s 144C(15) was statutorily required to be served with a draft assessment order, which however, was not done in the present case. However, the CIT(A) being of the view that as the A.O in the present case had only given effect to the directions of the Tribunal, therefore, the provisions of Sec.144C(1) were not applicable, thus declined to accept the said claim of the assessee. It was observed by the CIT(A), that as the Tribunal had not directed the A.O to pass a de novo assessment, hence, the provisions of Sec. 144C(1) which mandates passing of a draft assessment order was not applicable in the case of the assessee. Accordingly, the CIT(A) rejected the aforesaid contention of the assessee wherein the latter had assailed the validity of the assessment order passed by the A.O, and dismissed the appeal.
The assessee being aggrieved with the order passed by the CIT(A) has carried the matter in appeal before us. It was submitted by the ld. Authorized Representative (for short ‘A.R’) for the assessee, that this was the second round of appeal of the assessee before the Tribunal. The ld. A.R for the assessee submitted, that the Tribunal had vide its order dated 08.08.2013 restored the appeal to the file of the A.O for de novo adjudication. The ld. A.R took us through the facts of the case and submitted, that the assessee company was paying a commission @ 12.5% of the sale value to its AE at Singapore, namely M/s KSB Singapore (Asia Pacific) Pte. Ltd., which was its sole selling P a g e | 8 to 2722/Mum/2018 AYs. 2004-05, 2006-07 to 2008-09 KSB Limited (earlier known as KSB Pumps Limited) Vs. Assistant Commissioner of Income Tax (LTU)-2 agent. It was submitted by the ld. A.R, that the TNMM method adopted by the assessee was rejected by the TPO in the first round of appeal, and he had after applying CUP method made a TP adjustment of Rs.63,60,732/-. On appeal, the Tribunal vide its order dated 08.08.2013, after approving the CUP method as the most appropriate method for benchmarking the transaction of commission payment by the assessee, had restored the matter back to the file of the A.O for fresh adjudication of the ALP of the commission payments. It was submitted by the ld. A.R, that as per the direction of the Tribunal, the assessee had vide its letter dated 12.08.2014 that was addressed to the A.O submitted a fresh TP study report in respect of payment of commission. The ld. A.R submitted that on a reference made in the course of the set aside proceedings by the A.O to the TPO, the latter had passed an order under Sec. 92CA(3), dated 18.01.2016, as per which a TP adjustment of Rs. 63,60,732/- as was earlier made by his predecessor, was once again proposed by him. It was submitted by the ld. A.R, that after receiving the aforesaid order of the TPO under Sec. 92CA(3), dated 18.01.2016, the A.O had passed a final assessment order under Sec.143(3) r.w.s 92CA(3) r.w.s. 254, dated 23.03.2016, dispensing with the statutory requirement of forwarding a draft of the proposed order of assessment to the assessee. Accordingly, it was submitted by the ld. A.R, that the failure on the part of the A.O to pass a draft assessment order had divested the assessee of its statutory right of filing his objections to the variations proposed by the TPO with the DRP. On the basis of the aforesaid facts, it was submitted by the ld. A.R, that the assessment framed by the A.O without forwarding a draft of the proposed assessment order was devoid of any force of law and was liable to be struck down on the said ground itself. In support of his aforesaid contention the ld. A.R had relied on certain judicial pronouncements viz. (i) Pr. CIT Vs. Andrew Telecommunications Pvt.
P a g e | 9 to 2722/Mum/2018 AYs. 2004-05, 2006-07 to 2008-09 KSB Limited (earlier known as KSB Pumps Limited) Vs. Assistant Commissioner of Income Tax (LTU)-2 Ltd.(Tax Appeal No. 144 of 2017, dated 16.07.2018) (Bom); (ii) Dimensions Data Asia Pacific Pte. Ltd. Vs. DCIT (W.P No. 921 of 2018, dated 06.07.2018) (Bom); (iii) Nokia India Pvt. ltd. Vs. Addl. CIT [WP (C) No. 3629 of 2017, dated 07.09.2017) (Del); (iv) DCIT Vs. Control Risks India Pvt. Ltd. [SLP (C) Diary No. 7090/2019, dated 16.03.2018] (SC); & (v) CIT Vs. Nokia India Pvt. Ltd. [SLP (C) Diary No. 7302/2018, dated 14.05.2018](SC). It was submitted by the ld. A.R, that in case the ground of appeal no. 9 wherein the validity of the assessment framed by the A.O without passing a draft assessment order as envisaged under Sec.144C(1) is allowed, then the remaining grounds would be rendered as academic in nature. Apart there from, it was submitted by the ld. A.R that the cross appeals in the case of the assessee for A.Y. 2007-08, and the appeal of the assessee for A.Y. 2006-07 was also disposed off by the Tribunal in the first round of appeal, vide its aforesaid consolidated order dated 08.08.2013, and the matter on the same terms was restored to the file of the A.O for de novo adjudication. It was submitted by the ld. A.R, that following the aforesaid order for A.Y. 2004-05, A.Y 2006-07 and A.Y 2007-08, the Tribunal had thereafter on similar terms, vide its order dated 03.02.2014, restored the cross-appeals in the case of the assessee for A.Y. 2008-09 to the file of the A.O for fresh adjudication. It was submitted by the ld. A.R that in all the aforementioned years the A.O had framed the assessment without passing a draft assessment order as envisaged under Sec.144C of the I.T Act.
11. Per contra, the ld. Departmental Representative (for short ‘D.R’) submitted that as the Tribunal had restored the matter for a limited purpose of determination of the ALP of the commission payments by the assessee to its AE by following CUP method, therefore, there was no statutory obligation cast upon the A.O to have passed a draft assessment order. In support of his aforesaid contention, the ld. D.R P a g e | 10 to 2722/Mum/2018 AYs. 2004-05, 2006-07 to 2008-09 KSB Limited (earlier known as KSB Pumps Limited) Vs. Assistant Commissioner of Income Tax (LTU)-2 took us through the observations of the Tribunal. The ld. D.R rebutting the contentions advanced by the counsel for the assessee submitted, that the case laws relied upon by him were distinguishable on facts, as in the said cases the matter was restored to the Tribunal for de novo adjudication. Alternatively, the ld. D.R relied on the order of the ITAT Hyderabad ‘A’ Bench, Hyderabad in the case of M/s Cyient Ltd. Vs. DCIT, Circle-2(1), Hyderabad (ITA No. 1052 to 1054/Hyd/2016, dated 29.12.2017) and submitted, that in the same terms the matter may be restored to the file of the A.O with a direction to pass a draft assessment order.
The ld. A.R rebutting the aforesaid contentions of the counsel for the revenue submitted, that it was incorrect on his part to claim that there was no direction on the part of the Tribunal for de novo adjudication. It was submitted by the ld. A.R, that as the assessment framed by the A.O de hors passing of a draft assessment order was unsustainable in the eyes of law, therefore, the same was liable to be vacated on the said count itself.
We have heard the Authorized Representatives for both the parties, perused the orders of the lower authorities and the material available on record, and also the judicial pronouncements relied upon by them. The issue involved in the present appeal lies in a narrow compass i.e as to whether the assessment framed by the A.O under Sec.143(3) r.w.s 92CA r.w.s 254, dated 23.03.2016 in pursuance to the directions of the Tribunal, without passing a draft assessment order was sustainable or not. We find that the Tribunal in the first round of appeal was seized of the matter as regards the benchmarking of the ALP of the commission payments by the assessee to its AE at Singapore, namely M/s KSB Singapore (Asia Pacific) Pte. Ltd. As observed by us hereinabove, the Tribunal after necessary P a g e | 11 to 2722/Mum/2018 AYs. 2004-05, 2006-07 to 2008-09 KSB Limited (earlier known as KSB Pumps Limited) Vs. Assistant Commissioner of Income Tax (LTU)-2 deliberations, had observed, that CUP method was the most appropriate method to compute the ALP in respect of commission paid by the assessee to its AE at Singapore. However, as the Tribunal was not inclined to accept the manner in which the TPO had applied the CUP method for computing the ALP in respect of commission payment, therefore, it had in all fairness restored the matter to the file of the A.O, with a direction to provide the assessee a reasonable opportunity to support its case in respect of determination of ALP of the commission payments. A perusal of the order of the Tribunal reveals, that the assessee was given the liberty to file a fresh TP study report for the transaction under consideration, in case if he so desired. Further, as is discernible from the order, the Tribunal had observed, that the A.O would be at discretion, as per the mandate of law, to refer the matter to the TPO, and therein re-adjudicate the issue afresh. We find that pursuant to the aforesaid order of the Tribunal, the assessee vide its letter dated 12.08.2014 addressed to the A.O, had submitted a fresh TP study report in respect of payment of commission to its AE. The A.O had thereafter referred the matter to the TPO under Sec. 92CA(1) on 13.11.2014. As observed by us hereinabove, the TPO once again worked out the transfer pricing adjustment with respect to commission paid by the assessee to its AE at Rs.63,60,732/-. On receipt of the aforesaid order passed by the TPO under Sec.92CA(3), dated 18.01.2016, the A.O passed the assessment order under Sec.143(3) r.w.s 92CA r.w.s. 254, dated 23.03.2016. It is the case of the assessee before us, that as the A.O had exceeded his jurisdiction and therein framed the assessment without forwarding a draft of a proposed order of assessment as envisaged under Sec.144C(1), therefore, the assessment so framed by him is unsustainable in the eyes of law and is liable to be vacated on the said count itself. On the contrary, it is the claim of the revenue that as there was a limited P a g e | 12 to 2722/Mum/2018 AYs. 2004-05, 2006-07 to 2008-09 KSB Limited (earlier known as KSB Pumps Limited) Vs. Assistant Commissioner of Income Tax (LTU)-2 direction by the Tribunal for re-determining the ALP of the commission payment by the assessee to its AE, therefore, it was not obligatory on the part of the A.O to have passed a draft assessment order.
We have given a thoughtful consideration to the issue before us. As per Sec. 144C (1) r.w.s 144C(15) of the Act, in a case where the A.O pursuant to the order of the TPO passed under sub-section (3) of Sec. 92CA, 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 the assessee, then notwithstanding anything to the contrary contained in the Act, in the first instance, he is obligated to forward a draft of the proposed order of assessment to the assessee. Further, as per sub-section (2) of Sec.144C, on receipt of the draft order, the assessee shall within 30 days of the receipt of such order is vested with a discretion viz. (i) to file his acceptance of the variations to the A.O; or (ii) file his objections, if any, to such variations with (a). the Dispute Resolution Panel; and (b). the assessing officer. In case, the assessee intimates to the A.O his acceptance of the variations, or files no objection within the aforesaid stipulated time period of 30 days of receipt of the draft order then, as per sub-section (3) of Sec.144C it is obligatory on the part of the A.O to complete the assessment on the basis of the draft order. Apart there from, as per sub-section (4) of Sec. 144C, the AO remains under an obligation to pass the assessment order under sub-section (3) within one month from the end of the month in which viz. (i) the acceptance is received; or (ii) the period of filing of objections by the assessee under sub-section (2) expires. Further, the DRP shall, in a case where any objection is received under sub-section (2), of Sec. 144C, issue such direction, as it thinks fit, for the guidance of the A.O to enable him to complete the assessment. Further, the aforesaid directions shall be issued by the DRP after considering viz. (i) draft order; (ii) objections filed by the P a g e | 13 to 2722/Mum/2018 AYs. 2004-05, 2006-07 to 2008-09 KSB Limited (earlier known as KSB Pumps Limited) Vs. Assistant Commissioner of Income Tax (LTU)-2 assessee; (iii) evidence furnished by the assessee; (iv) report, if any of the assessing officer, valuation officer or transfer pricing officer or any other authority; (v) records relating to the draft order; (vi) evidence collected by, or caused to be collected by it; and (vii) result of any inquiry made by, or caused to be made by it. A perusal of the aforesaid statutory provision, viz. Sec. 144C, therein reveals that forwarding of a draft of the proposed order of assessment to an assessee in whose case variation in the income or loss returned as a consequence of the order of the TPO passed under sub-section (3) of Sec. 92CA is proposed, is not merely an idle formality, but in fact, the same is a statutory requirement which cannot be dispensed with. As a matter of fact, it is only after receipt of such draft order that the assessee is able to exercise his statutory right of filing his objections, if any, to the proposed variations to his returned income or loss with the DRP. The fact that a statutory obligation is cast upon the A.O to forward a draft of the proposed order of assessment, can be appreciated from the fact that the time limit for framing an assessment by the A.O under sub- section (3) of Sec.143 r.w sub-section (4) of Sec.144C, has to be done within a period of one month from the end of the month in which viz. (i) the acceptance to the variations is received from the assessee; or (ii) the period of filing of objections by the assessee as envisaged in sub- section (2) of Sec. 144C expires. In our considered view, in the absence of a draft of the proposed order of assessment, the assessee would stand divested of his statutory right of objecting to the proposed variations before the DRP. In sum and substance, the forwarding of a draft of the proposed order of assessment by the A.O to an assessee where a variation to his income or loss returned is proposed to be made pursuant to the order passed by the TPO passed under sub- section (3) of Sec. 92CA, is statutorily required and cannot be whimsically dispensed with by him.
P a g e | 14 to 2722/Mum/2018 AYs. 2004-05, 2006-07 to 2008-09 KSB Limited (earlier known as KSB Pumps Limited) Vs. Assistant Commissioner of Income Tax (LTU)-2 15. We shall now advert to the facts involved in the case before us. A perusal of the order passed by the Tribunal in the first round of appeal reveals, that the Tribunal being of the view that the benchmarking of the ALP of the commission payment by the assessee to its AE could safely be drawn by applying CUP method, had while setting aside the matter to the file of the A.O, categorically observed that the assessee would be at a discretion to file a fresh TP study report for the said international transaction. Further, it was observed by the Tribunal, that the A.O as per the provisions of law may refer the matter to the TPO, and therein adjudicate the mater afresh. As the assessee in the course of the set aside proceedings had filed a fresh TP study report, wherein it had undertaken secondary analysis using external CUP as the most appropriate method and had selected 8 comparables agreements, therefore, the A.O referred the matter to the TPO under Sec. 92CA(1) on 13.11.2014. We find that the TPO as per his order passed under Sec. 92CA(3), dated 18.01.2016, had rejected the benchmarking analysis of the assessee, and therein proposed the transfer pricing adjustment of Rs.63,60,732/- as was earlier made by his predecessor. Now, in our considered view, the A.O after receiving the aforesaid order passed by the TPO under Sec. 92CA(3), dated 18.01.2016, wherein a TP adjustment of Rs.63,60,732/- was proposed, thus remained under a statutory obligation as envisaged in Sec. 144C(1) r.w.s 144C(15) to have forwarded a draft of the proposed order of the assessment to the assessee, therein proposing to make a variation to its returned income, in consequence of the aforesaid order of the TPO. We are unable to persuade ourselves to subscribe to the claim of the ld. D.R, that as there was a limited direction by the Tribunal to re-determine the ALP of the commission payment by the assessee to its AE, therefore, there was no obligation cast on the A.O to have passed a draft order before framing the assessment. In fact, we P a g e | 15 to 2722/Mum/2018 AYs. 2004-05, 2006-07 to 2008-09 KSB Limited (earlier known as KSB Pumps Limited) Vs. Assistant Commissioner of Income Tax (LTU)-2 are of a strong conviction, that the A.O in the course of the ‘set aside’ proceedings on receiving the order passed by the TPO u/s 92CA(3), had triggered Sec. 144C(1) r.w.s 144C(15) , which obligated him to forward a draft of the proposed assessment to the assessee, if he proposed to make any variation in the income returned by the assessee, as a consequence of the aforesaid order passed by the TPO under sub-sec. (3) of Sec. 92CA. According to us, there can be no escape for the A.O from compliance of the aforesaid statutory requirement. We are of the considered view, that the AO by dispensing with the statutory obligation of forwarding a draft of the proposed assessment to the assessee had, as a matter of fact divested the assessee of its statutory right of filing objections against the proposed variations to its returned income before the DRP. Our aforesaid view is fortified by the judgment of the Hon’ble High Court of Delhi in the case of Nokia India Pvt. Ltd. Vs. Additional CIT [W.P (C) No. 36929/2017, dated 07.09.2017]. The Hon’ble High Court in the aforesaid case had, observed, that the mandatory requirements under Sec.144C(1) had to be met even where the TPO had passed the order in the second round on remand by the Tribunal. The ‘Special Leave Petition’ (for short ‘SLP’) filed by the revenue against the aforesaid order of the Hon’ble High Court had thereafter been dismissed by the Hon’ble Supreme Court in the case of Addl.CIT Vs. Nokia India Pvt. Ltd. [SLP (C) Diary No. 7302/2018, dated 14.05.2018]. Further, a similar view had also been taken by the Hon’ble High Court of Delhi in the case of Control Risks India Pvt. Ltd. Vs. DCIT [WP (C) 5722/2017, dated 27.07.2017]. The Hon’ble High Court in the aforesaid case, observed, that the A.O had passed a final assessment order on 11.05.2017, without passing a draft assessment order. In the backdrop of the aforesaid facts, the High Court relying on its earlier decision in the case of Turner International India Pvt. Ltd. Vs. DCIT P a g e | 16 to 2722/Mum/2018 AYs. 2004-05, 2006-07 to 2008-09 KSB Limited (earlier known as KSB Pumps Limited) Vs. Assistant Commissioner of Income Tax (LTU)-2 (2017) 82 taxman.com 125 (Del) concluded, that as the A.O by overlooking a legal position had proceeded to pass a final assessment order, thereby depriving the assessee of questioning the draft assessment order under Sec.144C before the DRP, therefore, the assessment order so passed by him could not be sustained and was liable to be quashed. The ‘SLP’ filed by the revenue against the aforesaid order of the High Court had also been dismissed by the Hon’ble Supreme Court in Deputy Commissioner of Income Tax, Delhi Vs. Control Risks India Pvt. Ltd. [SLP (Civil) Diary No. 7090/2018, dated 16.03.2018] (SC). We find that the Hon’ble High Court of Bombay in the case of PCIT Vs. M/s Andrew Telecommunication Pvt. Ltd. [Tax appeal No. 144of 2017, dated 16.07.2018] (Bom) had declined to accept the contention advanced by the revenue, that if a matter was remanded by the Tribunal, then no obligation was cast upon the A.O to pass a draft assessment order. We find that the Hon’ble High Court observed, that the issuance of a draft assessment order was not an empty formality. In fact, it was observed by the Hon’ble High Court that when a draft assessment order is passed and a copy is given to the assessee, the assessee can raise objections before the DRP on any of the proposed variations. Accordingly, it was held that a right was given to the assessee to object and to have the objections considered not by the A.O, but by the DRP. The Hon’ble High Court after extensive deliberations observed, that it was not discernible from the scheme of Sec.144C that if the proceedings were started a fresh on remand, there would be no requirement of passing a draft assessment order. In the backdrop of the aforesaid observations, the Hon’ble High Court had observed that non-issuance of the draft assessment order vitiated the final assessment order passed by the A.O. Also, the Hon’ble High Court of Bombay in the case of Dimension Data Asia Pacific Pte. Ltd. Vs.
P a g e | 17 to 2722/Mum/2018 AYs. 2004-05, 2006-07 to 2008-09 KSB Limited (earlier known as KSB Pumps Limited) Vs. Assistant Commissioner of Income Tax (LTU)-2 DCIT [W.P No. 921 of 2018, dated 06.07.2018] (Bom) had rejected the view of the revenue that the requirement of passing a draft assessment order under Sec.144C would only extend to the orders passed in the first round of proceedings, or in respect of an order passed by the A.O in remand proceedings by the Tribunal in a case where the entire original assessment order had been set aside. It was observed by the Hon’ble High Court, that the aforesaid distinction which was sought by the revenue was not borne out by Sec. 144C of the Act. In fact, it was observed by the Hon’ble High Court that even in partial remand proceedings from the Tribunal, the A.O was obliged to pass a draft assessment order under Sec.144C(1). We also find that the Hon’ble High Court of Bombay in the case of International Air Transport Association Vs. DCIT and Others [Writ Petition (L) No. 351 of 2016, dated 18.06.2016] had observed, that a draft assessment order passed under Sec.144C(1) of the Act bestows certain rights upon an eligible assessee such as, to approach the DRP with its objections to the draft assessment order. It was further observed by the Hon’ble Court that this is for the reason that an eligible assesses grievance can be addressed before a final assessment order is passed and appellate proceedings invoked by it. However, the rights made available to an eligible assessee under Sec. 144C are rendered futile, if directly a final order under Sec.143(3) is passed without being preceded by a draft assessment order. On the basis of the aforesaid settled position of law, we are of a strong conviction that the A.O in the present case by dispensing with the statutory requirement of forwarding a draft of the proposed order of assessment, as envisaged in Sec. 144C(1), before passing the final assessment order, had thus, clearly traversed beyond the scope of his jurisdiction. Accordingly, in terms of our aforesaid observations and respectfully following the aforesaid judicial pronouncements, we are of the considered view that P a g e | 18 to 2722/Mum/2018 AYs. 2004-05, 2006-07 to 2008-09 KSB Limited (earlier known as KSB Pumps Limited) Vs. Assistant Commissioner of Income Tax (LTU)-2 the assessment order passed by the A.O under Sec.143(3) r.w.s 92CA(3) r.w.s 254, dated 23.03.2016 cannot be sustained and is liable to be struck down on the said count itself. Accordingly, the order passed by the CIT(A) is set aside and the assessment order passed by the A.O under Sec. 143(3) r.w.s 92CA(3) r.w.s. 254, dated 23.03.2016 is quashed.
The appeal of the assessee allowed. AYs 2006-07 & 2007-08 ITA Nos. 2720 & 2721/Mum/2018 17. We find that in the captioned appeals the assessee had assailed the validity of the assessment order passed by the A.O under Sec.143(3) r.w.s. 92CA, r.w.s. 254, dated 23.03.2016, on the ground that the A.O had erroneously assumed jurisdiction and had passed the assessment order without forwarding a draft of the proposed order of assessment to the assessee, as envisaged in Sec. 144C(1) of the I.T Act. As the facts and the issue involved in the captioned appeals remain the same, as were there before us in the appeal of the assessee for A.Y. 2004-05, therefore, our order passed while disposing off the appeal of the assessee for A.Y. 2004-05, in A.Y. 2006-07 in ITA No.2720/Mum/2018 and A.Y. 2007-08 in ITA No. 2721/Mum/2018. Accordingly, the order passed by the CIT(A) is set aside, and the respective assessment orders passed by the A.O under Sec. 143(3) r.w.s 92CA r.w.s 254, dated 23.03.2016 for the aforementioned years are quashed. The appeals of the assessee are allowed in terms of our aforesaid observations.