M/S. EATON FLUID POWER LTD.,,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX,,

आदेश आदेश / ORDER आदेश आदेश

PER D. KARUNAKARA RAO, AM :

This is the appeal filed by the Assessee against the orders of DRP/TPO/AO. In this case, TPO passed the order u/s.92CA(3) of the I.T. Act, 1961 on 24-01-2013. Subsequently, AO passed the draft assessment order u/s.144C(1) of the Act on 26-03-2013 incorporating the adjustments recommended by the TPO. As per the law, assessee approached the DRP seeking directions and the DRP passed an order dated 31-12-2013. Eventually, a final assessment order was passed by the AO on 15-01-2014 determining the total income at 34,89,59,976/- as against the returned loss of Rs.9,47,21,950/-.

assessee also filed the following additional grounds and the same as

extracted as under :

“1. That on the facts and circumstances of the case and in law, the assessment order dated March 26, 2013 issued by the Assessing Officer (“AO”) 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 (“Act”.)

AO u/s.144C(1) constitutes an assessment order as the same is

followed by issue of the demand notice u/s.156 and penalty notice

u/s.274 r.w.s.271(1)(c) of the Act. Such an assessment order is not

sustainable as the same is not the product of the proper procedure laid

down in the statute. These issues are raised as additional grounds

before the Tribunal. On the admission of additional grounds, assessee

demonstrated that the issues raised in the said grounds constitute legal

in nature and they do not call for any investigation into the facts for

adjudication of the same.

Counsel for the submitted that if above additional grounds of appeal are

decided in favour of assessee, then the original grounds of appeal would

become academic. In support of the allowability of additional grounds

(jurisdictional issue) in favour of the assessee, assessee relied on the

following decisions (Pages 1 to 40 of the paper book) :

Further, Ld. AR for the assessee also pointed out that, on similar

facts, in the case of sister concern of the assessee – Eaton Industrial

Systems Pvt. Ltd. in ITA No.536/PUN/2014, dated 12-04-2018 for A.Y.

2009-10, the Tribunal allowed the appeal of the assessee. In this

regard, Ld. AR relied on the contents of Para 9 onwards of the said

order of the Tribunal.

on the orders of authorities below.

additional grounds, we find the said additional grounds should be

admitted and adjudicated in this order.

Further, on the merits of these additional grounds, we find the

relevant facts of the case include that assessee is a company and is

engaged in the manufacture and distribution of fluid power equipment

such as pumps, gear pumps, valves, cylinders and related components

for mobile & industrial markets. In this case, a reference was made to

the Transfer Pricing Officer (TPO) u/s. 92CA(1) of the Act, who in turn,

passed an order dated 24-01-2013 u/s. 92CA(3) of the Act, proposing

total adjustments of Rs.344,308,840/-. The AO thereafter, passed draft

assessment order dated 26-03-2013 u/s.143(3) r.w.s. 144C(1) of the

Act. Ld. AR for the assessee referring to the said draft assessment order

and pointed out that while passing the said draft order, the AO

crystallized the demand at this stage itself and issued notice u/s.156 of

the Act as well as the notice u/s.274 r.w.s.271(1)(c) of the Act. The

copies of these notices are available in the records. The demand notice

u/s.156 of the Act was issued to the assessee with the tax demand of

Rs.13.93 crores (rounded off) for furnishing inaccurate particulars of

income. In the said draft assessment order itself, vide Para No.24, the

AO calls it a proposed order of assessment, against which the assessee

was given 30 days either to accept the same or file objections before the

Dispute Resolution Panel (DRP). He further submitted that objections

were raised before the DRP on merits but no such preliminary issue was

raised and the said objections were dismissed. The AO thereafter,

passed order u/s. 143(3) r.w.s. 144C(13) of the Act, dated 15-01-2014,

wherein the said adjustment on account of arm's length price of

international transactions was made in the hands of assessee. Ld. AR

further submitted that draft assessment order passed by the AO raising

the demand notice along with notice for initiation of penalty proceedings

is unsustainable.

the lower authorities below on this legal issue and stated that there is

no merit in the plea of Ld. AR for the assessee.

and the Tribunal order in the case of M/s. Eaton Industrial Systems

Pvt. Ltd. (supra). On perusing the same, we find the facts in the case of

sister concern of the assessee above are identical. The Tribunal

discussed the issue elaborately relying on various decisions and allowed

the appeal of the assessee. Contents of Para No.9 to 12 are relevant in

this regard. We find the additional grounds raised by the assessee are

covered by the said order of the Tribunal. For the sake of completeness,

relevant findings of the Tribunal are extracted here as under :

“9. We have heard the rival contentions and perused the record. The additional grounds of appeal raised by the assessee do not require any investigation of facts and hence, the same are admitted. The issue which is raised in the present appeal is whether the draft assessment order passed in the case along with issue of demand notice is correct start of proceedings against the assessee. The requirement of the Act is that in the draft assessment order proposed, additions are to be made and show cause notice is to be issued to the assessee either accepting the same or to file objections before the DRP. However, in the facts of the present case, there was no proposal for making addition but the final assessment order was passed though the Assessing Officer calls it a draft assessment order and also observed that the assessee was at liberty to file objections before the DRP or accept the same. The Assessing Officer in the draft assessment order itself crystallized the demand on income assessed in the hands of assessee and he also issued demand notice under section 156 of the Act. The Assessing Officer further initiated penalty proceedings under section 271(1)(c) of the Act by issuing notice under section 274 of the Act. The contention of learned Departmental Representative for the Revenue is that though the demand notice was issued but the same was not served upon the assessee. However, we find that the assessee in the Appeal Memo itself had attached copy of demand notice issued and has also filed the same during the course of hearing before us. In any case, the demand notice issued is available on record and the same is issued against the assessee. Hence, there is no merit in the plea of learned Departmental Representative for the Revenue in this regard and the same is dismissed.

“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 to adjudicate the issue raised, we need to make reference to the provisions of section 144C of the Act.

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 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.

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 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.

“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 corrigendum issued by the second respondent are vitiated by errors apparent on the face of the record and they are legally not sustainable.”

“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 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.”

“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.

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.

“21. In almost identical facts, in Turner International (supra), this Court held in favour of the Assessee on the ground that it was mandatory for the AO to have passed a draft assessment order under Section 144C of the Act prior to issuing the final assessment order. The following passages from said decision are relevant for the present purposes:

"11. The question whether the final assessment order stands vitiated for failure to adhere to the mandatory requirements of first passing draft assessment order in terms of Section 144C(1) of the Act is no longer res intregra. There is a long series of decisions to which reference would be made presently.

by the dismissal of the Revenue's SLP (C) [CC No. 16694/2013] on 27th September, 2013.

notice of demand u/s.156 of the Act as well as issue of notice u/s.274

r.w.s. 271(1)(c) of the Act at the stage of making draft assessment order

as per the provisions of section 144C(1) of the Act. Normally, such

notices are issued at the end of the assessment proceedings and at the

time of making assessment order. The fact that demand is raised is

evident on the fact of draft assessment order which bears the entry of

the demand in the register of Demand Collection and Balance (DCR

02/45, dated 20-2-13). The notice u/s.274 of the Act is found issued

for furnishing of inaccurate particulars of income. On law, it is settled

legal proposition at the level of High Courts that the assessment orders

based on such draft assessment orders not following the mandatory

provisions of section 144C of the Act is without jurisdiction and

therefore, null and void and not enforceable in law. Further, the

Hon’ble Andhra Pradesh High Court in the case of M/s. Zuari Cements

Ltd. Vs. ACIT in Writ Petition No.5557/2012, dated 21-02-2013 held

that the impugned order dated 12-12-2011 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.

(SLP filed against the judgment of AP High Court in the case of ACIT Vs.

M/s. Zuari Cements Ltd. by the Revenue stands dismissed on this

issue).

Therefore, we hold that the assessment order passed by the AO

in the instant case dated 15-01-2014 is without jurisdiction and null

and void. Accordingly, the additional grounds raised by the assessee

are allowed in his favour.

assessee, we find adjudication of the issues raised in the original

grounds on merits become an academic exercise. Accordingly, the said

grounds are dismissed as academic.

Order pronounced in the open court on this 25th day of April, 2018.

Sd/- Sd/- (VIKAS AWASTHY) (D. KARUNAKARA RAO) �याियक �याियक सद�य �याियक �याियक सद�य सद�य /JUDICIAL MEMBER लेखा सद�य लेखा लेखा सद�य लेखा सद�य सद�य / ACCOUNTANT MEMBER सद�य

पुणे Pune; �दनांक Dated : 25th April, 2018 सतीश

आदेश आदेश क� आदेश आदेश क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : अ�ेिषत

अपीलाथ� / The Appellant 1. ��यथ� / The Respondent 2. 3. The CIT(A)-13, Pune 4. CIT-IIT/TP, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “A Bench” Pune; 5. गाड� फाईल / Guard file. 6.

आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER,स आदेशानुसार

स�यािपत �ित //True Copy// Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune