GOLDMAN SACHS (INDIA) SECURITIES PVT.LTD,MUMBAI vs. ACIT CIR 7 (1) (1) , MUMBAI

In making an upward transfer pricing adjustment to the extent of Rs 19,80,000 by re-computing the Arm's Length Price (ALP) of the international transaction pertaining to provision of non-binding investment advisory and support services (A services) by the Appellant to its associated enterprises (AEs), inter alia, on following grounds: a) Rejecting the transfer pricing documentation maintained by the Appellant in accordance with provisions of the Act read with the Income-tax Rules, 1962 (Rules); and b) Including the carried interest received by the employees of the Appellant in the cost base of the Appellant for the purpose of charging cost plus mark- ups for provision of IA services;

In not appreciating that the Appellant is mainly a routine Information Technology enabled Services (ITes) service provider and incorrectly categorizing the Appellant as a knowledge process outsourcing (KPO) service provider, thereby making an upward transfer pricing adjustment to the extent of Rs 14,06,67,354 by re-computing the ALP under the TNMM, inter alia, on following grounds: a) Rejecting the transfer pricing documentation maintained by the Appellant in accordance with provisions of the Act read with the Rules; b) Chery picking and not following a scientific search process in identifying companies and not providing the search criteria/ strategy adopted for identifying such additional comparable companies; c) Rejecting the following functionally similar companies selected as comparables by the Appellant in the transfer pricing documentation: • Sundaram Business Services Limited • ACE Software Exports Limited • Allsec Technologies Ltd • Crystal Hues Limited • Suprawin Technologies Limited • Cosmic Global Limited • Ultramarine & Pigments Limited (Segmental) • Datamatics Financial Services Limited d) Rejecting R Systems International Limited (BPO Segment) merely on account of different financial year (FY); e) Rejecting Allsec Technologies Ltd and Jintal Intelicom Private Limited, by applying export turnover filter; f) Rejecting Sundaram Business Services Limited by on account of persistent losses in the past three years, despite in FY 2015-16 the company has earned profits; g) Rejecting Hartron Communications Limited (Segmental), on account of negative margin earned by the comparable company: h) Accepting following companies as comparables to the Appellant, despite the same not being comparable to that of the Appellant due to following factors such as functional dissimilarity, insufficient segmental informing, super normal profits, etc. • MPS Limited • Thirdware Solutions Limited Corporate tax grounds

In disallowing the amortization cost in respect of employee stock option plans (ESOP) granted to its employees [hereinafter collectively referred as ESOP cost] amounting to INR 8,95,03,698 incurred by the Appellant, on the basis that the ESOP costs are notional/contingent in nature. In disregarding the order of Hon'ble ITAT in the appellant's own case for AY 2008-09, AY 2009-10, AY 2011-12, AY 2012-13, AY 2014-15 and AY 2015-16 where the amount of ESOP cost was allowed as a deductible expenditure in the year of amortization. Without prejudice to the above, where your Honours seek to uphold the action of the learned AO, a deduction with respect to the amount actually paid for the value of shares delivered should be granted to the Appellant.

In disallowing an amount of INR 19,22,903 paid to the stock exchanges for non-confirmation of clearing house trades, client code modification, etc. on the basis that the payment made is in the nature of penalties/fine. In disregarding the order of Hon'ble ITAT in appellant's own case for AY 2008-09, ΑΥ 2009-10, AY 2011-12, AY 2012-13, AY 2014-15 and AY 2015-16 where the amount paid to the stock exchanges was allowed as a deductible expenditure. In further disregarding the order of Hon'ble Bombay High Court in Appellant's own case for AY 2008-09 and AY 2009-10 where this ground of the Revenue has not been admitted.

In not allowing the deduction in respect of education cess paid on income- tax amounting to INR 5,50,32,424 and education cess paid on dividend distribution tax (DDT) amounting to INR 4,85,09,297. Without prejudice to above, upon adjudication, where your Honours decide the aforesaid Ground No. 7 in favour of the Appellant and any other grounds against the Appellant, then the Appellant humbly requests your Honours to allow the deduction of total education cess paid on income-tax after considering the additional education cess payable on the tax effect relating to such ground(s) which is/ are decided against the Appellant.

In not allowing the credit of taxes withheld at source amounting to INR 1,54,97,043 as claimed in the return of income by the Appellant.

In not granting the consequential interest under section 244A of the Act.

In initiating penalty proceedings under section 271(1)(c) of the Act. The Appellant craves leave to add, alter, vary, omit, substitute or amend any or all of the above grounds of appeal, at any time before or at the time of the appeal, so as to enable the Hon'ble ITAT to decide this appeal according to law."

Vide Ground No. 1 (supra), the assessee has challenged the validity of the draft assessment order dt. 28/12/2019 and also legality and validity of subsequent DRP and final assessment order.

Representatives of both the sides were heard at length. Case records carefully perused and judicial decision relied on have been carefully considered.

The quarrel revolves around the provisions of Section 144C of the Act and the same reads as under:- "

Provisions of section 144C read as under: "144C. (1) The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee."

Most relevant clauses pertinent for adjudication of the quarrel reads as under: “(3) The Assessing Officer shall complete the assessment on the basis of the draft order, if – (a) the assessee intimates to the Assessing Officer the acceptance of the variation; or (b) no objections are received within the period specified in sub-section (2). (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 [or section 153B], 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."

In the light of the aforestated provisions of Section 144C and relevant sub-Sections of the Act, the ld. Counsel for the assessee vehemently argued that the assessment proceedings concluded on 28/12/2019 and, therefore, any orders passed thereafter, are non-est to which the ld. D/R rebutted by referring to the concluding para of the assessment order dt. 28/12/2019 which reads as under:- “Assessed u/s 143(3) r.w.s. 144C(1) of the I.T. Act, 1961. Tax and interest will be charged as per law when final order is passed. Credit for prepaid taxes after due verification will be given. Income tax computation in ITNS 150A will form integral part of final order. Penalty notice u/s 274 r.w.s. 271(1)(c) will be issued separately. Demand notice and challan will also be issued with final order.”

It is the say of the ld. D/R that since the AO has made his intention very clear that this is not the final order, therefore, it cannot be said that the assessment proceedings have concluded on 28/12/2019. Pointing out to the corrigendum order dt. 29/12/2019, exhibited at page 610 of the paper book, the ld. D/R stated that the AO has made it very clear that order dt. 28/12/2019 may be treated as draft order u/s 144C of the Act.

We have given a thoughtful consideration to the aforementioned submissions of the ld. D/R and have carefully perused the relevant documents referred. Firstly, we fail to understand that under which provision of the Act the AO has issued the corrigendum and secondly assuming that the order dt. 28/12/2019 is a draft assessment order, as alleged by the ld. D/R, we find that the notice of demand issued u/s 156 of the Act is dt. 28/12/2019, the tax computation sheet is also dt. 28/12/2019 and the penalty notice is also issued on the very same date i.e., 28/12/2019. These facts go to show that on 28/12/2019, the AO quantified the taxable income and determined the tax payable by issuing and serving demand notice u/s 156 of the Act. In our considered opinion, this action of the AO has brought the proceedings to an end and the proceedings initiated u/s 144C of the Act stands concluded.

In our considered view, the provisions of Section 144C of the Act triggers a series of steps prescribed in sub-Section (2) to Section 12 of the Act and as can be seen from the most relevant sub-Sections (3) and (13) (extracted supra), the assessment is completed either under sub- Section (3) or (13). A perusal of Section 144C of the Act shows that the AO shall, at the first instance forward the draft order of the proposed assessment and on receiving the said order, the assessee may approach the Dispute Resolution Panel (DRP), by raising objections. If the assesse accepts the variations, then the AO shall proceed by framing the final assessment order and if the objections are raised by the DRP, then, upon receipt of the directions issued by the DPR, the AO shall complete the assessment. However, we find that while drafting the said draft assessment order, the AO not only issued and served demand notice but has also initiated the penalty proceedings. Vide order dt. 10/01/2020, framed u/s 154 of the Act, the AO has decided as under:- “In this case, for A.Y. 2016-17, a draft assessment order us 144C was passed on 30.12.2019 vide DIN ITBAJAST/S/143(3))2019-20/1023352392(1) dated 28.12.2019. However, the demand notice u/s 156 of the I.T. Act determining demand of Rs. 252,54,84,961/- (Rs. 61,26,061/- & Rs. 251,93,58,900/-, being regular demand and DDT demand respectively) payable was inadvertently issued with DIN ITBA/AST/S/156/2019-20/1023352459(1) dated 28.12. 2019. Similarly penalty notice u/s 274 rw.s. 271(1)(c) was also issued with DIN DIN ITBA/PNL/S/271(1)(c)/2019-20/1023352480(1) dated 28.12.2019. Since the aforesaid assessment order is a draft assessment order, the aforesaid notices issued u/s 156 and u/s 274 rws 271(1) (c) are hereby cancelled. Accordingly, the tax demand of Rs. 252,54,84,961/- is also hereby cancelled.”

In our considered view, the assessment order dt. 28/12/2019 when once become invalid and non-est, we do not find any provision to rectify a non-existing order. Therefore, the aforementioned effort of the AO would do no good to the revenue.

So far as the question, whether demand notice is an integral part of the assessment order in concerned, the same has been answered by the Hon'ble High Court of Gujarat in the case of CIT Vs. Purshottam Das T Patel 209 ITR 52 wherein the Hon'ble High Court has relied on the decision of the Hon'ble Supreme Court in the case of Kalyan Kumar Ray Vs. CIT 191 ITR 634. The relevant findings of Hon'ble High Court read as under: "'Assessment' is one integrated process involving not only the assessment of the total income but also the determination of the tax. The latter is as crucial as the former. The Income- tax Officer has to determine, by an order in writing, not only the total income but also the net sum which will be payable by the assessee for the assessment year in question and the demand notice has to be issued under section 156 of the Incometax Act, 1961, in consequence of such an order. The statute does not, Page No : 55 however, require that both the computations (i.e., of the total income as well as of the sum payable) should be done on the same sheet of paper, the sheet that is superscribed 'assessment order'. It does not prescribe any form for the purpose. Once the assessment of the total income is complete with indications of the deductions, rebates, reliefs and adjustments available to the assessee, the calculation of the net tax payable is a process which is mostly arithmetical but generally time- consuming. If, therefore, the Income-tax Officer first draws up an order assessing the total income and, indicating the adjustments to be made, directs the office to compute the tax payable on that basis and then approves of it, either immediately or sometime later, no fault can be found with the process, though it is only when both the computation sheets are signed or initialled by the Income-tax Officer that the process described in section 143(3) will be complete." In our opinion, this decision, far from helping the Revenue, goes against it. The Supreme Court has in terms stated that assessment is one integrated process involving not only the assessment of the total income but also the determination of the tax. It has further observed that the latter is as crucial as the former. Therefore, unless the total income is determined and the determination of tax is also done, it cannot be said that the process of assessment is complete. What section 153 requires is that the assessment should be completed within the prescribed time-limit. The words "order of assessment" cannot be construed to mean assessment of total income only. Those words would mean an order in writing whereby the total income of the assessee is assessed and the tax payable by him is determined. When an order in writing in respect of both these things is passed, it can be said that there is a complete order of assessment. These two steps may be taken simultaneously or separately, but it cannot be gainsaid that both of them will have to be taken within the time prescribed by the Act. Admittedly, in this case the second step was not taken within the prescribed time. After determining the total income, the Income-tax Officer possibly left the matter to his subordinates for the purpose of calculating the tax payable by the assessee on the basis of the assessed total income. Even if we assume in favour of the Assessing Officer that he approved the said calculation when the papers were put before him for signing the demand notice, and that he signed the same, the fact remains that that step was taken by him after the prescribed period was over. The Tribunal was, therefore, right in holding that the assessment in this respect was time-barred. We, therefore, answer the question in the affirmative, i.e., against the Revenue and in favour of the assessee. No order as to costs"

The contention of the ld. D/R that vide order dt. 10/01/2020, the Officer has rectified the apparent mistakes and has withdrawn the demand notice, is not acceptable as, in our understanding of the law, there is no provision in the Act which provides for proposed/draft notice of demand and secondly whether the demand has been entered in the demand and collection register, is an internal matter/procedure of the revenue and cannot be taken into consideration to decide whether the demand notice issued along with order dt. 28/12/2019 complete the proceedings. In our considered opinion, the AO has bypassed the relevant sub-Sections i.e., sub-Sections (3) and (13) to Section 144C of the Act mentioned elsewhere.

Whether by by-passing mandatory provisions of the Act can assessment survive? The answer has been given by the Hon'ble Supreme Court in the case of Dipak Babaria 3 SCC 502 wherein the Hon'ble Supreme Court has held as under: “If the law requires that a particular thing should be done in a particular manner, it must be done in that way and none other. State cannot ignore the policy intent and procedure contemplated by the statute.

In light of the above ratio laid down by the Hon'ble Supreme Court, we are of the considered opinion that by issuing the demand notice on 28/12/2019 itself the Assessing Officer has by passed all the mandatory sub-sections of section 144C of the Act.

The question whether participation in subsequent proceedings would estop the assessee from challenging the validity of the order dated 28/12/2019 has been answered by the Hon'ble Supreme Court in the case of V Mr. T.P. Firm MUAR in 56 ITR 67 wherein the Hon'ble Supreme Court has laid down the ratio :- “Approbate and Reprobate