2012 (4) TMI 259 - AT - Income Tax

Tribunal overturns assessment order citing invalid panel composition and failure to address objections.

The Tribunal set aside the assessment order due to the invalid composition of the Dispute Resolution Panel (DRP) and the DRP's failure to provide a ... Constitution of DRP contrary to principle of natural justice - jurisdictional Commissioner should not be nominated as member of DRP - requirement of a speaking order by DRP under 144C(5) - scope of DRP's directions to AO under section 144C - Assessing Officer to act in conformity with Transfer Pricing Officer's adjustmentConstitution of DRP contrary to principle of natural justice - jurisdictional Commissioner should not be nominated as member of DRP - Validity of DRP composition where one member was the Jurisdictional Commissioner of the assessee. - HELD THAT: - The Tribunal examined the DRP notification and noted that one member of the DRP was the Jurisdictional Commissioner. It relied upon the observation made by the High Court of Uttarakhand that, to avoid any appearance of bias, a jurisdictional Commissioner should not be nominated as a member of the DRP. The Tribunal found that the CBDT issued the notification constituting the DRP after that High Court observation and held that the presence of the jurisdictional Commissioner on the DRP rendered the DRP order vulnerable to challenge on principles of natural justice. The Department's contention that the Uttarakhand decision did not directly relate to the assessee was rejected; the Tribunal treated the High Court's observation as material and dispositive for the validity of the DRP constitution in this case. [Paras 5, 6]DRP order is liable to be set aside on account of the DRP's constitution including the Jurisdictional Commissioner; AO's assessment based on that DRP order is set aside and fresh assessment is directed.Requirement of a speaking order by DRP under 144C(5) - scope of DRP's directions to AO under section 144C - Assessing Officer to act in conformity with Transfer Pricing Officer's adjustment - Whether the DRP complied with statutory mandate under section 144C by considering and recording reasons on objections to the TPO's proposed ALP adjustments. - HELD THAT: - The Tribunal considered sub-sections of section 144C which require the DRP to consider objections, draft orders, evidence and reports and to give parties an opportunity of being heard before issuing directions prejudicial to the assessee. On examination of the DRP order, the Tribunal found that the DRP merely stated that the AO should act in conformity with the TPO's adjustments but did not record reasons or comment on the objections filed by the assessee; the order therefore was not a speaking order in accordance with the statutory mandate and principles of natural justice. Although the Department referred to the obligation of the AO to follow TPO adjustments, the Tribunal noted that this did not excuse the DRP from considering and recording its reasons on the objections under section 144C. [Paras 7, 8, 9]DRP's order is not a speaking order in terms of section 144C and is contrary to principles of natural justice; the assessment is set aside and AO directed to pass fresh assessment after owing due compliance with statutory requirements.Final Conclusion: Appeal allowed for statistical purposes; AO's assessment (based on the impugned DRP order) is set aside and the matter is remitted to the AO to pass a fresh assessment in conformity with the Act and having regard to the High Court observation regarding constitution of DRP. Issues:1. Composition of the Dispute Resolution Panel (DRP) and its validity.2. Consideration of objections by DRP and the requirement of a speaking order.Analysis:Issue 1: Composition of the DRP and its validityThe appellant challenged the validity of the order of the DRP based on two grounds. Firstly, the appellant argued that the composition of the DRP, including the Jurisdictional Commissioner of the assessee, violated the principles of natural justice. The appellant relied on a decision of the Hon'ble High Court of Uttarakhand, which emphasized the importance of avoiding any perception of bias by excluding the Jurisdictional Commissioner from the DRP. The appellant contended that the order of the DRP should be set aside due to this violation. The Departmental Representative, however, argued that the composition was in accordance with the law and that the case cited by the appellant was not directly applicable. The Tribunal, after considering the arguments and the High Court's directive, found merit in the appellant's submission. The Tribunal concluded that the order passed by the DRP was contrary to the High Court's observation and directed that the assessment order be set aside.Issue 2: Consideration of objections by DRP and the requirement of a speaking orderThe second objection raised by the appellant related to the DRP's failure to consider the objections raised by the assessee in a speaking order. The appellant argued that the DRP did not provide reasons or comments on the objections while agreeing with the adjustments proposed by the Transfer Pricing Officer (TPO). The appellant highlighted the provisions of Section 144C of the Income Tax Act, which mandate the DRP to consider objections and issue directions for the guidance of the Assessing Officer (AO). The Tribunal noted that the DRP's order lacked reasoning regarding the objections filed by the assessee, thus not meeting the requirements of natural justice and the Act. The Tribunal held that the order passed by the DRP was not a speaking order as required by law. Consequently, the Tribunal set aside the AO's order and directed a fresh assessment to be conducted in compliance with the Act and the High Court's observations.In conclusion, the Tribunal allowed the appeal filed by the assessee for statistical purposes, emphasizing the importance of adherence to legal procedures and principles of natural justice in tax assessments.