Assessment order void when demand notice issued with draft assessment order under section 144C

The ITAT Mumbai held that an assessment order under section 144C was void when the AO issued a draft assessment order simultaneously with demand notice under section 156 and penalty notice under section 271(1)(c). Following precedents from Vijay Television (Madras HC), Aker Powergas (ITAT Mumbai), and Atlas Copco (ITAT Pune), the tribunal ruled that issuing demand notice at the draft stage brings finality to assessment prematurely, violating mandatory procedural requirements. This constitutes more than a mere procedural irregularity and cannot be cured, rendering the subsequent final assessment order legally unsustainable. The assessee's appeal was allowed.

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Issues:
1. Taxability of receipts under International Marketing Program Participation Agreement (IMPPA) in India.
2. Validity of draft assessment order dated 29.12.2016 passed by the Assessing Officer.

Analysis:

Issue 1: Taxability of IMPPA receipts in India
The appeal was filed challenging the order of the Commissioner of Income Tax (Appeals) regarding the taxability of receipts under IMPPA in India as 'business income' due to the existence of a permanent establishment in India as per the Double Taxation Avoidance Agreement (DTAA) between India and Netherland. The assessee argued that it was not involved in the operation or management of Indian hotels, only sub-licensing Marriott trademark and providing sales and marketing services. The Assessing Officer (A.O.) treated IMPPA receipts as 'royalty' and expenses as Fees for Technical Services (FTS). The Commissioner upheld the decision, relying on previous tribunal rulings. The Tribunal found that the receipts should be treated as 'business profit' and taxable in India only if the assessee has a permanent establishment in India.

Issue 2: Validity of draft assessment order
The additional ground challenging the draft assessment order dated 29.12.2016 was admitted by the Tribunal. The assessee contended that the A.O.'s action in issuing the draft assessment order along with the notice of demand violated section 144C of the Income Tax Act, making it bad in law. The A.O. had issued the draft assessment order proposing variations to the return filed by the assessee and had sent the notice of demand along with it. The Tribunal referred to various decisions, including Vijay Television (P.) Ltd. case, and held that such action by the A.O. made the subsequent assessment order null and void. The Tribunal found that the assessment order dated 14.02.2017 was unsustainable and declared it null and void.

In conclusion, the appeal filed by the assessee was allowed, and the assessment order was deemed null and void due to the procedural irregularity in issuing the draft assessment order along with the notice of demand. The additional ground raised by the assessee was admitted, rendering the need for adjudication on other grounds unnecessary.

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