Assessment order under section 144C(1) invalid without mandatory draft assessment order being issued first

ITAT Mumbai held that an assessment order passed under section 144C(1) without first issuing a draft assessment order is invalid and unsustainable. Following precedents from Bombay HC in Exxon Mobil Company and Delhi HC in Turner International India, the Tribunal emphasized that section 144C(1) mandates passing a draft assessment order before the final assessment order. Since the AO failed to comply with this mandatory procedural requirement while adjudicating transfer pricing issues on remand, the final assessment order was quashed as invalid.

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Issues Involved:
1. Validity of the assessment order without passing a draft assessment order.
2. Compliance with section 144C of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

Validity of the assessment order without passing a draft assessment order:
The assessee challenged the validity of the assessment order dated December 29, 2016, on the grounds that it was passed without issuing a draft assessment order, which is a mandatory requirement under section 144C of the Income Tax Act, 1961. The assessee argued that this procedural lapse rendered the assessment order "bad in law and void ab initio." The Tribunal found merit in the assessee's contention, noting that no fresh document was required to adjudicate this additional ground. The Tribunal admitted the additional ground for adjudication on merits.

Compliance with section 144C of the Income Tax Act, 1961:
The Tribunal examined whether the Assessing Officer (AO) complied with the procedural requirements of section 144C, which mandates the issuance of a draft assessment order before the final assessment order. The assessee, a non-resident company incorporated in the Netherlands and engaged in the business of operating hotels worldwide, had previously been involved in litigation concerning the nature of receipts from International Sales and Marketing as royalty/fee for technical services. The Tribunal had earlier restored the matter to the AO with specific directions to consider the assessee's plea of mutuality. However, the AO directly passed the final assessment order without issuing a draft assessment order, which the Tribunal found to be in violation of section 144C.

The Department argued that the assessment order was valid as it was passed to give effect to the directions of the Tribunal and the CIT(A), and therefore, a draft assessment order was not required. However, the Tribunal, relying on precedents such as Dimension Data Asia Pacific PTE Ltd. Vs. DCIT, Exxon Mobil Company (P.) Ltd. Vs. DCIT, and Turner International India (P.) Ltd. Vs. DCIT, rejected this contention. The Tribunal held that even in remand proceedings, the AO is required to pass a draft assessment order under section 144C.

The Tribunal emphasized that the special procedure under section 144C is mandatory for foreign companies where the AO proposes to assess by making a variation in the returned income. The failure to issue a draft assessment order rendered the final assessment order invalid and unsustainable. Consequently, the Tribunal quashed the assessment order dated December 29, 2016.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the assessment order was invalid due to non-compliance with the mandatory requirement of issuing a draft assessment order under section 144C. The grounds raised on the merits of the addition became academic and were left open. The order was pronounced in the open court on February 20, 2023.

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