ITAT annuls final assessment for failure to comply with Section 144C

The Income Tax Appellate Tribunal (ITAT) ruled in favor of the assessee, finding that the Assessing Officer (AO) failed to comply with the mandatory provisions of Section 144C by issuing a final assessment order instead of a draft assessment order. As a result, the final assessment order was deemed invalid, leading to its annulment. The ITAT did not delve into the Transfer Pricing adjustment due to the procedural irregularity. The appeal was allowed in favor of the assessee, with the order pronounced on 20th June 2018.

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Issues Involved:
1. Validity of the order passed by the Assessing Officer (AO).
2. Correctness of the Transfer Pricing (TP) adjustment of Rs. 16.30 Crores.
3. Jurisdictional error in issuing the final assessment order instead of a draft assessment order.

Detailed Analysis:

1. Validity of the AO's Order:
The primary issue in this appeal is whether the order passed by the AO is valid in the eyes of the law. The AO's order dated 31-03-2017 was scrutinized under Section 143(3) read with Sections 144C(13) and 254 of the Income Tax Act. The appeal questions the legality of the AO's final assessment order, particularly focusing on whether the AO followed the correct procedural requirements.

2. Correctness of the TP Adjustment:
The assessee-company, engaged in manufacturing and selling bulk drugs and intermediates, had transactions with an Associated Enterprise (AE). The Transfer Pricing Officer (TPO) initially proposed an adjustment of Rs. 19.36 Crores, which was later reduced to Rs. 16.30 Crores by the Dispute Resolution Panel (DRP). The ITAT, in its previous order (ITA No. 1851/Hyd/2012 dated 11-03-2016), directed the TPO to re-compute the Arm’s Length Price (ALP) and verify the rebate claim on CENVAT credit. Despite these directions, the TPO rejected the assessee's contentions and confirmed the adjustment of Rs. 16.30 Crores, which the AO upheld in the final order.

The ITAT had previously directed the AO/TPO to allow adjustments for under-utilization of capacity and differences in depreciation methods, emphasizing that these factors materially affect the price or cost charged or paid, or the profit arising from such transactions. The AO/TPO were instructed to re-compute the ALP after making necessary adjustments and verifying the unallocated costs. However, the AO/TPO failed to follow these directions, repeating the original order without proper justification.

3. Jurisdictional Error in Issuing Final Assessment Order:
The assessee contended that the AO erred in issuing a final assessment order under Section 143(3) instead of a draft assessment order as required by Section 144C. The assessee argued that this procedural lapse deprived them of the opportunity to raise objections before the DRP, rendering the final assessment order invalid. The assessee cited several case laws to support their argument, including:
- JCB India Ltd. Vs. DCIT [85 taxmann.com 155 (Delhi)]
- Turner International India (P) Ltd. Vs. DCIT [82 taxmann.com 125 (Delhi)]
- CIT Vs. C-Sam (India) (P) Ltd. [84 taxmann.com 261 (Gujarat)]
- Vijay Television (P) Ltd. Vs. DRP, Chennai [46 taxmann.com 100 (Madras)]
- ITAT, Delhi Bench in M/s. Globerian India Pvt. Ltd. Vs. DCIT (ITA No. 2265/Del/2014)
- ITAT, Pune Bench in M/s. Eaton Industrial Systems Pvt. Ltd. Vs. DCIT (ITA No. 536/PUN/2014)
- ITAT, Pune Bench in DCIT Vs. M/s. Rehau Polymers Pvt. Ltd. (ITA No. 566/PUN/2015)
- ITAT, Pune Bench in Agfa India Pvt. Ltd. Vs. ACIT (ITA No. 341/PN/2014)
- Soktas India (P) Ltd. Vs. ACIT, Kolhapur [77 taxmann.com 19 (Pune-Trib)]

The Delhi High Court in JCB India Ltd. held that the AO must issue a draft assessment order before passing the final assessment order, and failure to do so constitutes an incurable illegality. The ITAT, Pune Bench in Soktas India (P) Ltd. also emphasized that compliance with Section 144C is mandatory, and the AO's failure to issue a draft assessment order invalidates the final assessment order.

Conclusion:
The ITAT concluded that the AO did not comply with the mandatory provisions of Section 144C, making the final assessment order invalid. Consequently, the order was annulled, and there was no need to consider the merits of the TP adjustment. The appeal was allowed in favor of the assessee.

Order Pronounced:
The appeal of the assessee was considered allowed, and the order was pronounced in the open court on 20th June 2018.

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