2021 (2) TMI 186 - HC - Income Tax

Failure to Pass Draft Assessment Order in Transfer Pricing Case Deemed Substantial Error

The court held that the failure to pass a draft assessment order in a case involving Transfer Pricing issues was a substantial error. The court emphasized ... Validity of TP order - AO ought to have passed an order of draft assessment in terms of Section 144C of the Act and not an order of regular assessment quantifying the final demand and imposing penalty - HELD THAT:- The error committed is not a technical lapse as sought to be explained away, but one that is substantive. It is an admitted position that the assessment of this petitioner involves issues of transfer pricing and an order has been passed by the Transfer Pricing Officer determining the arms length price. The scheme of assessment in terms of Section 144C statutorily requires the officer to pass a draft assessment order at the first instance and put the same to the assessee for its acceptance or for filing of objections before the Dispute Resolution Panel. The language of Section 144 C makes this position more than abundantly clear. As draw support in this regard from a decision of this Court in VIJAY TELEVISION (P.) LTD. [2014 (6) TMI 540 - MADRAS HIGH COURT]confirmed by the Division Bench [2018 (10) TMI 1125 - MADRAS HIGH COURT]that reiterates the settled proposition that Section 144C sets forth a mandatory scheme of assessment and it is incumbent upon the Assessing Officer to pass an order of draft assessment at the first instance before proceeding to finalise the assessment in line with the procedure set out under Section 144C. The impugned order has been passed ‘inadvertently’ by choosing of the wrong field in the Income Tax Department software would not just be an over-simplification, but a wrong statement since a perusal of the order of assessment reveals that the assessment has been styled consciously, as an order of regular assessment only. A draft order of assessment would normally indicate, in conclusion, that the assessee has the option of either acquiescing with the proposed assessment or proceeding to file objections to the same within 30 days. This statement is conspicuously absent in the present order. Thus no hesitation in quashing the impugned order and consequential demand. The Writ Petition is allowed. Issues:Challenge to assessment order for AY 2016-17 involving Transfer Pricing issues - Failure to pass draft assessment order under Section 144C - Maintainability of writ petition before High Court.Analysis:1. The petitioner challenged the assessment order for AY 2016-17, contending that as the assessment involved Transfer Pricing issues, the Assessing Officer should have passed a draft assessment order under Section 144C of the Income Tax Act, 1961, instead of a final assessment order quantifying the demand and imposing penalties.2. The respondent conceded in their counter that a draft assessment order should have been passed in the circumstances of Transfer Pricing issues. The respondent argued that the error was a technical lapse and the assessee could have sought recourse through the assessing officer or the appellate authority instead of filing a writ petition directly before the High Court.3. The assessing officer raised the issue of maintainability, citing the availability of a statutory remedy for rectification of mistakes before the Assessing Officer. However, the court found that the error in not passing a draft assessment order was substantive, given the involvement of Transfer Pricing issues in the assessment.4. The court emphasized that Section 144C mandates the assessing officer to pass a draft assessment order initially in cases involving Transfer Pricing issues. The failure to follow this statutory requirement was deemed a significant procedural lapse.5. Referring to a previous decision, the court reiterated that Section 144C lays down a mandatory scheme of assessment, requiring the assessing officer to pass a draft assessment order before finalizing the assessment. The court highlighted that the language of Section 144C clearly outlines this procedure.6. The court noted that the assessing officer's claim of inadvertently choosing the wrong field in the Income Tax Department software was not a sufficient explanation. The assessment order was consciously styled as a regular assessment order, indicating a lack of adherence to the statutory requirement of passing a draft assessment order in cases involving Transfer Pricing issues.7. In a related judgment, the court clarified that the mandate of passing a draft assessment order under Section 144C applies whether it is an original assessment or an assessment made on remand from an appellate authority. The failure to pass a draft assessment order was deemed a violation of the statutory provisions.8. The absence of a statement in the assessment order providing the assessee with the option to either accept the proposed assessment or file objections within 30 days further highlighted the procedural irregularity in the assessment process.9. In conclusion, the court held that the failure to pass a draft assessment order in a case involving Transfer Pricing issues was a substantial error, leading to the quashing of the impugned order and consequential demand. The writ petition was allowed, and connected miscellaneous petitions were closed without costs.