Assessment order under Section 144C invalid when mandatory procedural requirements bypassed by tax authorities

ITAT Mumbai held that an assessment order under Section 144C passed without following mandatory procedural requirements was invalid and non-est. The AO bypassed required steps by directly issuing demand notice and initiating penalty proceedings on 28/12/2019 without first preparing draft assessment order and allowing DRP process. The tribunal ruled that once an assessment order becomes invalid, no provision exists to rectify a non-existing order, making all subsequent proceedings void. The assessee's challenge succeeded despite participation in subsequent proceedings, as statutory provisions cannot be overridden by estoppel principles.

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Issues Involved:

1. Validity of Final Assessment Order
2. Validity of Transfer Pricing Order
3. Transfer Pricing Grounds - Adjustment under Section 92CA
4. Corporate Tax Grounds
5. Initiation of Penalty Proceedings

Detailed Analysis:

1. Validity of Final Assessment Order:

The primary issue was the validity of the final assessment order passed under section 143(3) of the Income Tax Act without first issuing a draft assessment order as required for an 'eligible assessee' under section 144C(1). The tribunal found that the Assessing Officer (AO) issued a demand notice and initiated penalty proceedings on the same day as the purported draft order, indicating it was treated as a final order. The tribunal held that this action concluded the proceedings, making subsequent orders non-est. The tribunal emphasized that the statutory process under section 144C was bypassed, rendering the assessment invalid.

2. Validity of Transfer Pricing Order:

The tribunal examined whether the transfer pricing order was barred by limitation. The order under Section 92CA(3) was passed beyond the prescribed time limit, thus affecting the validity of the final assessment order. The tribunal concluded that the order was null and void due to this procedural lapse.

3. Transfer Pricing Grounds - Adjustment under Section 92CA:

The tribunal addressed the upward adjustment of Rs 19,80,000 in transfer pricing by re-computing the Arm's Length Price (ALP) for services provided. The rejection of the appellant's transfer pricing documentation and inclusion of carried interest in the cost base were key points of contention. The tribunal noted that the appellant's categorization as a knowledge process outsourcing (KPO) service provider instead of an IT-enabled services (ITes) provider led to significant adjustments. However, due to the signing of an Advance Pricing Agreement (APA), the appellant withdrew these grounds.

4. Corporate Tax Grounds:

The tribunal considered the disallowance of amortization costs for employee stock option plans (ESOP) amounting to INR 8,95,03,698, which had been allowed in previous years. The tribunal also reviewed the disallowance of payments to stock exchanges, which were deemed penalties. The tribunal highlighted the disregard for past tribunal and High Court decisions where such expenses were allowed as deductions. Additionally, the tribunal addressed the non-allowance of education cess as a deduction and the failure to credit taxes withheld at source.

5. Initiation of Penalty Proceedings:

The initiation of penalty proceedings under section 271(1)(c) was challenged. The tribunal found that the issuance of a penalty notice along with the demand notice on the same day as the purported draft order indicated the AO's intent to finalize the assessment, which was procedurally incorrect.

Conclusion:

The tribunal allowed the appeal, declaring the assessment proceedings and subsequent orders non-est due to procedural irregularities. The tribunal's decision emphasized adherence to statutory procedures and the invalidity of actions taken beyond prescribed limits. The appellant's withdrawal of certain grounds due to an APA agreement further influenced the tribunal's handling of the case.

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