2025 (9) TMI 303 - HC - Income Tax

Assessing Officer must issue draft assessment under s.144C(1) when an order causes TPO to alter Arm's Length Price

The Pr. Commissioner of Income Tax Bengaluru, The Deputy Commissioner of Income Tax Circle 1 (1) (1) Bengaluru Versus M/s. Alpha Elsec Defence And Aerospace Systems Pvt. Ltd.,

The Pr. Commissioner of Income Tax Bengaluru, The Deputy Commissioner of Income Tax Circle 1 (1) (1) Bengaluru Versus M/s. Alpha Elsec Defence And ... ISSUES PRESENTED AND CONSIDERED 1. Whether Section 144C(1) of the Income Tax Act, 1961 is mandatory such that where a variation arises from a Transfer Pricing Officer's re-determination under Section 92CA(3), the Assessing Officer is obliged to issue a Draft Assessment Order under Section 144C before passing any final assessment giving effect to that variation. 2. Whether an order 'giving effect' to a Tribunal's remand to the TPO (resulting in a variation in Arms Length Price) can be treated as valid where no Draft Assessment Order under Section 144C was issued, or whether such final assessment is void ab initio. 3. Whether the Tribunal should, instead of declaring the final assessment void for failure to issue the Draft Assessment Order, have directed the Assessing Officer to first issue the Draft Assessment Order and then proceed under Section 144C. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Mandatory nature of Section 144C(1) when variation arises from TPO under Section 92CA(3) Legal framework: Section 92CA(3) authorises the TPO to determine ALP; Section 144C(1) requires that where any variation is noted as a consequence of the TPO's order, the Assessing Officer shall issue a Draft Assessment Order to enable objections before the DRP, prior to passing a final assessment giving effect to such variation. Precedent Treatment: This Court's prior ruling (referred to in the judgment) held that issuance of Draft Assessment Order under Section 144C is mandatory and failure to do so renders the assessment order void ab initio; that precedent is applied rather than distinguished. Interpretation and reasoning: The Court examined the statutory language and factual matrix: the Tribunal remanded comparables to the TPO who re-determined ALP producing a variance. Given that a variation resulted from the TPO's exercise under Section 92CA(3), the statutory trigger in Section 144C(1) was activated. The Assessing Officer's omission to issue the mandatory Draft Assessment Order deprived the assessee of the statutorily mandated opportunity to object before the DRP. Ratio vs. Obiter: Ratio - Section 144C(1) is mandatory when variation arises from TPO; failure to issue the Draft Assessment Order invalidates subsequent final assessment. Obiter - none material on this point beyond reinforcing the mandatory textual reading. Conclusion: The Court confirmed that Section 144C(1) is mandatory in such circumstances and must be complied with where the TPO's re-determination leads to a variation. Issue 2 - Validity of 'order giving effect' without issuance of Draft Assessment Order Legal framework: The scheme mandates that final assessment giving effect to any variation arising under Section 92CA(3) can only follow the Draft Assessment Order/DRP process under Section 144C. Precedent Treatment: The Court applied its earlier decision holding the absence of a Draft Assessment Order renders the giving-effect assessment void ab initio; the earlier decision was followed as directly applicable. Interpretation and reasoning: The Court rejected the Revenue's contention that the TPO merely 'gave effect' to the Tribunal's directions without making an independent determination such that Section 144C(1) would not be triggered. The remand by the Tribunal left the determination of ALP to the TPO's discretion regarding comparables; the TPO's re-determination produced a substantive variance. The statutory test is whether a variation results from the TPO's order - which occurred - thereby mandating the Draft Assessment Order. As that procedure was not followed, the final order giving effect is invalid. Ratio vs. Obiter: Ratio - An assessment giving effect to a TPO re-determination that results in variation is void ab initio if issued without the Draft Assessment Order under Section 144C. Obiter - the characterization of the TPO's act as mere 'giving effect' does not avoid Section 144C where discretion and re-determination occurred. Conclusion: The final assessment order which gave effect to the TPO's re-determination without issuance of the Draft Assessment Order is void ab initio; the Tribunal's declaration to that effect was upheld. Issue 3 - Whether Tribunal should have afforded a procedural cure rather than declaring the assessment void Legal framework: The statutory scheme prescribes a sequence (Draft Assessment Order ? DRP objections ? final order) which protects the taxpayer's statutory rights; courts and tribunals may consider remedies consistent with statutory requirements. Precedent Treatment: The Court did not depart from the precedent requiring strict compliance; it treated the earlier decision as squarely applicable and controlling. Interpretation and reasoning: The Court considered the Revenue's argument that the Tribunal ought to have permitted the Assessing Officer to issue the Draft Assessment Order post facto and then proceed. The Court found that the mandatory statutory scheme cannot be circumvented by post-hoc directions; nevertheless, it acknowledged that if any statutory recourse remains open to the Revenue, such remedies may be pursued in accordance with law. The Court therefore did not fault the Tribunal's declaration of voidness given the clear statutory non-compliance, but it noted that procedural cure by retrospective issuance was not a remedy the Tribunal was obliged to grant. Ratio vs. Obiter: Ratio - The Tribunal was entitled to declare the assessment void where mandatory statutory steps were omitted. Obiter - suggestion that the Revenue may pursue any available legal recourse to cure or challenge the defect, but the Tribunal was not required to direct issuance of a Draft Assessment Order instead of declaring voidness. Conclusion: The Tribunal's approach in declaring the assessment void for failure to issue the Draft Assessment Order was tenable; the Tribunal was not obliged to permit a procedural cure in place of declaring voidness, though ordinary legal remedies remain available to the Revenue. Cross-reference and overall disposition Where a Tribunal's remand leads the TPO to re-determine ALP and that re-determination produces any variation from the original assessment, Section 144C(1) mandates issuance of a Draft Assessment Order by the Assessing Officer before any final order giving effect can be lawfully passed; failure to do so renders the final assessment void ab initio. The Court applied and followed its prior ruling on this mandatory procedure and dismissed the Revenue's appeal accordingly.