Reassessment quashed for failure to issue mandatory draft order u/s144C(1) after TP remand and adjustment

ITAT Delhi allowed the assessee's appeal and quashed the reassessment order passed u/s 254/143(3) r.w.s. 144C. The Tribunal held that, following remand on transfer pricing issues and fresh reference to the TPO, the Assessing Officer was mandatorily required to issue a draft assessment order u/s 144C(1) once a prejudicial TP adjustment was proposed. As no draft order was issued, the procedure prescribed under s.144C was violated, rendering the final assessment order without jurisdiction and void. Consequently, the impugned order dated 30.12.2016 was set aside in its entirety.

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1. ISSUES PRESENTED AND CONSIDERED

(1) Whether failure to issue a draft assessment order under section 144C(1) in the second round of assessment proceedings, after a fresh reference to the Transfer Pricing Officer and proposed variation prejudicial to the assessee, renders the final assessment order void.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (1): Validity of assessment order for non-compliance with section 144C(1) in second round of proceedings

Legal framework

Section 144C(1) mandates that where the Assessing Officer proposes any variation in the income or loss returned which is prejudicial to an eligible assessee, a draft assessment order shall be forwarded to the assessee before passing the final assessment order. The judgment discusses judicial precedents holding that this requirement applies even in remand or second-round proceedings, and that non-compliance is not curable under section 292B.

Interpretation and reasoning

(a) The Tribunal noted that in the first round a draft assessment order had been issued, but the transfer pricing adjustment was later set aside by the Tribunal and remitted to the Assessing Officer/TPO for de novo examination.

(b) Pursuant to the remand, the Assessing Officer made a fresh reference to the TPO, after obtaining the approval of the prescribed authority, and the TPO again proposed a transfer pricing adjustment prejudicial to the assessee.

(c) The Tribunal held that, in such circumstances where a fresh exercise of determining arm's length price is undertaken and a prejudicial variation is proposed, a draft assessment order is "mandatorily required" under section 144C(1).

(d) Relying on decisions of the jurisdictional High Court, including those holding that during remand proceedings it is mandatory to pass a draft assessment order under section 144C and that failure to do so is not a defect curable under section 292B, the Tribunal concluded that the statutory procedure must be strictly followed even in the second round of assessment.

(e) The Tribunal rejected the Revenue's contention that a draft order issued in the first round dispensed with the requirement in the second round, and did not accept the plea that any lapse was merely procedural and salvaged by section 292B.

Conclusions

(a) In a remand/second-round assessment where a fresh reference is made to the TPO and a variation prejudicial to the assessee is proposed, issuance of a draft assessment order under section 144C(1) is mandatory.

(b) Failure to issue such a draft assessment order vitiates the final assessment order; the defect is not curable under section 292B.

(c) The assessment order passed under sections 254/143(3) read with section 144C without first issuing a draft assessment order was held to be invalid and was quashed.

(d) In view of this legal infirmity, the appeal was allowed, and the Tribunal did not proceed to adjudicate the remaining grounds on the merits of the transfer pricing adjustment.

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