PCIT Vs Flextronics Technologies (India) Pvt. Ltd. (Karnataka High Court)
Summary: The Revenue challenged the order dated 31.12.2018 passed by the Income Tax Appellate Tribunal, Bengaluru in IT(TP)A No.832/Bang/2017 concerning Assessment Year 2012-13. The ITAT had quashed the assessment order on the ground that it was not in conformity with the mandatory requirements of Section 144C of the Income-tax Act, 1961 and was barred by limitation. The Karnataka High Court admitted the Revenue’s appeal to consider four questions of law concerning the limitation applicable to the assessment, compliance with the Dispute Resolution Panel (DRP) directions, the applicability of Section 153(3), and the validity of an assessment order passed under Sections 143(3) read with 144C(13).
The assessee had challenged the final assessment order dated 31.01.2017. In the assessment proceedings, the Assessing Officer had made transfer pricing adjustments aggregating to Rs.40,11,77,583. The draft assessment order was passed on 29.03.2016 under Section 144C, and the assessee filed objections before the DRP on 29.04.2016. The DRP issued directions under Section 144C(5) read with Section 144C(8) on 28.12.2016, granting relief in respect of the transfer pricing adjustment.
The Assessing Officer recorded in the final assessment order that, upon receipt of the DRP’s directions, a reference was made to the Transfer Pricing Officer for reworking the arm’s length price adjustment. However, the order giving effect (OGE) to the DRP directions in respect of the transfer pricing adjustments had not been received. The Assessing Officer stated that, since the assessment proceedings were time-barring, the assessment was being completed on the basis of the transfer pricing adjustment contained in the draft assessment order, with the intention of subsequently taking necessary action under Section 154 after receipt of the TPO’s order giving effect.
The final assessment consequently included the entire transfer pricing adjustment of Rs.40,11,77,583. After setting off brought-forward losses of the same amount, the total assessed income was shown as Nil and the balance tax payable was also shown as Nil. The assessment order further recorded initiation of penalty proceedings under Section 271(1)(c).
Before the High Court, the Revenue contended that the Assessing Officer had passed the order within the prescribed time and therefore the ITAT’s order was unsustainable. The assessee, however, submitted that Section 144C(10) makes every direction issued by the DRP binding upon the Assessing Officer. It was further contended that under Section 144C(13), the Assessing Officer is required to pass the assessment order in conformity with the DRP’s directions within one month from the end of the month in which those directions are received. According to the assessee, instead of incorporating the DRP’s directions, the Assessing Officer had confirmed the transfer pricing adjustment contained in the draft assessment order because the TPO’s order giving effect had not been received in time.
The High Court agreed with the assessee’s submission. It specifically held that, under Section 144C, the Assessing Officer is bound by the directions issued by the DRP and is required to pass the assessment order in conformity with those directions within the statutory period prescribed under Section 144C(13). The Court noted that the Assessing Officer himself had recorded that the final order was being passed without incorporating the relief granted by the DRP because the order giving effect had not been received.
The Court therefore accepted the ITAT’s finding that the impugned assessment order was not in conformity with Section 144C and was barred by time. The Revenue’s argument that the assessment had otherwise been passed within time could not cure the failure to comply with the mandatory requirements of Section 144C. The Court consequently found no reason to interfere with the ITAT’s order.
The ruling underscores the mandatory nature of the DRP mechanism under Section 144C. Once the DRP issues directions, the Assessing Officer is required to comply with those directions while completing the final assessment within the statutory period. The final assessment cannot simply reproduce the transfer pricing adjustment contained in the draft order on the ground that the TPO’s order giving effect to the DRP directions was not received in time. TaxGuru has also reported subsequent decisions dealing with the requirement that final assessment orders comply with binding DRP directions and the timeline under Section 144C(13).
Exactly how the limitation framework under Section 144C operates has continued to generate litigation, including disputes concerning the relationship between the special timeline under Section 144C(13) and the general assessment limitation provisions.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
This appeal by the Revenue challenging the order dated December 31st, 2018, passed in IT(TP)A No.832/Bang/2017 passed by the Income Tax Appellate Tribunal, Bengaluru (for short ‘ITAT’) has been admitted to consider following questions of law:
1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law holding that entire assessment order as barred by time when the draft order and final assessment order were passed within time limit?
2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that final assessment order as bad on the ground that assessing authority has not passed order as per directions of Dispute Resolution Panel?
3. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in not following the decision of Hon’ble Punjab and Haryana High Court in the case of Des Kul Bhushan (reported in 47 Taxmann 79 (P&H) wherein it is observed that when an assessment order is set aside the limitation gets extended under Section 153(3) of the Act?
4. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that assessment order passed under Section 143(3) read with Section 144C(13) is bad in law even though the said order is passed according to parameters set out in said provision?
2. Shri. M. Dilip, learned Standing Counsel for the Revenue assailing ITAT’s order submitted that Assessing Officer has passed the order in time and therefore the impugned order is unsustainable in law.
3. Shri.T.Suryanarayana, learned Senior Advocate for the assessee submitted that under Section 144C(10) of the Income Tax Act, 1961 (‘IT Act’ for short) every direction issued by the Dispute Resolution Panel (‘DRP’ for short) shall be binding on the Assessing Officer and under Section 144C(13) the Assessing Officer is duty bound to pass the assessment order in conformity with the directions within one month from the end of the month in which such directions are received by the DRP. He argued that the Assessing Officer has recorded in the assessment order that on receipt of directions by the DRP, reference was made to Transfer Pricing Officer (‘TPO’ for short) for re-working the Arms Length Price (ALP). The Order Giving Effect (OGE) in respect of DRP’s direction corrected with the TP adjustments were not received in time and the Assessing Officer has confirmed the draft assessment order and the same is in violation of Section 144C. The ITAT has rightly set aside the said order. With these submissions, he prayed for dismissal of this appeal.
4. We have carefully considered the rival contentions and perused the records.
5. The Assessing Officer has recorded thus in his order:
“5. The DRP by its order dated 28.12.2016 gave certain directions to the TPO. The AO thereafter passed the impugned order without incorporating the directions given by the DRP dated 28.12.2016. The following were the relevant observations of the AO in the final order of assessment dated 31.01.2017, which is the order impugned in this appeal.
“Accordingly, adjustments as determined by the TPO to ALP of Rs. 40,11,77,583/- was added to the retuned income of the assessee and draft assessment order was passsed on 29.03.2016 under the provisions of section 144C of the Income-Tax Act,1961. The assessee based on the draft assessment order filed its objections before the Hon’ble DRP, Bangalore on 29.04.2016. The Hon’ble DRP vide its directions issued u/s. 144C(5) r.w.s.144C(8) of the IT Act dated 28.12.2016 has given relief relating to the TP adjustment.
5. On receipt of direction of Hon’ble DRP a reference was made to TPO for reworking the ALP adjustment as per DRP’s direction. The OGE. in respect of DRP’s directions connected with the TP adjustments has not been received. As this is a time barring assessment proceedings the assessment order is passed based on the TP adjustment mentioned in the draft assessment order. On receipt of the order giving effect from TP necessary action for a either increase or decrease of the TP adjustment will be done u/s.154 of the IT Act.
6. As the assessee company has furnished inaccurate particulars penalty proceedings u/s.271(1)(c) is initiated separately. Considering the directions issued by the Hon’ble DRP, the assessment is completed as under.
| Income as per Return of Income | Nil |
| Add: TP Adjustment | 40,11,77,583 |
| Less: B/F Loss Set Off | 40,11,77,583 |
| Total Assessed Income | Nil |
| 1. Balance Tax Payable | Nil |
Issue Demand Notice & Penalty notice accordingly.”
6. Shri.Suryanarayana is right in his submission that under Section 144C of the IT Act, the Assessing Officer is bound by the directions issued by the DRP and required to pass the assessment order in conformity with the directions issued within one month from the end of month in which such directions are issued.
7. The ITAT has recorded that impugned order is not in conformity with the provisions of Section 144C of the IT Act and barred by time.
8. Shri.Dilip’s contention is, the Assessing Officer has rightly passed the order within time. But it is relevant to note that the said order is not in conformity with Section 144C of the IT Act. Hence, no exception can be taken to the impugned order passed by the ITAT.
Hence, we proceed to pass the following:
ORDER
(1) Appeal is dismissed.
(2) Questions of law answered in favour of assessee and against the Revenue. No costs.
