Case Law Details

Case Name : //Visual Graphics Computing Services (India) Pvt. Limited Vs. The Asst. Commissioner of Income-tax (ITAT Chennai)
Appeal Number : ITA No. 2073/(Mds)/2011
Date of Judgement/Order : 17/04/2012
Related Assessment Year : 2007-08
Courts : All ITAT (4334) ITAT Chennai (217)

The provisions of Transfer Pricing regulations contained in Section 92 belong to a separate code enacted for computing income from international transactions having regard to Arm’s Length Price (ALP) so as to confirm that there is no tax avoidance by the taxpayer. Operation of Transfer Pricing provisions ends when the Transfer Pricing Officer passes an order holding that the operating profit of the taxpayer is compatible with ALP norms and no adjustment is necessary.

Limiting the profit eligible for tax holiday under Section 10A(7) read with Section 80IA(10) must be independent of the order of the Transfer Pricing Officer and it is not permissible for the AO to work out the 1 0A deduction on the basis of the ALP profit determined under the order of the Transfer Pricing Officer. ALP is determined based on the MAM which can either be profit based or price based. In case of latter methods, profits are not considered but “derived” from prices and hence the adoption of ALP profits to determine what is “ordinary profits” for the purpose of Section 10A(7) cannot be justified. The Tribunal also considered the decision in the case of Tweezerman (India) Pvt Ltd wherein it was held that the AO was not justified to invoke provisions of Section 80IA(10) read with Section 1 0B(7) so as to reduce the eligible profits on the basis of the ALP computed by the Transfer Pricing Officer without showing how he determined that the tax payer had shown more than ordinary profits.

INCOME TAX APPELLATE TRIBUNAL, CHENNAI

ITA No. 2073/(Mds)/2011 – Assessment Year : 2007-08

Visual Graphics Computing Services (India) Pvt. Limited

Vs.

The Asst. Commissioner of Income-tax

Date of Pronouncement : 17th April, 2012

O R D E R

PER Dr. O.K. NARAYANAN, VICE-PRESIDENT

This is a Transfer Pricing Appeal(TPA) filed by the assessee for the assessment year 2007-08. The appeal is directed against the order of the assessing authority dated 24.09.2011 passed under sec.143(3) read with sec. 144C of the Income-tax Act, 1961. The reference under sec.144C has been made to the Dispute Resolution Panel (DRP) at Chennai, in the context of the order passed by the Transfer Pricing Officer(TPO)-III at Chennai on 25.6.2010. The directions of the DRP have been issued on 19.8.2011.

2. The assessee is a 99.995% subsidiary of Mckinsey & Co. Inc., USA. The balance 0.005% of shares is held by McKinsey International Inc., USA. The assessee is engaged in the business of preparing power-point presentations and also in developing the software necessary for preparing such presentations. The assessee has also started a new division in the previous year relevant to the impugned assessment year by name, Global Finance and Accounting(GFA) division. The said division has offered finance and accounting services to its Associate Enterprises(AE).

3. In the light of the transactions, the assessee had with its AE, the issue of determining the Arm’s Length Price(ALP), has been referred to the TPO. The assessee has adopted Transactional  Net Margin Method(TNMM) as the most appropriate method. Operating profit to cost of production/service has been adopted as the Profit Level Indicator (PLI).

4. The assessee had furnished all the necessary details including comparable cases and other operating particulars as required under the Act and Rules. In the light of those technical details furnished by the assessee, the TPO found that the assessee has given cases of 18 comparable entities. The arithmetic mean of operating profit of those comparable entities is worked out at 21.92%. The margin of the assessee has been computed at 33.24%. Three companies included in the list of comparable cases have shown higher rates of margin, than reported by the assessee. The company, Maple E Solutions Ltd.(MESL), has shown a margin of 45.07%; Vishal Information Technologies Ltd.(VITL) at 51.23% and TSR Darshaw Ltd. TSRDL) at 46.40%. The TPO has accepted the TNMM method adopted by the assessee and also the PLI and FAR analysis. Accordingly, she came to the following final conclusion :

“7. Accordingly, it is evident that the International transactions carried on by the assessee with the Associate Enterprise is above ALP by ~ 4,48,50,795/- which is the difference between the operating profit shown by the assessee, ~ 13,15,71,991/- and the operating profit, ~ 8,68,20,996/- computed @ 21.92% of the operating cost. Therefore, the ALP of the International transactions is computed at ~48,18,57,980/-. It is hereby clarified that the findings and discussions made in this order are applicable only in respect of reference received for assessment year 2007-08 and not for subsequent assessment years.”

5. Thus, in the light of the above conclusion, the TPO made a finding for the purpose of sec.92 that the rate of margin and profit returned by the assessee are above the ALP and, therefore, the profit reported by the assessee be accepted and no adjustment is called for in the case of the assessee.

6. In the light of the order of the TPO, the Assessing Officer has passed a draft assessment order under sec.144C(1) of the  Act. The assessing authority has proposed therein, three disallowances. The assessee is a unit entitled for the deduction available under sec.10A. Therefore, the assessing authority has to compute the quantum of deduction available to the assessee under that section. In this context, the first proposition of disallowance made by the Assessing Officer is that lease line charges incurred by the assessee have to be reduced from the export turnover on the ground that those expenses were incurred for the delivery of software outside India. So also, he proposed deduction of foreign travel expenses from the export turnover for the reason that it was incurred in providing technical services outside India. These disallowances have been proposed in computing the export turnover for the purpose of sec.10A, placing reliance on the definition of ‘export turnover’ provided in clause (iv) of Explanation 2 to sec.10A. The second disallowance proposed by the Assessing Officer is the expenditure estimated to have been incurred for earning non taxable income. The Assessing Officer proposed 0.5% of the investment as per clause (iii) of Rule 8D read with sec.14A. The Assessing Officer opined that even if Rule 8D was not applicable for the impugned assessment year 2007-08, still it would be logical to apply those  rules. The third and most important disallowance proposed by the Assessing Officer is that he would reduce the quantum of eligible deduction under sec.10A by ~ 4,48,50,975/-. This amount is the excess of the price realized by the assessee over the ALP determined by the TPO. It is the case of the Assessing Officer that this excess profit worked out in the context of transfer pricing study is not entitled for deduction under sec.10A in the light of the provisions contained in sub-sec.(7) thereof read with sec.80IA(10). He held that this excess profit is beyond the “ordinary profits” to be considered for giving deduction under sec.10A. Provisions contained in sections 10A(7) and 80IA(10) authorize the assessing authority to limit the quantum of deduction available under sec.1 0A to the “ordinary profits” earned by an eligible unit. This provision is in fact meant for snubbing the tendency of assessees to overstate the profits of eligible units to claim undeserved deduction under sec.10A and to understate the profits of non-eligible units to save tax. It is to discourage similar dubious method of tax evasion, that the statute has imported the concept of “ordinary profits” in the scheme of sec.10A. In the present case, the assessing authority treated the profit in excess of the ALP profit as extraordinary in the context of sec.10A and  limited the deduction under that section to the ALP profit treating it on the “ordinary profits”. In fact, the assessing authority adopted the order of TPO to decide the benchmark of “ordinary profits” for giving deduction under sec.10A. The ALP profit computed by the TPO has been adopted as such on the “ordinary profits”. Accordingly, he proposed to exclude the excess profit qua the ALP profit from the scope of sec.10A deduction.

7. The draft order has been taken up by the assessee before the DRP. The DRP summarized the objections of the assessee against the draft assessment order in the following items:

(i) Erroneous disallowance of deduction under sec.1 0A

(ii) Exclusion of foreign travel expenditure incurred in foreign currency from export turnover while computing deduction under sec.1 0A

(iii) Miscellaneous objections

(iv) Exclusion of telecommunication charges from export turnover while computing deduction under sec.1 0A (v) Disallowance under sec.14A of the Act.

8. The DRP rejected all the objections raised by the assessee and confirmed every proposal made by the Assessing Officer in his draft assessment order.

9. As a culmination of all the proceedings so far discussed, the Assessing Officer finally passed the assessment order under sec.143(3) verbatim incorporating the earlier proposals made by him in the draft assessment order and confirmed by the DRP.

10. It is in this context that the assessee has come in appeal before us.

11. The assessee has filed detailed grounds of appeal before us. The grounds are arranged segment-wise pertaining to different issues.

12. The first issue raised by the assessee reflected in ground Nos. 2.1 to 2.4 is legal in nature. The ground is that the draft assessment order passed by the assessing authority under sec.144C(1) is void ab initio and consequently the final assessment order is barred by limitation. This legal issue, will be considered, after we adjudicate the grounds raised by the assessee on the merits of various disallowances.

13. The first such ground is stated in ground Nos.3.3.1 to 3.3.10. The ground, in specific, is that the DRP has erred in the facts and circumstances of the case and in law in confirming the action of the Assessing Officer in reducing ~ 4,48,50,975/- from the eligible deduction under sec.10A, resorting to the difference between the ALP determined by the TPO and the actual operating profit reported by the assessee.

14. We heard Shri S.E.Dastur, the learned senior counsel appearing for the assessee in detail. It is the case of the learned senior counsel that the Assessing Officer and the DRP have erred in law to invoke sec.10A(7) along with sec.80IA(10) of the Act in excluding, a portion, out of the eligible amount of profits entitled for deduction under sec.10A. The learned senior counsel stated that they have not established that the business transacted between the assessee and its AE are “arranged” so as to yield more than ordinary profits with a scheme in mind to inflate the profits of the eligible unit by understating the profits of ineligible unit. The authorities below have not made out any such case of undue advantage attempted by the assessee in transacting with its AE and inflating the operating profit reported. It is the case of  the learned senior counsel that the provisions of law stated in sec.10A(7) and sec.80IA(10) do not refer to ALP computed under sec.92 of the Act to be treated as “ordinary profits” for the purpose of deduction under sec.1 0A.

15. The learned senior counsel explained that sec.80IA which is necessary to invoke sec.10A(7) cannot be applied in the case of an international transaction. The lower authorities have mis¬construed that the ALP determined under sec.92 of the Act is the same, as the ordinary profits mentioned in sec.10A(7); whereas the scheme and purpose of those provisions are entirely different. Sec.80IA(10) is concerned with an eligible deduction. The purpose of sec.80IA(10) is to ensure that the unit eligible for claiming deduction under sec.80IA or, for the present case, sec.10A does not arrange its affairs with another unit not entitled for the deduction, in such a manner that the profit of the eligible unit is inflated and the profit of the ineligible unit is subdued. But the above concept of sec.80IA(10) would not be applicable in transfer pricing cases.

16. The learned senior counsel further explained that in a transaction between an eligible unit and another entity outside India not liable to tax in India, there cannot be a case that the  Revenue would be adversely affected even if the eligible unit in India charges a higher price to the unit outside India. The Revenue should not be concerned, whether the eligible unit makes a profit of ~ 100/- or ~ 150/- on a transaction with overseas unit, as such profit whatever its quantum, would not be brought to tax by virtue of deduction under sec.10A claimed by the eligible unit. The AE would not claim any deduction of the payments resulting in the profit of either of ~ 10/- or ~ 15/- as such, the payments made outside India are not taxable in India. If at all, it is only the Revenue of the foreign countries which would be adversely affected and not at any rate Indian Revenue. Therefore, he submitted that sec.10A(7) would not be applicable to a transaction of the present type between an eligible unit and its overseas AE. On the other hand, when profits more than ordinary level are transferred to India to its eligible unit, Indian Revenue gains therefrom, as the higher profits of the eligible unit in India would ultimately flow back to the assessee’s foreign company which holds its entire share capital through the medium of dividend on which the assessee would pay a higher dividend distribution tax under sec.115O of the Act. The learned senior counsel further stated that such a higher amount of inward  remittance would result in higher foreign exchange earnings by our country.

17. Apart from the above submissions on merits and facts of the case, the learned senior counsel, further raised a legal contention that sec.92(3) provides that sec.92 is not to be applied in a case where the computation of income under sub-section (1) has the effect of reducing the income chargeable to tax.

18. The learned senior counsel further explained that if the profits earned by the assessee are comparable with the profits earned by other companies in the same industry, sec.10A(7) cannot apply. He explained that even if sec.10A(7) has to be applied, the Assessing Officer has to dutifully demonstrate that the course of transactions between the assessee and its AE is so arranged as to produce more than ordinary profits. He further explained that the ALP determined under sec.92 cannot form basis for calculating ordinary profits under sec.10A. Sec.10A was introduced much before the introduction of Transfer Pricing provisions. Therefore, ALP could never have envisaged to be the basis for determination of ordinary profits for the purposes of sec. 1 0A(7)/ 80IA(1 0).

19. The learned senior counsel contended that ALP has to be computed by adopting the most appropriate method. The most appropriate method may be a profit based method (cost plus method, transactional net margin method or profit split method) or a price based method (comparable uncontrolled price method or re-sale price method). In the latter case, the determination of ALP does not involve determination of profits at all. In such cases, the profit would only be a derived figure. Therefore, there is no linkage between ALP and “ordinary profits”. ALP is a concept determined as per the rules and procedures laid down in the statute. “Ordinary profits” on the other hand, is a commercial concept to be understood as excluding super profit. It would not be correct to incorporate the concept of ALP to determine “ordinary profits”.

20. The learned senior counsel has placed reliance on the following decisions :

(1) TweezerMAN (India) (P) Ltd. v. ACIT [133 TTJ (Chn) 308]

(2) Digital Equipment India Ltd. v. DCIT (103 TTJ (Bang) 329)

(3) Mentor Graphics (Noida) Pvt. Ltd. v. DCIT (109 ITD 101)

(4) Lincoln Pharmaceuticals Ltd. v. ITO [38 SOT 376(Ahd)]

21. Shri Ashok Kumar, the learned Commissioner appearing for the Revenue justified the stand of the lower authorities on the issue, whether super profit computed in the context of sec.92 could be considered for recomputing the deduction under sec.10A(7). The learned Commissioner explained that the reference to the TPO was necessitated because of the international transactions entered into between the assessee and its AE. He explained that reference to the TPO is not something strange in the assessment proceedings; on the other hand, it is a part of the assessment proceedings. It is in the course of study of the ALP and other TP matters that the TPO comes to a factual finding that the profits reported by the assessee is higher than the profits computable on ALP.

22. The learned Commissioner argued that the discussion and finding made by the TPO are part and parcel of the materials available for assessment. The assessing authority has to make necessary adjustments in the assessment order in the light of the findings recorded in the order of the TPO. Even if no adjustment was called for in the TP transactions as such, the super profit computed in the order of the TPO has a direct nexus with the quantum of deduction available to the assessee under sec.10A. He, therefore, stated that the reduction of the super profit from the deduction available under sec.10A has been rightfully attempted by the assessing authority.

23. Once the report of the TPO is placed on record, the Assessing Officer may propose adjustments either on the international transactions or on regular aspects of computation of income depending upon the finding recorded in the order of the TPO. Once the assessment order is connected to the order of the TPO as well, the Assessing Officer has to pass a draft assessment order which may either be accepted by the assessee or taken up before the DRP. All those matters are of procedural nature. The crucial issue is that as a result of assessment proceedings including the order of the TPO, whether a finding of fact is available on the question of “ordinary profits” or not. Where the TPO makes a finding that the profits reported by the assessee is above the “ordinary profits”, the excess of that profit has to be dealt in by the Assessing Officer within the provisions contained in sec.10A. It is in that context, the Assessing Officer has resorted to sec.10A(7) read with sec.80IA(10) and disallowed that excess profit in computing the eligible deduction under  sec.10A. He supported the orders of the lower authorities on this point.

24. We heard both sides in detail and considered the issue. As far as the present case is concerned, the TPO has made a categorical finding that the operating profit reported by the assessee is higher than the profit worked out on the basis of ALP. The TPO, therefore, concluded that no TP adjustment is called for in the present case. The Assessing Officer has made the reference to the TPO under sec.92CA. The reference is made for the purpose of computing income arising from an international transaction with regard to ALP as provided in sec.92. Therefore, it is to be seen that the scope and extent of reference made by the Assessing Officer to the TPO is confined to the singular purpose stated in sec.92. Sections 92A, 92B, 92C, 92CB, 92D, 92E and sec.92F are all, precisely defining and facilitating provisions ultimately for the purpose of computing the income as stated in sec.92. All the above stated sections provided in Chapter X of the Income-tax Act, 1961 belong to a separate code as such, enacted for the purpose of computing income from international transactions having regard to ALP so as to confirm that there is no avoidance of tax by an assessee.  Therefore, where in a case, the TPO suggests that the operating profit declared by an assessee is compatible to ALP norms and no adjustment is necessary, the operation of all those provisions come to an end. If the Assessing Officer has to make any other adjustment towards computing deduction available under sec.10A, the computation has to be made in the context of sec. 1 0A(7) read with sec.80IA(1 0).

25. It is clear that in a case of Transfer Pricing assessment, it has got two segments. The first segment consists of rules and procedures for computing the income other than the income arising out of international transactions with Associate Enterprise. The second segment consists of rules and procedures in connection with computation of income from international transactions with AE on the basis of ALP. The second segment relating to computation of ALP, is a set of rules for the purposes of Transfer Pricing matters and those procedures and rules can be used only for the purpose serving the object of sec.92. When the TPO states that there is no need of TP adjustment, the matter should end there and any other adjustment that the Assessing Officer would like to make with reference to the first segment  must be made independent of the order of the TPO under sec.92CA.

26. To state in simple terms, the TP regime is different from regular computation of income. Sec.10A belongs to that part of regular computation of income and it should be computed independent of TP regulations and TP orders. It is not therefore, permissible for the Assessing Officer to work out sec.10A deduction on the basis of ALP profit generated out of the order of the TPO.

27. In fact these issues have already been considered in various orders of the Tribunal. The ITAT, Chennai ‘A’ Bench in the case of TweezerMAN (India) (P) Ltd. v. ACIT (133 TTJ 308) has considered the matter in detail and held that the reduction of eligible profits of an assessee as done by the Assessing Officer by invoking the provisions of sec.80IA(10) read with sec.10B(7), in the context of TPO’s order is unsustainable. The Tribunal has held that the Assessing Officer was not justified to invoke the provisions of sec.80IA(10) read with sec.10B(7) so as to reduce the eligible profits on the basis of the ALP computed by the TPO without showing how he determined that the assessee had shown more than “ordinary profits”.

28. As rightly argued by the learned senior counsel, ALP is determined on the basis of the most appropriate method. Most appropriate method is chosen either on profit basis method or price basis method. In the latter case, profits are not at all considered. In that method, profit is only a derivative of prices. When profits itself not worked out, how it is justified to adopt ALP profits to determine what is “ordinary profits” for the purpose of sec.1 0A(7)?

29. In the facts and circumstances of the case, we hold that the Assessing Officer has erred in reducing ~ 4,48,50,795/- from the eligible profits of the assessee under sec.10A. The said adjustment made by the assessing authority in computing the deduction under sec.1 0A is accordingly, deleted.

30. This issue is decided in favour of the assessee.

31. The second issue of exclusion of foreign travel expenses and lease line charges from export turnover has already been decided by ITAT, Chennai Special Bench in the case of ITO vs. Sak Soft Ltd. [30 SOT 55 (Chennai) (SB)]. The Special Bench has held therein that if expenses are to be reduced from export turnover, they have to be reduced from the total turnover also, to maintain the parity. In view of the above decision rendered by the Special Bench, we hold that all such adjustments made by the Assessing Officer to the export turnover of the assessee also be made in the total turnover of the assessee as well. These issues are thus decided in favour of the assessee.

32. The last issue on merit is regarding the disallowance made under sec.14A. It is the case of the assessee that it has not incurred any expenditure towards earning of dividend income. The dividend yielding investments were made out of surplus internal accrual generated from business and the sale proceeds of investments. No other expenses had been incurred for making the investments. It is the case of the learned senior counsel appearing for the assessee that Rule 8D of the I.T.Rules, 1962 was inserted with effect from 24.3.2008 and is applicable prospectively from the assessment year 2008-09 onwards and is not applicable to the impugned assessment year. Without prejudice to the above contention, it is the case of the learned senior counsel that if at all any disallowance is to be made under sec.14A, the disallowance may be limited to 2% of the dividend income as was done by the Tribunal in the case of M/s. Rane Brake Linings Ltd. v. DCIT in ITA No.745/Mds/2005.

33. We considered the matter. As rightly pointed out by the learned senior counsel, Rule 8D is not applicable for the impugned assessment year. But, the assessee has earned substantial amount of dividend income. Even if, there may not be any direct visible expenditure to earn such dividend income, a reasonable portion of the top management time/expenditure could be attributed to earning of that income. It is based on the general principle that no income is gratuitous and every income is earned after incurring certain expenses. Therefore, a reasonable disallowance is called for. As quantification is not permissible under Rule 8D for the impugned assessment year, the disallowance has to be made on the basis of reasonableness and fairness. In the present case, the Assessing Officer has made a disallowance of ~ 9,81 ,686/-. We modify the disallowance to a sum of ~ 6 lakhs on a fair basis. This issue is decided partly in favour of the assessee .

34. Another incidental ground raised by the assessee is against the levy of interest under sec.234B and 234D of the Act. We may state that these are consequential in nature and, therefore, do not call for any formal adjudication.

35. Another ground raised by the assessee in the present appeal is that the Assessing Officer has erred in initiating penalty proceedings under sec.271(1)(c). This ground is beyond the scope of the present appeal.

36. Now, we are coming back to the legal issue raised by the assessee and argued by the learned senior counsel at length.

37. It is the argument of the learned senior counsel that the Assessing Officer had no jurisdiction to pass a draft assessment order, as no transfer pricing adjustment was suggested by the TPO. Therefore, the draft order and the DRP directions are without jurisdiction. If so, the learned senior counsel contended that the final order passed by the Assessing Officer is barred by limitation.

38. The learned senior counsel explained that sec.144C(1) provides that the Assessing Officer shall, notwithstanding anything to the contrary contained in the Act, in the first instance, forward a draft of the proposed order of assessment to the eligible assesse, if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee. The learned senior counsel reiterated that thus, sec.144C(1) can apply only in case of an eligible assessee.

39. Sec.144C(15)(b) defines “eligible assessee” to mean (i) any person in whose case the variation referred to in sub-sec.(1) arises as a consequence of the order of the TPO passed under sub-sec.(3) of sec.92CA; and (ii) any foreign company. The learned senior counsel pointed out that clause(ii) of sec.144C(15)(b) does not apply to the present case, as the assessee is an Indian company. Clause(i) also does not apply since in the present case, the TPO has not prescribed any adjustment in the Transfer Pricing order. So, the Assessing Officer had no jurisdiction to pass a draft order under sec.144C(1). Therefore, the order is without jurisdiction and liable to be annulled. It is the case of the learned senior counsel that consequent to the above, all the variations proposed in the draft order will have to be dropped.

40. As a culmination of the above process, it is the argument of the learned senior counsel that as no transfer pricing adjustment was proposed in TPO’s order, the Assessing Officer should have passed the assessment order under sec.143(3) within the specified period of limitation, which was not done by him. The  learned senior counsel concludes that the order is illegal and the said illegality cannot be cured. He has pointed out that there is a difference between an illegal order and an irregular order.

41. We have thoughtfully considered the above legal arguments advanced by the learned senior counsel.

42. The soul of Transfer Pricing regime is sec.92 of the Act, which provides that any income arising from an international transaction shall be computed having regard to the ALP. Sec.92 arises in a case where the assessee is having transactions with foreign AE. Therefore, sec.92A provides for the meaning of “AE”. Again, logically sec.92B provides the meaning of international transaction. Thereafter comes sec.92C, which provides for computation of ALP for the purpose of sec.92. Sec.92CA is to provide for reference to and determination of ALP by the TPO. Sec.92CB gives power to Central Board of Direct Taxes to make safe harbour rules. Sec.92D declares the liability of the concerned person to maintain the necessary information on international transactions. Sec.92E prescribes for a report to be obtained from Chartered Accountant. Sec.92F provides the definition of certain terms used in Transfer Pricing law.

43. Thus, it could be seen that the law stated in sections 92 to 92F for computing the income from international transactions having regard to ALP, has been provided under Chapter X, “as special provisions relating to avoidance of tax”.

44. On the other hand, the procedure for assessment is provided in Chapter XIV of the Act. Chapter XIV runs from sec.139 to 158. An assessment has finally to be concluded under sec.143(1) or sec.143(3) or sec.144(4). In the present case, the assessment has been made under sec.143(3) .

45. Whether an assessment is barred by limitation or not, is a question to be determined within the law stated under Chapter XIV and not under the provisions of statute contained in Chapter X relating to Transfer Pricing regime. The order passed by the TPO under sec.92CA(3) is not an assessment order. It is a reference order made by the TPO which is to be considered by the Assessing Officer to make Transfer Pricing adjustments which form part of the final assessment order. Like-wise, the draft assessment order is also not an assessment order. It is only a statutory communication conveyed to the assessee stating the adjustments proposed by him, in the light of the reference order obtained from the TPO. It is something like a pre-assessment notice. Consequently, the order passed by the DRP under sec.144C is also not an assessment/appellate order but only an order reviewing the proposals made by the Assessing Officer in his draft assessment order.

46. When we go through these different schemes, it is easy to find that the assessing authority is within the competence of law to refer the matter to the TPO, if the assessee had entered into international transactions with its AE. It is, as a result of the reference made by the assessing authority, that subsequent order of the TPO and the order of the DRP are followed. While making proposals on the basis of the order of the TPO, the Assessing Officer may propose adjustments which in fact do not fall under the segment of TP matters but fall under the segment of non-TP matters. For the reason that the Assessing Officer has made such a mistake, it is not possible to hold that an erroneously passed draft assessment order will make the assessment order passed under sec.143(3), time barred. The Assessing Officer has made a reference to the TPO and on the basis of the order of the TPO, he has made a draft order. In the said draft order, there is no proposal on TP matters, but he made a proposal on sec.10A deduction. But the material necessary for making such a  proposal, even if erroneous, was generated from the order of the TPO. Therefore, the Assessing Officer proposed to reduce the super profit from the computation of sec.10A deduction. That may not be in accordance with the procedure prescribed. But it does not mean that the Assessing Officer should have never passed such a draft assessment order. If the Assessing Officer has to make such adjustment in the light of the information available from the order of the TPO, then he has to pass a draft assessment order. Whether those adjustments are sustainable or not, is a different issue. The legality or illegality of those adjustments do not determine the validity and limitation of an assessment made under sec.143(3).

47. Therefore, it is necessary to see that the reference made to the TPO, the order passed by the TPO, the draft assessment order passed by the Assessing Officer and the directions issued by the DRP are all pre-assessment procedures of aid and guidance provided to the assessing authority by the statute. If any irregularity is committed by the Assessing Officer in following the above set of pre-assessment procedures, such irregularity does not make the assessment order illegal. At the best, it makes the order only irregular.

48. In the present case, when the adjustments made by the Assessing Officer are deleted by the Tribunal, that irregularity is automatically cured. In such circumstances, the assessment order need not be invalidated. The assessment order does not become void ab initio. In the present case, the irregularity will be rectified as soon as the Assessing Officer passes the order to give effect to the order of the Tribunal.

49. Therefore, we are not able to accept the argument of the learned senior counsel that the impugned assessment is barred by limitation.

50. In result, this appeal filed by the assessee is partly allowed.

Order pronounced on Tuesday, the 17th of April, 2012 at Chennai.

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