Case Law Details
FedEx Express Transportation and Supply Chain Services (India) Private Limited Vs DCIT (ITAT Mumbai)
The case of FedEx Express Transportation and Supply Chain Services (India) Private Limited Vs DCIT (ITAT Mumbai) revolves around the validity of a Transfer Pricing order, draft assessment order, and the consequent final assessment order. The key contention is whether the mistake of passing the draft assessment order in the name of a non-existent entity constitutes a jurisdictional defect that renders the entire assessment proceedings void.
In this case, FedEx Express Transportation and Supply Chain Services (India) Private Limited (FEIPL) amalgamated with another company, and the assessment proceedings were being carried out in the name of FEIPL. The Transfer Pricing Officer (TPO) passed an order under Section 92CA(3) of the Act and the Assessing Officer passed the draft assessment order under Section 143(3) r.w.s. 144C(1) of the Act in the name of FEIPL. However, on the date of these orders, FEIPL had ceased to exist due to the amalgamation. This scenario presented a jurisdictional issue.
The core question was whether a legally valid draft assessment order is mandatory to establish jurisdiction under Section 144C of the Act. The draft assessment order plays a crucial role as it affects the assessment of the income or loss of the assessee. The draft assessment order is considered a final order from the perspective of the Department. The draft order provides the foundation for the commencement of DRP proceedings and the subsequent final assessment order. Therefore, it is mandatory for the Assessing Officer to pass a valid draft assessment order before proceeding with the assessment under Section 144C of the Act.
The legal position is supported by the judgments of the Hon’ble Bombay High Court and other High Courts, emphasizing the necessity of a valid draft assessment order. These judgments have clarified that a draft assessment order is not merely a procedural step but holds jurisdictional significance. Failure to issue a valid draft assessment order, especially in the case of an “eligible assessee,” renders the subsequent proceedings void.
The argument that such a mistake could be rectified under Section 292B of the Act was rejected because the issue was related to jurisdiction, not a mere procedural error. Passing a final assessment order under Section 143(3) r.w.s. 144C(13) without a preceding valid draft assessment order goes against the legislative intent of Section 144C. The entire assessment proceedings, post an invalid draft assessment order, were deemed illegal and void ab initio.
In the FedEx Express Transportation and Supply Chain Services (India) Private Limited Vs DCIT (ITAT Mumbai) case, the passing of a draft assessment order in the name of a non-existent entity created a jurisdictional defect. This defect rendered the entire assessment proceedings void. The case highlights the importance of a legally valid draft assessment order in the context of jurisdiction under Section 144C of the Act.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The captioned appeal by the assessee is directed against the order of Assessing Officer dated 29.01.2016 passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (in short ‘the Act’), which is in terms of the directions issued by the Disputes Resolution Panel-1, Mumbai under section 144C(5) of the Act dated 28.12.2015.
2. In this appeal, assessee has raised the following Grounds of appeal:
“I. Ground on jurisdiction
1. On the facts and in the circumstances of the case and in law, the learned Assessing Officer (‘AO’) erred in passing the draft assessment order in the name of Federal Express India Private Limited, an entity which is not in existence on the date of passing the order on account of merger with the Appellant.
It is prayed that the draft assessment order passed by the learned AO be held as bad in law, null and void-ab-initio and accordingly the final assessment order passed by the learned AO pursuant to the directions of the Hon’ble Dispute Resolution Panel (‘DRP’) is also liable to be quashed.
II. Corporate Tax Grounds
Disallowance under Section 43B of the Income-tax Act, 1961 (‘the Act’) amounting to INR 46,88,806
2. On the facts and in the circumstances of the case and in law, the learned AO erred in applying the provisions of Section 43B of the Act to the impugned provision for leave encashment.
The learned AO erred in not allowing deduction of amount paid during AY 2011-12 towards leave encashment before the specified date under Section 43B of the Act, which pertained to a provisions created in years prior to AY 2011 12.
It is prayed that the disallowance of provision for leave encashment of INR 46,88,806 under Section 43B of the Act be deleted.
It is further prayed that the deduction for payment towards leave encashment during AY 2011-12 before the due date specified under Section 43B of the Act be allowed, in case the disallowance of unpaid provision for leave encashment is upheld.
III. Transfer Pricing Grounds
Provision of support services for International Priority Business (‘IPB’)
3. On the facts and in the circumstances of the case and in law, the learned AO / Transfer Pricing Officer (‘TPO’) / DRP erred in recomputing the arm’s length price of the international transaction in respect of IPB services provided by the Appellant at INR 35,92,18,459 instead of INR 31,68,12,137, thereby making a transfer pricing adjustment of INR 4,24,06,322
It is prayed that the learned AO be directed to consider the international transaction of IPB services provided by the Appellant at arm’s length and thereby delete the aforesaid adjustment of INR 4,24,06,322.
4. On the facts and in the circumstances of the case and in law, the learned TPO / DRP erred in considering Inmacs Management Services Limited as a comparable company in relation to the IPB services provided by the Appellant.
It is prayed that the learned AO be directed to reject Inmacs Management Services Limited from the set of comparable companies in relation to the IPB services provided by the Appellant.
5. On the facts and in the circumstances of the case and in law, the learned TPO / DRP erred in considering ICC International Agencies Limited as a comparable company in relation to the IPB services provided by the Appellant.
It is prayed that the learned AO be directed to reject ICC International Agencies Limited from the set of comparable companies in relation to the IPB services provided by the Appellant.
6. On the facts and in the circumstances of the case and in law, the learned AO / TPO / DRP erred in not considering the correct margins of Indus Technical & Financial Consultants Limited as submitted by the Appellant.
It is prayed that the learned AO be directed to consider the correct margins of Indus Technical & Financial Consultants Limited while arriving at the mean margin earned by comparable companies in relation to the IPB services provided by the Appellant.
Notional Interest
7. On the facts and in the circumstances of the case and in law, the AO / TPO erred in making an adjustment of INR 12,07,977 to the income of the Appellant in respect of notional interest arising on account of delay in collection of dues from Associated Enterprises (‘AEs’).
It is prayed that the learned AO be directed to delete the adjustment of INR 12,07,977 in respect of notional interest arising on account of delay in collection of dues from AEs.
8. On the facts and in the circumstances of the case and in law, the AO / TPO erred in:
i. Disregarding the explicit directions issued by the DRP; and
ii. Disregarding the fact that in actual conduct, the Appellant has not charged any interest to its non-AEs for the delay in collection of dues.
It is prayed that the learned AO be directed to follow the explicit directions issued by the DRP and consider the actual conduct followed by the Appellant in charging interest to non-AEs, thereby deleting the transfer pricing adjustment of INR 12,07,977 on account of notional interest.
9. On the facts and in the circumstances of the case and in law, the AO / TPO / DRP erred in making an adjustment of INR 8,03,233 to the income of the Appellant in respect of notional interest arising on account of advances given to a third party i.e. a non – AE.
It is prayed that the transfer pricing adjustment proposed on account of advances given to a third party ought to be deleted.
10. Without prejudice to ground nos. 7-9, on the facts and in the circumstances of the case and in law, the AO/ TPO erred in levying interest beyond the end of the Previous Year.
It is prayed that the learned AO be directed to compute the delay in realisation only upto the end of the Previous Year for the purpose of calculation of notional interest.
Co-ordination services in respect of high value packages
11. On the facts and in the circumstances of the case and in law, the learned AO / TPO / DRP erred in recomputing the arm’s length price of the international transaction in respect of provision of co-ordination support services for high value packages at INR 59,43,945 instead of INR 54,49,491 thereby making a transfer pricing adjustment of INR 4,94,454.
It is prayed that the learned AO be directed to consider the international transaction of the Appellant pertaining to co-ordination services provided in respect of high value packages at arm’s length and accordingly, delete the transfer pricing adjustment of INR 4,94,545.
12. On the facts and in the circumstances of the case and in law, the learned TPO / DRP erred in considering PL Shipping & Logistics India Ltd as a comparable company in relation to the co-ordination services provided in respect of high value packages.
It is prayed that the learned AO be directed to reject PL Shipping & Logistics India Ltd from the set of comparable companies in relation to the coordination services provided by the Appellant in respect of high value packages.
13. On the facts and circumstances of the case and in law, the learned TPO / DRP erred in considering South India Corporation Ltd as a comparable company in relation to the co-ordination services provided in respect of high value packages.
It is prayed that the learned AO be directed to reject South India Corporation Ltd from the set of comparable companies in relation to the co-ordination services provided by the Appellant in respect of high value packages.
IV.VCredit of Advance Tax paid
14. The learned AO erred in not granting credit of advance tax paid amounting to INR 20,00,000.
It is prayed that credit of advance tax paid amounting to INR 20,00,000 be granted to the Appellant
V. Levy on interest
15. On the facts and in the circumstances of the case and in law, the learned AO erred in levying interest under Section 234B and 234C of the Act.
It is prayed that the levy of interest under Section 234B and 234C of the Act ought to be deleted.”
3. The assessee before us is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of clearing services. The return of income was filed by the assessee declaring an income of `13,08,38,720/-, which was subject to a scrutiny assessment whereby the total income has been assessed at `17,96,36,280/-. The difference between the returned and assessed income is primarily on account of transfer pricing adjustment and disallowance of Provision for leave encashment. The aforesaid aspects have been challenged by the assessee in appeal before us.
4. A perusal of the aforestated Grounds of appeal reveal that apart from assailing the merits of additions made to the returned income, assessee has also assailed the assessment order as being bad in law, null and void ab initio. Since the aforesaid aspect of the matter challenging the validity of the assessment goes to the root of the matter, the rival parties have been heard on this aspect at the threshold itself. Therefore, we proceed to adjudicate the aforesaid aspect hereinafter.
5. The plea of the assessee regarding the validity of the assessment, which is manifested in Ground of appeal no. 1 is to the effect that the assessment order passed by the Assessing Officer is bad in law, null and void ab initio because the draft assessment order dated 03.03.2015 was passed in the name of an entity which was not existing as on the date of the draft assessment order and, therefore, the entire assessment proceedings leading upto the final assessment order dated 29.01.2016 deserves to be quashed.
6. Before we proceed to appreciate the rival stands, the facts relevant to the said dispute can be summarised as follows. The return of income for Assessment Year 2011-12 was e-filed by Federal Express (India) Pvt. Ltd. (in short ‘FEIPL’) declaring an income of `13,08,38,720/-, which was subsequently revised on 29.03.2013. The return was processed under Section 143(1) of the Act and subsequently it was taken up for scrutiny and a notice under Section 143(2) of the Act dated 21.09.2012 was issued in the name of FEIPL. As the assessee had entered into an ‘international transaction’ within the meaning of Sec. 92B of the Act, the Assessing Officer also made a reference to the Transfer Pricing Officer (TPO) under Section 92CA(1) of the Act on 15.07.2013; thereafter, the TPO passed an order under Section 92CA(3) of the Act dated 30.01.2015 proposing various adjustments. Pertinently, a scheme of amalgamation was filed by FEIPL whereby it amalgamated into Federal Express Transportation Supply Chain Services (India) Pvt. Ltd. (in short ‘FETSCS’). The said scheme of amalgamation was approved by the Hon’ble Bombay High Court vide order dated 05.07.2013 with retrospective effect from 01.04.2012; and, such merger was effective from 01.10.2013. As a consequence, FETSCS was the resultant amalgamated company and the amalgamating company, i.e. FEIPL, ceased to exist subsequent to the approval of scheme of amalgamation by the Hon’ble Bombay High Court. At the time of hearing, the Learned Representative for the assessee pointed out that the assessee submitted a communication dated 01.10.2013 to the Assessing Officer intimating the approval of scheme of amalgamation of the erstwhile FEIPL with FETSCS. It has also been brought out that a communication dated 28.01.2015 was also submitted to the TPO informing him about the amalgamation of FEIPL with FETSCS. The TPO passed the order under Section 92CA(3) of the Act in the name of the erstwhile FEIPL on 30.01.2015. Further, the draft assessment order under Section 143(3) r.w.s. 144C(1) of the Act was passed by the Assessing Officer on 03.03.2015 incorporating the order of the TPO also in the name of the erstwhile FEIPL.
7. On receipt of the draft assessment order, the assessee company, FETSCS, which was in existence at that point of time, filed its objections against the draft assessment order before the Dispute Resolution Panel (DRP) wherein, inter-alia, it objected to the validity of the draft assessment order on the ground that it has been passed in the name of amalgamating company which was not in existence on the date of passing of such order.
The DRP has since dismissed such objections as a procedural mistake. In any case, the DRP passed its order on 28.12.2015 issuing directions in the name of FETSCS, the amalgamated company which was in existence at the relevant point of time. Pursuant to the directions of the DRP, the final assessment order has been passed by the Assessing Officer on 29.01.2016 under Section 143(3) r.w.s. 144C(13) of the Act in the name of FETSCS, i.e. the amalgamated company which was in existence.
8. In the above background, the case sought to be set-out by the appellant is that the order passed by the TPO as well as the draft assessment order passed by the Assessing Officer are in the name of non-existent entity, i.e. FEIPL, which is bad in law and as a result, all the subsequent proceedings are to be treated as illegal, bad in law and void ab initio. As per the appellant, such a mistake cannot be construed as a procedural mistake, but the same is a jurisdictional defect, which cannot be cured. It has also been pointed out that there is no dispute on the factual matrix inasmuch as the fact of the amalgamation being approved by the Hon’ble Bombay High Court on 05.07.2013 with retrospective effect from 01.04.2012 was brought to the notice of the TPO as well as the Assessing Officer vide communications dated 28.01.2015 and 01.10.2013 respectively. At the time of hearing, a reference has been made to pages 49 to 50 and 125 of the Paper Book wherein is placed copies of the aforestated two communications.
9. As per the Learned Representative, by passing the transfer pricing order under Section 92CA(3) of the Act and the draft assessment order under Section 143(3) r.w.s. 144C(1) of the Act in the name of the erstwhile non-existent entity, the income-tax authorities have failed to adhere to the mandated assessment procedures laid down under the Act and, therefore, the subsequent assessment is invalid, being bad in law. It has been pointed out that there is a judicially accepted legal proposition that in case where the Assessing Officer has failed to comply with the assessment procedures laid down under the Act, the consequential assessment is to be construed as invalid in the eyes of law. In this context, the Learned Representative has referred to various instances, viz. service of notice under Section 143(2)(ii) of the Act beyond the statutory period; service of notice under Section 143(2) of the Act on an incorrect address; issue of notice to a dead person; reassessment under Section 147/148 of the Act without issue of notice under Section 143(2) of the Act, etc. A reference has also been made to the judgments of the Hon’ble Delhi High Court in the case of Spice Entertainment Ltd. vs CIT, ITA Nos. 475 & 476 of 2011 (Del.) and CIT vs Dimension Apparels Pvt. Ltd., 370 ITR 288 (Del.) to canvass that the assessment order passed in the name of a non-existent entity is to be treated as an illegality and not merely a procedural defect. Reference has also been made to the following decisions to say that where a notice relating to assessment is issued on a non-existent amalgamating company, the entire assessment proceedings is liable to be set-aside :-
i) Ambuja Cements Rajasthan Ltd. vs ACWT-LTU (WTA No. 11/Mum/2014) (Mum. Trib.)
ii) I.K. Agencies Pvt. Ltd. vs. CWT (AWT No. 1, 2 & 3 of 2003 (Calcutta High Court)
10. Another aspect of the matter, and which has been vehemently canvassed before us, is with reference to the scheme of assessment as provided under Section 144C of the Act. In this context, it is canvassed that the provisions contained in Sec. 144C of the Act are special provisions in order to provide an alternate dispute resolution scheme to certain categories of assessees. It is explained that Sec. 144C of the Act lays down the mechanism of such dispute resolution, i.e. it gives a right to assessee to approach the DRP against the variations proposed by the Assessing Officer; provides special powers to the Assessing Officer to make an assessment adhering to different time lines notwithstanding Sec. 153 of the Act, etc. Sec. 144C(1) of the Act has been referred to say that it requires the Assessing Officer to forward draft of the proposed order of assessment in a case of an ‘eligible assessee’, wherever the Assessing Officer proposes any variation in the income or loss returned, which is prejudicial to the interests of the assessee. Emphasising the fact that such a draft assessment order can only be passed on an ‘eligible assessee’ as defined under Section 144C(15)(b)(ii) of the Act, it is canvassed that an ‘eligible assessee’ has necessarily to be a ‘person’; and, qua the instant case, an Indian company, in whose case the TPO has passed an order proposing a variation; so, however in the present case, such transfer pricing order has been passed in the name of erstwhile FEIPL, which was not in existence on the date of said order, having been amalgamated with FETSCS. Therefore, FEIPL cannot be viewed as an ‘eligible assessee’ as understood for the purposes of Sec. 144C(15)(b) of the Act since on the date of draft assessment order it did not exist. It was further pointed out that FEIPL ceased to be an ‘Indian company’ as per Sec. 2(26) of the Act and consequently ceased to be a ‘person’ for the purposes of Sec. 2(31) of the Act and accordingly, it cannot be construed as an entity envisaged and referred to in Sec. 144C(15)(b)(ii) of the Act. For the said reason, Sec. 144C(1) of the Act could not be made applicable in the absence of an ‘eligible assessee’ and thus, the entire scheme of Sec. 144C of the Act fails. In this manner, it has been sought to be pointed out that there was a lack of jurisdiction on the part of the Assessing Officer in making a draft assessment order under Section 144C(1) of the Act in the name of FEIPL in the absence of an ‘eligible assessee’.
11. It has also been emphasised that passing of a valid draft assessment order is mandatory for the Assessing Officer to assume jurisdiction under Section 144C(1) of the Act. It is pointed out that Sec. 144C of the Act impacts assessee also since it empowers the Assessing Officer to make variation in the income or loss returned that is prejudicial to the interests of the assessee. Sec. 144C of the Act also gives a right to the assessee to agitate the draft order before the DRP in case assessee is aggrieved with the variation so proposed. In other words, as per the Learned Representative, existence of a legally valid draft assessment order becomes the foundation for commencement of a valid DRP proceedings and the subsequent final assessment order. It has been emphasised that because of invalidity in assuming jurisdiction while passing of a draft assessment order, the entire assessment proceedings in the instant case have become invalid; in this context, reliance has been placed on the judgment of the Hon’ble Bombay High Court in the case of International Air Transport Association vs DCIT and ors., WP (L) No. 351 of 2016 to say that passing of a valid draft assessment order is a statutorily mandated requirement. Emphasising the importance of a valid draft assessment order, the Learned Representative referred to two set of legal propositions. Firstly, it was pointed out that where a draft assessment order was passed, but was not so required to be passed by law as the assessee was not an ‘eligible assessee’, the subsequent proceedings were held to be bad in law and liable to be quashed in the following decisions :-
i) Honda Cars India Ltd. vs DCIT, W.P. (C) No. 4262 of 2015 (Del.)
ii) Pankaj Extrusion Ltd. vs ACIT, 198 Taxman 6 (Guj.)
iii) ESPN Star Sports Mauritius S.N.C. ET Compagnie vs Union of India, W.P (C) No. 2384 & 2397 of 2015) (Del.)
12. On the other hand, the second proposition referred was where a draft assessment was indeed required to be passed on an ‘eligible assessee’ as per Sec. 144C(1) of the Act, but the same was not so passed, in the following decisions the entire assessment proceedings have been held to be invalid and liable to be quashed :-
i) Vijay Television (P.) Ltd. vs DRP (Writ Petition Nos. 1526 & 1527 of 2014 (Mad.)
ii) International Air Transport Association vs DCIT & Ors., Writ Petition (L) No. 351 of 2016 (Bom.)
iii) M/s. Zuari Cements Ltd. vs ACIT, Writ Petition No. 5557 of 2012 (AP)
13. Both the aforesaid propositions have been adverted to with the object of emphasising that existence of a legally valid draft assessment order is a pre-requisite for commencement of further legally valid DRP and final assessment proceedings.
14. In the above background, the Learned Representative submitted that even though the final assessment order has been passed in the correct name, but as the draft assessment order was invalid, the final assessment order is lacking in jurisdiction, which is liable to be quashed. According to the Learned Representative, the proceedings which are a nullity at the very initiation suffer from a jurisdictional defect and such nullity could encompass the entire proceedings; and, the same is beyond the purview of Sec. 292B or 292BB of the Act.
15. On the other hand, the Ld. DR appearing for the Revenue reiterated the stand of the DRP that passing of draft assessment order in the name of FEIPL, the erstwhile amalgamating company, was only a procedural mistake. In this context, our attention was drawn to the judgment of the Hon’ble Delhi High Court in the case of Sky Light Hospitality LLP vs ACIT, W.P No. 10870 of 2017 to contend that mentioning of erstwhile entity’s name in the draft assessment order is a mistake which is curable in terms of Sec. 292B of the Act. Apart therefrom, it has been contended that the draft assessment order cannot be equated with the final assessment order, and that the proceedings before the DRP are only a continuity of assessment proceedings and, therefore, any defect which has crept into the draft assessment order would not be fatal to the entire assessment proceedings. The Ld. DR also referred to the requirements of Sec. 170(2) of the Act, which refers to an ‘assessment’, and since the assessment is understood to be completed under Section 144C of the Act only on passing of the final assessment order; and, in the present case, such final assessment order has been passed in the name of the correct entity, i.e. FETSCS; therefore, according to the ld. CIT-DR, the objection raised by the assessee is not correct. In sum and substance, the stand of the Ld. DR is that the error, if any, in passing the assessment order in the name of a wrong entity does not affect the validity of the final assessment order which, in any case, has been passed in the name of the correct entity.
16. We have carefully considered the rival submissions. As our discussion in the earlier paras show, the plea of the assessee revolves around the validity of the Transfer Pricing order passed by the TPO under Section 92CA(3) of the Act, the draft assessment order passed under Section 143(3) r.w.s. 144C(1) of the Act; and, the validity of the consequent final assessment order based on the draft assessment order. While the stand of the assessee is that a mistake in passing of the draft assessment order in the name of a non-existent entity is vital, being a jurisdictional defect, leading to nullification of the entire assessment proceedings, the stand of the Revenue is that it is only a procedural mistake and the same has also been cured by the Assessing Officer at the stage of the final assessment order, which is passed in the name of the correct entity, i.e. the amalgamated company which was in existence.
17. Though in the earlier paras we have succinctly noted the factual matrix, but in order to recapitulate, the following discussion is relevant. The company, FEIPL amalgamated with FETSCS in terms of the order of the Hon’ble Bombay High Court dated 05.07.2013 whereby the scheme of amalgamation was approved with retrospective effect from 01.04.2012 and the effective date of merger was 01.10.2013. At the time of amalgamation, the assessment proceedings for the instant assessment year were being carried out before the Assessing Officer in the case of FEIPL consequent to issuance of notice under Section 143(2) of the Act dated 21.09.2012. It is also notable from the record that vide communication dated 01.10.2013, a copy of which is placed at pages 49-50 of the Paper Book, the Assessing Officer was informed about the amalgamation of FEIPL with FETSCS. Similarly, vide communication dated 28.01.2015, a copy of which is placed at page 125 of the Paper Book, the TPO was also informed about the amalgamation. Nevertheless, inspite of the aforesaid communications, the TPO passed the order under Section 92CA(3) of the Act dated 30.01.2015 and the Assessing Officer also passed the draft assessment order under Section 143(3) r.w.s. 144C(1) of the Act on 03.03.2015 in the name of FEIPL, the erstwhile amalgamating company. Thus, factually speaking, on the date of passing of the order by the TPO as well as the draft assessment order by the Assessing Officer, the company, FEIPL did not exist. It does not require any exposition of law to understand that consequent to amalgamation of two companies being approved by a High Court, the amalgamating company ceases to exist in the eyes of law, as has been explained by the Hon’ble Supreme Court in the case of Saraswati Industrial Syndicate Ltd. vs CIT, 186 ITR 278 (SC). In fact, to the similar effect is also the judgment of Hon’ble Delhi High Court in the case of Spice Entertainment Ltd. (supra).
18. In the above factual background, what we are required to consider is as to whether the draft assessment order passed under Section 143(3) r.w.s. 144C(1) of the Act in the case of a non-existent entity is without jurisdiction, as canvassed by the assessee. Furthermore, if we were to accept the aforesaid proposition, the next question would be as to whether the final assessment order passed by the Assessing Officer under Section 143(3) r.w.s. 144C(13) of the Act is also without jurisdiction, especially in view of the fact that the final assessment order has been passed in the correct name, i.e. in the name of the amalgamated entity.
19. Before we proceed further, it would be appropriate to briefly touch upon the scheme of reference to Dispute Resolution Panel contained in Sec. 144C of the Act. Prior to the introduction of Sec. 144C of the Act by the Finance (no.2) Act, 2009 with retrospective effect from 01.04.2009, if assessee was aggrieved by any of the additions/disallowances made by the Assessing Officer, an appeal would lie to the Commissioner (Appeals) under Section 246A of the Act. However, a new scheme of dispute resolution was brought into the Act by insertion of Sec. 144C of the Act in the context of ‘eligible assessee’ prescribed therein. Sec. 144C of the Act contains 15 subsections and provides for a mechanism for dispute resolution, powers of Dispute Resolution Panel, definition of Dispute Resolution Panel, eligible assessee, etc. In terms of the schematic arrangement prescribed in Sec. 144C of the Act, firstly a ‘draft proposed order of assessment’ would be passed in the case of an ‘eligible assessee’; thereafter such ‘eligible assessee’ is permitted within 30 days of receipt of the order, either to file objections before the DRP or accept such draft assessment order and communicate the same to the Assessing Officer. If the assessee opts for filing objections before the DRP, the DRP hears such assessee and gives directions to the Assessing Officer for completion of assessment. Thereafter, the Assessing Officer passes a ‘final assessment order’ within the period prescribed. If the assessee chooses to accept such draft assessment order or fails to communicate the Assessing Officer within one month, the Assessing Officer shall pass the final assessment order within the period prescribed therein. As a perusal of Sec. 144C(1) of the Act shows, the Assessing Officer is required to forward the draft of the proposed order of assessment only to an ‘eligible assessee’, and not to every assessee under the Act. The meaning of the expression ‘eligible assessee’ can be found in clause (b) to sub-section 15 of Sec. 144C of the Act, which reads as under :-
“(15) For the purposes of this section, –
(a) …….
(b) “eligible assessee” means, –
(i) any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of section 92CA; and
(ii) any foreign company.”
Ostensibly, the expression ‘eligible assessee’ has a restrictive meaning as it covers only two types of persons. Firstly, any person in whose name the TPO has proposed variation in the order passed under Section 92CA(3); and, secondly, any foreign company. In the instant case, FEIPL, the entity in whose name the draft assessment order has been passed, was not a foreign company and, therefore, it can be understood to be an ‘eligible assessee’ only if it falls within Sec. 144C(15)(b)(i) of the Act. Notably, sub-clause (i) of clause (b) of sub-section 15 of Sec. 144C of the Act refers to a ‘person’ in whose case variation is proposed by the order of TPO. The word ‘person’ has been defined in Sec. 2(31) of the Act to mean, inter-alia, a ‘company’, which in turn has been defined in Sec. 2(17) of the Act. Broadly speaking, a ‘company’ is understood to mean an ‘Indian company or any institution, association or body corporate registered/incorporated/declared’. It is also notable that the expression ‘Indian company’ has also been defined in Sec. 2(26) of the Act to mean ‘a company which is formed and registered under the Companies Act, 1956’. Therefore, on a conjoint reading of the above provisions, it is justifiably canvassed by the assessee before us that qua the instant case, the ‘eligible assessee’ under Section 144C of the Act has necessarily to be a ‘person’ which is an Indian company formed and registered under the Companies Act, 1956 in whose case the transfer pricing order has been passed proposing a variation. Notably, in the instant case, the erstwhile entity, FEIPL, was an Indian company, but it ceased to exist on 01.10.2013 pursuant to the scheme of amalgamation sanctioned by the Hon’ble Bombay High Court vide order dated 05.07.2013, i.e. before the date of passing of the transfer pricing order by the TPO under Section 92CA(3) of the Act in the name of FEIPL. Thus, as on the date of passing of order by the TPO on 30.01.2015, FEIPL did not exist as an Indian company under the Companies Act, 1956 as understood by Sec. 2(26) of the Act and consequently, there does not exist any ‘person’ as contemplated under Section 2(31) of the Act. Thus, it is a case where the TPO proposed variation in the case of a non-existent entity, which is not even understood as a ‘person’ under the Act. This also brings out that FEIPL could not be understood as an ‘eligible assessee’ in the eyes of law under Section 144C(15)(b)(i) of the Act; and, in any case, on the date of passing of order by the TPO, the existing entity was FETSCS, but it is nobody’s case that the TPO has passed any order in the name of FETSCS proposing any variation in the returned income. Therefore, in this background, it has to be inferred that in the absence of an ‘eligible assessee’ as understood for the purposes of Sec. 144C(15)(b)(i) of the Act, no draft of the proposed order of assessment could have been passed by the Assessing Officer under Section 144C(1) of the Act, much less in the name of FEIPL. Therefore, the draft assessment order passed in the present case in the name of erstwhile FEIPL is invalid in the eyes of law.
20. The next question which we are required to examine now is as to whether a valid draft assessment order is mandatory to assume jurisdiction under Section 144C of the Act. In other words, it would be appropriate to examine as to whether an invalid draft assessment order, as noted above in the earlier paras, can be construed as a jurisdictional defect meaning thereby that the same is incurable thereby making the subsequent assessment proceedings null and void in the eyes of law. The phraseology of Sec. 144C(1) of the Act itself shows that the Assessing Officer is required to forward a draft of the proposed order of assessment if he proposes to make a variation in the returned income or loss which is prejudicial to the interests of the assessee. Undoubtedly, the draft assessment order has legal connotations as it lays the foundation of any prospective reduction in the income of the assessee or creates a tax liability over and above the returned income. Thus, in that sense, it is not merely a procedural step in the assessment proceedings. Further, if we go a little deeper into the scheme of Sec. 144C of the Act and consider sub-section (3) of Sec. 144C of the Act, which reads as under
“(3) The Assessing Officer shall complete the assessment on the basis of the draft order, if…. ”,
it envisages that an assessment has to be completed on the basis of a draft assessment order, thereby making it apparent that the draft order is a core component of assessment. In fact, the assessee has an option to accept the draft order proposed by the Assessing Officer as per Sec. 144C(2) of the Act. In such a case, the Assessing Officer will proceed to pass the final assessment order under Section 143(3) r.w.s. 144C(13) of the Act without making any further variation in income/loss as assessed by him in the draft assessment order. In such a situation, the Assessing Officer would not have the option to amend the draft order of assessment proposed by him. Thus, looked at from the angle of the Assessing Officer, the draft assessment order is in fact the final assessment of income/loss of the assessee since only the assessee has been accorded a right under Section 144C(2) to file objections before the DRP. Further, the fact that the Assessing Officer does not have any right to appeal against the final assessment order passed under Section 143(3) r.w.s. 144C(13) further proves the point that the draft assessment order proposed is a final order of assessment from the point of view of the Department.
21. Thus, it can be concluded that Sec. 144C of the Act impacts the assessee as it empowers the Assessing Officer to make a variation in the income or loss returned which is prejudicial to the interest of the assessee. Against such variation proposed by the Assessing Officer in the draft assessment order, it is only the assessee who has been given a right to object. Hence, such a right must arise from a legally sustainable valid draft order. If under the provisions of the Act an authority is required to exercise power or to do an act in a particular manner, then that power has to be exercised and the act has to be performed in that manner alone and not in any other manner, a proposition which is fortified by the judgment of the Hon’ble Allahabad High Court in the case of Dr. Shashi Kant Garg vs CIT (2006) 285 ITR 158. In other words, the existence of a legally valid draft order becomes the premise or foundation for the commencement of a legally valid DRP proceedings and consequently, a legally valid final assessment order as per Sec. 143(3) r.w.s. 144C(13) of the Act. In view of the above, we hold that it is mandatory for the Assessing Officer to pass a legally valid draft assessment order and without the same, he cannot assume jurisdiction to proceed with the assessment under Section 144C of the Act.
22.Our above understanding stands fortified by the judgment of the Hon’ble Bombay High Court in the case of International Air Transport Association vs. DCIT & Ors., Writ Petition (L) No. 351 of 2016 (Bom. HC) which has clearly held that a draft assessment order under Section 144C(1) of the Act is ‘mandated’ before the Assessing Officer passes a final order under Section 143(3) of the Act in case of an ‘eligible assessee’, and the relevant extract of the judgment reads as under :-
“5. Therefore, in view of Section 144C(15) of the Act which defines eligible assessee to whom Section 144C(1) of the Act applies to inter alia mean any foreign company. Therefore, a draft assessment order under Section 144C(1) of the Act is mandated before the Assessing Officer passes a final order under Section 143(3) of the Act in case of eligible assessee. An draft assessment order passed under Section 144C(1) of the Act bestows certain rights upon an eligible assessee such as to approach the DRP with its objections to such a draft assessment order. This is for the reason that an eligible assessee’s grievance can be addressed before a final assessment order is passed and appellate proceedings invoked by it. However, these special rights made available to eligible assessee under Section 144C of the Act are rendered futile, if directly a final order under Section 143(3) of the Act is passed without being preceded by draft assessment order.
6. In the above view, the assessment order dated 23rd March, 2015 passed by the Assessing Officer for the assessment year 2012-13 is completely without jurisdiction. This is so as it has not been preceded by a draft assessment order. Hence, the foundational/basic order viz. the assessment order dated 23rd March, 2015 is set aside and quashed as being without jurisdiction. Consequent orders passed on rectification application as well as on penalty are also quashed and set aside being unsustainable.”
23. The Hon’ble Bombay High Court in the case of Dimension Data Asia Pacific PTE Ltd vs DCIT (WP No. 921 of 2018) (Bom HC) has also emphasised that it is imperative for the Assessing Officer to first pass a draft assessment order as per provisions of section 144C in the case of an eligible assessee and a final assessment order cannot be passed in absence of a draft assessment order since the assessee has been granted special rights to appeal under the scheme of section 144C of the Act. The relevant portion of the judgment reads as under :-
“7. We note that, it is an undisputed position before us, that the petitioner is a Foreign Company and an eligible assessee as defined in Section 144C(15)(b)(ii) of the Act. It has been held by this Court in International Air Transport Association (supra) that a Foreign Company is entitled to being assessed in accordance with Section 144C of the Act. It is the above Section 144C of the Act, which provides a separate scheme for the manner in which the Assessing Officer would pass assessment orders under the Act and a separate procedure to challenge an draft order i.e. before an assessment order which is subject to appeal under the Act is passed. The entire object is to ensure that the disputes of Foreign Companies are resolved expeditiously and final assessment orders are not passed without a re-look to the proposed order (draft order), if so desired by the Foreign Company. In essence, it obliges the Assessing Officer to first pass a draft of the proposed assessment order indicating the proposed variation in the income returned. This draft Assessment Order is to be passed under Section 144C(1) of the Act, which entitles an eligible assessee such as a Foreign Company to approach the DRP with its objection to the Draft Assessment order. This is so provided, so that an eligible assessee can have his grievance addressed before the final assessment order is passed. In case, an assessee does not object to the draft assessment order, then a final assessment order is passed in terms of the draft assessment order by the Assessing Officer. It is only on passing of the final assessment order that the assessee, if aggrieved by it, would be able to approach the appellate authorities under the Act. These special rights are made available under Section 144C of the Act to an eligible assessee such as the petitioner. Therefore, it cannot be ignored by passing an final order under Section 144(13) of the Act without preceding it with a Draft Assessment order as required therein.
10. Moreover, so far as a Foreign Company is concerned, the Parliament has provided a special procedure for its assessment and appeal in cases where the Assessing Officer does not accept the returned income. In this case, in the working out of the order dated 5th May, 2017 of the Tribunal results in the returned income being varied, then the procedure of passing a draft assessment order under Section 144C(1) of the Act is mandatory and has to be complied with, which has not been done.”
(underlined for emphasis by us)
24. A perusal of the aforesaid judgments of the Hon’ble Bombay High Court leads to an irresistible conclusion that the draft assessment order imbibes a jurisdictional power in terms of Sec. 144C(1) of the Act. Obviously, passing of draft assessment order creates a right upon an ‘eligible assessee’ to approach the DRP. In other words, the triggering of special provisions contained in Sec. 144C of the Act or the special right available to the ‘eligible assessee’ springs up only by virtue of passing of draft assessment order under Section 144C(1) of the Act on the ‘eligible assessee’. Thus, if such an order is passed on an assessee who is not an ‘eligible assessee’ as defined in Sec. 144C(15)(b)(i) of the Act, it would render the entire proceedings pursuant to such order null and void. Therefore, in the present case, as the draft assessment order has been passed in the name of FEIPL, which is a non-existent entity, and there is no draft assessment order passed in the name of FETSCS, the existing amalgamated company, there cannot be said to be a valid draft assessment order in existence. It is for this reason we are inclined to uphold the stand of the assessee that all the subsequent proceedings post the invalid draft assessment order are illegal, bad in law and void ab initio.
25. We also derive support from the judgment of the Hon’ble Madras High Court in the case of Vijay Television (P.) Ltd. VS DRP (supra) and from the Hon’ble Andhra Pradesh High Court in the case of M/s. Zuari Cements Ltd. (supra) where a draft assessment order was required to be passed as per law but was not passed and hence the final assessment order was held to be without jurisdiction. Further, even in cases where a draft assessment order was passed but it was not so required to be passed in law, since the assessee was not an ‘eligible assessee’, the entire assessment proceedings thereafter have been held to be bad in law and liable to be quashed by the Hon’ble High Courts in the cases of Honda Cars India Ltd. vs DCIT, W.P (C) No. 4262 of 2015 (Del.), Pankaj Extrusion Ltd. vs ACIT, 198 Taxman 6 (Guj.) and ESPN Star Sports Mauritius S.N.C ET Compagnie vs. Union of India, W.P (C) No. 2384 & 2397 of 2015 (Del).
26. We may now refer to the arguments set-up by the Ld. DR. Ostensibly, the Ld. DR admitted that draft assessment order being passed in the name of a non-existent entity is a mistake; but, the stand of the Ld. DR is that such a mistake is rectifiable in terms of Sec. 292B of the Act. In this context, we have already inferred in the earlier paras that the draft assessment order cannot be passed unless there is an ‘eligible assessee’ in terms of Sec. 144C(15)(b)(i) of the Act. We have also noted earlier that it is obligatory on the part of the Assessing Officer to pass a valid draft assessment order; failure to do so amounts to a jurisdictional defect, which in our view, cannot be cured under Section 292B of the Act or corrected by passing the final assessment order in the correct name, as canvassed by the Ld. DR. To emphasise, a draft assessment order in the name of an ‘eligible assessee’ provides the requisite jurisdiction to the Assessing Officer under Section 144C(1) of the Act. If there is a mistake while complying with such a jurisdictional requirement, the same cannot be termed as a procedural irregularity or mistake rectifiable under Section 292B of the Act. Thus, the said stand of the Ld. DR is liable to be rejected. We hold so.
27. Before parting, we may also refer to the reliance placed by the Ld. DR on the judgment of the Hon’ble Delhi High Court in the case of Sky Light Hospitality LLP (supra) to canvass that the mistake in the draft assessment order by passing it in the name of a non-existent entity is a procedural mistake. We have carefully perused the said decision and find that in the case before the Hon’ble High Court, there was a mistake by the Assessing Officer only while issuing the notice under Section 148 of the Act. The notice was issued in the name of the erstwhile amalgamating company, so however, all other documents, namely, tax evasion report, reasons to believe, approval by the Principal Commissioner, order under Section 127 of the Act, etc. correctly recorded the name of the amalgamated company, i.e. the entity which was in existence. In the background of such peculiar circumstances, the Hon’ble High Court took a view that mere incorrect mentioning of the name in the notice was a defect curable in terms of Sec. 292B of the Act. However, the facts in the case before us are in complete contrast. In fact, in the course of hearing, the Ld. DR was specifically asked to point out any instance in the present case where the Department had correctly issued any notice, etc. in the name of the successor company before passing of the transfer pricing order by the TPO under Section 92CA(3) of the Act or the draft assessment order by the Assessing Officer. Nothing was brought on record by the Department in this regard and, therefore, in our view, the ratio of the judgment of the Hon’ble Delhi High Court in the case of Sky Light Hospitality LLP (supra) is not attracted to the facts of the present case.
28. In conclusion, to summarise, we hold that since the Transfer Pricing order under Section 92CA(3) of the Act was passed in the name of the amalgamating company, FEIPL, which was not an ‘eligible assessee’ as per Sec. 144C(15)(b)(i) of the Act, the Assessing Officer did not have any jurisdiction under Section 144C(1) of the Act to pass a draft assessment order. Furthermore, the draft assessment order was also passed in the name of the amalgamating company, FEIPL which was a non-existent entity in the eyes of law on the date of passing of such order; thus, the draft assessment order passed in the present case is illegal and bad in law. Accordingly, the entire assessment proceedings based on such a draft assessment order are illegal and the same are hereby quashed.
29. Before we conclude, we may also discuss the reference made by the appellant to the provisions of Sec. 170 of the Act in order to demonstrate that the actions of the income-tax authorities (in the context of the order passed by the TPO and draft assessment order passed by the Assessing Officer) were not as per law. In this context, we may peruse Sec. 170 of the Act, which reads as under :-
“170.(1) Where a person carrying on any business or profession (such person hereinafter in this section being referred to as the predecessor) has been succeeded therein by any other person (hereinafter in this section referred to as the successor) who continues to carry on that business or profession, –
(a) the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession;
(b) the successor shall be assessed in respect of the income of the previous year after the date of succession.
(2) Notwithstanding anything contained in sub-section (1), when the predecessor cannot be found, the assessment of the income of the previous year in which the succession took place up to the date of succession and of the previous year preceding that year shall be made on the successor in like manner and to the same extent as it would have been made on the predecessor, and all the provisions of this Act shall, so far as may be, apply accordingly.”
30. Sub-section (1) of Sec. 170 of the Act prescribes that when a business or profession carried on by a person is succeeded by another person, who continues to carry on that business, the predecessor shall be assessed in respect of the income up to the date of succession and the successor shall be assessed in respect of the income after the date of succession in the particular previous year in which the succession has taken place. If the predecessor cannot be found, then, provisions of sub-section (i) would not apply, but provisions of sub-section (2) would apply.
31. A reading of the above provisions suggest that where the predecessor cannot be found, then, the assessment of income upto the date of succession and of the previous year preceding the year of succession, shall be made in the like manner and to the same extent as it would have been made on the predecessor and all the provisions of this Act shall, so far as may be, apply accordingly. Thus, Section 170(2) of the Act has clearly laid down the requirement of making an assessment on the successor in respect of the predecessor’s income, in the like manner and to the same extent as it would have been made on the predecessor, and all the provisions of this Act shall, so far as may be, apply accordingly. This position has also been upheld by the Hon’ble Delhi High Court in the case of CIT vs. Dimension Apparels Pvt. Ltd. (ITA No. 327-329 & 330, 332 of 2014) and also by our co-ordinate bench at Kolkata in the case of Pampasar Distillery Ltd. vs. ACIT (2007) 15 SOT 331 (Kol).
32. Accordingly, in the present case, as on the date of passing of the draft assessment order, the amalgamating company, FEIPL had amalgamated with and into FETSCS, the amalgamated company. Thus, on the date of such order, the amalgamating company could not be found/was not in existence. Accordingly, we are of the view that as per provisions of Section 170(2) of the Act, the Assessing Officer ought to have made the assessment in the name of amalgamated entity, in like manner and to same extent, had the assessment been made on amalgamating company, i.e. the transfer pricing order under Section 92CA(3) of the Act and the draft assessment order by the Assessing Officer ought to have been made on FETSCS, the amalgamated company. As regards the argument of the Ld. DR to the effect that the Assessing Officer has complied with Section 170 of the Act; according to the Ld. DR, the assessment referred to Sec. 170 of the Act means completion of assessment by passing a final order of assessment and the final assessment order has been passed in the name of FETSCS, the successor amalgamated company. In our view, the word ‘assessment’ under the Act cannot be interpreted so narrowly but has to be understood in each section with reference to the context in which it has been used, as held by the Hon’ble Supreme Court in the case of A. N. Lakshman Shenoy vs. ITO, (1958) 34 ITR 275 (SC). In fact, the Hon’ble Privy Council in the case of CIT v. Khemchand Ramdas, 4 ITR 414 (PC) has observed as under :-
“One of the peculiarities of most Income-tax Acts is that the word “assessment” is used as meaning sometimes the computation of income, sometimes the determination of the amount of tax payable, and sometimes the procedure laid down in the Act for imposing liability upon the tax-payer.”
33. Thus, the expression ‘assessment’ can also mean the procedures laid down in the Act, if the context so requires; and, qua Sec. 170 of the Act, the word ‘assessment’ has to be understood as procedure laid down therein. Accordingly, under Section 170 of the Act, the Assessing Officer was required not only to complete, but also to conduct assessment (i.e. following the prescription of Sec. 144C of the Act in this case) in the hands of the successor in the like manner and to the same extent as it would have been done in the hands of the predecessor. Ostensibly, in the present case, the TPO as well as the Assessing Officer have failed to do so by passing the transfer pricing order under Section 92CA(3) of the Act and the draft assessment in the name of FEIPL, a non-existent entity and hence the argument of the ld. DR that the provisions of Section 170 of the Act have been complied is untenable.
34. In view of the above, we hold that the entire assessment in the present case is vitiated in law and is hereby quashed. In the result, Ground of appeal no. 1 is allowed.
35. Since we have quashed the entire assessment, all other Grounds are not being adjudicated for the present, as they are rendered academic.
36. Resultantly, appeal of the assessee is allowed, as above.
Order pronounced in the open court on 11th July, 2019.
