Draft Assessment Orders in Transfer Pricing Cases: Legal Obligations under Section 144C

Section 144C of IT Act, 1961 was brought through Finance Act, 2009 & introduced for orderly assessment with respect to the international tax case along with transfer pricing. Under this after serving a notice under it a draft assessment order would be given under which recipient shall receive chance of representation during dispute redressal for assessment before such assessment being made final. This section play very crucial role in balancing right of taxpayer & revenue authority by embedding procedural safeguards. Here in this article we will explain detailed explanation of key provision elaborated.

Key Provisions u/s. 144C

1. Eligibility for this section

This 144C apply to eligible assessee only which includes as follows :

Foreign company.

• Assessee with transfer pricing adjustment u/s. 92CA.
• Nonresident & other cases involving international taxation issue.

2. Definition of Eligible Assessee:

According to u/s. 144C(15) eligible assessee is:

• Any person in whose case variation arise due to Transfer Pricing Officer’s order u/s. 92CA(3).
• Case where AO makes adjustment to the income / loss prejudicial to

3. Draft Assessment Order (DAO):

• Mandatory Issuance:

U/S 144C(1) states that it become  AO’s statutory obligations to pass  Draft Assessment Order if there is any disparity in  returned income / loss of the eligible assessee which causes prejudice.

• Purpose of DAO:

The AO provides the assessee with  option of raising objections on those discrepancy before finalization of assessment.

It is initial process/procedure in assessment under such circumstances.

• Importance of Compliance: According to judicial precedent like Principal CIT v. Headstrong Services India Pvt. Ltd failure to issue  DAO can lead to jurisdictional error thus rendering  final assessment invalid.

4. Filing Objection:

• Choice of Appeal Path:

Upon receiving the DAO the assesse has two option:

1. Objection has to file before Dispute Resolution Panel within 30 days.

2. Select usual appeal channel by filing appeal with Commissioner of Income Tax.

5. Implication of Non Filing:

• If the assessee fail to file objection before DRP in prescribed time AO proceeds to finalize  assessment on  basis of DAO.
• The final assessment can later challenge by assessee before CIT(A).

6. Dispute Resolution Panel (DRP)’s Task:

i. Composition:

The DRP consist of 3 high ranking officer including Principal Commissioners / CIT appointed u/s. 144C(15).

ii. Mandate: The DRP scrutinize the objection filed by assessee against DAO.

iii. Binding Direction: u/s.144C(5):

a. DRP offer binding direction to AO on adjustment proposed in DAO.

b. AO is bound to follow said instruction while finalizing assessment.

iv. Opportunity to the Assessee:

It provide structured platform for  assessee to present their objection & ask for redressal of grievances relative to transfer pricing adjustments or other variations.

7. Final Assessment Order:

i. Finalization Based on DRP Direction:

• • AO include direction of DRP in final assessment order if assesse raises objection. This is provided u/s.144C(13).
  • AO has no discretion to ignore direction issued by

ii. Finalization Without Objections:

• • If assessee doesn’t file objection within prescribed time then DAO is considered as final assessment order.
  • The assessee is permitted to bring order before appeal authority such as CIT or ITAT.

iv. Section 144C’s Importance:

8. Safeguard of Taxpayer Rights:

DAO must ensure that taxpayer is informed of proposed adjustment & given chance to respond thereby keeping principle of natural justice.

9. Dispute Resolution’s Overview:

DRP system avoid delayed lawsuit by settling dispute at  assessment step itself.

10. Jurisdictional Mandate:

Procedural requirement u/s. 144C is mandatory. Any deviation such as skipping DAO stage automatically make assessment invalid according to t judicial decision GE Oil and Gas

11. Swift Resolution:

DRP search for to bring dispute to expedite resolution thus improve the load on appellate authorities & court. 1.India Pvt Ltd v. ACIT 2. Zuari Cement Ltd. v. ACIT

12. Judicial Pronouncement:

• Case Study: GE Oil and Gas India Private Ltd. v. ACIT

Citation: 436 ITR 168 (Madras HC)

Facts of the Case:

A. Background:

• GE Oil % Gas India Pvt.Ltd. transfer pricing adjustment were made  AO u/s. 92CA of  T act.
• Final assessment order issued by AO directly without first having passed DAO u/s. 144C(1) of I.T.Act.

B. Dispute:

• Challenge final assessment order based on no obedience to mandatory procedure mandated u/s. 144C(1).

Refutations of DAO caused assessee to lose opportunity to objection made for alteration before DRP.

C. Legal Case:

• The AO’s acts is said to be violative of provision u/s. 144C(1) whereby final assessment order is invalid.

Submission by the Assessee:

i. NonObjection on part of the AO Section 144C(1):

• • Assessee contended that Non Issuance of DAO by AO was not practical fault but it was jurisdictional flaw.
  • Section 144C(1) is proviso which deal with Variations prejudicial to eligible assessee’s interest mandates issuing of

ii. Denial of Statutory Rights:

Missing DAO deny the assessee  right to file objection before  DRP which is  important procedural protection to eligible assessees.

D. Irreparable Harm:

The assessee lost the opportunity to contest proposed adjustment at earlier stage by bypassing  mandatory process which led to irreparable harm.

E. Jurisdictional Defect:

Assessee argued that final assessment order was abolished because  AO had no authority due to non compliance with legal provision.

♦ Observations by the Assessing Officer:

1. Justification of Actions:

The AO justified omission of DAO by raising administrative constraint & time limits to complete assessment.

2. Substantive Compliance Argument: AO submit that the final order for assessment dealt with adjustment & went on to give detailed reasoning which satisfy requirement of law on substantive compliance.

3. No Prejudice:

The AO argued that absence of  DAO did not prejudice the assessee since the final assessment order could be challenged through appellate remedies.

♦ Observations by the Commissioner of Income Tax :

1. Support for AO’s Actions:

The CIT supported AO’s order stating that  final assessment order was in accord with  substantive provisions of  law.

2. Practical Irregularity:

The CIT accepted procedural error but contended that it didn’t invalidate  entire assessment.

3. No Effect on Tax Computation:

The CIT further argued that  issuance of  DAO did not impact computation of taxable income or the adjustments made.

♦ Tribunal’s Decision:

1. Non-Compliance with Section 144c(1):

Held that omission by AO to issue DAO is mandatory requirement u/s. 144C(1).

2. Jurisdictional Mistake:

Held that it is not procedural illegality but  jurisdictional mistake making  final assessment order void.

3. Void Final Assessment Order:

The final assessment order was declared invalidate by the Tribunal because the AO failed to strictly follow the requirements of the law.

Judicial Judgment: Madras High Court:

1. Compulsory Provision:

• • Court said that above 144C(1) impose mandatory obligation on AO to issue DAO in cases involving entitled assessees.
  • The use of expression in first instance in  section brings home  point that the DAO is  sine qua non for  final assessment order.

2. Jurisdictional Mistake:

Court said that  failure on part of AO to fulfill with Section 144C(1) was jurisdictional mistake& not  procedural lapse or irregularity.

3. Effect of Non Compliance:

Court noted that lack of DAO meant that  assessee was deny  right to raise objection to the adjustment before the DRP which is  substantive right under I.T Act.

4. Incurable Defect:

Court held that the defect couldn’t be cured by subsequent action allowing assessee to challenge  final assessment order through other appellate remedy.

5. Abolition of Final Assessment Order:

Court held that  final assessment order was void ab initio on  ground of want of jurisdiction.

♦ Key Takeaway:

1. Significance of DAO Section 144C(1) stipulate that in case of eligible assessees, DAO is required to be issued & in absence of which final assessment order is liable to be cancelled.

2. Substantive Right of Assessee: Vital opportunity for objection under DAO is offered to assessee thus ensuring application of principle of natural justice

3. Jurisdictional Nature of Defect: It is jurisdictional defect that can’t be disregarded by subsequent action or on substantive compliance with said section 144C(1).

4. Binding Judicial Precedent: Judgment set precedent for future cases under strict application of procedural safeguard while making assessment involving International Taxation & Transfer pricing.

5. Effect on Tax Administration: Rule highlight imperative role of tax administration in strictly following statutory for assessment process ensuring process is fair & transparent.

♦ Case Study: JCB India Ltd. vs DCIT

Citation: 61 ITR 148 (Delhi HC)

Fact of the Case:

1. Background:

• • The JCB India Ltd. where AO made substantial transfer pricing adjustments on basis of  report by  Transfer Pricing Officer (TPO)  u/s. 92CA of the I.T Act.
  • AO issued final assessment order directly without passing DAO as is mandate u/s. 144C(1) of T Act.

2. Nature of the Dispute:

• • The assessee contested validity of final assessment order contending that AO was not able to satisfy mandatory provision of issuance of DAO.
  • It was highlighted that non oblivion of Section 144C(1) render assessment proceedings invalid.

3. Legal Challenge:

• • The Delhi HC faced central question whether AO’s action of not passing DAO was only procedural fault or jurisdictional infirmity hence final assessment order became void.

♦ Submission by the Assessee:

1. Mandatory Requirement of DAO:

• • Assessee brought forth the contention that Section 144C(1) demand the issuance of a DAO in the first instance after which the assessee should be given opportunity to object before DRP
  • Failure to do so would commit breach of procedural safeguards meant for ensuring that assessment would be fair.

2. Jurisdictional Defect:

• • The assessee contended that the non inclusion of DAO is not procedural irregularity but jurisdictional infirmity that vitiate entire assessment process.

3. Loss of Substantive Rights:

• • The assessee pointed out that in the absence of DAO it lost its legal right to file objection before DRP which is most important forum to redress transfer pricing dispute.

4. Denial of Natural Justice:

• • The assessee argued that bypassing DAO stage violated principle of natural justice as they were denied opportunity to address variation proposed by AO.

Observations by the Assessing Officer:

1. Direct Issuance of Final Order:

• • AO passed final assessment order on basis of TPO’s report without giving opportunity to the assessee to respond through DAO.

2. Substantive Compliance Argument:

• • AO submitted that order of final assessment contained enough detail of proposed adjustments & that all grievances of assessee could be redressed through remedie under appeal.

3. Time Constraint:

• • The AO has cited administrative pressure & the constraint of time to complete assessment within statutory timeline as reason for omission.

Observations by the Commissioner of Income Tax:

1. Support for the AO’s Actions:

• • The AO’s order supported by the CIT, holding that final assessment order satisfied the substantive test of the Act despite procedural fault.

2. Procedural Lapse vs. Jurisdictional Error:

CIT Said that failure to issue DAO was mere procedural lapse without resulting in invalidation of assessment proceeding.

3. Tax Computation Focus:

The core issue according to CIT was that absence of DAO didn’t have any bearing on taxable income computation.

Tribunal’s Decision:

1. Violation of Section 144C(1):

• • Held that mandatory requirement u/s. 144C(1) are violated if DAO is not issued more so when very aim is to safeguard rights of eligible assessees.

2. Jurisdictional Nature of the Defect:

• • The Tribunal held that the omission of DAO would amount to jurisdictional defect that nullifies & make invalid final assessment order

3. Invalidating the Final Order:

• • The Tribunal declared final assessment order void ab initio because of AO’s failure to follow statutory procedure.

Judicial Judgment: Delhi High Court:

1. Mandatory Nature of Section 144C(1):

• • The Delhi HC held that Section 144C(1) places binding obligation on AO to pass DAO initially for assessees who are eligible.

2. Jurisdictional Mistake:

• • Court held that not following Section 144C(1) is not procedural failure but jurisdictional error which render the final assessment order valueless.

3. Consequences of Non-Compliance:

• • The Court underline that bypassing DAO stage has deprived assessee of their statutory right to object to adjustments before the DRP which is a serious violation of principle of natural justice.

4. Incurable Defect:

• • Therefore defect cannot be cured by subsequent action such as corrigendum or allowing assessee to file appeal before CIT(A).

5. Quashing of Final Order:

• • The HC invalidate final assessment order declaring it void ab initio due to lack of jurisdiction

Key Takeaways:

1. Importance of Draft Assessment Order:

• • Section 144C(1) require that DAO be issued as first step in assessment process for eligible assessees. In case of any deviation final assessment order is rendered invalid.

2. Substantive Rights of Assessee:

• • The DAO afford the assessee vital opportunity to raise objection before DRP. It ensure that principles of natural justice are complied with.

3. Jurisdictional Nature of the Defect:

• • The non compliance with issuance of DAO amount to jurisdictional defect rather than procedural irregularity. It goes to the root of the entire assessment proceedings.

4. Binding Precedent:

• • It reaffirm that Section 144C(1) is mandatory provision and has binding precedential value in such future cases which will otherwise have same kind of procedural defaults.

5. Administrative Responsibility:

• • It reminds tax authorities that procedural step can’t overlook but need strict observance to them making assessment process fair & transparent.

♦ Other case laws as referred:

• Shell India Market Pvt. Ltd. v. Additional CIT (2021, Bombay High Court)
• ITO v. M. Pirai Choodi (Supreme Court): Highlighted the significance of adhering to statutory provisions and procedural safeguards.
• J.K. Synthetics Ltd. v. CTO: Stressed the principle that procedural safeguards must align with legislative intent.
• CIT v. Turner International India (P.) Ltd ,
• CIT v. Citi Financial Consumer Finance India (P.) Ltd

Conclusion:

The important safeguard in assessing transfer pricing cases is Section 144C I.T Act. It ensure fairness & transparency in assessment making prejudicial adjustment. The provision compels draft assessment order by which valuable right is given to assessee to object to DRP.

Judicial pronouncements such as Shell India Market Pvt. Ltd. reveal that if such mandate has not been complied with then it amounts to jurisdictional error making the assessment void.

Adhering to Section 144C for taxpayers as well as revenue authorities is integral component in trust as well as fairness of tax administration.

Important Takeaways:

1. Mandatory Compliance: 

• • Section 144C states that issuance of draft assessment order is compulsorily needed and cannot be evaded.

2. Jurisdictional Safeguard:

• • Lack of jurisdiction ab initio makes the assessment null and void in case there is a failure to comply

3. Rights of Assessee:

• • The provision safeguards the assessee’s right to object before the DRP, ensuring fairness.

4. Judicial Precedents:

• • Cases like Shell India Market Pvt. Ltd. emphasize the mandatory nature of Section 144C and set strong precedents for compliance.

5. Natural Justice:

• • The draft order stage aligns with the principles of natural justice, providing a fair opportunity for the assessee to contest adjustments.

6. Revenue Implications:

• • Bypassing the draft order stage can lead to invalid assessments, causing delays and legal complications.
  • Section 144C reflects and embodies procedural safeguards in assessments so that the process will be transparent and equitable.