Brief of the Case
ITAT Delhi held In the case of Honda Trading Corporation. vs, DCIT that despite the use of the word `may’, the time limit for passing the order by the TPO is mandatory, as in the otherwise situation of the TPO having been allowed more time by implication, say of three months or more, could at that time have frustrated the provisions of section 153 for the passing of the assessment order by the AO. Thus we have no hesitation in holding that the use of the word `may’ in sub-section (3A) of section 92CA is to be construed as `shall’, thereby making this time limit as mandatory and not directory. As such, it is held that the TPO is bound by the given time limit for passing of his order. When an order is passed without jurisdiction or beyond the permissible time, it is considered as null and void. The effect of passing a null and void order is that it is considered as non est, meaning thereby, that it entails all the consequences of not having been passed at all and is ignored for all practical purposes.
Facts of the Case
The assessee, Honda Trading Corporation, Japan, was established in Japan on 21.3.1972 to act as Trading Corporation for developing import/export of overseas/domestic products through international distribution networks of Honda Motor Co. Ltd. The assessee is basically engaged in supplying parts for motorcycle, automobile, power equipments, automotive equipments and machinery, non-ferrous metals, steel, plastic and warehouse operations
The assessee filed its return of income on 13.10.2010. Five international transactions were reported, being payment of Technical supervision fees, Sale of raw material and Sale of fixed assets to Honda Siel Cars India Ltd.; payment of Technical supervision fees to Rajasthan Prime Steel Processing Centre Pvt. Ltd.; and payment of Technical supervision fees to Honda Motorcycle & Scooter India Pvt. Ltd. All these five international transactions are with three Indian group companies. The AO made reference dated 22.3.2013 to the TPO for determining the arm’s length price (ALP) of the above referred international transactions.
The TPO, during the course of proceedings before him, made a reference dated 8.1.2014 through the Indian Competent authority for Exchange of Information under the Provisions of Exchange of Information Article Indo-Japan DTAA, seeking certain details necessary for completion of the determination of the ALP of the international transactions reported by the assessee. The Indian Competent authority forwarded such official request to the Japanese Competent authority vide its letter dated 24.1.2014. The desired information was received by the Director of Income-tax on 2.4.2014 vide letter of the Under Secretary dated 24.3.2014. Taking into consideration all the relevant material including the information so received from the Japanese Competent authority, the TPO passed order u/s 92CA (3) on 31.5.2014 proposing transfer pricing adjustment to the tune of Rs.2,15,36,967. Draft order was passed by the AO on 11.7.2014 proposing the computation of total income at Rs.7.27 crore, including addition on account of transfer pricing adjustment amounting to Rs.2.15 crore.
The assessee raised objections against the draft order before the Dispute Resolution Panel (DRP) filed on 13.8.2014, which were disposed of vide Direction u/s 144C (5) dated 24.12.2014. The final assessment order was passed by the AO on 29.1.2015 determining total income at Rs.7.27 crore, which also includes addition of Rs.2.15 crore on account of transfer pricing adjustment. The assessee has set up a case that the final assessment order be declared null and void on the ground that the draft order of the AO as well as the order passed by the TPO u/s 92CA(3), were passed beyond the time limit prescribed under the Act.
Contention of the Assessee
Time limit for passing of the draft order by AO
The ld counsel of the assessee submitted that the draft order was passed by the AO on 11.7.2014, which is barred by limitation in terms of the time limit given in section 153(1). He argued that since the draft order in this case was passed by the AO on 11.7.2014, the same is barred by the time limit provided u/s 153, which expired on 7.6.2014.
Time limit for passing of order by the TPO
The ld counsel of the assessee submitted that the TPO passed order on 31.5.2014, which was time barred and, hence, the same should be annulled leading to the quashing of the final assessment order.
Contention of the Revenue
Time limit for passing of the draft order by AO
The ld counsel of the revenue submitted that the time limit for the purpose of section 153 is to be reckoned from the date on which the information is received by the Principal Commissioner or Commissioner and not the Director of Income-tax, as has been the case under consideration.
Further he contended that the `period of one year’ as stipulated in clause (viii) of the Explanation 1 to section 153, should be considered for the purposes of exclusion and not the period between the date on which first reference was made and the date on which the information was received by the DIT. The reason advanced in support of this argument was that since the Japanese Competent authority sent incomplete information, hence the date of receipt of information by the DIT should be ignored and the extended period of one year should be taken into consideration. It was put forth that if the such period of one year is taken into consideration in terms of clause (viii) of the Explanation 1 to section 153, then the time limit will get extended to 31.3.2015 and hence the draft order as well as the final assessment order and also the order of the TPO will be saved by the limitation.
He also contended that the date of draft order is irrelevant for the purposes of section 153 and the limitation contained in this provision should be seen qua the date of passing of the final assessment order.
Time limit for passing of order by the TPO
The ld counsel of the revenue contended that the use of the word `may’ in this provision for the passing of the order by the TPO within a period of 60 days of the limitation set out in section 153 indicates that the adherence to this time limit is not mandatory. He contended that even if the order is passed after the period of 60 days from the period of limitation as given u/s 153, still it would be treated as having been passed within time.
Held by ITAT
Time limit for passing of the draft order by AO
An overview of section 153(1)(a) read with 3rd proviso and also clause (viii) to the Explanation to section 153, brings out that in a case where reference is made by the AO to the TPO for determination of the
ALP of international transactions undertaken by the assessee, who, in turn, also seeks information from the Competent authority of another country through the Indian competent authority, the period of limitation for passing of the order is three years from the end of the assessment year as increased by the period commencing from the date on which reference is made by the Indian competent authority for exchange of information ending with the date on which the information requested is last received by the Principal Commissioner or the Commissioner, save and except where such period is more than one year. As the A.Y. under consideration is 2010-11, a period of three years from the end of the relevant assessment year, gives us the date of 31.3.2014. When we further add a period of 68 days ( 30 days of April, 2014 + 31 days of May + 7 days of June, 2014), the date of limitation as per section 153 gets determined at 7th June, 2014.
We are unable to countenance the contention of the ld. DR urging the consideration of an extended period of one year for the purposes of exclusion from the time limit as given u/s 153. It is manifest from the language of the provision that the such period commences with the date on which a reference or first of the references for exchange of information is made and ends with the date on which the information requested is last received by the Principal Commissioner or Commissioner or a period of one year, whichever is less. It means that if the desired information is received in different installments or the desired information is incomplete in the first go and again a request is made for sending the complete information, which is received later on, then the terminating point will be the date on which the information complete in all respects is last received. Where the TPO gets satisfied with the information supplied by the Competent authority of the other country or if he is unsatisfied with the information but chooses not to further pursue the matter with such Competent authority, then the period liable to be excluded ends with the receipt of last information by the Commissioner.
Nature of order u/s 153, whether it is draft order or final assessment order
An assessment can be said to be completed when an assessment order is passed determining the total income and also the amount of tax payable or refundable, as the case may be. The Hon’ble Supreme Court in Kalyan Kumar Ray vs. CIT (1991) 191 ITR 634 (SC) has held that an assessment order involves determination of income and tax.
Under the transfer pricing provisions, the term `draft order’ has been statutorily explained in section 144C(1), which provides that: `The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment to the eligible assessee 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 above provision not only reveals that a `draft order’ is nothing but `a draft of the proposed order of assessment’, but also that it is forwarded `in the first instance’ if the AO ‘proposes to make …. any variation in the income or loss returned which is prejudicial to the interest of such assessee’ and further it does not finally determines the tax liability along with the amount of tax due or refundable.
Further Section 144C deals with: ‘Reference to dispute resolution panel.’ Sub-section (2) of section 144C provides that on receipt of the draft order, the eligible assessee shall within 30 days of receipt by him of the draft order either file his acceptance to the variations in the income or loss proposed in such draft order with the AO or file objections, if any, to such variations with the DRP and also the AO. Sub-section (3) of section 144C provides that the AO shall complete the assessment on the basis of the draft order, if either the assessee intimates to him the acceptance of variations or no objection is received within the stipulated time. The time limit for passing of the assessment order in such circumstances has been set out in sub-section (4) of section 144C. This sub-section mandates that the AO shall pass the assessment order under sub-section (3) within one month from the end of the month in which either the acceptance is received to the proposed variations in the income as per the draft order or the period of filing objections under sub-section (2) expires.
It is clear that where a draft order has been passed, then in all the possible options available with the assessee, that is, either accepting draft order or challenging it before the DRP or proposing to challenge the final order before the CIT (A), the final assessment order is invariably required to be passed within the time limit as prescribed under either sub-sections (4) or (13) of section 144C. Thus it is palpable that a draft order has to be necessarily followed by a final assessment order, which eventually determines the total income along with the computation of tax payable or refundable.
This demonstrates that all orders passed prior to the final assessment order are interim in nature, namely, an order passed by the TPO cannot be characterized as completion of assessment as it simply determines the ALP of international transactions undertaken by the assessee; a draft order passed by the AO can also not be considered as completion of assessment as it is simply `a draft of the proposed order of assessment’; and the direction issued by the DRP also cannot be equated with the completion of assessment, which simply decides on the disputes raised by the assessee against the draft order. As section 153 refers to the completion of assessment and passing of the assessment order, the natural corollary which follows is that it has no relation whatsoever with the passing of draft order.
In fact, the term `draft order’ is totally absent in section 153, which indicates that it has been treated as alien to section 153. If we accept the contention of the ld. AR that after the introduction of section 144C, the time limit provided u/s 153 applies only to the draft order, it would amount to re-writing section 153 which falls in the exclusive domain of the Parliament. We are unable to read the term `draft order’ interchangeably with the term `assessment order’ in the context of section 153 or practically for any other purpose.
On argument of the ld. AR that if the time limit prescribed u/s 153 is considered as relating to the completion of assessment, this will leave no other provision setting out the time-frame for passing of the draft assessment order, we find that mere fact that no time limit has been prescribed for the passing a draft order, does not and cannot mean that the time limit for the completion of assessment given u/s 153 should be inferred as that for passing a draft order. It is a settled legal position that where no time limit is prescribed for passing an order, then such order should be passed within a reasonable time. As there is no time limit prescribed for the passing of the draft order, such order is also required to be passed within a reasonable time. We find that the information from the Japanese Competent authority was received by the DIT on 24.1.2014. By no standard, the passing of the draft order on 11.7.2014, that is, within a period of less than six months from the date of such receipt of information, can be construed as having been passed in an unreasonable time.
Turning to the facts of the instant case, we find that the AO passed the final assessment order on 29.1.2015, which is well within a period of one month from the end of the month in which direction was received from the DRP on 24.12.2014. As such, we hold that the final assessment order passed by the AO is within the time prescribed u/s 144C (13). Further since the draft order has also been passed within a reasonable time, the same is also not barred by limitation. The contention of the ld. AR that the draft order passed in this case was barred by limitation, is therefore, found to be without any substance and hence repelled.
Time limit for passing of order by the TPO
As per sub-section (3) of section 92C, the TPO is required to pass the order determining the ALP of the international transactions. No time limit was initially given for the passing of order by the TPO. It is only by the Finance Act, 2007, that sub-section (3A) was inserted providing time limit for the passing an order by the TPO. Now, where a reference is made to the TPO after 1.6.2007, an order under sub-section (3) may be made at any time before 60 days prior to the date on which the period of limitation referred to in section 153, or, as the case may be, in section 153B, for making the order of assessment or re-assessment, etc., expires.
There is no doubt that the legislature has used the word `may’ in sub-section (3A) of section 92CA. There is further no doubt that the ambit of the word `may’ is different from the word `shall’. Whereas, ordinarily the use of the word `shall’ signifies mandatory compliance, the word ‘may’ signifies directory compliance. But at times, the word `may’ can also be read as `shall’ and vice versa. In fact, all depends upon the context and the background of the provision in which such a word is used.
Reverting to section 92CA, we find that the Finance Act, 2007 inserted sub-section (3A) carrying the time limit of sixty days for passing of the order by the TPO before the expiry of time limit for completion of assessment by the AO u/s 153. Despite the use of the word `may’, the time limit for passing the order by the TPO is mandatory, as in the otherwise situation of the TPO having been allowed more time by implication, say of three months or more, could at that time have frustrated the provisions of section 153 for the passing of the assessment order by the AO. Thus we have no hesitation in holding that the use of the word `may’ in sub-section (3A) of section 92CA is to be construed as `shall’, thereby making this time limit as mandatory and not directory. As such, it is held that the TPO is bound by the given time limit for passing of his order.
In the present case, It has been noticed above that the time limit as per section 153(1) read with the third proviso and clause (viii) of the Explanation to the section, comes at 7th June, 2014. Period of 60 days prior to such time limit coming as per section 153, available with the TPO for passing his order, comes to an end on 8th April, 2014. As against this, the order was actually passed by the TPO on 31st May, 2014. Thus, the order passed by the TPO is patently time barred.
The Hon’ble Madras High Court in Vijay Television (P.) Ltd. vs. DRP (2014) 369 ITR 113 (Mad) considered a case in which the assessment order was directly passed without routing through draft order or DRP. The Hon’ble Court held it to be a non curable defect and resultantly the assessment was quashed. It was held that when there is an omission on the part of the AO to follow the mandatory procedure prescribed under the Act, such an omission cannot be termed as a mere procedural irregularity and it cannot be cured.
Extantly, we are confronted with a situation in which the draft order has been passed in time but the lapse has come in the passing of the order by the TPO. The consequence of the above scenario is that the passing of a valid and properly timed draft order cannot lead to the setting aside of the final assessment order. However the passing of the time barred order by the TPO, which is again a mandatory procedure prescribed under the Act, would be a non-curable defect, having the consequence as if it was not passed. In such circumstances, though the final assessment order would be saved but the addition on account of transfer pricing adjustment arising from the determination of the ALP of the international transactions by the TPO as emanating from his time barred order, would be unsustainable.
Accordingly appeal of the assessee partly allowed.