In a significant ruling on Section 144C of the Income-tax Act, High Court of Punjab & Haryana at Chandigarh Bench has held that an assessee covered under an Advance Pricing Agreement with no TPO variation is not an “eligible assessee”, and the AO has no jurisdiction to pass a draft assessment order. The Court further held that Section 292B of the Income Tax Act cannot be invoked to validate a fundamentally illegal order, and the petitioner was not an “eligible assessee” under Section 144C(15)(b) because the TPO had not proposed any variation to the return, given that the petitioner was covered under an Advance Pricing Agreement with the CBDT. Consequently, the High Court held that the AO had no jurisdiction to pass the draft assessment order under Section 144C(1).
The Court further held that the revenue’s attempt to treat the draft order as a final assessment order under Section 143(3) by alleging “human error” was unsustainable, as the order itself expressly stated it was a draft order and that no demand or penalty notice was being issued. Section 292B could not be invoked to validate a fundamentally illegal order, and no subsequent order acknowledging any mistake had been passed. In the absence of a final assessment order under Section 143(3), the consequent demand under Section 156 and penalty notice under Section 271(1)(c) were held to be unsustainable in law.
The Division Bench comprising Justice Deepak Sibal and Justice Rupinderjit Chahal observed that a perusal of the assessment order dated Dec 28, 2019 clearly revealed that it was a draft assessment order. The addition of income was only a proposal, and the operative part of the order clearly mentioned that since it was only a draft order, no consequent demand or penalty notices were being issued. The order further informed the petitioner of its right to file objections under Section 144C(2) or accept the order so that a final assessment order could thereafter be passed.
The Court noted that Section 143(3) of the Act clearly provides for the determination of a sum payable by the assessee through passing of a final assessment order, which was missing in this case. The Court rejected the revenue’s argument that the draft order was a result of a mistake due to pressing of a wrong tab by the AO at the time of uploading, because the order itself started with the heading “Draft Order u/s 144C of the Income-tax Act” and the operative part clearly mentioned that the additions were only by way of a proposal.
The Court further observed that even if there was a mistake, it should have been corrected through a subsequent order acknowledging such mistake, which was never done. Therefore, Section 292B of the Act would have no application to the petitioner’s case. The Court also noted that the petitioner was admittedly not an “eligible assessee” in terms of Section 144C(15)(b) of the Act because there was no variance found by the TPO in the petitioner’s income-tax return with regard to international transactions with its associate enterprise. Thus, in the petitioner’s case, there was no occasion to pass a draft assessment order under Section 144C(1) of the Act.
Briefly, the petitioner, a wholly-owned subsidiary of M/s Second Foundation Inc, a company incorporated in the United States of America, is primarily engaged in providing software development services to its US parent company from its units in India. On April 29, 2017, the petitioner filed its income-tax return for the assessment year 2016-17 declaring a total income of Rs. 62.14 crores. Since the return involved international transactions with a foreign associate enterprise, the Assessing Officer referred the matter to the Transfer Pricing Officer to determine the arm’s length price of such transactions. The TPO later passed an order finding no variance in the petitioner’s income-tax return because the petitioner had entered into an Advance Pricing Agreement with the Central Board of Direct Taxes on Feb 06, 2017, which covered the assessment year in question.
After considering the TPO’s order, the AO passed a draft assessment order under Section 144C read with Section 143(3) of the Income-tax Act, proposing to add Rs. 13.73 crores to the petitioner’s declared income on account of disallowance of foreign travelling expenses. The draft order clearly stated that it was only a draft order, no demand notice or penalty notice was being issued, and the addition was only a proposal. When the petitioner challenged this draft order, the revenue’s counsel stated that the draft order was actually the final assessment order under Section 143(3). The petition was disposed of with liberty to the petitioner to challenge any subsequent order, and no subsequent assessment order was passed.
However, on Feb 28, 2020, the petitioner received a demand notice under Section 156 of the Act for Rs. 4.37 crores and a penalty notice under Section 274 read with Section 271(1)(c). On Feb 29, 2020, the petitioner was informed that a final assessment order dated Feb 28, 2020 had been passed. When the petitioner asked for a copy, the revenue later informed it that no such order existed and that the draft order dated Dec 28, 2019 was the final assessment order. The petitioner then challenged the assessment order, the demand notice, and the penalty notice through the present petition.
