Draft Assessment Order Mandatory u/s 144C of Income Tax Act for ALP Variation : Karnataka HC Upholds ITAT Decision Declaring Order Void [Read Order]

The Revenue-appellant challenged against the order passed by ITAT for the Assessment Year 2010-11 dated 08.02.2023. In this case,Alpha Elsec Defence and Aerospace Systems Pvt.Ltd., respondent-assessee,was a joint venture between M/s. Alpha Design Technologies Pvt. Ltd. and M/s. ITL Optronics of Israel, engaged in manufacturing, assembling, and testing opto-electronic equipment. It filed its return of income on 27.09.2010, declaring a loss of ₹9,60,93,512.

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The Assessing Officer (AO )selected the case for scrutiny and referred it to the Transfer Pricing Officer (TPO), who, on 29.09.2016, made an adjustment to the ALP. Based on this, the AO issued a draft assessment order. The assessee filed objections before the Dispute Resolution Panel (DRP), which issued directions on 25.11.2014. A final assessment order was then passed on 30.12.2014.

The assessee appealed before the Tribunal, which, on 27.11.2015, set aside the ALP determination for three comparables and remanded the matter. The TPO re-determined the ALP on 29.09.2016, and the Assessing Officer passed an order on 22.11.2016 giving effect to it. The assessee challenged this before the Commissioner of Income Tax (Appeals)[CIT(A)], who upheld the TPO’s findings.

The assessee then filed a further appeal before the tribunal, which held that the order dated 22.11.2016 was void ab initio as the AO failed to issue a draft assessment order as required under Section 144C of the Income Tax Act.

The revenue counsel argued that the Tribunal’s order dated 27.11.2015 had given clear directions, and the TPO only followed them without making any fresh assessment. Therefore, he claimed the AO was not required to issue a draft assessment order.

The assessee’s counsel argued that the tribunal had asked the TPO to reconsider three comparables, and the TPO re-determined the ALP, which differed from the assessee’s figures. She submitted that since there was a variation, Section 144C(1) required the AO to issue a draft assessment order.

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She further stated that, as no draft assessment order was issued, the order dated 22.11.2016 was void ab initio and referred to the Karnataka High Court’s judgment in Pr. Commissioner of Income Tax-2 & Another v. M/s. Cisco Systems Capital (India) Pvt. Ltd. to support her claim.

Justice S.G Pandit and Justice K.V. Aravind considered the submissions from both parties and reviewed the appeal papers. The AO had referred the matter to the TPO to determine the ALP, and the TPO passed an order under Section 92CA.

A draft assessment order was issued, objections were filed before the Dispute Resolution Panel (DRP), and directions were given. Based on these directions, the Assessing Officer passed the final assessment order, which was later challenged before the Tribunal.

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The ITAT set aside the comparability of three companies and directed the TPO to verify and re-determine the ALP. The TPO re-determined the ALP, which differed from the assessee’s figures. The court held that since there was a variation, Section 144C(1) made it mandatory for the AO to issue a draft assessment order.

The court rejected the Revenue’s argument that a draft order was unnecessary as the TPO only followed the tribunal’s directions. It observed that the thad left the ALP determination to the TPO’s discretion. Referring to its earlier judgment in M/s. Cisco Systems Capital (India) Pvt. Ltd., the court held that failure to issue a draft assessment order made the assessment order void ab initio.

The bench concluded that the tribunal was right in declaring the order dated 22.11.2016 void and found no merit in the appeal and dismissed it.

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