Turner International... v. Deputy Commissioner ..., Delhi High Court, Judgment, Law, casemine.com

Citation Codes

Equivalent Citations

citation codes

Case Number

W.P(C) 4260/2015 and W.P(C) 4261/2015

Attorney(S)

Mr. M.S Syali, Senior Advocate with Mr. Mayank Nagi & Mr. Tarun Singh, Advocates
Mr. Dileep Shivpuri, Senior Standing Counsel & Mr. Sanjay Kumar, Junior Standing Counsel

Judges

Justice Dr. S. Muralidhar
Justice Chander Shekhar

Acts

Section 92CA(2) of the Income Tax Act, 1961 (Act).8.

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Smart Summary

Factual and Procedural Background

The writ petitions challenge the Assessment Orders passed by the Assessing Officer (AO) on 31st March 2015 for the Assessment Years (AY) 2007-08 and 2008-09, along with the accompanying Demand Notices. The Petitioner, a wholly-owned subsidiary of Turner Broadcasting System Asia Pacific Inc., is engaged in sub-distribution of distribution rights and sale of advertisement inventory on satellite channels.

For AY 2007-08, the Petitioner filed returns declaring income of Rs. 10,69,43,491/-, later revised to claim higher TDS. For AY 2008-09, income declared was Rs. 35,04,23,465/-. Due to international transactions, the AO referred the matter to the Transfer Pricing Officer (TPO), who passed orders for both AYs. Draft Assessment Orders based on TPO's findings were passed by the AO, which the Petitioner objected to before the Dispute Resolution Panel (DRP). The DRP upheld the TPO's orders, and the AO passed final assessment orders, which the Petitioner appealed to the Income Tax Appellate Tribunal (ITAT).

The ITAT, by a common order dated 14 January 2013, found that neither the Petitioner nor the TPO had considered appropriate comparables, rendering the determination of the arm's length price (ALP) unjustifiable. The ITAT set aside the DRP's order and remanded the matter to the AO for a fresh transfer pricing study and assessment. Following this, fresh notices were issued by the TPO in August 2013, and new TPO orders were passed in January 2015 proposing upward adjustments to the Petitioner's income. The AO then passed final Assessment Orders on 31 March 2015 confirming these adjustments and issued demand notices and penalty proceedings.

Legal Issues Presented

Whether the final assessment orders passed by the AO without first framing draft assessment orders under Section 144C(1) of the Income Tax Act, 1961, are valid.
Whether failure to comply with the mandatory provision of issuing draft assessment orders vitiates the final assessment orders and consequent demand notices.

Arguments of the Parties

Revenue's Arguments

The failure to issue draft assessment orders under Section 144C(1) is a curable defect.
The matter should be remanded to the AO to pass draft assessment orders, allowing the Petitioner to pursue objections before the DRP.

Petitioner's Arguments

This information was not available in the provided opinion.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Zuari Cement Ltd. v. ACIT (Andhra Pradesh High Court, 21 February 2013)	Failure to pass draft assessment order under Section 144C(1) renders final assessment order without jurisdiction, null, void, and unenforceable.	The Court relied on this precedent to hold that the final assessment orders and demand notices were invalid due to non-compliance with Section 144C(1).
Zuari Cement Ltd. v. ACIT (Supreme Court, dismissal of SLP on 27 September 2013)	Affirmation of the Andhra Pradesh High Court's ruling on invalidity of final assessment orders without draft assessment orders.	The Supreme Court’s dismissal of the Special Leave Petition reinforced the binding nature of the principle applied by the Court.
Vijay Television (P) Ltd. v. Dispute Resolution Panel [2014] 369 ITR 113 (Madras High Court)	Final assessment order and corrigendum issued thereafter without draft assessment order are liable to be quashed; corrigendum beyond permissible time is invalid.	The Court cited this decision to support the invalidation of the final assessment orders and demand notices challenged.
ESPN Star Sports Mauritius S.N.C ET Compagnie v. Union of India [2016] 388 ITR 383 (Delhi High Court)	Reaffirmation of the principle that failure to issue draft assessment orders under Section 144C(1) invalidates final orders and demand notices.	The Court followed this precedent to conclude that the final assessment orders and related notices must be set aside.
International Air Transport Association v. DCIT (2016) 290 CTR (Bom) 46 (Bombay High Court)	Same principle regarding mandatory issuance of draft assessment orders under Section 144C(1) applies.	Supported the Court’s conclusion on the invalidity of the final assessment orders and demand notices.

Court's Reasoning and Analysis

The Court analyzed the statutory mandate under Section 144C(1) of the Income Tax Act, which requires the Assessing Officer to first pass a draft assessment order before finalizing the assessment. The Court noted that this procedural requirement is mandatory and non-compliance results in the final assessment order being without jurisdiction and legally void. The Court reviewed a consistent line of authoritative precedents from various High Courts and the Supreme Court which uniformly held that failure to issue a draft assessment order invalidates the final order and the consequent demand notices.

The Court rejected the Revenue’s contention that the defect was curable by remanding the matter for issuance of a draft order. Instead, it emphasized the binding nature of the precedents which mandate setting aside the final orders and notices when the draft order is not issued as required. The Court thus concluded that the final assessment orders dated 31 March 2015, the consequent demand notices, and penalty proceedings must be invalidated for non-compliance with the mandatory procedural requirement.

Holding and Implications

The Court’s final ruling is that the writ petitions are allowed, and the following are set aside:

The final assessment orders dated 31 March 2015 for AYs 2007-08 and 2008-09.
The consequential demand notices issued by the AO.
The initiation of penalty proceedings under Section 271(1)(c) of the Act.

The direct effect of this decision is the invalidation of the final assessment orders and related notices due to procedural non-compliance. The opinion does not establish any new precedent but follows a well-settled legal position regarding the mandatory nature of draft assessment orders under Section 144C(1) of the Income Tax Act.

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Turner International India Pvt. Ltd. Petitioner v. Deputy Commissioner Of Income Tax Circle 25(2), New Delhi

S. Muralidhar, J.:— The challenge in these writ petitions is to the Assessment Orders passed by the Assessing Officer (‘AO’) on 31st March, 2015 for the Assessment Year (‘AY’) 2007-08 (subject matter of challenge in WP (C) No. 4261/2015) and AY 2008-2009 (subject-matter of challenge in WP (C) No. 4260/2015). Both the Assessment Orders were accompanied by the Demand Notices which have also been challenged in these writ petitions.

2. The background facts are that the Petitioner is a wholly-owned subsidiary of Turner Broadcasting System Asia Pacific Inc. It is engaged in the business of sub-distribution of distribution rights and sale of advertisement inventory on satellite delivered channels.

3. For the AY 2007-08, it filed its returns on 31 October 2007, declaring its income at Rs. 10,69,43,491/-. This was later revised on 31 March, 2009 to claim a higher TDS. As far as AY 2008-09 is concerned, the Petitioner filed a return of income on 30th September, 2008 declaring its income at Rs. 35,04,23,465/-.

4. In respect of both the returns, since there were international transactions involving the Assessee, a reference was made by the AO to the Transfer Pricing Officer (‘TPO’). In respect of both the AYs, two separate orders were passed by the TPO on 29 October, 2010 (in respect of AY 2007-08) and 17 October, 2011 (in respect of AY 2008-09), in respect of the Distribution Activity segment.

5. On the basis of the above orders of the TPO, draft Assessment Orders were passed by the AO. These were objected to by the Petitioner before the Dispute Resolution Panel (‘DRP’). After the DRP concurred with the TPO, final assessment orders were passed by the AO. These were appealed against by the Petitioner before the ITAT.

6. By a common order dated 14 January 2013, in both the appeals pertaining to the two AYs, the ITAT observed that neither the Petitioner nor the TPO had taken into consideration appropriate comparables and, therefore, the determination of arms length price (‘ALP’) was not justifiable. While setting aside the order of the DRP, the ITAT remanded the matters to the AO for undertaking a transfer pricing study afresh and framing an assessment in accordance with law.

7. Following the above order of the ITAT, fresh notices were sent on 2nd August, 2013 by the TPO to the Petitioner under Section 92CA(2) of the Income Tax Act, 1961 (‘Act’).

8. Two separate orders were passed by the TPO on 30 January, 2015 proposing an upward adjustment to the total income of the Petitioner for each of the AYs.

9. Pursuant to the above order, the AO on 31 March, 2015 passed final Assessment Orders in respect of both AYs under Sections 254/143(3)/144 C (13) read with Section 92 CA (4) of the Act confirming the additions as proposed by the TPO. Accompanying the aforementioned final Assessment Orders were notices of demand under Section 156 of the Act and notices under Section 271(1)(c) of the Act initiating penalty proceedings.

10. The short ground on which the aforementioned final assessment orders and the consequent demand notices have been challenged is that there was non-compliance with the mandatory provision contained in Section 144C(1) of the Act requiring the AO to first frame draft assessment orders.

11. The question whether the final assessment order stands vitiated for failure to adhere to the mandatory requirements of first passing draft assessment order in terms of Section 144C(1) of the Act is no longer res intregra. There is a long series of decisions to which reference would be made presently.

12. In Zuari Cement Ltd. v. ACIT (decision dated 21 February, 2013 in WP(C) No. 5557/2012), the Division Bench (DB) of the Andhra Pradesh High Court categorically held that the failure to pass a draft assessment order under Section 144C (1) of the Act would result in rendering the final assessment order “without jurisdiction, null and void and unenforceable.” In that case, the consequent demand notice was also set aside. The decision of the Andhra Pradesh High Court was affirmed by the Supreme Court by the dismissal of the Revenue's SLP (C) [CC No. 16694/2013] on 27 September, 2013.

13. In Vijay Television (P) Ltd. v. Dispute Resolution Panel [2014] 369 ITR 113 (Mad.), a similar question arose. There, the Revenue sought to rectify a mistake by issuing a corrigendum after the final assessment order was passed. Consequently, not only the final assessment order but also the corrigendum issued thereafter was challenged. Following the decision of the Andhra Pradesh High Court in Zuari Cement Ltd. v. ACIT (supra) and a number of other decisions, the Madras High Court in Vijay Television (P) Ltd. v. Dispute Resolution Panel (Supra) quashed the final order of the AO and the demand notice. Interestingly, even as regards the corrigendum issued, the Madras High Court held that it was beyond the time permissible for issuance of such corrigendum and, therefore, it could not be sustained in law.

14. Recently, this Court in ESPN Star Sports Mauritius S.N.C ET Compagnie v. Union of Indi [2016] 388 ITR 383 (Del.), following the decision of the Andhra Pradesh High Court in Zuari Cement Ltd. v. ACIT (Supra), the Madras High Court in Vijay Television (P) Ltd. v. Dispute Resolution Panel, Chennai (Supra) as well as the Bombay High Court in International Air Transport Association v. DCIT (2016) 290 CTR (Bom) 46, came to the same conclusion.

15. Mr. Dileep Shivpuri, learned counsel for the Revenue sought to contend that the failure to adhere to the mandatory requirement of issuing a draft assessment order under Section 144C (1) of the Act would, at best, be a curable defect. According to him the matter must be restored to the AO to pass a draft assessment order and for the Petitioner, thereafter, to pursue the matter before the DRP.

16. The Court is unable to accept the above submission. The legal position as explained in the above decisions in unambiguous. The failure by the AO to adhere to the mandatory requirement of Section 144C (1) of the Act and first pass a draft assessment order would result in invalidation of the final assessment order and the consequent demand notices and penalty proceedings.

17. For the aforementioned reasons, the final assessment orders dated 31 March, 2015 passed by the AO for AYs 2007-08 and 2008-09, the consequential demand notices issued by the AO and the initiation of penalty proceedings are hereby set aside.

18. The petitions are allowed in the above terms. No order as to costs.

Turner International... v. Deputy Commissioner ...