S.144C-Draft assessment order can be issued only to eligible assessee

Brief of the Case

Delhi High Court held In the case of Honda Cars India Limited vs. DCIT that Since the petitioner is not an eligible assessee in terms of Section 144C(15)(b), no draft order can be passed in the case of the petitioner U/s. 144C(1).  Section 144C (15)(b) of the Act defines an “eligible assessee” to mean (i) any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under section 92CA(3); and (ii) any foreign company.

In this case appellant is admittedly not a foreign Company and  Secondly, the Transfer Pricing Officer has not proposed any variation to the return filed by the petitioner so he is not an eligible Assessee U/s. 144C (15)(b) and as a consequence of this  Assessing Officer cannot propose an order of assessment that is at variance in the income or loss return.

Facts of the Case

The petitioner is a Company incorporated in India and is engaged in the business of manufacture and sale of passenger cars.  The petitioner is a subsidiary company of Honda Motors Company Limited, Japan (“Honda Japan” for short).The petitioner purchases raw material, spare parts, capital goods etc. from Honda Japan and cars are manufactured in India under the technical collaboration agreements.  The petitioner pays royalty to Honda Japan. On 29.11.2011, return of income was filed by the petitioner for the assessment year 2011-2012 declaring NIL income. Since the petitioner had entered into international transaction, on 11.11.2013, the Assessing Officer referred the same to the TPO. On 30.01.2015, the TPO passed an order under Section 92CA (3) of the Act and no variation was proposed to the returned income of the petitioner.

On 31.03.2015, the Assessing Officer passed the impugned draft assessment order under Section 144C of the Act proposing the total income of the petitioner to be assessed at Rs 1830,07,49,517/-.  While making disallowance under Section 40(a)(i) of the Act in respect of payments made by the petitioner to non-resident associated enterprise, the Assessing Officer has proposed to disallow the entire payments made by the petitioner for purchasing raw materials, spare parts etc.

Contention of Appellant

The ld counsel of the appellant submitted that firstly the petitioner is not an eligible assessee, as defined under Section 144C(15)(b) of the Act as the Transfer Pricing Officer (TPO) had not proposed any variation in the income or loss return which was to the prejudice of the petitioner.  Secondly, while framing the draft assessment order, the Assessing Officer was also required to give effect to the Circular issued by the Central Board of Direct Taxes (CBDT) while making disallowances under Section 40(a)(i) of the Act whereby the Assessing Officer could make disallowance of only the net amount and not the gross amount of purchases made by the petitioner from its associated enterprise.  Thirdly, it is contended that in terms of Section 153(1) third proviso, the assessment could be completed by 31.03.2015 and since only a draft assessment order was passed, which suffers from jurisdictional defect, the assessment proceedings have now become time barred.

Held by High Court

High Court held that a reading of Section 144C (1) shows that the Assessing Officer, in the first instance, is to forward a draft of the proposed order of assessment to the “eligible assessee”, if he proposes to make any variation in the income or loss return which is prejudicial to the interest of such assessee.  The draft assessment order is to be forwarded to an “eligible assessee” which means that for the section to apply a person has to be an “eligible assessee”. Section 144C (15)(b) of the Act defines an “eligible assessee” to mean (i) any person in whose case the variation referred to in subsection (1) arises as a consequence of the order of the Transfer Pricing Officer passed under section 92CA(3); and (ii) any foreign company. The definition “eligible assessee” for the purposes of Section 144(C) (15)(b) is a hard and fast definition and can only be applicable in the above two categories.

In the given case, the petitioner is admittedly not a foreign Company. Secondly, the Transfer Pricing Officer has not proposed any variation to the return filed by the petitioner.  The consequence of this is that the Assessing Officer cannot propose an order of assessment that is at variance in the income or loss return.  The Transfer Pricing Officer has accepted the return filed by the petitioner.  In view of the which, neither of the two conditions are satisfied in the case of the petitioner and thus the petitioner for the purposes of Section 144C (15)(b) is not an “eligible assessee”.  Since the petitioner is not an eligible assessee in terms of Section 144C (15)(b), no draft order can be passed in the case of the petitioner under Section 144C(1). Similar is the view taken by the High Court of Gujarat in Pankaj Extrusion Limited versus Assistant Commissioner of Income Tax  : (2011) 198 Taxman  6 (Gujarat).

In view of the above, it is clear that the petitioner, not being an “eligible assessee” in terms of Section 144C (15)(b), the Assessing Officer was not competent to pass the draft assessment order under Section 144C (1) of the Act.  The draft assessment order dated 31.03.2015 is accordingly quashed.

Accordingly, appeal disposed of.

CA Deepak Aggarwal