Punjab and Haryana High Court Sets Aside IT Assessment Order Against UCWeb Mobile During Pendency Of DRP Proceedings

The Punjab and Haryana High Court has recently set aside the final assessment order passed against UCWeb Mobile Private Ltd. while its objections to the draft assessment order were pending before the Dispute Resolution Panel (DRP).

The court held that the assessment violated the procedure prescribed under Section 144C of the Income-tax Act, which requires the Assessing Officer to pass the final assessment in conformity with directions issued by the DRP after considering the assessee's objections.

A Division Bench comprising Justice Deepak Sibal and Justice Rupinderjit Chahal allowed UCWeb Mobile's writ petition. It set aside the final assessment order, the consequential demand notice and the notice initiating penalty proceedings.

UCWeb Mobile, a wholly owned subsidiary of UC Mobile New World Limited, British Virgin Islands, is engaged in the distribution and re-selling of designated services of UCWeb Singapore Pte Ltd. in India.

For assessment year 2021-22, its assessment involved international transactions with associated enterprises and was referred by the AO to the TPO under Section 92CA(1) of the Act.

The TPO, through an order dated October 29, 2023, proposed an addition of Rs. 60,09,84,289 to the petitioner's declared income. Based on this order, the AO issued a draft assessment order under Section 144C(1) on November 6, 2023.

As an eligible assessee under Section 144C(15)(b), UCWeb Mobile filed objections before the DRP within the prescribed 30-day period on December 6, 2023. However, it failed to separately intimate the AO about the filing of those objections.

The AO consequently proceeded to pass the final assessment order on December 15, 2023, while the objections were still pending before the DRP. A demand notice under Section 156 and notice initiating penalty proceedings under Section 274 read with Section 270A were also issued.

UCWeb Mobile approached the High Court challenging the assessment, primarily contending that the AO could not have finalised the assessment while the DRP proceedings were pending. The High Court stayed the operation of the assessment order on February 26, 2024.

During the pendency of the writ petition, the DRP partially accepted the petitioner's objections and directed modification of the TPO's order. The TPO subsequently revised its earlier order.

UCWeb Mobile brought these developments to the AO's notice and requested a fresh assessment in accordance with the DRP's directions, but the request was not acted upon.

The petitioner argued that Section 144C mandates the AO to complete the assessment in conformity with the DRP's directions and that such directions are binding under Section 144C(10). It was also submitted that the failure to inform the AO about the objections was merely a bona fide lapse and should not deprive the petitioner of the statutory DRP mechanism.

The Revenue, on the other hand, argued that the AO could not be faulted for passing the final assessment order because the petitioner had failed to inform him about the objections filed before the DRP. The Revenue relied upon Sections 144C(3) and 144C(4) to contend that the AO was required to proceed with the assessment.

The High Court, however, held that the final assessment order could not be sustained. It observed that where an eligible assessee files objections before the DRP, the assessment has to be completed after consideration of those objections and in accordance with the directions issued by the DRP.

The Court particularly relied upon Sections 144C(10) and 144C(13), noting that the DRP's directions are binding upon the AO and that the AO is required to complete the assessment in conformity with those directions.

"the impugned final assessment order dated 15.12.2023 is found to be at variance with the directions of the DRP dated 27.08.2024, which directions were issued after consideration of the petitioner's objections filed under Section 144C(2) of the Act to the draft assessment order dated 06.11.2023. Therefore, the impugned final assessment order violates Sections 144C(10) and 144C(13) of the Act. It also goes against the spirit behind Section 144C of the Act", the Court said.

The Court further noted that the entire addition of Rs. 60,09,84,289 was based on the TPO's October 29, 2023 order. Since that order was subsequently revised pursuant to the DRP's directions, the original TPO order forming the basis of the assessment had effectively been substituted. The Court observed that in such circumstances, upholding the original assessment would be “absurd.”

On the petitioner's failure to inform the AO about the DRP objections, the Court held that although there was a lapse, UCWeb Mobile did not stand to gain from the omission. It therefore characterised the failure as a bona fide lapse and held that the petitioner should not be prejudiced on that account.

"the impugned final assessment order dated 15.12.2023 was passed by the AO because the petitioner did not inform the AO that under Section 144C(2) of the Act the petitioner had filed its objections to the draft assessment order but since for such lapse the petitioner does not stand to gain anything, such inaction on the petitioner's part can only to be termed as a bonafide lapse for which the petitioner should not be put to prejudice", the Court said.

Accordingly, the High Court set aside the final assessment order, the consequential demand notice under Section 156 and the penalty initiation notice under Section 274 read with Section 270A.

The matter was restored to the stage of Section 144C(13), with the AO directed to pass a fresh final assessment order in accordance with the DRP's directions dated August 27, 2024 and the revised TPO order dated September 17, 2024.

For Petitioner: Nageshwar Rao and Ashim Aggarwal, Advocates

For Respondent: Varun Issar, Senior Standing Counsel and Nikita Garg, Standing Counsel