Perfetti Van Melle (India) Pvt. Ltd vs ACIT

Introduction

The Income Tax Appellate Tribunal (ITAT), Delhi ‘I-2’ Bench, delivered a significant ruling in the case of Perfetti Van Melle (India) Pvt. Ltd. vs. The A.C.I.T (ITA No. 9116/DEL/2019, Assessment Year 2015-16). This case commentary analyzes the Tribunal’s decision, which centered on the procedural validity of a draft assessment order under Section 144C of the Income Tax Act, 1961. The core issue was whether the Assessing Officer (AO) could issue a demand notice and initiate penalty proceedings within a draft assessment order, thereby prematurely concluding the assessment process. The ITAT held that such actions contravene the mandatory sequential process under Section 144C, rendering the subsequent assessment order void ab initio. This ruling reinforces the principle that assessment is an integrated process, and strict adherence to statutory procedures is non-negotiable in transfer pricing matters.

Facts of the Case

The assessee, Perfetti Van Melle (India) Pvt. Ltd., challenged the assessment order dated 31.10.2019 framed under Section 143(3) read with Section 144C of the Act. The primary grounds of appeal included disputes over the treatment of Advertising, Marketing, and Promotion (AMP) expenses as international transactions, substantive adjustments using the AMP intensity approach, and protective adjustments using the Bright Line Test and residual profit split method. However, the pivotal issue was an additional ground raised by the assessee: that the draft assessment order dated 27.12.2018 was in contravention of Section 144C, making all subsequent orders void.

The Revenue objected to this additional ground, arguing it was raised for the first time and involved factual aspects. The ITAT admitted the ground, noting it was a pure legal issue requiring no verification of facts outside the record. The Tribunal then examined the sequence of events: on 27.12.2018, the AO issued a draft assessment order that quantified taxable income, determined tax payable, issued a demand notice under Section 156, and initiated penalty proceedings. The Revenue contended this was merely a draft, while the assessee argued it effectively completed the assessment.

Reasoning of the Tribunal

The ITAT’s reasoning was meticulous and grounded in a strict interpretation of Section 144C. The Tribunal began by quoting the relevant provisions, particularly sub-sections (1), (3), and (13). Section 144C(1) mandates that the AO shall forward a draft of the proposed order to an eligible assessee if any variation prejudicial to the assessee’s interest is proposed. Sub-section (3) states that the AO shall complete the assessment on the basis of the draft order if the assessee accepts the variation or no objections are received. Sub-section (13) provides that upon receiving directions from the Dispute Resolution Panel (DRP), the AO shall complete the assessment in conformity with those directions.

The Tribunal observed that the AO’s action on 27.12.2018—issuing a demand notice and initiating penalty—went beyond the scope of a draft order. The ITAT emphasized that assessment is an integrated process, relying on the Supreme Court’s decision in Kalyan Kumar Ray vs. CIT (191 ITR 634) and the Gujarat High Court’s ruling in CIT vs. Purshottam Das T Patel (209 ITR 52). In Purshottam Das, the High Court held that “assessment is one integrated process involving not only the assessment of the total income but also the determination of the tax.” The demand notice under Section 156 is an integral part of this process, and its issuance signifies the completion of the assessment.

The Tribunal rejected the Revenue’s argument that the demand notice was merely a “proposed/draft notice of demand.” The ITAT noted that the Act does not provide for such a concept. The AO’s internal procedures, such as not entering the demand in the Demand and Collection Register or not uploading the order on the ITD system, were deemed irrelevant. The Tribunal held that the issuance of a demand notice and initiation of penalty proceedings effectively concluded the assessment, bypassing the mandatory steps under Section 144C(3) and (13). This contravention rendered the draft order and all subsequent orders—including the DRP’s directions and the final assessment order—void ab initio.

The Tribunal also addressed the Revenue’s argument that the assessee’s participation in subsequent proceedings created estoppel. Citing the principle from V Mr. T.P. Firm MUAR, the ITAT held that participation does not cure a jurisdictional defect. Additionally, the Tribunal rejected the applicability of Section 292B, which saves orders from technical defects, noting that the AO’s action was not a mere technical error but a fundamental lack of jurisdiction. The ratio decidendi is clear: strict compliance with Section 144C is mandatory, and any deviation, such as issuing a demand notice in a draft order, vitiates the entire assessment.

Conclusion

The ITAT’s ruling in Perfetti Van Melle is a landmark decision that underscores the procedural sanctity of Section 144C in transfer pricing assessments. By holding that the issuance of a demand notice and penalty initiation within a draft assessment order effectively concludes the assessment, the Tribunal has reinforced the principle that assessment is an integrated process. This judgment provides critical precedent for taxpayers challenging draft assessment orders that prematurely finalize proceedings. It emphasizes that internal revenue procedures cannot override substantive legal requirements, and taxpayers cannot be estopped from challenging jurisdictional defects merely by participation. The decision serves as a reminder to tax authorities to adhere strictly to statutory procedures, ensuring fairness and due process in international tax matters.

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