The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has quashed assessment orders passed against Marriott International Inc., holding that the Assessing Officer (AO) failed to comply with the statutory requirements of Section 144C of the Income-tax Act, 1961.

The bench of Saktijit Dey (Vice President) and Prabhash Shankar (Accountant Member) has observed that  merely using the word “draft” in the assessment order or demand notice cannot cure the substantive defect when the conduct of the Assessing Officer demonstrates that a final assessment has already been made.

Marriott International Inc., a tax resident of the United States, administers a centralized marketing fund used for advertising, promotional and sales activities on behalf of hotel owners and franchisees operating various Marriott brands. For the relevant assessment years, the company filed returns declaring nil income and claimed refunds of tax deducted at source (TDS).

During scrutiny proceedings, the Income Tax Department examined receipts earned by Marriott from India, including International Service Marketing (ISM) fees and reimbursements. The Assessing Officer treated these receipts as “royalty” taxable in India under both the Income-tax Act and the India–USA Double Taxation Avoidance Agreement (DTAA).

The AO thereafter issued what was described as a “draft assessment order” under Section 144C(1). However, simultaneously, the officer also issued a demand notice under Section 156, computed tax liability, adjusted prepaid taxes, and initiated penalty proceedings under Section 271(1)(c).

The central question before the Tribunal was whether an order described as a “draft assessment order” can still be regarded as a valid draft when it is accompanied by a demand notice, tax computation and penalty initiation.

Marriott argued that the Assessing Officer had effectively passed a final assessment order while merely labeling it as a draft order. According to the taxpayer, such action deprived it of the valuable statutory right to approach the Dispute Resolution Panel (DRP), a protection specifically granted to eligible assessees under Section 144C.

After examining the assessment records, the ITAT observed that the Assessing Officer had not merely proposed variations to the returned income but had gone much further by directing computation of tax liability; issuing demand notices under Section 156; charging interest under various provisions; adjusting prepaid taxes against assessed liability; and initiating penalty proceedings.

The Tribunal noted that such actions are characteristic of a final assessment order and are incompatible with the concept of a draft assessment order contemplated under Section 144C.

According to the bench, when an assessment is still at the draft stage, there is no occasion for the tax department to issue a demand notice or initiate penalty proceedings because the assessment process has not yet attained finality.

The Tribunal extensively relied on earlier decisions involving Marriott group entities as well as judicial precedents from various High Courts and Tribunals.

Particular reliance was placed on earlier Mumbai ITAT decisions in Marriott’s own cases for Assessment Years 2006-07 to 2009-10, where similar assessment orders were quashed because demand notices and penalty notices had been issued along with draft assessment orders.

The bench also referred to rulings including: Cisco Systems Services BV; Vijay Television Pvt. Ltd.; Perfetti Van Melle (India) Pvt. Ltd.; Atlas Copco (India) Ltd.; Turner International India Pvt. Ltd.; and JCB India Ltd. These decisions consistently held that compliance with Section 144C is mandatory and not a mere procedural formality.

The Tribunal emphasized that Section 144C grants eligible taxpayers an important substantive right to challenge proposed additions before the Dispute Resolution Panel before a final assessment is made.

By issuing a demand notice and taking steps associated with a completed assessment, the Assessing Officer effectively bypassed the DRP mechanism and denied the assessee the opportunity intended by Parliament.

Holding that the mandatory requirements of Section 144C(1) were not followed, the ITAT concluded that the Assessing Officer had exceeded his jurisdiction.

The Tribunal ruled that the purported draft assessment orders were, in substance, final assessment orders and therefore invalid. Consequently, the assessment orders for both Assessment Years 2013-14 and 2014-15 were quashed in their entirety.

Since the assessments themselves were annulled, the Tribunal treated the remaining grounds raised by Marriott as academic and left them open.

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