Transfer pricing upward adjustment requires draft assessment under dispute resolution procedure; failure renders final assessment without jurisdiction, favouring assessee.

Where an assessing officer proposes an upward transfer pricing adjustment prejudicial to the assessee, he must first forward a draft assessment order to the eligible assessee under the dispute resolution procedure; failure to pass such a draft assessment order before finalising the assessment renders the final assessment jurisdictionally infirm. The decision treated reference to the dispute resolution panel and the absence of compliance with the draft order requirement as determinative, resulting in relief to the assessee against the upward adjustment under the transfer pricing exercise.

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Issues Involved:
1. Non-issuance of draft assessment order under Section 144C(1) of the Income-tax Act, 1961.
2. Jurisdictional validity of the final assessment order.

Summary:

Non-issuance of Draft Assessment Order:
The Petitioner filed returns for Assessment Years 2010-11 and 2009-10, which were processed under Section 143(1) of the Income-tax Act, 1961. Subsequently, the cases were selected for scrutiny, and the Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO) under Section 92CA(2). The TPO made upward adjustments, leading the AO to pass draft assessment orders. The Petitioner objected to these orders before the Dispute Resolution Panel (DRP), which upheld the additions. The final assessment orders were challenged before the Income Tax Appellate Tribunal (ITAT), which set aside the transfer pricing adjustments and remanded the matter for de-novo consideration. The AO, without issuing a draft assessment order under Section 144C(1), passed the final assessment orders, which the Petitioner impugned in these petitions.

Jurisdictional Validity of the Final Assessment Order:
The Petitioner argued that Section 144C(1) mandates the issuance of a draft assessment order if any variation prejudicial to the assessee's interest is proposed. Failure to issue such an order renders the final assessment order null and void. The Court agreed with this contention, citing previous judgments, including Principal Commissioner of Income-tax v. Andrew Telecommunications (P) Ltd. and ExxonMobil Company Private Limited v. The Deputy Commissioner of Income Tax, which held that non-compliance with Section 144C(1) results in the final assessment order being without jurisdiction.

Conclusion:
The Court concluded that the AO's failure to issue a draft assessment order under Section 144C(1) rendered the final assessment orders without jurisdiction. Consequently, the Court quashed the impugned final assessment orders and related notices for both assessment years. The petitions were disposed of with no order as to costs.

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