Final assessment void ab initio for failure to issue mandatory draft order under s.144C(1), denying DRP objection rights

ITAT, Bengaluru - AT held the final assessment void ab initio because the AO failed to issue the mandatory draft assessment order under s.144C(1), thereby denying the taxpayer the opportunity to file objections with the DRP. Relying on binding HC precedent that remand proceedings must comply with s.144C procedure, the Tribunal found the omission an incurable defect and set aside the assessment. The appeal by the assessee was allowed.

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ISSUES PRESENTED AND CONSIDERED

1. Whether additional grounds of appeal raising purely legal questions, not requiring fresh facts, may be admitted at the appellate stage though not raised before the first appellate authority.

2. Whether a final assessment order passed by the Assessing Officer after remand from the Tribunal/Tax Authority, without issuance of a draft assessment order under the statutory provision requiring a draft order on receipt of the Transfer Pricing Officer's report, is valid or is void ab initio.

ISSUE-WISE DETAILED ANALYSIS - Admission of Additional Grounds

Legal framework: Appellate practice permits admission of additional grounds that are purely legal and can be decided on the record without needing new facts; judicial authority allows admission where resolution does not require further evidence.

Precedent treatment: The Tribunal applied established authorities holding that legal grounds may be admitted if they can be decided on the existing record; such authorities have been treated as applicable and persuasive.

Interpretation and reasoning: The Tribunal found the additional grounds to be purely legal and determinable on materials already on record; consequently, admission was appropriate to avoid procedural bar that would impede substantive adjudication of a legal defect alleged in the assessment process.

Ratio vs. Obiter: Ratio - additional grounds that raise pure questions of law and require no additional facts may be admitted at the appellate stage even if not earlier pressed before the first appellate authority. Obiter - none beyond the immediate application.

Conclusion: The additional grounds were admitted for adjudication because they were legal in nature and decidable on the existing record.

ISSUE-WISE DETAILED ANALYSIS - Validity of Final Assessment Order Without Draft Order under Section 144C

Legal framework: The statutory scheme mandates that, where international/transfer pricing issues are referred to the Transfer Pricing Officer (TPO), the Assessing Officer must pass a draft assessment order after receiving the TPO report, furnish the draft to the assessee, and afford the assessee the right to file objections before the Dispute Resolution Panel (DRP) prior to passing the final assessment order; this procedure applies afresh when the matter is remanded to the TPO/AO for reconsideration.

Precedent treatment: Multiple High Courts and appellate tribunals have held that omission to pass the draft assessment order in the post-remand proceedings is a material, incurable defect rendering the final assessment order without jurisdiction and void; such authorities were followed by the Tribunal in resolving the issue.

Interpretation and reasoning: The Tribunal analyzed the remand directions which restored the process of determining arm's length price to the TPO and permitted fresh search for comparables - effectively sending the matter back for a fresh exercise. Given that the remand reinvigorated the TPO/AO's exercise, the statutory sequence (TPO report ? draft assessment order ? opportunity to object to DRP ? final order) must be followed. The requirement to issue a draft assessment order is not a mere formality: it creates the assessee's statutory right to object before the DRP. Failure to issue the draft order deprived the assessee of the statutorily mandated opportunity to object, which the Tribunal held to be fatal. Arguments that the draft-order requirement is unnecessary on remand because the assessment was not wholly set aside were rejected on the basis that the statute's language is unambiguous and applies whenever a TPO report is received, including after remand.

Ratio vs. Obiter: Ratio - where remand restores the TPO/AO to reconsider issues and the TPO submits a report, the Assessing Officer must issue a draft assessment order under the statutory provision to enable the assessee to file objections before the DRP; omission to do so vitiates the final assessment order and renders it void ab initio. Obiter - observations rejecting the Revenue's alternative remedy/contention that the assessee could have appealed the final order instead of seeking DRP objections.

Conclusion: The final assessment order passed without issuance of the statutory draft assessment order (and hence without affording the assessee the opportunity to object before the DRP) was held void ab initio. Consequently, the Tribunal quashed that assessment order. Other grounds of appeal were left open for future adjudication.

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