Assessee entitled to mandatory draft under s.144C(1); final assessment without draft quashed for denying s.144C(2) objections
HC held that where the TPO recommended an upward variation to the arm's-length price, the Assessing Officer was required under s.144C(1) to first serve a draft assessment order on the eligible assessee before passing a final order. The AO's direct issuance of a final assessment without providing the mandatory draft deprived the assessee of the s.144C(2) right to object to the DRP or to pursue normal appellate remedies. The final assessment was quashed and set aside; decision rendered in favour of the assessee.
ISSUES PRESENTED AND CONSIDERED
1. Whether, where a Transfer Pricing Officer recommends a variation to arm's length price that is prejudicial to the assessee, the Assessing Officer is statutorily obliged under Section 144C(1) of the Income Tax Act to first forward a draft assessment order to the eligible assessee before passing a final assessment order.
2. Whether the Assessing Officer's direct passing of a final assessment order without serving the draft as required by Section 144C(1) constitutes a jurisdictional error (incurable illegality) vitiating the assessment order.
3. Whether any different legal consequence follows from procedural pressures or statutory timelines when Section 144C(1) mandates service of a draft assessment order.
4. Ancillary: Whether any observations are required on the Transfer Pricing Officer's order under Section 92CA where challenge to that order was not pressed.
ISSUE-WISE DETAILED ANALYSIS - Issue 1: Obligation to serve draft assessment under Section 144C(1)
Legal framework: Section 144C(1) requires that where a variation is proposed by the Transfer Pricing Officer, and such variation is prejudicial to an eligible assessee (as defined in Section 144C(15)), the Assessing Officer must, in the first instance, forward a draft of the proposed assessment order to the assessee. Section 144C(2) thereafter provides the avenue to file objections before the Dispute Resolution Panel (DRP); Section 92CA governs transfer pricing reference and recommendations by the Transfer Pricing Officer.
Precedent treatment: The Court followed the Division Bench precedent which held that failure to pass and furnish a draft assessment order under Section 144C(1) is not a mere procedural lapse but a breach of a mandatory provision that confers substantive rights on the assessee.
Interpretation and reasoning: The Court found the transaction to be an international transaction and the assessee to be an eligible assessee under Section 144C(15)(b)(i). The Transfer Pricing Officer's recommended valuation (increase in arm's length price from Rs. 363.10 to Rs. 517.82 per share) amounted to a variation prejudicial to the assessee. Given that factual position, statutory language and legislative intent require service of a draft so the assessee may either file objections before the DRP under Section 144C(2) or proceed by other remedies. The mandatory character of Section 144C(1) was emphasized: the provision gives an important substantive right to object to prejudicial variations, and that right cannot be bypassed by immediately issuing a final order.
Ratio vs. Obiter: Ratio - where a TPO recommends a prejudicial variation and the assessee is an eligible assessee, the Assessing Officer must first forward a draft assessment order under Section 144C(1). Obiter - observations on timelines and administrative pressure not justifying non-compliance.
Conclusion: The Assessing Officer erred in law by not forwarding the draft assessment order; compliance with Section 144C(1) is mandatory in such circumstances.
ISSUE-WISE DETAILED ANALYSIS - Issue 2: Jurisdictional character of non-compliance with Section 144C(1)
Legal framework: Jurisdictional error doctrine in statutory taxation context; interplay with Section 292B (curative provisions) and limits of rectification/salvage of a void order that is passed without statutory jurisdiction.
Precedent treatment: The Court applied the Division Bench authority holding that failure to follow Section 144C(1) is a jurisdictional error and not remedied by any provision that might otherwise cure procedural irregularities. The Court distinguished reliance on a Supreme Court decision addressing denial of cross-examination and different remedial posture where statutory appellate remedies existed, holding that that authority was inapposite.
Interpretation and reasoning: The Court reasoned that the duty to serve a draft assessment order is integral to the Assessing Officer's power to pass a valid final order in cases involving prejudicial variations. By bypassing the draft procedure, the Assessing Officer effectively assumed jurisdiction to pass a final order where the statute prescribed a precondition. Administrative timelines or pressures do not supply statutory jurisdiction. Section 292B cannot be read so as to confer jurisdiction where none exists; thus final orders passed in breach are void ab initio.
Ratio vs. Obiter: Ratio - non-compliance with the mandatory procedure under Section 144C(1) constitutes jurisdictional error rendering the final assessment order void. Obiter - comment that timeline extensions and administrative pressure do not excuse non-compliance.
Conclusion: The final assessment order passed without serving the draft was vitiated by jurisdictional error and therefore liable to be quashed and set aside.
ISSUE-WISE DETAILED ANALYSIS - Issue 3: Effect of procedural pressures/timelines
Legal framework: Statutory prescription of procedure versus administrative exigencies; significance of legislative extensions of timelines in the context of mandatory procedural requirements.
Precedent treatment: The Court rejected the Revenue's contention that timelines and pressure justified non-compliance, relying on authority that treated the duty under Section 144C(1) as mandatory regardless of time constraints.
Interpretation and reasoning: The Court observed that timeline extensions had been granted previously and that procedural obligations meant to protect substantive rights cannot be discarded on grounds of perceived administrative inconvenience. The mandatory text of Section 144C(1) and the importance of the assessee's right to object before DRP weigh against excusing non-compliance.
Ratio vs. Obiter: Obiter guiding principle - administrative pressure or timelines do not trump mandatory procedural statutory rights. Not essential to the holding beyond reinforcing the mandatory character of Section 144C(1).
Conclusion: No legal justification arises from timeline pressures for bypassing the draft-service requirement under Section 144C(1).
ISSUE-WISE DETAILED ANALYSIS - Issue 4: Challenge to the Transfer Pricing Officer's order
Legal framework: Remedies available against an order under Section 92CA (transfer pricing reference) are distinct and separate from the procedure under Section 144C; an assessee may seek relief against TPO's determination by following prescribed statutory avenues.
Precedent treatment: Not addressed substantively; the Court confined itself to the procedural defect under Section 144C(1).
Interpretation and reasoning: The Court noted that challenge to the TPO's order dated 28th January 2025 was not pressed and therefore declined to express any opinion on its merits.
Ratio vs. Obiter: Obiter - explicit non-decision; the Court did not adjudicate the correctness of the TPO's valuation.
Conclusion: No adjudication on the Transfer Pricing Officer's order; relief limited to quashing the final assessment for failure to comply with Section 144C(1).
FINAL CONCLUSIONS
The Court quashed and set aside the final assessment order passed without service of the draft assessment order as mandated by Section 144C(1), holding such non-compliance to be a jurisdictional error rendering the final order void. The order in relation to the Transfer Pricing Officer's determination was not adjudicated as that challenge was not pressed. No order as to costs.
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