The Income Tax Appellate Tribunal, Delhi, has reaffirmed that procedural mandates under Section 144C of the Income Tax Act, 1961 are not mere formalities but essential safeguards for taxpayer rights. In a significant ruling, the Tribunal quashed final assessment orders for failure to issue a draft assessment order even in remand proceedings, establishing that compliance with statutory procedure is non-negotiable.
Background & Facts
The Dispute
The appellant, Honda Cars India Ltd., was assessed for Assessment Years 2009-10 and 2010-11 under transfer pricing provisions. The Assessing Officer (AO) initially determined an adjustment of Rs. 13,80,67,817/- to the appellant’s income under Section 92CA of the Act, based on the Transfer Pricing Officer’s (TPO) recommendation. The appellant challenged the assessment before the Commissioner of Income Tax (Appeals) and subsequently before the Income Tax Appellate Tribunal (ITAT).
Key Facts
- The original assessment order was passed on 30.03.2017 under Section 143(3) read with Section 144C and Section 92CA
- The appellant had earlier challenged the methodology used for determining Arm’s Length Price (ALP), arguing it was not based on appropriate comparables
- On 07.01.2016, a Coordinate Bench of ITAT set aside the original assessment and remanded the matter to the AO for fresh adjudication, directing that the AO consider the appellant’s contentions on ALP determination afresh
- The AO, on 05.05.2016, obtained prior approval from the Principal Commissioner of Income Tax, Noida, to refer the matter again to the TPO
- The TPO issued a fresh order under Section 92CA(3) on 24.01.2017, proposing the same adjustment of Rs. 13,80,67,817/-
- The AO passed the final assessment order on 30.03.2017 without issuing a draft assessment order under Section 144C(1)
- The appellant filed appeals before ITAT, which were heard on 11.03.2026
Procedural History
- 30.03.2017: Final assessment order passed by AO under Section 143(3)/144C/92CA
- 07.01.2016: ITAT remanded the matter for fresh adjudication, directing AO to reconsider ALP methodology
- 05.05.2016: AO obtained prior approval from Principal Commissioner for re-referral to TPO
- 13.05.2016: AO referred the matter again to TPO
- 24.01.2017: TPO issued fresh order under Section 92CA(3)
- 31.07.2018: CIT(A)-44 dismissed the appeals, upholding the assessment
- 25.11.2025: Appellant filed application before ITAT seeking to raise additional ground on violation of Section 144C
- 11.03.2026: Hearing held before ITAT
- 25.03.2026: Judgment pronounced
The Parties' Positions
The appellant contended that the final assessment order was invalid because no draft assessment order was issued prior to its passing, thereby denying the appellant the statutory right to approach the Dispute Resolution Panel (DRP) under Section 144C(1). The appellant relied on multiple precedents, including Headstrong Services India (P) Ltd. v. Pr.CIT, to argue that the omission was not a curable irregularity but a jurisdictional defect.
The Revenue, represented by the CIT(DR), argued that since the matter was remanded for fresh adjudication, the AO was entitled to treat it as a de novo assessment and was not bound to follow the procedural steps of Section 144C. The Revenue further contended that the appellant had ample opportunity to present its case and that the outcome was substantively correct.
Relief Sought
The appellant sought quashing of the impugned assessment order dated 30.03.2017 on the ground of procedural violation under Section 144C, and requested that the matter be remanded to the AO for fresh assessment in accordance with law.
The Legal Issue
The central question was whether Section 144C(1) of the Income Tax Act, 1961 mandates the issuance of a draft assessment order even when a matter is remanded by the Appellate Tribunal for fresh adjudication, and whether failure to comply with this requirement vitiates the final assessment order.
Arguments Presented
For the Appellant
The appellant’s counsel relied on Headstrong Services India (P) Ltd. v. Pr.CIT (2021) to argue that when a matter is remanded for fresh adjudication, the AO must treat it as a new assessment and strictly comply with all procedural requirements under Section 144C, including issuance of a draft assessment order. The appellant emphasized that the right to approach the DRP is a substantive statutory right, not a procedural formality. The omission to issue a draft order deprived the assessee of an opportunity to make representations before the DRP, which is a violation of natural justice. The appellant also cited National Thermal Power Co. Ltd. v. CIT, Jute Corporation of India Ltd. v. CIT, and Ramco Cements Ltd. v. DCIT to support the admission of the additional ground under Rule 11 of the ITAT Rules.
For the Respondent
The Revenue contended that since the Tribunal had remanded the matter for de novo adjudication, the AO was not bound by the earlier procedural steps and could proceed directly to pass a final order. It argued that the substance of the assessment was correct and that technical non-compliance should not override the outcome. The Revenue further submitted that the appellant had not been prejudiced as it had fully participated in the proceedings before the TPO and AO.
The Court's Analysis
The Tribunal rejected the Revenue’s contention that remand proceedings exempt the AO from compliance with Section 144C. It held that the statutory mandate under Section 144C(1) is triggered whenever an assessment is proposed to be made under Section 143(3) after a reference to the TPO under Section 92CA, regardless of whether the assessment is original or on remand.
"The procedure under Section 144C is not a mere formality but a statutory safeguard to ensure that the assessee is given an opportunity to be heard before the DRP. When the AO proceeds to pass a final order without a draft, it deprives the assessee of a statutory right, which cannot be cured by subsequent action."
The Tribunal noted that the AO had treated the remanded matter as a fresh assessment, as evidenced by the re-referral to the TPO and the fresh order passed under Section 92CA(3). In such circumstances, the AO was under a clear obligation to issue a draft assessment order under Section 144C(1), allowing the assessee to file objections before the DRP. The failure to do so rendered the final assessment order legally invalid.
The Tribunal further relied on the Delhi High Court’s decision in Headstrong Services India (P) Ltd., which held that non-compliance with Section 144C in remand proceedings is not a curable irregularity but a jurisdictional defect that vitiates the entire proceeding. The Tribunal concluded that the Revenue’s argument of substantive correctness cannot override the mandatory nature of statutory procedure.
The Verdict
The appellant succeeded. The Tribunal allowed the appeals and quashed the impugned assessment order dated 30.03.2017. The matter was remanded to the Assessing Officer for fresh assessment in accordance with law, with strict compliance to Section 144C, including issuance of a draft assessment order and opportunity to approach the DRP. The Tribunal directed that the fresh assessment be completed within six months from the date of receipt of this order.
What This Means For Similar Cases
Draft Orders Are Non-Negotiable in Remand Cases
- Practitioners must now insist on compliance with Section 144C in every case involving TPO referrals, even if the matter is remanded
- Failure to issue a draft order, regardless of the stage of proceedings, renders the final order void ab initio
- Appeals against assessments must include a ground on procedural violation under Section 144C, even if not raised earlier
DRP Rights Are Substantive, Not Procedural
- The right to approach the DRP is a statutory right under Section 144C, not a procedural formality
- Courts and Tribunals will not uphold assessments where this right is denied, even if the final adjustment is mathematically correct
- Taxpayers must be given a full opportunity to contest the proposed adjustment before the DRP
Procedural Compliance Trumps Substantive Outcome
- The judgment reinforces that procedural compliance under the Income Tax Act is mandatory and cannot be waived on grounds of substantive correctness
- Revenue authorities must follow statutory procedures even in complex transfer pricing cases
- This decision strengthens the position of taxpayers in challenging assessments on technical grounds, especially where DRP access is denied
