The Income Tax Appellate Tribunal, Bangalore, has reaffirmed that an Assessing Officer is legally bound to implement the directions of the Dispute Resolution Panel under Section 144C(13) of the Income Tax Act, irrespective of whether the Transfer Pricing Officer has yet issued a consequential order. This ruling clarifies a critical procedural obligation in international transaction assessments.
Background & Facts
The Dispute
The assessee, Ecom Commodities India Private Limited, is engaged in trading agricultural produce and providing IT-enabled services. For the assessment year 2022-23, the company filed its return on 29.11.2022 declaring a total income of Rs. 3,92,32,630 and a book profit under Section 115-JB of Rs. 10,54,95,416. The return was selected for scrutiny, triggering a reference to the Transfer Pricing Officer (TPO).
Key Facts
- The TPO passed an order under Section 92CA(3) on 27.01.2025, proposing a transfer pricing adjustment of Rs. 6,72,32,796 relating to interest on delayed receivables.
- The Assessing Officer (AO) issued a draft assessment order on 03.03.2025, incorporating the TPO’s adjustment and proposing total income of Rs. 10,64,65,426 and book profit of Rs. 17,27,28,217.
- The assessee filed objections before the Dispute Resolution Panel (DRP).
- On 27.12.2025, the DRP issued directions under Section 144C(5), partially allowing the assessee’s submissions and specifically directing the re-computation of interest on receivables using LIBOR with a markup of 450 basis points.
- The DRP also directed deletion of adjustments made to the book profit under Section 115-JB.
- The AO did not receive any order from the TPO giving effect to the DRP’s directions.
- Despite this, the AO passed the final assessment order on 29.01.2026, ignoring the DRP’s directions and adopting the draft assessment figures.
Procedural History
- 29.11.2022: Assessee filed return of income
- 27.01.2025: TPO issued order proposing transfer pricing adjustment
- 03.03.2025: AO issued draft assessment order
- 27.12.2025: DRP issued directions under Section 144C(5)
- 29.01.2026: AO passed final assessment order without implementing DRP directions
- 02.06.2026: Hearing before ITAT, Bangalore
- 05.06.2026: Judgment pronounced
The Parties' Positions
For the Assessee
The authorized representative contended that the final assessment order violated Section 144C(13), which mandates that the AO must pass the order in conformity with the DRP’s directions. It was argued that the AO’s reliance on non-receipt of the TPO’s implementing order is legally untenable. The assessee relied on two binding decisions of the Karnataka High Court: PCIT v. Flextronics Technologies (India) (P.) Ltd. [2023] 459 ITR 493 and PCIT v. VMWARE Software India Pvt. Ltd. (ITA No. 221/2023, dated 26.09.2023), both holding that the AO’s duty to comply with DRP directions is absolute.
For the Revenue
The Departmental Representative defended the final assessment order, arguing that the AO could not implement the DRP’s directions without a consequential order from the TPO. It was submitted that the AO was merely following procedural hierarchy and could not act independently of the TPO’s implementation.
Relief Sought
The assessee sought quashing of the final assessment order dated 29.01.2026 and a direction to the AO to pass a fresh order in conformity with the DRP’s directions dated 27.12.2025.
The Legal Issue
Is the Assessing Officer legally obligated to comply with the directions issued by the Dispute Resolution Panel under Section 144C(13) of the Income Tax Act, even if the Transfer Pricing Officer has not yet issued a consequential order giving effect to those directions?
Arguments Presented
For the Assessee
The assessee relied on the plain language of Section 144C(13), which states that the AO shall pass the final assessment order "in conformity with" the DRP’s directions. It was argued that the DRP’s directions are binding and self-operative; the AO’s duty is not contingent on the TPO’s action. The assessee cited Flextronics Technologies and VMWARE Software India, both upheld by the Supreme Court, to establish that non-compliance with DRP directions renders the assessment order void. The submission was that the AO’s role is to implement, not to wait for another agency to act.
For the Respondent
The Revenue contended that the TPO’s order is a necessary precondition for the AO to effectuate the DRP’s directions. It argued that without a formal TPO order adjusting the transfer pricing, the AO lacks the legal basis to modify the assessment. The Revenue relied on administrative convenience and procedural sequence, asserting that the AO cannot unilaterally override the TPO’s domain.
The Court's Analysis
The Tribunal examined the statutory framework under Section 144C, particularly subsections (5) and (13). It noted that Section 144C(5) empowers the DRP to issue directions after considering objections, and Section 144C(13) mandates that the AO shall pass the final assessment order "in conformity with" those directions. The language is unambiguous and imposes a non-discretionary duty.
"The AO is not a passive recipient of DRP directions but an active implementer bound by law to give effect to them. The absence of a TPO order does not nullify the DRP’s authority or absolve the AO of its statutory obligation."
The Tribunal emphasized that the DRP is a statutory body with quasi-judicial powers, and its directions are not advisory but binding. The TPO’s role is to assist the DRP by providing technical input; the DRP’s determination is final on the merits. The AO’s duty arises directly from Section 144C(13), not from any subsequent TPO order.
The Tribunal further noted that the Karnataka High Court had already settled this issue in Flextronics Technologies and VMWARE Software India, and the Supreme Court had declined to interfere with the latter decision on 14.11.2024. The Tribunal held that these precedents are binding on it under the doctrine of stare decisis.
The Revenue’s argument that the AO was merely awaiting the TPO’s order was rejected as contrary to the legislative intent. The Tribunal observed that the DRP mechanism was introduced to expedite resolution and prevent procedural delays from undermining taxpayer rights.
The Verdict
The appeal is allowed. The final assessment order dated 29.01.2026 is quashed. The Assessing Officer is directed to pass a fresh assessment order in strict conformity with the directions issued by the Dispute Resolution Panel dated 27.12.2025. The other grounds raised by the assessee are rendered academic and are kept open. The order shall be passed within 60 days from the date of this order.
What This Means For Similar Cases
DRP Directions Are Self-Executing
- Practitioners must now argue that any assessment order ignoring DRP directions is void ab initio, regardless of TPO delays
- The AO cannot use administrative inaction by the TPO as a defense for non-compliance
- A fresh assessment must be issued within the statutory timeline, not indefinitely postponed
TPO Delays Do Not Excuse AO Non-Compliance
- The burden of implementing DRP directions lies solely with the AO
- Taxpayers may file writ petitions if the AO fails to act within a reasonable time after DRP directions
- The ITAT’s reliance on Flextronics and VMWARE establishes a binding precedent across Karnataka jurisdiction
Procedural Rigor Over Administrative Convenience
- The judgment reinforces that statutory compliance trumps procedural convenience
- Tax officers must treat DRP directions as final and binding, not as recommendations pending further action
- This decision strengthens taxpayer rights in transfer pricing disputes by closing a common loophole used to delay relief
