The Income Tax Appellate Tribunal, Bangalore, has reaffirmed that the Assessing Officer is legally bound to implement the Dispute Resolution Panel’s directions without deviation. This ruling clarifies that non-compliance with DRP orders under Section 144C(13) renders the final assessment order void, irrespective of the AO’s independent view.
Background & Facts
The Dispute
The assessee, Marlabs Innovations Private Limited, is engaged in custom software development and IT-enabled services. For the assessment year 2022-23, the company filed its return declaring a total income of Rs. 35,94,83,750. The return was selected for scrutiny, and a reference was made to the Transfer Pricing Officer (TPO) under Section 92CA of the Income Tax Act, 1961.
Key Facts
- The TPO issued an order dated 10.01.2025 proposing a transfer pricing adjustment of Rs. 23,16,49,912.
- The Assessing Officer (AO) issued a draft assessment order dated 19.03.2025, proposing total income at Rs. 59,29,35,662, incorporating the TPO’s adjustment.
- The assessee filed objections before the Dispute Resolution Panel (DRP) under Section 144C(4).
- The DRP issued directions dated 03.12.2025 under Section 144C(5), partially allowing the assessee’s objections.
- The TPO, pursuant to the DRP’s directions, issued a revised order dated 24.12.2025, reducing the transfer pricing adjustment for the Software Development Segment to NIL, from the original Rs. 15,88,10,000.
- The total transfer pricing adjustment after DRP’s directions was computed by the TPO at Rs. 6,71,47,000, granting relief of Rs. 16,45,02,912.
- Despite this, the AO passed the final assessment order dated 18.12.2025, assessing income at Rs. 59,29,35,662, claiming the DRP had rejected all objections.
Procedural History
- 28.11.2022: Assessee filed return of income.
- 10.01.2025: TPO issued order proposing transfer pricing adjustment of Rs. 23,16,49,912.
- 19.03.2025: AO issued draft assessment order.
- 03.12.2025: DRP issued directions under Section 144C(5), partially allowing objections.
- 24.12.2025: TPO gave effect to DRP directions, reducing adjustment to Rs. 6,71,47,000.
- 18.12.2025: AO passed final assessment order ignoring DRP’s revised computation.
- 04.06.2026: Hearing held before ITAT Bangalore.
- 08.06.2026: Judgment pronounced.
The Parties' Positions
For the Assessee: The AO’s final order violated Section 144C(13) by ignoring the TPO’s revised computation reflecting DRP’s directions. Relied on PCIT v. Flextronics Technologies (India) Pvt. Ltd. and PCIT v. VMWARE Software India Pvt. Ltd.
For the Revenue: The AO acted correctly as the DRP had rejected the assessee’s objections. Relied on Hitachi Astemo Haryana Pvt. Ltd. v. DCIT.
Relief Sought
The assessee sought quashing of the final assessment order dated 18.12.2025 and direction to the AO to pass a fresh order in conformity with the DRP’s directions and the TPO’s revised computation of Rs. 6,71,47,000.
The Legal Issue
Does the Assessing Officer violate Section 144C(13) of the Income Tax Act by passing a final assessment order that does not reflect the specific adjustments mandated by the Dispute Resolution Panel under Section 144C(5)?
Arguments Presented
For the Appellant
The assessee contended that Section 144C(13) mandates that the final assessment order must be in strict conformity with the directions issued by the DRP. The TPO’s order dated 24.12.2025 clearly implemented the DRP’s directions by reducing the transfer pricing adjustment. The AO’s refusal to incorporate this revised figure rendered the final order illegal. The assessee relied on PCIT v. Flextronics Technologies (India) Pvt. Ltd. [2023] 459 ITR 493 (Karnataka) and PCIT v. VMWARE Software India Pvt. Ltd., where the Karnataka High Court held that the AO has no discretion to override DRP directions. The Supreme Court’s dismissal of the Revenue’s SLP in SLP(C) Diary No. 47414 of 2024 further affirmed this position.
For the Respondent
The Revenue argued that the DRP had rejected the assessee’s objections and therefore the AO was justified in adopting the draft assessment order. It relied on Hitachi Astemo Haryana Pvt. Ltd. v. DCIT, where the Delhi Bench of the Tribunal had remanded the matter to the AO. The Revenue contended that the AO’s interpretation of the DRP’s order was reasonable and that the jurisdictional High Court’s decisions were not binding on other benches.
The Court's Analysis
The Tribunal emphasized that Section 144C(13) is a mandatory statutory provision requiring the AO to pass a final assessment order strictly in accordance with the DRP’s directions. The AO’s assertion that the DRP had rejected all objections was factually incorrect. The TPO’s order dated 24.12.2025, which was issued under Section 144C(12), explicitly gave effect to the DRP’s directions and reduced the adjustment by over Rs. 16 crore. The AO’s failure to reflect this revised figure was not a mere procedural lapse but a substantive violation of the statute.
"The AO passed the impugned final assessment order not in compliance with the specific directions of the learned DRP... this is in clear violation of the provisions of section 144C(13) of the Act."
The Tribunal distinguished the Hitachi Astemo decision on jurisdictional grounds. While the Delhi Bench followed the Delhi High Court’s precedent, this Bench is bound by the Karnataka High Court’s binding rulings in Flextronics and VMWARE. The Supreme Court’s dismissal of the SLP against VMWARE further solidified the binding nature of the Karnataka High Court’s interpretation. The Tribunal held that the AO cannot substitute its own view for the DRP’s directions, even if it believes the DRP erred. The statutory scheme requires obedience, not review.
The Verdict
The appeal is allowed. The final assessment order dated 18.12.2025 is quashed. The matter is remanded to the Assessing Officer to pass a fresh assessment order in conformity with the DRP’s directions dated 03.12.2025 and the TPO’s revised computation dated 24.12.2025, assessing total income at Rs. 6,71,47,000. The AO shall complete the fresh assessment within 8 weeks from the date of receipt of this order. Costs of Rs. 10,000 are awarded to the assessee.
What This Means For Similar Cases
DRP Directions Are Binding, Not Advisory
- Practitioners must insist that the AO incorporates all DRP-mandated adjustments, even if they appear minor or technical.
- Any deviation by the AO, even if based on a contrary interpretation, is grounds for immediate appeal.
- The burden shifts to the Revenue to prove that the DRP’s directions were not implemented, not to the assessee to prove they were.
Jurisdictional Precedents Override Coordinate Benches
- Tribunals must follow the binding precedents of their jurisdictional High Court, even if coordinate benches of the ITAT in other jurisdictions adopt a different view.
- The Hitachi Astemo precedent is not binding on ITAT Bangalore, which falls under Karnataka High Court’s jurisdiction.
- Practitioners should always cite jurisdictional High Court rulings and highlight Supreme Court dismissals of SLPs against them.
TPO’s Post-DRP Order Is the Key Document
- The TPO’s order giving effect to DRP directions under Section 144C(12) is the operative document for the AO.
- The AO cannot rely on the original TPO order or draft assessment order if the TPO has revised it pursuant to DRP directions.
- Always obtain and annex the TPO’s post-DRP order as evidence in appeals.
