The Supreme Court has upheld the setting aside of income tax assessments completed without first issuing draft assessment orders to eligible assessees under Section 144C of the Income Tax Act, 1961, in a batch of transfer pricing matters arising after remand by the Income Tax Appellate Tribunal.

A Bench of Justice J.B. Pardiwala and Justice K. Vinod Chandran emphasised that the opportunity to accept proposed variations or raise objections before the Dispute Resolution Panel and the Assessing Officer is a valuable statutory right.

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The proceedings concerned different assessment years. The Supreme Court recorded that the Delhi High Court’s Division Bench had first dealt with the matter involving Turner International India Pvt. Ltd. for two assessment years and followed that decision in the other cases.

In the cases described by the Court, assessments had initially been finalised and challenged before the Income Tax Appellate Tribunal. The Tribunal subsequently remanded the matters, granting liberty to both the assessees and the Revenue to approach the Transfer Pricing Officer for a fresh study to determine the arm’s length price in accordance with law.

Following the remand, the Assessing Officer referred the matters to the Transfer Pricing Officer. According to the Supreme Court’s account, the references remained pending for a considerable period before the Transfer Pricing Officer passed orders.

The Assessing Officer then finalised the assessments on the basis of those orders without following the draft assessment procedure. This omission led to the assessments being set aside.

Draft Assessment Procedure Applies After Remand

The central legal issue was whether an assessment undertaken following a Tribunal remand could be finalised on the strength of the Transfer Pricing Officer’s order without first providing the eligible assessee with a draft assessment order.

The Supreme Court explained that Section 144C specifically requires the Assessing Officer, in the first instance, to forward a draft of the proposed assessment order to the eligible assessee where a variation prejudicial to that assessee’s interest is proposed.

The requirement therefore remained applicable in the remand proceedings before the Court. The fresh transfer pricing exercise did not dispense with the assessee’s statutory opportunity to respond to the proposed assessment through the prescribed mechanism.

Thirty-Day Opportunity To Accept Variations Or Object

The Bench referred to Section 144C(2), which enables an eligible assessee, within 30 days of receiving the draft order, either to accept the proposed variations or to file objections before the Dispute Resolution Panel and the Assessing Officer.

By proceeding directly to final assessment, the authorities had denied the assessees that opportunity.

The Court described the safeguard as a “valuable right” conferred by the statutory provision containing the non-obstante clause. Since that right had not been afforded, the High Court had set aside the assessment orders.

The Supreme Court’s reasoning recognises that issuing a draft assessment order serves a substantive purpose: it gives the eligible assessee access to the statutory objection process before the assessment is finalised.

The Bench found no reason to disturb the High Court’s orders and rejected the Revenue’s special leave petitions.

It separately considered SLP (C) No. 14443 of 2024 and Diary No. 44315 of 2024, which had been filed by assessees. The Court allowed both petitions and set aside the impugned assessments on the same reasoning concerning non-compliance with the draft assessment procedure.

The Supreme Court also condoned delay and directed that all miscellaneous applications and pending applications, if any, stand rejected.

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