The Punjab and Haryana High Court has held that where an “eligible assessee” has filed objections against a draft assessment order before the Dispute Resolution Panel (DRP), the Assessing Officer (AO) cannot proceed to pass a final assessment order without awaiting the DRP’s directions.
The Bench of Justice Deepak Sibal and Justice Rupinderjit Chahal has observed that the final assessment must conform to the directions issued by the DRP under Section 144C of the Income-tax Act, 1961.
The petitioner/assessee was an Indian company and a wholly owned subsidiary. It was engaged in the distribution and re-selling of designated services.
Buy Now: 80+ Income Tax Judgments | E-Magazine July 2026
For AY 2021-22, the petitioner filed its income-tax return on March 15, 2022. The return was selected for scrutiny and a notice under Section 143(2) of the Income-tax Act was issued on June 28, 2022.
Since the scrutiny assessment involved international transactions with associated enterprises, the Assessing Officer made a reference to the Transfer Pricing Officer (TPO) under Section 92CA(1) for determination of the arm’s length price. The TPO subsequently passed an order under Section 92CA(3) on October 29, 2023, proposing an addition of ₹60,09,84,289 to the petitioner’s declared income.
Based on the TPO’s order, the AO issued a draft assessment order under Section 144C(1) on November 6, 2023. Since the transfer-pricing adjustment resulted in a variation prejudicial to the petitioner, it qualified as an “eligible assessee” under Section 144C(15)(b).
The petitioner exercised its statutory remedy and filed objections before the DRP within the prescribed 30-day period. However, it admittedly failed to separately intimate the AO that objections had been filed before the DRP.
While the objections were pending before the DRP, the AO proceeded to pass the final assessment order on December 15, 2023, under Sections 143(3), 144B and 144C(3).
Along with the assessment order, a demand notice under Section 156 and a notice initiating penalty proceedings under Section 274 read with Section 270A were also issued.
The petitioner approached the High Court, contending that the final assessment was premature because its objections before the DRP were still pending. The High Court, at the preliminary hearing on February 26, 2024, stayed operation of the assessment order.
The subsequent developments proved significant. On August 27, 2024, the DRP issued directions under Section 144C(5), partially accepting the petitioner’s objections and requiring modification of the TPO’s earlier order. Pursuant to those directions, the TPO passed a revised order on September 17, 2024.
The petitioner informed the AO about the DRP directions and the revised TPO order and requested that a fresh final assessment order be passed in accordance with them. However, the AO did not do so.
The principal question before the Court was whether the final assessment order dated December 15, 2023, together with the consequential demand and penalty notices, could legally survive when the assessee had already filed objections before the DRP and the DRP subsequently issued directions modifying the very transfer-pricing determination on which the final assessment was based.
The Court identified the issue in precise terms: whether, in light of the subsequent DRP directions and revised TPO order, the final assessment order and consequential notices were sustainable in law.
The Bench examined the statutory mechanism contained in Section 144C.
Under Section 144C(1), where an eligible assessee is subjected to a variation prejudicial to its interests, the AO is required, in the first instance, to forward a draft assessment order.
Under Section 144C(2), the eligible assessee has 30 days to either accept the proposed variation or file objections before the DRP and the AO.
Where objections are filed, the DRP is required to examine the objections and issue directions for the guidance of the AO under Section 144C(5). Section 144C(10) expressly provides that every direction issued by the DRP is binding on the AO.
Further, Section 144C(13) requires the AO, upon receiving the DRP’s directions, to complete the assessment in conformity with those directions within the prescribed period.
The Court stressed that the statutory framework cannot be viewed merely as a procedural formality. The object of Section 144C is to ensure that an eligible assessee gets an opportunity to have its objections considered by the specialised DRP before the assessment reaches finality.
The Bench observed that the “spirit” of Section 144C is that once an eligible assessee has chosen to challenge the proposed variations before the DRP, the final assessment order should be passed in accordance with the directions subsequently issued by the DRP.
The Court particularly relied upon Sections 144C(10) and 144C(13), which make the DRP’s directions binding upon the AO and require the AO to complete the assessment in conformity with those directions.
Applying this principle, the Court found that the December 15, 2023 assessment order could not be sustained because it was passed before the DRP had decided the petitioner’s objections and was consequently inconsistent with the DRP’s later directions.
The Court held that the impugned assessment order violated Sections 144C(10) and 144C(13) and also went against the legislative scheme underlying Section 144C.
The Court found an additional and significant reason for setting aside the assessment.
The ₹60.09 crore addition had been made solely on the basis of the TPO’s order dated October 29, 2023. However, following the DRP’s directions dated August 27, 2024, the TPO had subsequently revised that order on September 17, 2024.
Thus, the very TPO order which formed the foundation—or, in the Court’s words, the “soul”—of the December 15, 2023 assessment order had itself been substituted by the subsequent TPO order.
The Bench therefore held that sustaining the original assessment in such circumstances would be untenable.
The department argued that the AO could not be faulted because the petitioner had failed to intimate the AO about the filing of objections before the DRP. According to the Department, in the absence of such intimation, the AO was legally obliged to proceed under Sections 144C(3) and 144C(4).
The High Court acknowledged that the petitioner had indeed failed to inform the AO. However, it refused to allow that procedural lapse to defeat the substantive statutory mechanism under Section 144C.
The Bench held that the petitioner did not gain anything from the failure to intimate the AO. It therefore characterised the omission as a “bonafide lapse” and held that the petitioner should not be prejudiced on that account.
The Punjab and Haryana High Court found support for its conclusion in earlier decisions concerning the interplay between the assessee’s objections before the DRP and the AO’s power to finalise an assessment.
The Court referred to the Delhi High Court’s decision in Pepsico India Holdings Pvt. Ltd. v. Assessment Unit, Income Tax Department, National Faceless Assessment Center and Others, which had relied upon the Bombay High Court’s ruling in Sulzer Pumps.
The principle emerging from those decisions was that once objections have been filed before the DRP within the prescribed period, the assessment should ultimately be completed in accordance with the DRP’s directions. The AO may pass a fresh assessment order after receiving those directions.
The Bench also referred to the Karnataka High Court’s decision in Open Silicon Research Pvt. Ltd. v. Assessment Unit, National Faceless Assessment Centre, Income-Tax Department.
In that case, the Karnataka High Court had observed that although failure to intimate the AO about objections filed before the DRP constituted a lapse, once objections had actually been filed before the DRP, the AO ought not to proceed with the assessment until the DRP issued its directions.
The Punjab and Haryana High Court found the reasoning persuasive and applied the same approach in the present case.
In the final operative portion, the High Court allowed the writ petition.
The Bench set aside the final assessment order dated December 15, 2023, passed under Sections 143(3), 144C(3) and 144B; the consequential demand notice issued under Section 156; and the notice initiating penalty proceedings under Section 274 read with Section 270A.
The matter was restored to the stage contemplated under Section 144C(13). The AO was directed to pass a fresh final assessment order in accordance with the DRP’s directions dated August 27, 2024 and the revised TPO order dated September 17, 2024.
Membership Required to Access Case Details & Order Copy
To view the complete Case Details and Download Order Copy, you must have an active membership. Please subscribe to continue.
