Facts of the Case

The writ petitions were filed by Microsoft India (R&D) Pvt. Ltd., challenging multiple final assessment orders passed by the Jurisdictional Assessing Officer pursuant to remand directions issued by the Income Tax Appellate Tribunal (ITAT).

The petitioner is an eligible assessee within the meaning of Section 144C(15) of the Income-tax Act, 1961, and the assessments involved transfer pricing adjustments. After remand by the ITAT for fresh determination, the Assessing Officer directly passed final assessment orders without first issuing a draft assessment order, accompanied by demand notices under Section 156 and penalty initiation notices.

The petitioner contended that such action violated the mandatory procedure prescribed under Section 144C of the Act.

 

Issues Involved

Whether a final assessment order passed without issuing a draft assessment order under Section 144C(1) of the Income-tax Act is legally sustainable.

Whether compliance with Section 144C is mandatory even in remand proceedings pursuant to ITAT directions.

Whether failure to issue a draft assessment order vitiates the entire assessment proceedings, including consequential demand and penalty notices.

 

Petitioner’s Arguments

The petitioner argued that:

Section 144C creates a substantive statutory right in favour of an eligible assessee to receive a draft assessment order and raise objections before the Dispute Resolution Panel (DRP).

The Assessing Officer acted without jurisdiction by bypassing the mandatory procedure and directly issuing final assessment orders.

The violation of Section 144C could not be cured by subsequent proceedings, as it goes to the root of the assessment.

Reliance was placed on binding precedents, including Turner International India Pvt. Ltd. v. DCIT and Headstrong Services India Pvt. Ltd., wherein similar assessment orders were quashed.

 

Respondent’s Arguments

The Revenue contended that:

The assessments were framed pursuant to remand directions and, therefore, issuance of a draft assessment order was not necessary.

The procedure adopted substantially complied with the requirements of the Act.

No prejudice was caused to the assessee, as opportunities of hearing were otherwise provided.

 

Court Order / Findings

The Delhi High Court rejected the Revenue’s contentions and held that:

Section 144C is mandatory and not directory, and its non-compliance renders the final assessment order void ab initio.

The obligation to issue a draft assessment order applies even in remand proceedings, provided the assessee continues to qualify as an eligible assessee.

The Assessing Officer has no discretion to bypass the statutory mechanism under Section 144C.

The Court reaffirmed and followed its earlier rulings, particularly Turner International India Pvt. Ltd. v. DCIT, holding that failure to issue a draft assessment order is a jurisdictional defect, not a procedural irregularity.

Accordingly, the impugned final assessment orders, along with consequential demand notices and penalty proceedings, were set aside.

 

Important Clarification

The Court clarified that:

Compliance with Section 144C is independent of the stage of proceedings and applies equally to original assessments and remand proceedings.

The right to approach the DRP is a valuable statutory safeguard, and denial of such right cannot be condoned on grounds of administrative convenience or technical interpretation.

Any assessment framed in violation of Section 144C is non est in law, irrespective of the merits of the additions made.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1770193795_MICROSOFTINDIARDPVT.LTD.VsDEPUTYCOMMISSIONEROFINCOMETAXANR..pdf

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