ITAT Quashes Assessment for Breach of Section 144C: Draft Order Mandatory in Transfer Pricing Cases

The ITAT Delhi quashed the entire assessment proceedings, citing the provisions of Section 144C of the Income Tax Act. The tribunal rules that in cases involving foreign companies or transfer pricing cases, the tax authorities must first issue a “draft assessment order“, allowing the assessee to challenge the order before the Dispute Resolution Panel (DRP).

The appeal was filed by Honda Cars India Limited (successor in interest to Honda Motor India Private Limited) against the Assistant Commissioner of Income Tax, Circle-1 Noida (Income Tax Authorities), before the ITAT Delhi, challenging an order dated July 31, 2018, passed by the CIT(A), New Delhi. The case pertains to the Assessment Years 2009-10 and 2010-11.

During the hearing of the case, the assessee mainly challenged the validity of the final assessment order dated March 30, 2014. The assessee claimed that the Assessing Officer (AO) failed to comply with the mandatory procedure under Section 144C of the Income Tax Act; they did not issue any draft assessment order before passing the final order, which took away the assessee’s right to challenge the order before the Dispute Resolution Panel (DRP).

When the tribunal analysed the case, it endorsed the additional ground raised by the assessee, and no further factual investigation was needed in the present case to prove that the assessment proceedings were invalid. The tribunal also observed that after an earlier remand by the tribunal and directions from the Allahabad High Court, the assessing officer treated the matter as a fresh assessment and referred it again to the transfer pricing officer (TPO). However, despite this fresh process, they were still required to issue a draft assessment order; however, they failed to do so.

The tribunal relied on an earlier judicial ruling based on a similar issue and held that failure to adhere to the provisions of Section 144C is not a minor procedural lapse but a serious defect that invalidates the entire assessment. Consequently, the final assessment orders were declared legally unsustainable. Accordingly, the Tribunal quashed the impugned assessment orders and allowed the assessee’s appeal.