Gujarat High Court Reaffirms Mandatory Draft Order In Transfer Pricing Officer Assessments

The Gujarat High Court has held that failure to issue a draft assessment order under Section 144C in cases involving Transfer Pricing Officer (TPO) adjustments renders the final assessment order void. The Court emphasised that an “eligible assessee” must be issued a draft order in terms of Section 144C, including cases with TPO adjustments, and that skipping this step deprives the assessee of the statutory right to approach the Dispute Resolution Panel (DRP).

A Division Bench comprising Justice A.S. Supehia and Justice Pranav Trivedi heard the petitions, which covered two assessment years—2017-18 and 2018-19—decided through a common judgment, though the facts were primarily drawn from the 2018-19 case.

The case arose after Sun Pharmaceuticals, the petitioner, was selected for scrutiny under the Computer Assisted Scrutiny Selection (CASS) system, following which a notice under Section 143(2) was issued on 23 September 2019. The company had declared a loss of Rs. 1,506 crore for AY 2018-19 and filed a revised return, which was subsequently referred to the TPO, who made an upward adjustment of Rs. 94.88 lakh.

The Principal Commissioner of Income Tax (PCIT), Vadodara, issued a notice under Section 263, holding that the assessment order for AY 2018-19 was erroneous and prejudicial to the revenue, and directed the Assessing Officer (AO) to pass a de novo order. The Court observed that the PCIT had not specified the stage from which the new proceedings should begin, and held that the AO was required to “fall back” to the stage of the TPO's order dated 26 July 2021, rather than proceeding directly to a final assessment.

The petitioner contended that because a TPO variation existed, it qualified as an “eligible assessee” under Section 144C, and that failure to issue a draft order rendered the assessment void ab initio. The Revenue argued that, since the petitioner had not filed objections to the original draft order of 2021, a new draft order was unnecessary.

The High Court rejected this, clarifying that Section 144C is a “self-contained code”, providing an eligible assessee with a statutory right to object through the DRP, and that the PCIT's setting aside of the original assessment does not dilute the mandatory nature of Section 144C(1).

The Court also noted that remand was not possible because the nine-month and twelve-month limitation periods under Section 153(3) and (4) had expired, and Section 153(6) does not allow the Revenue to bypass these time limits even when procedural errors are identified.

The Bench held that the draft assessment order is mandatory, and that the TPO had correctly treated the petitioner as an eligible assessee. It observed:

“12.2 Thus, in our considered opinion the appropriate course which ought to have been adopted by the Assessing Officer was to fall back to the stage of the order dated 26.07.2021 passed by the TPO suggesting upward adjustment of Rs.94,88,151/. The draft Assessment Order dated 20.09.2021 culminated into final Assessment Order passed on 29.10.2021, which was subject matter of revision. Hence, it was not open for the Assessing Officer to directly pass an order on 26.03.2025 under the provisions of Section 143, read with Section 263 read with Section 144 B of the IT Act, while ignoring the provisions of Section 144 C of the IT Act, more particularly, in wake of the draft assessment order on 20.09.2021 and final assessment order dated 29.10.2021.”

Following the settled legal precedent set by the Delhi High Court in Sumitomo Corporation India, the Gujarat High Court allowed the writ petitions, quashing and setting aside two separate assessment orders dated 26 and 27 March 2025.