ITAT Bangalore Deletes Additions as AO Issued Second Draft Assessment Order

Marvell India Pvt. Ltd. Vs DCIT (ITAT Bangalore)

The appeal before the Income Tax Appellate Tribunal (ITAT), Bangalore, concerned only Ground Nos. 18 and 19, relating to corporate tax additions made in the final assessment order for Assessment Year 2017-18, after the Tribunal had already disposed of the transfer pricing issues in an earlier order and later recalled these two grounds through a miscellaneous application.

The assessee, a subsidiary engaged in providing software development services to its associated enterprise, had originally filed its return declaring total income of ₹13.72 crore. During scrutiny, the Assessing Officer (AO) referred the international transactions to the Transfer Pricing Officer (TPO), who proposed transfer pricing adjustments. Based on the TPO’s order, the AO issued a draft assessment order dated 16.02.2021, containing only transfer pricing adjustments. The assessee filed objections before the Dispute Resolution Panel (DRP).

Subsequently, the AO issued another communication dated 15.04.2021 proposing corporate tax additions. Despite the pending objections before the DRP, the AO passed a final assessment order on 26.04.2021, incorporating both transfer pricing and corporate tax additions. The Karnataka High Court quashed that assessment order as well as the DRP’s earlier order and directed the DRP to consider the assessee’s objections filed against the original draft assessment order. Thereafter, the DRP issued fresh directions on 28.11.2022, dealing only with the transfer pricing adjustments contained in the draft assessment order dated 16.02.2021. However, the AO’s fresh final assessment order dated 29.12.2022 again included corporate tax additions amounting to ₹10.89 crore, although no DRP directions had been issued on those issues.

The assessee argued that the AO exceeded jurisdiction by making corporate tax additions that had never formed part of the original draft assessment order. It also contended that once the draft assessment order dated 16.02.2021 had been issued and objections filed before the DRP, the AO could neither issue another draft assessment order nor propose further additions. According to the assessee, the final assessment order could only conform to the variations proposed in the original draft assessment order and the DRP’s directions.

The Revenue contended that the AO had issued another draft assessment order on 15.04.2021 proposing the corporate tax additions and had therefore provided an opportunity to the assessee before passing the final assessment order.

The Tribunal examined Section 144C of the Income-tax Act and held that its language contemplates only one draft assessment order for a particular assessment year. It emphasized that the expressions “in the first instance” and “a draft order” indicate a single initial draft containing all proposed variations prejudicial to the assessee. The Tribunal observed that the statutory framework, including the assessee’s right to file objections, the DRP’s powers, and the AO’s obligation to pass the final assessment order in conformity with the DRP’s directions, is built around this single draft assessment order.

The Tribunal held that the AO could not issue two separate draft assessment orders for the same assessment proceedings—one for transfer pricing issues and another for corporate tax issues. Accordingly, it declared the subsequent draft assessment order dated 15.04.2021 to be illegal and bad in law and quashed it. The Tribunal also referred to judicial precedents supporting the principle that additions in the final assessment order cannot travel beyond the variations proposed in the draft assessment order.

Further, the Tribunal noted that the DRP’s fresh directions issued on 28.11.2022 dealt only with transfer pricing adjustments. Since no directions were issued regarding the corporate tax additions, the AO was bound under Section 144C to pass the final assessment order strictly in conformity with the DRP’s directions. By including corporate tax additions of ₹10.89 crore without any corresponding DRP direction, the AO acted in violation of Section 144C. The Tribunal therefore held those additions to be illegal and bad in law and directed that the entire corporate tax additions of ₹10,89,81,456 be deleted. The appeal was accordingly allowed.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This appeal at the instance of the assessee is directed against the order of ld. DCIT Circle 4(1)(1), Bengaluru dated 29.12.2022 vide DIN & Order No. ITBA/AST/S/143(3)/2022-23/1048343764(1) passed u/s 143(3) r.w.s. 260 of the Income Tax Act, 1961 (in short “The Act”) for the assessment year 2017-18.

2. The assessee has raised the following grounds of appeal:

Marvell India Pvt Ltd (hereinafter referred to as the ‘Appellant’ or ‘Company)’ objects to the final assessment order dated 29.12.2022 passed under section 143(3) read with Section 260 of the Income-tax Act, 1961 (hereafter referred to as the ‘Act’) by the Deputy Commissioner of Income Tax, Circle 4(1)(1), Bangalore on the basis of the directions dated 28.11.2022 of the Dispute Resolution Panel (hereinafter referred to as the ‘DRP’) and order under section 92CA (3) of the Act passed by the Transfer Pricing Authority dated 28.01.2021 for the aforesaid assessment year on the following, among other grounds:

Ground No. 1: Transfer Pricing (TP Adjustment)

1.1. The Ld. Assessing Officer has erred in law and on facts in making a TP adjustment of INR 11,55,70,934/- to the returned income of the Appellant and in holding that the international transactions between the Appellant and its AE of provisions of SWD services were not at arm’s length.

Ground No. 2: Reiection of the TP documentation of the Appellant

The Ld. Assessing Officer has erred in law and on facts by rejecting, without cogent reasons, the TP documentation maintained by the Appellant in the manner contemplated under the relevant provisions of Chapter X of the Act, and Rule 10 the Income-tax Rules, 1962 (hereinafter referred to as the ‘the Rules’) by stating that the documentation is “not reliable or correct” merely because the learned TPO did not agree with the positions and filters adopted by the Appellant, and instead chose to adopt additional filters / modified filters in selecting the comparable companies and has erred in law and on facts by conducting a fresh search analysis for comparable companies without considering the requirement of Rule 10D (4) of the Rules

Ground No. 3: Rejection of the comparability analysis undertaken by the Annellant

3. The Assessing Officer has erred in law by conducting a fresh search for comparable companies and by rejecting the search process carried out by the Appellant, without giving justifiable reasons. The Ld. Assessing Officer did not consider that the TPO can proceed to determine the ALP for the international transactions of the Appellant on its own only upon satisfaction of the conditions mentioned in Section 92C(3) of the Act which were not satisfied in the impugned case. Further, the learned TPO did not consider the requirement of Rule 10D(4) of the Rules when undertaking a fresh search for comparable companies.

Ground No. 4: Non-availability of data for FY 2016-17

4. The Ld. Assessing Officer has erred in not selecting companies only if the data pertaining to FY 2016-17 is available in public database. If the data pertaining to FY 2016-17 is not available. Ld. Assessing Officer has proceeded to not select the company, ignoring that data for FY 2015-16 and FY 2014-15 is available.

Ground No. 5: Companies with different financial accounting year end

5. The Ld. Assessing Officer has erred in law and on facts in rejecting certain comparable companies on the basis that their financial year-end dates do not coincide with the Appellant’s financial year-end date. The Ld. Assessing Officer has himself selected R Systems International Limited, a company having different FY as compared to the Appellant in the final set of comparable.

Ground No. 6: Turnover filter shnuld have an limper limit

6. The Ld. Assessing Officer has erred in law and on facts by incorrectly applying the turnover filter for non-exclusion of comparable having turnover more than Rs. 200 crores despite several rulings of coordinate bench including in appellant’s own case:

i. Nihilent Ltd

ii. Cybage Software Pvt Ltcl

iii. Mindware Ltd

iv. Larsen & Toubro Infotech Ltd

v. Infosys Ltd

vi. Persistent Systems Ltd

Ground No. 7: Application of filter for ten times of Appellants turnover

7. Without prejudice to Ground no. 5 and in the alternative, the Ld. Assessing Officer have erred in law and on facts by considering comparable companies having turnovers greater than ten times the turnover of the Appellant.

Ground No. 8: Application of export earning filter of 75%

8. The Ld. Assessing Officer has erred in applying the export earning filter with a threshold limit of 75% of the total turnover in selecting certain comparable companies.

Ground No. 9: Modification of persistent loss filter

9. The Ld. Assessing Officer has erred in law and facts in modifying persistent loss filter applied by the Appellant in its TP documentation and thereby rejecting comparable companies having losses in 2 out of 3 years.

Ground No. 10: Methodology applied For the computation of RPT filter.

10. The Ld. Assessing Officer has erred in law and on facts in incorrectly applying the RPT filter by taking only RPT Income/Total Income or RPT Expenditure/Total Expenditure instead of taking the total value of RPT transactions (RPT Income + RPT Expenditure) in the numerator and sales in the denominator.

Ground No. 11: Introducing new comparable companies selected by the learned TPO in relation to Software Development Services (“SWD”)

11. The Ld. Assessing Officer has erred in law and on facts in introducing new companies as comparable to the Appellant, despite there being differences in functional comparability, product dissimilarity, intangibles led revenues, availability of complete financial information, incorrect reliance on (unreliable) segmented financials, extra-ordinary events due to business restructuring, abnormal year, judicial pronouncements, or other differences:

i. Larsen & Toubro Infotech Ltd

ii. Mindtree Ltd

iii. Persistent Systems Ltd

iv. Tata Elxsi Ltd

v. Aptus Software Labs Pvt Ltd

vi. Cygnet Infotech Pvt Ltd

vii. Infobeans Technologies Ltd

viii. Nihilent Ltd

ix. Infosys Ltd

x. Cybage Software Pvt Ltd

xi. Consilient Technologies Pvt Ltd

Ground No. 12: Rejection of comparable companies included in Appellant’s TP documentation

12. The Ld. Assessing Officer has erred in law and on facts in rejecting the comparable companies selected by the Appellant, based on incorrect reasons:

i. Agilisys IT Systems India Pvt Ltd

ii. Sasken Communication Technologies Ltd

iii. Isummation Technologies Pvt Ltd

iv. Evoke Technologies Pvt Ltd

v. Minvesta Infotech Ltd

Ground No. 13: Rejection of additional comparable companies requested for inclusion by the Appellant during the course of assessment proceedings.

13. The Ld. Assessing Officer has erred in law and on facts in rejecting additional comparable companies requested for inclusion by the Appellant, during the assessment proceedings:

i. Synfosys Business Solutions Ltd

ii. Maveric Systems Ltd

iii. E-Zest Solutions Ltd

iv. Batchmaster Software Pvt Ltd

v. DCIS DOT COM Solutions India Pvt Ltd

vi. Indianic Infotech Ltd

vii. Nintec Systems Ltd

viii. Y Media Labs Pvt Ltd

ix. Sybrant Technologies Pvt Ltd

Ground No. 14: Computation of operating margins

14. The Ld. Assessing Officer has erred in considering provision for bad and doubtful debts for the purpose of computing the operating profit of comparable companies.

Ground No. 15: Not granting working capital adjustment.

15. The Ld. Assessing Officer has erred in law and on facts by disregarding the provisions of Section 92C of the Act read with Rule 10B (3) of the Rules, by not granting the working capital adjustment.

Ground No. 16: Risk adjustment

16. The Ld. Assessing Officer has erred in not appreciating that the Appellant, being a captive service provider, operates as a lower risk service provider as compared to comparable companies, which carry higher risks and accordingly erred in not granting appropriate risk adjustments.

Ground No. 17: Other TP related grounds

17. The Ld. Assessing Officer failed to appreciate the Appellant’s commercial wisdom on the application of arm’s length principle, being inextricably tied to the business realities.

Ground No. 18: Disallowance made without being proposed in the draft assessment order is is violation of Section 144C of the Income-tax Act. 1971

18. On the facts and in the circumstances of the case and in law, the Ld. Assessing Officer erred in making a disallowance of Rs 10,89,81,456 in the final assessment order dated 29 December 2022 even though no such disallowance was proposed in the draft assessment order died 16 February 2021 passed under section 143(3) read with section 144(C) of the Act.

19. Any adjustment made in the final assessment order, without having been raised in the draft assessment order, is contrary to the scheme of section 144C of the Act and a nullity in law. Therefore, the Appellant prays that the impugned disallowance of Rs. 10,89,81,456 made by the Ld: Assessing Officer in the final assessment order should be deleted.

Ground No. 19: Without prejudice to the Ground No 18. additions have been made without any basis or information and without taking cognizance of the rectification application filed by the Appellant.

20. On the facts and in the circumstances of the case, the Ld. Assessing Officer erred in passing the final assessment order, by making the following additions, without providing any relevant source/supporting information for making such additions and without taking into consideration the rectification application filed by the Appellant dated 25 May 2021 against the final assessment order passed by the Ld. AO without considering the Appellant’s appeal filed before the Hon’ble DRP:

a) Addition of Rs. 3,26,32,148 being the difference in the gross value of services as per the final assessment order (Rs. 1,15,24,12,858) and the gross value of services disclosed by the Appellant for AY 2017-18 (Rs. 1,11,97,80,710);

b) Addition of a customs duty payment of Rs. 6,04,933;

c) Addition of Rs. 5,18,48,973 on account of unexplained imports, whereas total imports done by the Appellant during the year was only Rs. 64,90,685; and

d) Addition of Rs. 3,03,86,087 on account of difference in clOsing WDV of fixed assets for AY 2016-17 and opening WDV of fixed assets for AY 2017-18.

The Appellant prays that the impugned additions of Rs. 10,89,81,456 made by the Ld. Assessing Officer in the final assessment order should be deleted.

Ground No. 20′ The Ld. Assessing Officer has erred in levying interest under Section 234B of the Income-tax Act. 1961 and initiatine penalty under Section 270A of the Income-tax Act. 1961.

21. On the facts and in the circumstances of the case and in law, the Ld. Assessing Officer erred in levying interest of Rs. 3,37,10,530 under section 234B of the Act. Interest under section 2346 of the Act is consequential in nature and needs to be recomputed based on the order of yothonours on the above grounds.

22. On the facts and in the circumstances of the case, the Ld. Assessing Officer erred in initiating penalty proceedings under section 270A of the Act for under-reporting and misreporting of income.

The Appellant craves leave to add to. amend. alter. modify. forego. or withdraw any the above Grounds of Apnea’ before the disposal of the Anneal

3. Brief facts of the case are that M/S. Marvell India Private Limited (hereinafter referred to as ‘Assessee’) is a subsidiary of Marvell Technology Group Ltd. and is engaged in provision of software development services to its Associated Enterprise (hereinafter referred to as ‘AE’). During the Assessment Year 2017­18, the Assessee filed its return of income by declaring total income of Rs.13,72,75,040/- and the same was taken up for scrutiny. During the assessment proceedings, the Ld. Assessing Officer (hereinafter referred to as ‘AO’) referred the international transactions entered by the Assessee to the ld. TPO for determining the Arm ‘s Length Price under Section 92CA of the Act.The learned Transfer Pricing Officer passed the Order u/s 92CA(3) of the Act on 28/01/2021 wherein transfer pricing adjustment of Rs. 13,32,47,187/- were proposed. Accordingly, the AO passed the Draft Assessment Order on 16.02.2021 by adding the transfer-pricing adjustments of Rs. 13,32,47,187/- to the returned Income & show cause as to why the assessment should not be completed as per the draft assessment order. Subsequently, the objections against the Draft Assessment Order dated 16.02.2021 were filed before the DRP by the Assessee on 16.03.2021. After the filing of the objection to the DRP, another Show Cause Notice dated 15.04.2021 was issued by the AO to the Assessee, which contained only thecorporate tax related adjustment. The Assessee objected to the issuance of the Show cause notice on the ground that the same was issued post issuance of Draft assessment Order dated 16.02.2021 which was contrary to the provisions of Act. However, the final assessment order dated 26.04.2021 was passed, without waiting for the DRP’s direction. The Final Assessment Order dated 26.04.2021 made additions on corporate tax issues as well as on transfer pricing issue. It is to be highlighted that the corporate tax adjustments were never proposed in the draft assessment order dated 16.02.2021. The Assessee filed written submissions to the AO on 10.05.2021 wherein it was categorically stated that the corporate tax issueswere never proposed in the draft assessment order dated 16.02.2021 and therefore, once Draft assessment Order dated 16.02.2021 was issued, neither any SCN could be issued nor any further adjustment to the income could be proposed.

3.1 Being aggrieved, the Assessee had approached the Hon’ble Karnataka High Court against the final assessment order dated 26.04.2021 as the same was passed without awaiting the outcome of the objections filed before the DRP. The Hon’ble Karnataka High Court vide Order dated 15.12.2021 quashed the Final assessment order dated 26.04.2021 as well as DRP Order dated 24/11/2021 and directed the DRP to proceed furtherby considering the objections dated 16/03/2021 filed by the assessee. Subsequently, the fresh DRP directions dated 28.11.2022 was issued. The DRP directed for transfer pricing adjustments as proposed in the draft assessment Order dated 16.02.2021. It is important to note that no direction was given on corporate tax additions by the ld. DRP as the same was not proposed in the Draft Assessment Order dated 16.02.2021. However, upon issuance of the DRP direction dated 28.11.2022, the Final Assessment Order dated 29.12.2022 was passed by the AO which again included corporate tax additions along with transfer-pricing adjustment.

3.2 Again aggrieved, the assessee preferred an appeal before this Tribunal by challenging the Final Assessment Order dated 29.12.2022 which includes Transfer Pricing adjustment along with Corporate Tax issues. This Tribunal vide Order in IT(TP)A No. 115/Bang/2023 dated 04.09.2024 granted relief on the Transfer Pricing adjustment relying on the assessee’s own case, however mistakenly did not adjudicate the ground no. 18 & ground no. 19 which relates to the Corporate Tax issues. The assessee thereafter filed a miscellaneous application registered as MA No 61/Bang/2024, seeking rectification of mistake in the Order dated 04.09.2024 to the extent it failed to adjudicate the Corporate Tax issues. Finally, this Tribunal passed the Order in MA No. 61/Bang/2024 dated 03/02/2025 & recalled the Order passed in respect of ground No. 18 & ground No.19 as there was apparent mistake on the face of the record.

4. Therefore, in the present appeal we have to adjudicate the ground No. 18 & ground No.19 only relating to the corporate tax issues which are again reproduced as below for ease of reference & convenience: –

Ground No.18: Disallowance made without being proposed in the draft assessment order is in violation of Section 144C of the Income-tax Act, 1971

18. On the facts and in the circumstances of the case and in law, the Ld. Assessing Officer erred in making a disallowance of Rs 10,89,81,456 in the final assessment order dated 29 December 2022 even though no such disallowance was proposed in the draft assessment order dated 16 February 2021 passed under section 143(3) read with section 144C of the Act.

19. Any adjustment made in the final assessment order, without having been raised in the draft assessment order, is contrary to the scheme of section 144C of the Act and a nullity in law. Therefore, the Appellant prays that the impugned disallowance of Rs. 10,89,81,456 made by the Ld. Assessing Officer in the final assessment order should be deleted.

Ground No. 19: Without prejudice to the Ground No 18, additions have been made without any basis or information and without taking cognizance of the rectification application filed by the Appellant.

20. On the facts and in the circumstances of the case, the Ld. Assessing Officer erred in passing the final assessment order, by making the following additions, without providing any relevant source/supporting information for making such additions and without taking into consideration the rectification application filed by the Appellant dated 25 May 2021 against the final assessment order passed by the Ld.AO without considering the Appellant’s appeal filed before the Hon’ble DRP:

a) Addition of Rs. 3,26,32,148 being the difference in the gross value of services as per the final assessment order (Rs. 1,15,24,12,858) and the gross value of services disclosed by the Appellant for AY 2017-18 (Rs. 1,11,97,80,710);

b) Addition of a customs duty payment of Rs. 6,04,933;

c) Addition of Rs. 5,18,48,973 on account of unexplained imports, whereas total imports done by the Appellant during the year was only Rs. 64,90,685; and

d) Addition of Rs. 3,03,86,087 on account of difference in closing WDV of fixed assets for AY 2016-17 and opening WDV of fixed assets for AY 2017-18.

The Appellant prays that the impugned additions of Rs. 10,89,81,456 made by the Ld. Assessing Officer in the final assessment order should be deleted.

5. Before us, the ld. AR of the assessee vehemently contended as detailed below-

(1) The Ld. AO acted in excess of its jurisdiction by assessing corporate tax additions which never formed part of the Draft Assessment Order dated 16.02.2021.

(2) Once the draft assessment order dated 16/02/2021 was issued, neither any further SCN could be issued nor any further adjustment to the income could be proposed.

(3) Since, there was no direction by the DRP on the corporate tax issues, no addition could be made by the AO in final assessment Order dated 29.12.2022.

(4) While passing the final assessment order, the AO cannot go beyond what is proposed in the draft assessment order.

6. Per contra, the ld. DR heavily relied on the order of the AO & vehemently submitted that it is not true that the AO had not issued the draft assessment order before making additions on various corporate tax issues in the final assessment order. The AO had in fact on 15/04/2021 had issued the draft assessment order proposing the various corporate tax additions & show caused to the assessee as to why assessment should not be completed as per the draft assessment order. Thus, the AO had given opportunity to the assessee by issuing the draft assessment order as per the provisions contained in section 144C(1) of the Act before passing final assessment order. Further, the ld. DR submitted that Hon’ble Karnataka High Court vide Order dated 15/12/2021 had categorically directed the ld. DRP to consider objections dated 16/03/2021 filed by the assessee which were the objections to the adjustments proposed in the draft assessment order dated 16/02/2021 and accordingly prayed that the appeal of the assessee may be dismissed.

7. We have heard the rival submissions and perused the material available on record. It is an undisputed fact that the ld. TPO passed an order under section 92CA(3) of the Act on 28.01.2021 incorporating TP adjustment of Rs. 13,32,47,187/-. The AO, thereafter passed the draft assessment order on 16.02.2021 and accordingly issued a show cause notice to the assessee as to why assessment should not be completed as per the draft assessment order dated 16/02/2021. Further, on perusal of the draft assessment order passed under section 144C of the Act on 16.02.2021, we observed that the AO had only proposed the adjustment to the transfer pricing amounting to Rs. 13,32,47,187/-as proposed by the TPO vide order passed under section 92CA(3) of the Act dated 28.01.2021 and no corporate tax adjustments therein were proposed in the said draft assessment order. Against this said draft assessment order, the assessee filed its objections before the Ld. DRP on 16.03.2021 objecting to the transfer pricing adjustment proposed in the draft assessment order. Now the contentions of the AR of the assessee is that while passing the final assessment order, the AO cannot go beyond what is proposed in the draft assessment order and secondly the Ld. AO acted in excess of its jurisdiction by assessing corporate tax additions which never formed part of the Draft Assessment Order dated 16.02.2021. Undisputedly, the corporate tax additions totaling Rs. 10,89,81,456/- were never proposed in the draft assessment order dated 16/02/2021 as rightly contended by the AR of the assessee but we do not agree with the contention of the AR of the assessee that while passing the final assessment order, the AO had gone beyond what is proposed in the draft assessment order as in the present case after filling of objection to the DRP, the AO on 15.04.2021 passed another draft assessment order proposing therein the various corporate tax additions amounting to Rs.10,89,81,456/- and show cause to the assessee as to why assessment should not be completed as per draft assessment order. Thus, we observed that the AO had passed two different draft assessment order one dated 16.02.2021 incorporating the TP adjustment proposed by the TPO and another draft assessment order dated 15.04.2021 proposing the various corporate tax issues. Now the mute question arises for the consideration here is that whether the AO in respect of one assessment proceedings of the same assessee for the same assessment year can pass two different draft assessment orders ?

7.1 According to section 144C(1) of the Act, the AO shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (draft order) to the eligible assessee if the AO proposes to make any variation which is prejudicial to the interest of assessee. We are of the considered opinion that section 144C(1) of the Act lay emphasis on the followings-

(i) The AO, in the first instance forward a draft order to the assessee;

(ii) If the AO proposes to make any variation prejudicial to the interest of assessee.

Thus, the legislatures at their own wisdom use the word ‘in the first instance’ as well as ‘a draft order’.

(i) ‘In the first instance’: We are of the considered opinion that this phrase is critical. It explicitly indicates that the forwarding of the draft order is an initial and singular event. It sets in motion a specific procedural chain for that assessment year concerning the proposed variations. Once this initial draft is forwarded, the subsequent steps, whether acceptance by the assessee or objections to the DRP, are all anchored to this one document.

(ii) ‘a draft of the proposed order of assessment’: The use of the indefinite article ‘a’ coupled with the singular noun ‘draft’ further reinforces the notion of a single, specific document. Therefore, the said draft order is the sole reference point throughout the entire Section 144C mechanism. It implies a consolidated proposal of all variations prejudicial to the assessee’s interest at that initial stage, rather than piecemeal or successive draft orders.

Further, in our considered opinion, the provisions of the Act also lay emphasis on “any variation proposed which is prejudicial to the interest of assessee”, which in our opinion includes not only the variation proposed relating to the TP issues but also variation proposed to the corporate tax issues which are prejudicial to the interest of the assessee must be proposed in a single draft order. Therefore, in the single draft order, the AO has to incorporate all the proposed variations which are prejudicial to the interest of the assessee. Thus, the AO cannot issue two formal draft assessment orders to an eligible assessee for the same assessment proceedings under Section 144C(1) of the Act to initiate separate DRP processes. The statutory language, particularly ‘in the first instance’ and ‘a draft order,’ along with the structured procedural flow and the limited powers of the DRP, clearly indicates a singular, initial formal communication that triggers the DRP mechanism. The DRP’s mandate is to review and modify the variations proposed in that specific draft order and therefore in our view, the Hon’ble Karnataka High Court vide order dated 15/12/2021 had rightly directed the ld. DRP to proceed further in accordance with law as contemplated u/s 144C(5) to 144C(13) of the Act by considering the objections dated 16/03/2021.

7.2 Further, we are also of the considered opinion that the entire procedural framework of Section 144C of the Act is built around this singular ‘draft order’:

(i) Assessee’s Response (Section 144C(2)): Upon receipt of ‘the draft order’ (singular), the eligible assessee has a clear choice within thirty days: either accept the variations proposed by the AO or file objections with both the DRP and the AO. This choice is directly linked to ‘the draft order’ received.

(ii) Completion of Assessment (Section 144C(3)): If the assessee accepts the variations or fails to file objections within the stipulated period, the AO ‘shall complete the assessment on the basis of the draft order.’ Again, the singular ‘draft order’ is the foundation for the final assessment.

(iii) DRP’s Role and Scope (Section 144C(5), (6), (8), (13)):

(a) If the objections are filed, the DRP issues directions ‘for the guidance of the Assessing Officer to enable him to complete the assessment’ (Section 144C(5)). The DRP considers ‘the draft order’ and the objections thereto (Section 144C(6)).

(b) Crucially, Section 144C(8) explicitly limits the DRP’s powers: it ‘may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order.’ This limitation is a strong indicator that the DRP operates within the confines of the initial draft order presented to it. It cannot direct the AO to issue a new draft or conduct extensive fresh inquiries that would necessitate a new draft, thereby restarting the process.

(c) Finally, the AO is bound to complete the assessment ‘in conformity with the directions’ issued by the DRP, ‘without providing any further opportunity of being heard to the assessee’ (Section 144C(13)). This reinforces the finality of the DRP’s directions based on the initial draft.

7.3 The mandatory nature of issuing a draft assessment order under Section 144C(1) of the Act before passing a final assessment order under Section 143(3) is well-established. Failure to issue this initial draft is considered a non-curable defect, leading to the invalidation of the subsequent final assessment order, demand notices, and penalty proceedings. This underscores the critical role of this initial draft as the trigger for the DRP mechanism. The Gujarat High Court in Principal CIT v. Woco Motherson Advanced Rubber Technologies Ltd. [2017] 80 taxmann.com 63 (Gujarat) held that the Assessing Officer cannot make any addition and/or disallowance other than what is proposed in the draft assessment order. This reinforces that the draft order sets the boundaries for the assessment and the DRP’s review. Further, the Karnataka High Court in CIT (International Taxation) v. Cisco Systems Services B.V. [2023] 149 taxmann.com 486 (Karnataka) highlighted the detailed procedure laid down in Section 144C, emphasizing the procedural importance of the draft order and the consequences of procedural errors. In view of the above discussion, we held that subsequent draft assessment order dated 15/04/2021 is illegal, bad in law and accordingly quashed.

7.4 We also take note of the fact that the AO passed the final assessment order on 26/04/2021 neither considering the objections of the assessee nor awaiting directions from the ld. DRP and accordingly, the Hon’ble High Court of Karnataka vide order dated 15/12/2021 had already quashed the assessment order dated 26.04.2021 as well as ld. DRP order dated 24/11/2021 and directed the ld. DRP to proceed further in accordance with law as contemplated under section 144C(5) to 144C(13) of the Act by considering the objections dated 16/03/2021 filed by the assessee. On perusal of the directions of the ld. DRP dated 28/11/2022, the ld. DRP had directed for the transfer pricing adjustments only as proposed in the draft assessment order dated 16/02/2021. On going through the final assessment order dated 29/12/2022, we observed that the AO had not only made additions towards total adjustments u/s 92CA of the Act as per the DRP directions amounting to Rs. 11,55,70,934/- but also added on various corporate tax issues totaling to Rs. 10,89,81,456/- & assessed on a total income of Rs. 36,18,27,430/- for the AY 2017-18. Now the ld. AR of the assessee contending that since no direction was given on corporate tax issues by the ld. DRP, the AO grossly erred in making corporate tax additions of Rs.10,89,81,456/- in the final assessment order dated 29/12/2022.

7.5 We are of the considered opinion that u/s 144C(10) of the Act, every direction issued by the ld. DRP shall be binding on the AO and u/s 144C(13) of the Act, the AO is duty bound to pass the assessment order in conformity with the directions within one month from the end of the month in which such directions are received. We also take note of the fact that the AO passed the final assessment order incorporating the directions issued by the ld. DRP with regard to TP adjustments & also made additions on various corporate tax issues amounting to Rs.10,89,81,456/- in the absence of any such directions, which in our opinion is in clear violation of section 144C of the Act. We are also of the considered opinion that the AO is bound by the directions issued by the DRP and required to pass the assessment order in conformity with the directions issued within one month from the end of the month in which such directions are received. Therefore, the additions of various corporate tax issues amounting to Rs. 10,89,81,456/- in the final assessment order dated 29/12/2022 in the absence of the ld. DRP direction is illegal & bad in law & the entire additions of Rs.10,89,81,456/- is liable to be deleted. We also make it clear that the subsequent draft assessment order dated 15/04/2021 issued by the AO proposing only corporate tax additions after filing of the objections by the assessee before the DRP as well AO is already quashed.

8. In the result the appeal filed by the assessee is allowed.

Order pronounced in the open court on 25th May, 2026