MFIFLEX TECHNOLOGIES PRIVATE LIMITED,BENGALURU vs. DEPUTY / ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 4(1)(1), BENGALURU, BENGALURU

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ITTPA 322/BANG/2026Status: DisposedITAT Bangalore10 July 2026AY 2022-237 pages
AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the Assessing Officer (AO) erred in law by including the Transfer Pricing (TP) adjustment of INR 5,42,75,740 in the final assessment order. The Tribunal noted that the AO himself recorded in the assessment order that the adjustment proposed was NIL to give effect to the Hon'ble DRP's directions. However, the AO proceeded to pass the final assessment order disregarding these directions, which is a clear violation of section 144C of the Income Tax Act, 1961. The Tribunal emphasized that as per section 144C(10), every direction issued by the DRP is binding on the AO, and under section 144C(13), the AO is duty-bound to pass the assessment order in conformity with these directions. The AO misdirected himself by not giving effect to the binding directions of the DRP, rendering the assessment order, which was a replica of the draft assessment order, illegal, bad in law, and void ab initio. Therefore, the assessment order incorporating the TP adjustment contrary to the DRP's directions was quashed. The appeal filed by the assessee was allowed.

What were the facts?

The assessee, Mfiflex Technologies Private Limited, is appealing an assessment order for AY 2022-23 passed by the Assessing Officer (AO) under section 143(3) r.w.s. 144C(13) r.ws. 144B of the Income Tax Act, 1961. The assessee's return declared a total income of INR 19,09,75,305. The case was selected for scrutiny due to high value international transactions related to reimbursement expenses. The Transfer Pricing Officer (TPO) initially proposed a downward adjustment of INR 5,42,75,740. The AO passed a draft assessment order including this adjustment. The assessee filed objections before the Dispute Resolution Panel (DRP), which issued directions on 20.11.2025. Subsequently, the AO passed the final assessment order on 29.11.2025, erroneously including the TP adjustment of INR 5,42,75,740, despite the DRP's directions leading to a NIL adjustment.

What were the issues?

1. Whether the Assessing Officer erred in including the entire Transfer Pricing (TP) adjustment of INR 5,42,75,740 in the assessment order, despite the TPO determining a NIL TP adjustment pursuant to the directions of the Dispute Resolution Panel (DRP), in violation of section 144C(10) of the Act. 2. Whether the assessment order is bad in law, void ab initio, and liable to be quashed for incorporating a TP adjustment contrary to the DRP's directions and the Order Giving Effect (OGE) issued by the TPO. 3. Whether the AO erred in not granting an opportunity to the assessee before making the impugned addition, violating principles of natural justice. 4. Whether the consequential demand and penalty notice are liable to be withdrawn due to the incorrect incorporation of the TP adjustment. 5. Whether the assessment order passed under section 143(3) read with section 144C(3) instead of section 143(3) read with section 144C(13) is without jurisdiction. Assessee's Contentions: The AO erred in including the entire TP adjustment of INR 5,42,75,740, despite the TPO determining a NIL adjustment post-DRP directions. The AO failed to give effect to the binding directions of the DRP, violating section 144C(10). The assessment order is bad in law, void ab initio, and liable to be quashed. The AO also erred by not providing an opportunity to the assessee and by issuing a consequential demand and penalty notice based on an incorrect adjustment. The AO incorrectly invoked section 144C(3) instead of 144C(13). Revenue's Contentions: The learned DR supported the order of the AO.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 144C(13),Section 144B,Section 92CA,Section 144C(1),Section 144C(5),Section 144C(10),Section 144C(14),Section 143(2),Section 142(1),Section 92CA(3),Section 144C(3)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “C’’BENCH: BANGALORE

Before: SHRI PRASHANT MAHARISHI & SHRI KESHAV DUBEY

For Appellant: Shri Sharath S., A.R
For Respondent: Shri Jeetendra Kumar, CIT-D.R
Hearing: 15.04.2026Pronounced: 10.07.2026

PER KESHAV DUBEY, JUDICIAL MEMBER:

This appeal at the instance of the assessee is directed against the order of the ld. Assessing Officer (in short “The AO”) dated 29.11.2025 vide DIN: ITBA/AST/S/143(3)/2025-26/1083139779(1) passed u/s 143(3) r.w.s. 144C(13) r.ws. 144B of the Income Tax Act, 1961 (in short “the Act”) for the assessment year 2022-23.

2.

The assessee has raised the following grounds of appeal: - “1.1 The Learned Assessing Officer (“Ld. AO”) erred in law and on facts in determining the total income of the Appellant by erroneously including by the entire Transfer Pricing (“TP”) adjustment of INR 5,42,75,740 in the impugned assessment order, despite the fact that the Learned Transfer Pricing Officer (“Ld. TPO”), while passing the Order Giving Effect (“OGE”) pursuant to the directions of the Hon’ble

IT(TP)A No.322/Bang/2026 Mfiflex Technologies Private Ltd., Bengaluru Page 2 of 7 Dispute Resolution Panel (“Hon’ble DRP”), has determined a Nil TP adjustment in the Appellant’s case. The impugned addition is therefore contrary to binding DRP directions, unsustainable in law and constitutes a mistake apparent on record. 2.1 The Ld. AO has erred in law in not giving effect to the binding directions of the Hon’ble DRP, in violation of section 144C(10) of the Act, which mandates that the assessment order shall be passed strictly in conformity with the directions issued by the Hon’ble DRP. 3.1 The Ld. AO has erred in law and on facts in passing the impugned assessment order which, to the extent it incorporates a Transfer Pricing adjustment contrary to the OGE issued by the Ld. TPO pursuant to the directions of the Hon’ble DRP, is bad in law, void ab initio and liable to be quashed. 4.1 The Learned Assessing Officer has erred in law and on facts in making an addition of INR 5,42,75,740, which represents a mistake apparent on record arising from an incorrect and noncompliant implementation of the directions issued by the Hon’ble DRP, and is therefore liable to be deleted and rectified. 5.1 The Ld. AO has erred in law by not granting any opportunity to the Appellant before making the impugned addition, despite the existence of a Nil TP adjustment, thereby violating the principles of natural justice. 6.1 The Learned Assessing Officer has erred in issuing a consequential demand of INR 2,00,24,310 and penalty notice based on an incorrect incorporation of the Transfer Pricing adjustment, despite a Nil adjustment determined pursuant to the Hon’ble DRP’s directions. The said demand and penalty notices therefore constitute a mistake apparent on record and are liable to be withdrawn upon deletion of the TP adjustment. 7.1 Without prejudice, the Ld. AO has erred in law in issuing the assessment order under section 143(3) read with section 144C(3) instead of section 143(3) read with section 144C(13), rendering the impugned assessment order and the consequential demand and penalty notices without jurisdiction and liable to be quashed.

That the Appellant craves leave, to add, to amend, modify, rescind, supplement, or alter any of the grounds stated here-in-above, either before or at the time of hearing of this appeal.”

3.

The brief fact of the case are that the assessee company is a wholly owned subsidiary of Q2 Software and it is engaged in the

IT(TP)A No.322/Bang/2026 Mfiflex Technologies Private Ltd., Bengaluru Page 3 of 7 business of software research and development services on cloud platform. The assessee company filed its return of income for the AY 2022-23 on 21/11/2022 declaring total income of Rs.19,09,75,305/-. Thereafter, the case of the assessee was selected for scrutiny under CASS for complete scrutiny for the following issues: -

1.

Addition of assets during the year in the block of assets where rate of depreciation claimed is 40% or higher. 2. High Value of International Transactions related to reimbursement expenses (T.P. Risk Parameter).

Accordingly, notices u/s. 143(2) of the Act and u/s 142(1) of the Act along with the show cause notices were issued to the assessee from time to time. During the course of assessment proceedings, the AO made a reference of international transactions u/s. 92CA of the Act to the ld. TPO for determining the Arm’s Length Price (ALP) with reference to all the transactions reported by the assessee. The ld. TPO vide order u/s.92CA(3) of the Act dated 08/01/2025 proposed downward adjustment of Rs.5,42,75,740/- on software development segment. Subsequently, the AO after taking into consideration the adjustment as suggested by the TPO passed the draft assessment order u/s. 144C(1) of the Act on 06/02/2025 by determining a total income of Rs.24,52,51,045/- against which the assessee filed the objections before the ld. DRP. The objections of the assessee was considered by the ld. DRP after providing opportunities to the assessee and accordingly issued direction u/s. 144C(5) of the Act on 20/11/2025. The ld. AO on a wrong footing that as per ld. DRP’s directions, TPO adjustment amounting to Rs.5,42,75,740/- remains same even after giving effect of directions of ld. DRP had added Rs.5,42,75,740/- to the taxable income of the assessee on account of TP adjustment in view of order u/s. 92CA(3)of the Act

IT(TP)A No.322/Bang/2026 Mfiflex Technologies Private Ltd., Bengaluru Page 4 of 7 and accordingly concluded the assessment proceedings by passing the order u/s. 143(3) r.w.s 144C(13) of the Act on 29/11/2025 on a total assessed income of Rs.24,52,51,045/-.

4.

Aggrieved by the assessment order passed u/s. 143(3) r.w.s. 144C(13) of the Act dated 29/11/2025, the assessee has filed the present appeal before this Tribunal.

5.

Before us, the ld. AR of the assessee, at the outset vehemently contended that the final assessment order passed by the AO without giving effect to the OGE passed by the ld. TPO pursuant to the directions of Hon’ble DRP is illegal and bad in law as it is in violation of statutory procedure prescribed in sections 144C(10), 144C(13) and 144C(14) of the Act and accordingly liable to be quashed. The ld. A.R. of the assessee also submitted that the AO grossly errored in law in determining the total income of the assessee by erroneously including the entire TP adjustment of Rs.5,42,75,740/- despite the fact that the TPO while passing the OGE pursuant to the directions of the ld. DRP had determined a NIL TP adjustment in the assessee’s case and accordingly contended the assessment order is bad in law, void-ab-initio and liable to be quashed.

6.

The ld. D.R. on the other hand supported the order of the ld.AO.

7.

We heard the rival submission and perused the material available on record. The main contention of the ld. A.R. of the assessee is that the the final assessment order passed by the AO without giving effect to the OGE passed by the ld. TPO pursuant to the directions of Hon’ble DRP is illegal and bad in law as it is in violation of statutory procedure prescribed in sections 144C(10),

IT(TP)A No.322/Bang/2026 Mfiflex Technologies Private Ltd., Bengaluru Page 5 of 7 144C(13) and 144C(14) of the Act. It is submitted that the AO grossly errored in law in determining the total income of the assessee by erroneously including the entire TP adjustment of Rs.5,42,75,740/- despite the fact that the TPO while passing the OGE pursuant to the directions of the ld. DRP had determined a NIL TP adjustment in the assessee’s case. On perusal of the assessment order dated 29/11/2025, we take a note of the fact that the AO while passing the assessment order himself observed as follows:-

“6. Summary of Final Adjustment Post DRP directions:- Particulars Adjustments as per Adjustment post 92CA(3) DRP directions Software Development Rs.5,42,75,740/- NIL Segment Total Adjustment Rs.5,42,75,740/- NIL Relief given by the Hon’ble NIL DRP Adjustment post DRP NIL directions

Therefore, the adjustment of NIL is proposed in this case to give effect to the Hon’ble DRP Directions. Consequential order giving effect as per the Directions of the DRP, Bengaluru for AY 2022-23 may be passed accordingly”.

On perusal of the above, we observed that as rightly contended by the ld. AR of the assessee, the AO on a wrong footing concluded the assessment proceeding by observing that as per the ld. DRP’s directions, TPO adjustment amounting to Rs.5,42,75,740/- remains same even after giving effect of directions of DRP and accordingly addition of Rs.5,42,75,740/- in view of the order under section 92CA(3) of the Act was confirmed. 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

IT(TP)A No.322/Bang/2026 Mfiflex Technologies Private Ltd., Bengaluru Page 6 of 7 such directions are received. We also take note of the fact that the assessing officer had, although recorded in the assessment order that the NIL is proposed in this case to give effect to the Hon’ble DRP directions however, proceeded to pass the final assessment order disregarding the directions issued by the ld. DRP which in our opinion is in clear violation of section 144C of the Act. We are also of the view 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 final assessment order passed by the AO which is nothing, but the replica of the draft assessment order is illegal, bad in law and liable to be quashed. In our considered opinion, the AO misdirected himself in not giving effect to the binding directions of ld. DRP by violating the provisions of section 144C(10) of the Act which mandates that the assessment order shall be passed strictly in conformity with the direction issued by the ld. DRP. In view of the above, we have no hesitation to hold that the assessment order passed by incorporating the transfer pricing adjustment contrary to the OGE issued by the TPO pursuant to the direction of ld. DRP is bad in law, void-ab-initio and accordingly quashed.

8.

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

Order pronounced in the open court on 10th July, 2026

Sd/- Sd/- (Prashant Maharishi) (Keshav Dubey) Vice President Judicial Member

Bangalore, Dated 10th July, 2026. VG/SPS

IT(TP)A No.322/Bang/2026 Mfiflex Technologies Private Ltd., Bengaluru Page 7 of 7 Copy to:

1.

The Applicant 2. The Respondent 3. The CIT 4. The DR, ITAT, Bangalore. 5 Guard file By order

Asst. Registrar, ITAT, Bangalore.

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