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Facts
The assessee, Mphasis Limited, filed its return of income. Following a merger and a reference to the Transfer Pricing Officer (TPO), adjustments were made to international transactions. The Assessing Officer (AO) also made disallowances under Section 10A and depreciation. The matter was remanded by the ITAT to the AO, TPO, and Dispute Resolution Panel (DRP) for re-adjudication.
Held
The Tribunal held that when issues are remanded by a higher appellate authority to the AO or TPO, a draft assessment order must be issued first, allowing the assessee the option to approach the DRP. The AO's failure to issue a draft assessment order before passing the final assessment order, as required by Section 144C of the Income Tax Act, renders the assessment order unsustainable.
Key Issues
Whether the Assessing Officer was required to issue a draft assessment order before passing a final assessment order after a remand by the ITAT, or if a final order could be passed directly.
Sections Cited
10A, 92CA, 144C, 254
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘C’BENCH: BANGALORE
Before: SHRI PRASHANT MAHARISHI, VICE – & SHRI SOUNDARARAJAN K.
ORDER PER PRASHANT MAHARISHI, VICE – PRESIDENT Mphasis Limited, 1. Bengaluru (the assessee/appellant) challenging the order passed by the Deputy Commissioner of Income Tax, Circle-e 4(1)(1), Bangalore (the learned Assessing Officer) dated 30th March 2024. The order was issued pursuant to Section 254 read with Section 92CA of the Income Tax Act, determining the total income of the assessee at Rs. 635,06,40,753. This matter is now before the Tribunal for a second round of 2. appeal.
Page 2 of 8 The facts of the case indicate that the assessee serves as the 3. parent company of the Mphasis Group, operating in the field of software development services and information technology enabled services. The assessee's business is organized into three distinct segments: software development, business process outsourcing, and infrastructure technology outsourcing. The assessee submitted its income tax return on 6 October 4. 2010, reporting a total income of Rs. 288,31,65,798. Following the merger of another company with the assessee, effective from 1 November 2009, a revised return was filed on 29 November 2011, declaring a total income of Rs. 289,11,77,806. The return was selected for scrutiny, and the matter was referred to the learned Transfer Pricing Officer for determination of the arm’s length price of reported international transactions. In the Transfer Pricing Report, the assessee applied the 5. Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for both the software development segment and the ITA segment. This approach was accepted by the Transfer Pricing Officer (TPO), who determined that the transactions were at arm’s length. However, adjustments were made to the sales commission of Rs. 93,53,07,973 and networking charges of Rs. 22,75,19,231, which were benchmarked separately. Additionally, overdue outstanding receivables from associated enterprises, exceeding the specified time frame, were treated as a separate international transaction, resulting in an interest adjustment of Rs. 92,33,451. Consequently, the total transfer pricing adjustment amounted to Rs. 1,17,20,60,655. In the draft assessment order, the ld. Assessing Officer (AO) 6. disallowed the deduction claim under Section 10A of the Act Page 3 of 8 amounting to Rs. 239,51,400,58. Additionally, depreciation was disallowed as an excess claim, totaling Rs. 63,38,865. During the assessment proceedings, the assessee submitted new claims for depreciation of goodwill, TDS, and deduction of amounts previously disallowed due to non-deduction of tax. The AO rejected these claims on the grounds that they were not included in the original return of income. Accordingly, the draft Assessment Order was issued. Upon 7. consideration of the objections presented before the learned Dispute Resolution Panel (DRP), directions were provided on 12.12.2014 granting certain reliefs.
Subsequently, the final Assessment Order was passed on 29 January 2015, determining the assessee's total income at Rs. 636,30,78,696.The issue reached the coordinate bench wherein a. The transfer pricing adjustment of selling and commission networking charges was remanded to the learned dispute resolution panel to consider the issue based on the evidence and details filed by the assessee and considering various judicial pronouncements. b. The transfer pricing adjustment of interest on outstanding debtors was remanded to the learned TPO to reconsider the issue. c. The issue of disallowance of claim of deduction under Section 10A was remanded to theld. AOnoting that the Hon’ble High Court has allowed the issue for assessment year 2007-08 but directed the AO to verifythe agreement and whether the services rendered by the associated Page 4 of 8 enterprises are under the supervision of the assessee along with the risk profile. d. The issue of disallowance of depreciation, depreciation on goodwill additional claim of tax deduction at source were remanded to the dispute resolution panel to consider the same in the light of the evidence. Pursuant to the directions issued by the ITAT, the Transfer 9. Pricing Officer passed order on 24.01.2024, re-determining the adjustment of interest on outstanding debtors at Rs. 31,34,373. Following this order, the Assessing Officer did not issue any draft assessment order. The ld. DRP issued an order on 12 March 2024 pursuant to 10. the direction of the ITAT. Subsequently, the DRP provided further instructions, however, no draft order was issued. On 30th March 2024, the learned Assessing Officer issued an 11. order pursuant to Section 254 in conjunction with Section 92CA of the Act, implementing the transfer pricing adjustment and the directives of the learned Dispute Resolution Panel. Additionally, the officer fulfilled the responsibilities assigned by ITAT.Consequently, he issued an order establishing the assessee's total income at Rs. 635,06,40,753. The assessee is dissatisfied with this order, asserting that the 12. learned Assessing Officer was required to issue first a draft assessment order, but instead issued a final assessment order. Therefore, citing the decision of the Hon’ble Karnataka High Court in PCIT vs. CISCO Systems Capital India Private Limited (ITA No. 128/Bang/2021) as well as the ruling of the Hon’ble Delhi High Court, it is contended that the assessment order is invalid and should be set aside.
Page 5 of 8 In addition to submitting the relevant documents, the 13. Authorized Representative provided a comprehensive argument addressing the merits of the sustained addition. The learned CIT DR presented a comprehensive argument, 14. asserting that the coordinate bench referred the matters to three distinct authorities, which, in her view, exceeds the limits permitted by law. She further contended that, after remanding to the DRP, it was unnecessary for the Assessing Officer to issue a draft assessment order. As both the AO and TPO acted in accordance with the directions of the ITAT, an additional draft assessment order was not required, since such a requirement is not stipulated under existing statutes. She also submitted that when matters are remanded to the learned AO or TPO, they implement ITAT’s directives. If the AO subsequently passes a draft assessment order, and it is challenged before the DRP by the assessee, and the DRP then issues directions to the AO that are contrary to those given by the ITAT, this will create a complex and unusual situation. The directions of the DRP are binding on the AO under Section 144C (10) of the Act, and the order of the TPO is also binding on the AO. According to her, it should have been the ITAT that restored the issues solely to the AO, to prevent legal ambiguity. Accordingly, she contended that in remand proceedings, the issuance of a draft order is unwarranted, and therefore, this ground should be dismissed. The Authorized Representative asserted that the Hon’ble 15. Karnataka High Court has addressed this matter directly. We have thoroughly examined the opposing arguments and 16. reviewed the orders issued by the lower authorities. The relevant facts are clearly presented above. The assessee contests the order implementing the ITAT decision under Section 254 read with Section 92 CA of the Act, dated 30 Page 6 of 8 March 2024. The ITAT's order dated 14 June 2021 partially remanded the matters to the Assessing Officer (AO), the Dispute Resolution Panel (DRP), and the Transfer Pricing Officer, although only the AO is listed as a respondent. If this remandwas not appropriate, the AO could have sought rectification. The Transfer Pricing Officer (TPO) issued an order pursuant 17. to Section 92CA(3) read with Section 254 of the Act on January 24, 2024. Subsequently, the Dispute Resolution Panel (DRP) provided its directions on March 12, 2024, following which the Assessing Officer completed the assessment and issued the final order on March 30, 2024. It is thus acknowledged that no draft order was prepared by the Assessing Officer; instead, a final assessment order was directly passed. When a case is remanded by a higher appellate authority to 18. the files of the learned Assessing Officer (AO)/Transfer Pricing Officer (TPO), the Honourable High Courts have held that the AO must first issue a draft assessment order, thereby allowing the assessee the option to seek guidance from the Dispute Resolution Panel (DRP). This protocol is explicitly supported by the decision of the Hon’ble Delhi High Court in Principal Commissioner of Income Tax vs. Sumitomo Corporation India Private Limited (2024) 166 taxmann.com 55 (Delhi), where the challenge pertained to the jurisdictional officer issuing a final order of assessment following directions for remand from the Income Tax Appellate Tribunal. Such action was deemed contrary to the procedure outlined under Section 144C of the Income Tax Act. Considering this binding precedent, which considered various other judicial pronouncements, it has been affirmed that the AO is obligated to issue a draft assessment order initially.
Page 7 of 8 An important question arises regarding the appropriate 19. course of action when a higher forum remands issues to the file of the learned Dispute Resolution Panel (ld. DRP). In our view, it is not appropriate for an appellate forum to restore matters directly to the ld. DRP; rather, the correct procedure is to remit them solely to the learned Assessing Officer (ld. AO). The DRP serves as a panel for issuing binding directions to the ld. AO and, according to section 144C(1), only the assessee is authorized to approach the ld. DRP. Therefore, if a higher forum inadvertently restores matters to the ld. DRP, there is no justification for the ld. AO to issue a draft assessment order in such cases. This is because the primary purpose of a draft assessment order is to provide the assessee with an opportunity to approach the DRP. Once the DRP has already issued its directions and communicated them to the ld. AO, which are in conformity with the direction of ITAT, issuing a further draft assessment order is unnecessary and a judicial waste. No judicial precedents were brought to our attention on this point. Accordingly, when matters are restored to the ld. DRP by a higher forum, there is no requirement for the ld. AO to pass a draft assessment order.
In the present case, since certain issues were remanded to the files of the Learned Assessing Officer (Ld. AO) and Learned Transfer Pricing Officer (Ld. TPO), along with others to the Learned Dispute Resolution Panel (Ld. DRP), the Ld. AO was required—pursuant to section 144C(1) of the Act—to issue a draft assessment order at the initial stage. The failure of the Ld. AO to comply with this procedure renders the assessment order dated 30th March 2024 unsustainable; accordingly, it is hereby set aside.
Order pronounced in the open court on 10th April 2026.