The High Court of Judicature at Bombay has set aside a final assessment order issued against Orpak Systems India Private Limited for the Assessment Year 2022-23, ruling that the Income Tax Department committed a fundamental jurisdictional error by bypassing mandatory statutory procedures. The division bench, consisting of Justice B. P. Colabawalla and Justice Farhan P. Dubash, determined that the failure to issue a draft assessment order before finalizing the tax liability deprived the petitioner of its statutory right to seek redress before the Dispute Resolution Panel (DRP).

The case originated from a routine scrutiny of Orpak Systems India’s return of income for the 2022-23 assessment year, in which the company declared a business loss exceeding ₹27 crore. Because the company had engaged in international transactions with associated enterprises, the case was referred to the Transfer Pricing Officer (TPO) to determine the arm’s length price of those transactions. In January 2025, the TPO recommended an upward transfer pricing adjustment of approximately ₹2.41 crore. Following this, the Assessment Unit under the National Faceless Assessment Centre issued a final assessment order, effectively reducing the declared loss without allowing the petitioner the opportunity to challenge the adjustment before the DRP.

During the proceedings, the Revenue acknowledged that no draft assessment order had been served upon the petitioner. The counsel for the department characterized this omission as an “inadvertent procedural lapse” and argued that the defect was curable. The Revenue requested that the matter be remanded back to the Assessing Officer to allow for the issuance of a draft order, effectively proposing to restart the assessment process from the correct stage.

However, the High Court rejected this characterization, emphasizing that the requirement under Section 144C of the Income Tax Act is a non-negotiable safeguard for eligible assessees. The court observed that the transition from a draft order to a final order is not merely a formality but a critical stage in the adjudication process that grants taxpayers the right to contest prejudicial adjustments before a specialized panel.

“These provisions clearly stipulate that in case of an eligible assessee, a Draft Assessment Order has to be served on the Petitioner to enable the Petitioner to approach the DRP,” the bench noted in its order. By issuing a final order directly, the faceless assessment authorities acted in clear violation of both Section 144C and the relevant subsections of 144B of the Act.

Jurisdictional Requirements and Precedents In reaching its decision, the court relied heavily on established precedents, specifically referencing its previous rulings in Danfoss Fluid Power Private Limited v. Union of India and Barentz India Private Limited v. Assessment Unit . In these prior matters, the Bombay High Court had clarified that the failure to serve a draft assessment order when a prejudicial adjustment is proposed constitutes an incurable illegality rather than a mere procedural irregularity.

The court reiterated the reasoning provided in the earlier case of SHL (India) Pvt. Ltd. v. Deputy Commissioner of Income-tax , which established that the requirement to first pass and furnish a draft assessment order is a mandatory prerequisite for the exercise of jurisdiction. “In our view, failure to follow the procedure under Section 144C(1) would be a jurisdictional error and not merely procedural error or a mere irregularity,” the judgment highlighted. The bench further asserted that the statute does not grant the Assessing Officer the power to bypass this step, noting that the final assessment order was “void ab initio” because it was issued without the authority conferred by a properly followed statutory process.

Consequences for Future Assessments The court remained firm in its refusal to remand the case for the sole purpose of correcting the procedural defect, stating that the current final assessment order could not be permitted to stand. The bench quashed the assessment order, the demand notice, and the associated penalty notices dated March 24, 2025.

While the court explicitly quashed the impugned order, it left the door open for the Revenue to initiate the process afresh, provided that doing so is legally permissible under the current timelines and regulations. The judges clarified that they were not offering an opinion on whether the department could restart the assessment proceedings, stating that all such contentions remain open for the parties to agitate should the need arise in the future.

The ruling serves as a strong reminder to the Income Tax Department regarding the necessity of adhering to the structured framework of the Faceless Assessment scheme. By mandating that administrative convenience or pressure to meet deadlines cannot override the substantive rights of the taxpayer, the High Court has reinforced the protective nature of the statutory scheme. The decision reinforces that the procedural steps outlined in the Income Tax Act, particularly those designed to provide an appellate or dispute-resolution remedy to the taxpayer, are vital safeguards that ensure fairness and transparency in tax administration.

With the final order for the assessment year 2022-23 quashed, the petitioner, Orpak Systems India Private Limited, is no longer bound by the initial tax liability determination. The department must now determine its next steps within the strict confines of the law, bearing in mind the High Court’s unequivocal stance on the necessity of following the mandated multi-stage assessment process. The order marks a significant outcome in the ongoing legal discourse surrounding the implementation of the faceless assessment regime and the procedural rigors required of assessing authorities.