Bombay High Court Quashes Assessment Orders Against Classic Legends Where No Pricing Variation Existed - 2025-09-09

Bombay High Court Quashes Assessment Orders Against Classic Legends Where No Pricing Variation Existed

In a significant ruling clarifying the scope of tax assessment procedures, the High Court of Judicature at Bombay has set aside a series of assessment orders issued against Classic Legends Pvt Ltd. The division bench, comprising B. P. Colabawalla, J. and Amit S. Jamsandekar, J., determined that tax authorities cannot invoke the Dispute Resolution Panel (DRP) procedure under Section 144C of the Income Tax Act, 1961, when the Transfer Pricing Officer (TPO) has confirmed that no variation exists in the arm's length price of international transactions.

The Origin of the Dispute

The legal challenge arose when Classic Legends Pvt Ltd received a Draft Assessment Order and a subsequent Final Assessment Order, along with related penalty notices, issued under Section 144C of the Income Tax Act. The petitioner contended that these proceedings were fundamentally flawed because the TPO had already reviewed its international transactions and concluded that they were consistent with the "arms length price" standards. Consequently, the company argued it did not meet the criteria of an "eligible assessee" required to trigger the specific assessment pathway mandated by Section 144C.

Arguments from the Parties

The petitioner asserted that the statutory definition of an "eligible assessee" under Section 144C(15) is narrow. Since the TPO had made no adjustment or variation to the income declared, the Assessing Officer lacked the jurisdiction to treat the company as an "eligible assessee" and proceed with the draft assessment route, which is intended solely for cases where prejudicial variations are proposed.

Conversely, the Revenue argued that the legislative intent behind Section 144C should be construed broadly. The Revenue contended that the power to issue a Draft Assessment Order remains valid even when the TPO finds "no variation," suggesting that the definition of "variation" should conceptually include "no variation" to ensure procedural consistency.

The Court’s Legal Analysis

The High Court rejected the Revenue's interpretation, siding with the established precedent set by previous rulings in Pankaj Extrusion Ltd v/s Assistant Commissioner of Income-tax and Honda Cars India Ltd v/s Deputy Commissioner of Income-tax .

The court emphasized that Section 144C is a special procedure triggered only when there is a proposed variation that is "prejudicial to the interest of such assessee." When no such prejudicial variation exists, the condition precedent for invoking the statute is absent. The court further noted that the term "means" in Section 144C(15) provides a rigid, exhaustive definition, leaving no room for the expansive interpretation proposed by the authorities.

Key Observations

Highlighting the statutory interpretation, the bench stated:

• "On a plain reading of the said provision, the Petitioner can be stated to be an 'eligible assessee' only if there is a case of variation referred to in the said sub-section 1 and which arises as a consequence of the order passed by the TPO."
• "We are unable to agree with the contention of the Revenue that the word 'variation' appearing in Section 144C(1) and 144C(15) would also include 'no variation'."
• "When there is no variation, there is no question of any prejudice being caused to the Assessee which would then entail him to file any objections to the Draft Order as contemplated under sub-section 2 of Section 144C."

Final Ruling

Concluding the proceedings, the court held that the Assessing Officer was not competent to pass the Draft Assessment Order, as the statutory threshold for "eligible assessee" status was not met. Consequently, the court quashed the Draft Assessment Order dated 8th March 2025, the Final Assessment Order dated 7th April 2025, and all related penalty notices. This ruling reinforces the principle that procedural shortcuts or extended administrative mechanisms cannot be applied outside the specific statutory conditions defined by the Income Tax Act.