Gujarat HC Quashes Assessment Over Objection Filing Mistake - 2026-01-01

Gujarat HC Quashes Assessment Over Objection Filing Mistake

In a landmark decision emphasizing procedural fairness in India's evolving faceless tax assessment regime, the Gujarat High Court has quashed a final income tax assessment order passed against Milacron India Private Limited for Assessment Year 2022-23. The court granted relief to the petitioner, remanding the matter to the Dispute Resolution Panel (DRP) for fresh adjudication after identifying a bona fide error in the filing of objections to a proposed transfer pricing adjustment. This ruling, delivered by a division bench comprising Justice AS Supehia and Justice Pranav Trivedi, underscores the mandatory nature of compliance under Section 144C of the Income Tax Act, 1961, while highlighting the tax authorities' duty to guide taxpayers on jurisdictional requirements. The case arose from an inadvertent submission of objections before the Jurisdictional Assessing Officer (JAO) instead of the Faceless Assessing Officer (at the National Faceless Assessment Centre, NFAC), leading to a premature final order and initiation of penalty proceedings. For legal professionals navigating complex transfer pricing disputes, this judgment serves as a critical reminder of the interplay between digital efficiency and equitable administration in tax litigation.

Case Background: Scrutiny and Transfer Pricing Referral

The roots of this dispute lie in the rigorous scrutiny framework established under the Income Tax Act to ensure arm's length pricing in international transactions. Milacron India Private Limited, a company engaged in manufacturing and dealing with associated enterprises (AEs), was selected for scrutiny assessment under the Computer Aided Scrutiny Selection (CASS) parameters. These parameters flagged significant international transactions and transfer pricing risks, prompting a reference to the Transfer Pricing Officer (TPO) under Section 92CA(1) of the Act.

The TPO, tasked with determining the arm's length price (ALP), issued a letter dated January 16, 2025, under Section 92CA(3), proposing an upward adjustment of Rs. 12,68,130. This adjustment pertained to notional interest imputed on alleged delayed realization of sale invoices from AEs, exceeding the normal credit period extended by the petitioner. Such adjustments are common in transfer pricing audits, where tax authorities scrutinize inter-company dealings to prevent profit shifting by multinational entities. Under the OECD-aligned guidelines incorporated into Indian law via Section 92, taxpayers must demonstrate that transactions with related parties adhere to ALP principles to avoid deemed income additions.

Following the TPO's proposal, the Faceless Assessing Officer (FAO) at NFAC issued a draft assessment order on March 24, 2025, under Section 144C(1), incorporating the proposed variation. This triggered the eligible assessee's right to challenge the variation before the DRP, as per Section 144C(2). The faceless assessment procedure, governed by Section 144B and introduced through the Finance Act, 2020, aims to minimize physical interactions and enhance transparency by centralizing processes at NFAC. However, it has also introduced complexities in jurisdictional filings, particularly distinguishing between the FAO and traditional JAO roles—a nuance at the heart of this case.

For tax practitioners, this background illustrates the heightened scrutiny on cross-border transactions post the 2022 amendments, which lowered ALP tolerance bands and intensified TPO interventions. Milacron's situation exemplifies how even compliant taxpayers can face adjustments on technical grounds like credit periods, often leading to protracted DRP and appellate battles.

The Procedural Error and Premature Assessment

Aggrieved by the draft order's proposed adjustment, Milacron filed its objections in Form 35A before the DRP on April 21, 2025, well within the 30-day limitation period prescribed under Section 144C(2). The DRP acknowledged the filing on the same day. However, in a simultaneous but erroneous move, the company also submitted copies of these objections to the JAO on April 22, 2025, which were duly acknowledged. This dual filing stemmed from a bona fide misunderstanding of the faceless regime's requirements, where objections under Section 144C(2)(b)(ii) must be directed to the Assessing Officer—specifically, the FAO in NFAC-led proceedings—rather than the local JAO.

Despite the pending DRP objections, the FAO proceeded unilaterally, issuing the final assessment order on May 2, 2025, under Section 143(3) read with Sections 144C(3) and 144B. Accompanying this order was a notice under Section 274 read with Section 270A, initiating penalty proceedings for under-reporting of income—a standard escalation in variation cases that could result in penalties up to 200% of the tax evaded.

The petitioner made several representations to the authorities seeking recall or rectification, but these were rejected, culminating in the final order's confirmation on June 25, 2025. Compounding the issue, the DRP, in its order dated June 25, 2025, dismissed the objections as "non est" (non-existent), citing lack of jurisdiction since the assessment order had already been passed. This cascade of events violated the sequential mandate of Section 144C: no final order can precede DRP directions under subsection (5).

As noted in the court's order: "It appears that the draft Assessment Order under Section 144C(1) of the Act was passed 24.03.2025 by the respondent no. 1 proposing adjustment of Rs.12,68,130/- and the petitioner having been aggrieved by the same filed its objections in Form 35A before the respondent no. 3 – Disputes Resolution Panel (DRP) on 21.04.2025 within the limitation period of 30 days as per the provisions of Section 144C(2) of the Act. At the same time, the petitioner also filed its objections on 22.04.2025 before respondent no.2 (JAO). Both the objections were acknowledged by the respondent authorities."

This procedural misstep not only prejudiced the taxpayer's right to DRP adjudication but also exposed gaps in the faceless system's communication protocols between JAO and NFAC.

Court's Key Observations and Legal Reasoning

The division bench meticulously dissected the procedural lapses, affirming that the final assessment order was rendered non-est under Section 144C(13), which deems any non-compliance with the prescribed mechanism as invalid. The court acknowledged the undisputed timely filing before the DRP but zeroed in on the erroneous JAO submission, which triggered the FAO's hasty action.

Crucially, the bench criticized the authorities' mechanical approach, emphasizing their affirmative duty to rectify jurisdictional errors. It observed that the JAO, upon acknowledging the objections, should have promptly directed the petitioner to the correct forum, especially given the ticking 30-day limitation clock. This guidance obligation stems from principles of natural justice and administrative fairness, implicit in Article 14 of the Constitution, which prohibits arbitrary state action.

The court's reasoning pivots on the bona fide nature of the error: "However, the case of the respective parties hinges on the noncompliance of the provision of Section 144C(2) (b)(ii) of the Act i.e. before the Assessing Officer. It is not in dispute that due to bona fide error, the petitioner filed objections within prescribed period of limitation before the JAO instead of Faceless Assessing Officer and accordingly the Faceless Assessing Officer passed the Final Assessment Order. ... In our considered opinion, the JAO on acknowledging the objections filed by the petitioner on 21.04.2025 ought to have communicated to the petitioner to approach the Faceless Assessing Officer as the limitation period would be running against the petitioner more particularly, when the Jurisdictional Assessing Officer did not have any jurisdiction to entertain such objections."

This critique aligns with evolving judicial trends post-faceless implementation, where courts have increasingly intervened in writ petitions to prevent technical dismissals. Unlike stricter precedents on limitation, such as those under the Limitation Act, here the emphasis on equity for inadvertent errors in a relatively new digital framework provides a taxpayer-friendly gloss.

Relief Granted: Remand and Fresh Adjudication

Allowing the writ petition, the court quashed both the final assessment order dated May 2, 2025, and the DRP's June 25, 2025, dismissal. The matter was remanded to the DRP with directions to adjudicate the objections afresh, ensuring compliance with Section 144C(5). To facilitate this, the bench granted Milacron a two-week window from receipt of the writ to refile objections before the FAO, with the 30-day limitation period restarting from that date. A caveat was added: failure to refile would revive the original FAO order.

As clarified by the court: "The petitioner shall file objections within a period of two weeks from the date of receipt of writ of this order and the period of limitation of 30 days would start from the date of filing such objections before the Faceless Assessing Officer. We further clarify that in case the petitioner does not file the objections within the time specified by us, the order passed by the Faceless Assessing Officer shall stand revived."

This conditional relief balances remediation with accountability, averting undue prejudice while upholding procedural timelines. Penalty proceedings under Section 270A stand abeyance pending DRP outcome, offering interim protection to the taxpayer.

Legal Implications Under the Income Tax Act

This judgment reinforces the sacrosanct status of Section 144C in transfer pricing and variation cases, where the draft-final order-DR P sequence is non-negotiable. Subsection (13) explicitly voids deviations, rendering assessments vulnerable to challenge via Article 226 writs. The ruling interprets "Assessing Officer" in Section 144C(2)(b)(ii) contextually for faceless cases, mandating NFAC filings—a clarification vital amid the regime's teething issues.

Furthermore, it imposes a proactive role on peripheral authorities like JAO, potentially expanding administrative duties under Section 144B's collaborative framework. For penalties, the decision indirectly tempers Section 270A's rigor by tying initiation to valid assessments, echoing Supreme Court views in cases like Principal Commissioner of Income Tax v. Tata Chemicals Ltd. on procedural prerequisites.

In broader statutory terms, it critiques the faceless system's implementation, where portal glitches or unclear notifications can exacerbate errors. Legal scholars may argue this paves the way for CBDT circulars on inter-authority coordination, aligning with the 2023 Finance Act's push for simplified compliance.

Impact on Tax Practitioners and the Faceless Regime

For legal professionals, this case is a playbook for defending procedural lapses in high-volume TP audits. Tax advisors must now audit client filings rigorously, leveraging e-filing portals' audit trails to prove bona fides. It empowers arguments in appellate forums, potentially reducing rejection rates for technical objections— a boon for MNCs facing ALP disputes on interest imputation, which spiked 15% in AY 2022 per CBDT data.

Systemically, the ruling exposes faceless assessment's pitfalls: while reducing corruption, it risks alienating taxpayers through opaque jurisdictions. Impacts include more High Court interventions, straining dockets, and calls for AI-enhanced guidance tools. Policymakers might respond with amendments clarifying JAO-NFAC roles, fostering trust in the digital ecosystem. Ultimately, it safeguards taxpayer rights, ensuring equity in an era where procedural hurdles can eclipse substantive merits.

In practice, firms like Milacron—dealing in global supply chains—benefit from curtailed adjustments, preserving cash flows amid economic pressures. For the justice system, it promotes a rehabilitative over punitive tax administration, aligning with global norms like BEPS 2.0.

Conclusion: Safeguarding Taxpayer Rights

The Gujarat High Court's intervention in the Milacron case exemplifies judicial oversight in upholding statutory procedures against administrative overreach. By quashing the flawed assessment and remanding for fresh DRP consideration, the bench not only rectified a bona fide mistake but also articulated a duty of guidance for tax authorities. This decision arrives at a pivotal time, as India's tax landscape grapples with digital transformation and international compliance. For legal professionals, it is a clarion call to prioritize procedural precision while advocating for fairness—ensuring that the faceless regime serves justice, not just efficiency. As transfer pricing disputes proliferate, such precedents will shape a more equitable fiscal framework, protecting taxpayers from inadvertent pitfalls in an increasingly complex regulatory environment.