IBS Software Services: No 144C Draft Order, a Jurisdictional Defect

A transfer pricing assessment that varies the returned income has to pass through a draft order before it can become final. Section 144C of the Income-tax Act, 1961 requires the Assessing Officer to forward that draft in the first instance wherever the variation is prejudicial to an eligible assessee. From receipt, the assessee has thirty days to accept the variation or to object before the Dispute Resolution Panel. Most of the work behind transfer pricing litigation support happens in that window, months before an appeal exists.

The Kerala High Court dealt with the omission of that step on 15 July 2025 in IBS Software Services Private Limited versus the Commissioner of Income Tax. It quashed the assessment orders and refused to remit the matters, because the limitation under the Act had already expired.

Section 144C in Sequence: The Draft Order Comes First

In short, the officer must send a draft order before he varies the returned income against an eligible assessee, the assessee then has thirty days from receipt to answer it, and the panel's directions bind the officer.

The sequence starts with sub-section (1), whose non obstante clause gives it overriding effect. The officer must, “in the first instance”, forward a draft of the proposed order of assessment where he proposes to make, on or after 1 October 2009, “any variation in the income or loss returned which is prejudicial to the interest of such assessee”, as the bare text of section 144C records.

Thirty days run from receipt of the draft. Under sub-section (2) the assessee files either acceptance of the variation with the Assessing Officer, or objections with the Dispute Resolution Panel and with the officer. Where the assessee accepts or files nothing, sub-sections (3) and (4) let the officer complete the assessment on the basis of the draft order. He must do so within one month from the end of the month in which the acceptance arrives or the objection period expires.

Objections move the file to the panel. It may confirm, reduce or enhance the variation, and it may not set one aside (sub-section (8)). Its directions bind the officer (sub-section (10)), and both sides are heard before any direction issues (sub-section (11)).

Each later step carries its own clock. No direction may issue later than nine months from the end of the month in which the draft was forwarded (sub-section (12)). On receipt of the directions the officer completes the assessment in conformity with them within one month from the end of that month, and without a further hearing (sub-section (13)).

Who Counts as an Eligible Assessee

The section reaches a defined class, and the definition is narrower than some practice notes suggest. Clause (b) of sub-section (15) of section 144C makes an eligible assessee of “any person in whose case the variation referred to in sub-section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under sub-section (3) of section 92CA”, and, in a separate limb, of any foreign company.

Eligibility turns on where the variation comes from. A company whose assessment carries a Transfer Pricing Officer's order under section 92CA(3) is inside the section whatever its residence, while a domestic company with no such variation stays outside it even where the file raises international transactions.

The foreign company limb carries no such condition. Read with sub-section (1), the section bites only on a variation prejudicial to the assessee, so an adjustment that improves the returned figure does not open it.

The Thirty Days, and a Final Order With No Draft Behind It

For a reader holding a draft order, the calendar starts at receipt. The thirty days in sub-section (2) run from the date the draft reaches the assessee. Objections go to the panel and to the officer within that period.

Filing nothing has consequences the section states. Sub-section (3) then turns the draft into the order, so the variation stands as proposed and the panel stage never opens. Objecting is not costless either, since the panel may enhance a variation as well as reduce it (sub-section (8)).

A final order passed with no draft behind it raises a different question. The omission is a jurisdictional error rather than an irregularity, because the officer has exercised a power the section withheld until the draft had been answered. Once the limitation under section 153 has run, a fresh assessment is unavailable too, so the defect ends the assessment instead of restarting it.

The date the draft was received, and the record built at the Transfer Pricing Officer stage, are what the later stages work from. The note on AY 2023–24 assessments takes up the submission that fixes the appeal.

The IBS Software Services Facts

IBS Software Services Private Limited and a second software development company filed returns for the assessment year 2007–08, and both files were selected for scrutiny. Notices under section 143(2) followed.

The officer noticed international transactions with associated enterprises and transferred the cases to the Transfer Pricing Officer under section 92CA to determine the arm's length price. Those references were made on 23 December 2009. Orders under section 92CA(3) followed, and each proposed an adjustment to the arm's length price. The 2025 Act moves that reference to section 166, as the shift from section 92CA to section 166 sets out.

No draft of the proposed order was ever forwarded. The officer took the Transfer Pricing Officer's figures, computed total income and finalised the assessments under section 143(3).

The date decided the applicability question. Because the references came after 1 October 2009, section 144C(1) reached an assessment for an earlier year. The petitioners argued that they were eligible assessees within that definition, that the mandatory procedure had been bypassed, and that the orders were therefore void ab initio.

What the Court Held, and Why the Circular Failed

Justice Manu allowed the writ petitions on 15 July 2025 and quashed the assessment orders. The section's words say nothing about an assessment year, so on a plain reading the judgment of 15 July 2025 holds it was intended “to govern all proceedings by the assessing officers regardless of the assessment year with respect to eligible assessees”. The cut-off it fixes is 1 October 2009.

The revenue relied on Circular 5/2010 of 3 June 2010, whose paragraph 45.5 read the section as applying from assessment year 2010–11. The court held that the Board cannot displace a provision of the Act by explanation, and noted that Circular 9/2013 of 19 November 2013 replaced that paragraph only after these petitions were filed.

On the defect itself the court followed the Bombay, Madras and Delhi High Courts in SHL India, Vijay Television and Turner International. The omission is jurisdictional. Section 292B cannot cure it. Remission was refused, because a fresh assessment would be “an impermissible course, as the period of limitation under the Act is already over”.

A second clock runs against the revenue. The Karnataka High Court has held the Transfer Pricing Officer's section 92CA(3A) limit mandatory, as the transfer pricing order time limit note sets out.

The Same Defect Since, and the Route Once the Order Has Issued

The Gujarat High Court applied the same rule in Sun Pharmaceutical Industries on 22 January 2026, on a fresh order passed after a section 263 revision without a return to the Transfer Pricing Officer's order: skipping the draft voids the final assessment. It declined to remand, the limitation having expired, as the LiveLawBiz report records.

ITAT Delhi quashed the final order in Sumitomo Corporation India on 10 April 2026, after a panel direction for a fresh look and an order that came without a new draft. The requirement survives a remand, as the report of 16 April 2026 sets out.

A file in that position turns on whether a draft order exists, when it was received, and whether the limitation leaves room to redo anything. Where a final order has issued without one, the route I take through the panel and the appeal is set out on the transfer pricing litigation and dispute support page, and a file can be put to me through the contact page.