Case Commentary: Marlabs Innovations Private Limited vs. Deputy Commissioner of Income Tax – A Landmark Ruling on Section 144C(13) Compliance
Introduction
In a significant pronouncement, the Income Tax Appellate Tribunal (ITAT), Bangalore Bench, in Marlabs Innovations Private Limited vs. Deputy Commissioner of Income Tax (ITA No. 833/Bang/2026), quashed a final assessment order under section 143(3) read with section 144C(13) of the Income Tax Act, 1961, for Assessment Year 2022-23. The Tribunal held that the Assessing Officer (AO) failed to conform to the binding directions issued by the Dispute Resolution Panel (DRP), thereby violating the mandatory provisions of section 144C(13). Relying on the jurisdictional Karnataka High Court decisions in PCIT vs. Flextronics Technologies (India) (P.) Ltd. (2023) 459 ITR 493 (Karnataka) and PCIT vs. M/S VMWARE Software India Pvt. Ltd. (ITA No. 221/2023), the ITAT reaffirmed that any departure from DRP directions renders the final assessment order invalid. This commentary delves into the facts, legal reasoning, and implications of this ruling for taxpayers and revenue authorities.
Facts of the Case
The assessee, Marlabs Innovations Private Limited, is engaged in custom software application development and IT-enabled services. For AY 2022-23, it filed a return declaring total income of ₹35,94,83,750. The case was selected for scrutiny, and the Transfer Pricing Officer (TPO) proposed a transfer pricing adjustment of ₹23,16,49,912 under section 92CA(3) vide order dated 10.01.2025. Conforming to this, the AO issued a draft assessment order on 19.03.2025 proposing an income of ₹59,29,35,662.
Aggrieved, the assessee filed objections before the DRP-2, Bangalore. The DRP, via directions dated 03.12.2025 under section 144C(5), partially allowed the objections. However, the AO, while passing the final assessment order on 18.12.2025, erroneously treated the DRP directions as a rejection of all objections and assessed income at the same figure as the draft order (₹59,29,35,662). Notably, the TPO, in a separate order dated 24.12.2025, gave effect to the DRP directions and reduced the transfer pricing adjustment from ₹23,16,49,912 to ₹6,71,47,000—granting a relief of ₹16,45,02,912.
Before the ITAT, the assessee contended that the final assessment order was not in conformity with the DRP directions, relying on the Flextronics and VMWARE decisions. The Revenue, in turn, cited Hitachi Astemo Haryana Private Limited vs. DCIT (Delhi ITAT), arguing that the matter could be remanded.
Reasoning of the ITAT
The Tribunal’s reasoning is the core of this commentary, spanning a detailed analysis of section 144C(13) and the binding nature of jurisdictional High Court precedents.
1. Misinterpretation of DRP Directions
The ITAT first examined the AO’s finding that the DRP had rejected all objections. A perusal of the TPO’s effect order dated 24.12.2025 revealed that the DRP had indeed granted partial relief—particularly reducing the Software Development Segment adjustment to NIL (from ₹15,88,10,000). The AO’s contrary conclusion was factually incorrect. The ITAT emphasized that the final assessment order must reflect the actual directions, not the AO’s own interpretation.
2. Mandate of Section 144C(13)
Section 144C(13) explicitly states that the AO shall pass the final assessment order “in conformity with the directions” issued by the DRP. The ITAT held that this is a mandatory requirement, not a directory one. The AO’s non-compliance—by ignoring the partial relief—constituted a clear violation of the statutory provision. The Tribunal underscored that the DRP’s directions are binding on the AO, and any deviation, even if based on a mistaken belief, is impermissible.
3. Binding Precedent of Jurisdictional High Court
The Revenue’s reliance on the Delhi ITAT decision in Hitachi Astemo (which restored the matter to the AO) was distinguished. The ITAT noted that the Delhi Bench followed the Delhi High Court, which was the jurisdictional High Court for that case. However, for the Bangalore Bench, the jurisdictional High Court is the Karnataka High Court. The decisions in Flextronics (459 ITR 493) and VMWARE (ITA No. 221/2023) are directly binding. In Flextronics, the Karnataka High Court quashed a final assessment order for being inconsistent with DRP directions. In VMWARE, the Supreme Court dismissed the Revenue’s SLP (SLP(C) Diary No.47414/2024), affirming the High Court’s view. Thus, the ITAT was compelled to follow these precedents.
4. Consequence: Quashing of Assessment Order
Given the violation, the ITAT quashed the final assessment order in its entirety. It observed that once the foundational order is invalid, the other grounds raised by the assessee become academic and were kept open. The decision to quash, rather than remand, aligns with the Flextronics ratio, where the Karnataka High Court held that a non-conforming order is void ab initio.
Conclusion
The ITAT allowed the appeal of Marlabs Innovations Private Limited, quashing the final assessment order for AY 2022-23. The ruling reinforces a cardinal principle: the AO must meticulously implement DRP directions. Any deviation, however slight, invalidates the assessment. By following the jurisdictional High Court’s binding authority, the ITAT underscored the hierarchy of judicial precedents. This decision serves as a robust safeguard for taxpayers against administrative non-compliance and discourages the Revenue from ignoring DRP findings. The other issues—such as ITeS segment adjustments and interest on delayed receivables—were kept open, meaning the assessee can reargue them if a fresh assessment is initiated.