Supreme Court delivers split verdict on tax assessment deadlines for foreign companies

The Supreme Court on Friday delivered a split verdict on the question of whether the time taken for the Dispute Resolution Panel (DRP) process under Section 144C of the Income Tax Act, 1961 (Act) is to be subsumed within or excluded from the limitation period prescribed under Section 153 of the Act for completing an assessment [Assistant Commissioner of Income Tax Vs Shelf Drilling Ron Tappmeyer Ltd].

While Justice BV Nagarathna held that all procedures under Section 144C must be completed within the existing Section 153(3) timeline, Justice Satish Chandra Sharma ruled that the 11-month timeline prescribed under Section 144C operates in addition to the 12-month limitation period under Section 153(3).

Justice Nagarathna in her judgment said,

"The object is to conclude the proceedings and make an assessment as expeditiously as possible. If orders are not made within the time stipulated under Section 153(3), then there would be no final assessment order and the return of income as filed by the assessee would have to be accepted."

Justice Nagarathna's view prioritized strict adherence to statutory timelines as intended by successive parliamentary amendments.

On the other hand, Justice Satish Chandra Sharma stated,

"The timelines prescribed under Section 153 will be applicable upto the stage of passing the draft assessment order under Section 144C(1). Once the procedure under Section 144C(1) gets triggered, the time available with the Dispute Resolution Panel... will be over and above the timelines prescribed under Section 153."

Justice Sharma's interpretation allowed revenue authorities extended time for complex assessments involving foreign companies and transfer pricing disputes.

Due to the divergent opinions, the matter will now be heard by a larger bench for final resolution.

Background

Section 144C was Introduced in 2009. This provision mandates a special assessment process for eligible assessees — mainly foreign companies and transfer pricing cases. Assessing officers must first issue a draft order, allowing objections before a three-member Dispute Resolution Panel (DRP). Timelines: 30 days for objections, 9 months for DRP directions, and 1 month for the final order—capped at 11 months from draft order issuance.

Section 153(3) sets time limits for fresh assessments after appellate remand. For orders under Sections 250, 254, 263 or 264, the assessing officer has 9 months from the end of the financial year in which the order is received (extended to 12 months for orders after April 1, 2019). The timeline applies to all taxpayers including those covered by Section 144C.

The dispute originated from Shelf Drilling Ron Tappmeyer Ltd., a foreign company engaged in offshore drilling operations. The company declared a loss of ₹120.18 crore for assessment year 2014-15 under Section 44BB provisions. Following scrutiny selection, a draft assessment order was issued on December 26, 2016, computing income at ₹4.35 crore.

After Dispute Resolution Panel proceedings, a final assessment order was passed on October 30, 2017. The Income Tax Appellate Tribunal remanded the matter to the Assessing Officer on October 4, 2019, directing fresh examination. Under Section 153(3), the revenue had time until March 31, 2021 to complete the fresh assessment. It was later extended to September 30, 2021 due to pandemic-related delays.

The revenue authorities issued a fresh draft assessment order on September 28, 2021, prompting the company to challenge the proceedings as time-barred under Section 153(3) limitations.

Justice Nagarathna's judgment

Justice Nagarathna's dissenting opinion applied harmonious construction principles to integrate Sections 144C and 153 within a unified timeline framework.

"The procedure contemplated under Section 144C applicable to an eligible assessee has to be concluded within a period of twelve months as stipulated in proviso to sub-section (3) of Section 153," Justice Nagarathna stated.

Her interpretation requires all Section 144C procedures including draft order preparation, objection periods, dispute resolution panel deliberations, and final order issuance to occur within Section 153(3)'s 12-month limitation.

Justice Nagarathna extensively analysed parliamentary materials, including Finance Ministers' budget speeches and explanatory notes, to demonstrate consistent legislative intent toward timeline reduction.

"The intent of the parliament behind Section 144C is to expedite the final disposal of tax disputes pertaining to an eligible assessee," she underscored.

The judgment referenced successive Finance Acts that progressively reduced assessment timelines from 24 months to 12 months, arguing this trend supports restrictive timeline interpretation.

Justice Nagarathna distinguished between the three non-obstante clauses in Section 144C, saying that sub-section (1) addresses procedural differences while sub-sections (4) and (13) operate within Section 153's framework.

"The non-obstante clause in sub-section (1) of Section 144C is not related to the overall limitation period prescribed under Section 153 of the Act but with the aspect of there being a distinct procedure which has been envisaged in the case of only eligible assessees," she concluded.

Justice Sharma's judgment

Justice Sharma's judgment established that Section 144C creates a distinct assessment procedure for eligible assessees, separate from ordinary assessment mechanisms under Sections 143 and 144.

"The timelines prescribed under Section 153 will be applicable upto the stage of passing the draft assessment order under Section 144C(1). Once the procedure under Section 144C(1) gets triggered, the time available with the Dispute Resolution Panel to carry out the process conceived under Section 144C(5) to Section 144C(12) and the time available with the assessing officer under Section 144C(13), will be over and above the timelines prescribed under Section 153," the judgment explained.

As per this interpretation, there is a two-stage timeline structure where Section 153 governs draft order preparation while Section 144C's internal timelines operate independently thereafter.

Justice Sharma's analysis of the non-obstante clauses in sub-sections (4) and (13) concluded these provisions explicitly override Section 153's timeline restrictions for final assessment completion.

"The non-obstante clauses contained in Sub-Section (4) and Sub-Section (13) of Section 144C of the Income Tax Act only extend the timeline for the passing of the final order and not that of the Draft Order," the judgment noted.

Thus, it permitted revenue authorities up to 11 additional months beyond Section 153(3)'s 12-month limit for completing assessments involving Dispute Resolution Panel proceedings.

Matter to go before larger Bench

In view of the divergent opinions, the matter was directed to be placed before the Chief Justice of India for constituting a larger Bench.

"Having regard to the divergent opinions expressed by us, we direct the Registry to place these matters before Hon'ble the Chief Justice of India for constituting an appropriate Bench to consider the issues which arise in these matters afresh," the Court directed.

The IT department was represented by Additional Solicitor General N Venkatraman, Senior Advocate Swarupama Chaturvedi and advocates
Raj Bahadur Yadav, HR Rao, Udai Khanna, V Chandrashekhara Bharathi,
Ashok Panigrahi, Sachin Sharma, A Deepa and Madhulika Upadhyay.

The respondents were represented by Senior Advocate JD Mistry with advocates Rubal Bansal Maini, Prakhar Pandey, Satvik Sareen and
Faisal Sherwani from Luthra & Luthra.

Advocates Nitesh Joshi, Kunal Cheema, Raghav Deshpande and Shubham Chandankhede also represented the respondents.

[Read Judgment]