This article has been published in the Taxsutra TP Expert Column at Limiting the Limitation to Draft Orders: Awaiting SC’s Verdict! | Taxsutra.

The fate of the orders passed in cases involving international tax (taxability of non-residents or cases involving transfer pricing issues) should hopefully be decided soon by the Supreme Court. The Supreme Court is set to decide the contentious issue that has captured the attention of taxpayers and the tax professionals alike, i.e. interplay between section 153 and section 144C of the Income Tax Act, 1961 (“the Act”). This issue originated from the judgment of Madras High Court in the case of Roca Bathroom and is commonly referred to as the “Roca Bathroom issue”. It revolves around whether the time limits prescribed under section 153 apply to the final assessment order or to the draft assessment order passed under section 144C. The keenly awaited decision of the Supreme Court is poised to clarify the ambiguities that have cropped up after this issue became subject matter of litigation before Tribunals and High Courts across the country.

This article delves into the discussion on much-anticipated Supreme Court’s verdict on special leave petition (“SLP”) filed by Revenue against the judgment of Madras High Court in the case of Commissioner of Income-tax v. Roca Bathroom Products (P.) Ltd. [TS-359-HC-2022(MAD)-TP]. This article broadly discusses the legislative framework of section 153 and section 144C of the Act, gives a bird’s-eye view of key judicial rulings, and highlights the recent trend in Tribunals and High Courts on this issue. There would be wide ramifications of Supreme Court’s decision on this issue and the hearing before Supreme Court is likely to happen soon on this matter.

Decoding section 153 and 144C: Key arguments from both the sides:

Section 153 provides for the limitation or an outer limit for the passing of the order of assessment or reassessment. Section 144C relates to reference to the Dispute Resolution Panel (“DRP”) and is applicable in case transfer pricing issues are involved or taxability of a non-resident is to be decided. Section 144C provides that the Assessing Officer (“AO”) is required to forward a draft of the proposed order of assessment to the assessee, if he proposes to make any variation to the returned income, which is prejudicial to the interest of such assessee. The assessee has the option to either accept variation proposed in the draft order or file objections against the draft order with the DRP. Section 144C(4) provides that the AO shall, notwithstanding anything contained in Section 153 of the Act, pass the assessment order within one month from the end of the month in which the acceptance of assessee is received or the period of filing of objections by the assessee before DRP expires. If objections are filed before DRP, the DRP is required to issue the direction within 9 months.

Taxpayers have argued that the final order of assessment is required to be passed within the outer limits set out in section 153, even if provisions of section 144C are applicable. Hence, the time limits prescribed under section 153 are applicable in all the cases, including those covered under section 144C and these time limits would prevail over time limits prescribed under section 144C. This is because the procedure of section 144C is to be followed by AO only if he proposes to make any variation prejudicial to the interest of the assessee. If no variation prejudicial to the interest of the assessee is proposed, AO is not required to go through the procedure prescribed under section 144C.

Revenue has long contended that the time limits prescribed under section153 are in addition to the time limits prescribed under section 144C. The time limits prescribed under section 144C of the Act do not get subsumed in the time limits prescribed under section 153. Revenue’s understanding of these provisions is that the time limits prescribed under section 153 are applicable to the draft order passed under section 144C and not to the final order passed in accordance with the procedure prescribed under section 144C. This view has been adopted by tax officers across India, with tax authorities routinely issuing draft orders within time limits prescribed under section 153 of the Act, while final assessment orders often extended beyond such time limits.

However, this approach faced significant legal challenges with taxpayers questioning legal validity of final assessment orders passed beyond the statutory limitation prescribed under section 153. It is interesting to note that section 153 uses the words “order of assessment” instead of “draft order of assessment”. The crux of the debate lies in whether draft order, as an interim step, can satisfy the outer time limits prescribed under section 153, or whether entire assessment procedure, culminating in the final assessment order, must adhere to the specified time limits.

Key judicial rulings on the issue:

The Madras High Court, in the case of Roca Bathroom (supra), ruled that section 144C does not operate in isolation. It was emphasized that the time limits prescribed under section 153 applies to the final assessment order, and not just to the draft assessment order.

The Bombay High Court, in the case of Shelf Drilling Ron Tappmeyer Ltd. v. ACIT [TS-485-HC-2023(BOM)-TP], rejected the argument of the revenue that Madras High Court’s ruling in case of Roca Bathroom is per incuriam and held that the time limits prescribed under section 153 would prevail over and above the assessment time limits prescribed under section 144C. It is pertinent to note that in this case, the revenue also brought to the attention of the Court that the implication of the Court’s findings would be that most of the orders passed in past years, after disposal of objections by the DRP, would become time barred. This is because the consistent understanding of tax officers, before the decision in the case of Roca Bathroom, was that the time limits applied to the draft orders and not to the final orders.

Revenue has filed SLP before the Supreme Court, challenging the ruling of the Madras High Court and Bombay High Court. Supreme Court has directed that the ruling in Shelf Drilling (supra) shall not be cited as a precedent in any other subsequent matter until further orders of the Supreme Court. However, the Supreme Court did not stay the ruling of Roca Bathroom (supra) and the same is still cited as a precedent to raise the argument of limitation before the tax authorities, the Tribunals and the High Courts.

Trend in the judicial forums across the country:

The Bombay High Court in the case of PayPal Payments Private Limited [TS-350-HC-2024(BOM)-TP] rejected revenue’s plea for reference of this issue to the larger bench. The Court provided an ad-interim relief to the assessee by staying the operation of assessment order and held that since question of law is pending determination before the Supreme Court, it is appropriate to await the decision of the Supreme Court. It was also observed by the High Court that the circulars have been issued by the revenue to all its representatives in Mumbai to seek adjournments in all pending cases involving this issue before the Tribunals.

Further, in another batch of appeals, the Bombay High Court has adjourned the proceedings sine die (i.e. for an indefinite period) with liberty to the parties to approach the High Court once this issue is decided by the Supreme Court.

Delhi High Court in case of Bid Services Division Mauritius Ltd. vs. Asst. CIT [W.P.(C) 11060 of 2023] had admitted the writ petition on the same issue and granted an interim relief to the assessee by holding that the revenue may continue with the assessment proceedings but cannot give effect to the final order if the same is adverse to assessee. Delhi High Court has given same relief in case of Ceragon Networks Ltd. vs. ACIT [W.P.(C) 12374/2024] and Infogain India Pvt. Ltd. vs. NFAC [W.P.(C) 6642/2024]. The Delhi High Court has acknowledged the need for clarity on this issue and has scheduled the hearing on January 25, 2025, emphasizing that this issue requires consideration.

Earlier, the Delhi Tribunal favoured the taxpayers on this issue, as seen in various cases, Vedanta Ltd. v. ACIT [TS-7574-ITAT-2020(Delhi)-O], Honda Trading Corporation, Japan v. DCIT [TS-429-ITAT-2015(DEL)-TP], Super Brands Ltd. (UK) v. ACIT [TS-737-ITAT-2022(DEL)] and provided relief by relying on the case of Roca Bathroom. However, in the case of Religare Capital Markets Limited v. DCIT [TS-1004-ITAT-2019(DEL)-TP], the Delhi Tribunal came up a different perspective and held that Section 144C functions as an independent mechanism, with its own timelines governing the issuance of the final assessment order, unaffected by the broader time limits provided under Section 153 of the Act.

The Delhi Tribunal is currently not hearing the matters involving this issue and adjourning the cases sine die, directing the parties to approach the Tribunal once Supreme Court has decided the issue.

However, the Hyderabad Tribunal is still adjudicating the cases involving this issue and has consistently provided relief to the taxpayers. It has recently held that the timelines prescribed under section 153 are appliable to final assessment orders, aligning with the principles laid down in Roca Bathroom (supra).

Way forward:

The Supreme Court’s decision in the Roca Bathroom (supra) (along with the other tagged matters) is expected to settle the longstanding debate over the interplay between section 153 and section 144C of the Act and whether time limits prescribed under section 153 are limited to the draft assessment order. The decision from Supreme Court shall provide much-needed clarity to decide the limitation to pass the assessment orders going forward in cases involving international tax and it shall also help in clearing the logjam of cases across judicial forums on this issue.

With a hearing likely to happen soon, the tax community eagerly awaits the decision of Apex Court that will lay the law on the issue of limitation and decide the fate of the assessment orders that have passed till date with an understanding that time limits of Section 153 do not apply to the final assessment orders.