In the framework of income tax assessments in India, statutory timelines play a critical role in ensuring fairness, efficiency, and finality in proceedings. The intersection of procedural provisions and limitation statutes often leads to interpretative challenges, especially when two separate provisions prescribe different timelines for completing assessments. This complex interaction became the focal point in a recent decision rendered by the Bombay High Court in the case of Shelf Drilling Ron Tappmeyer Ltd. v. Assistant Commissioner of Income Tax.
The core issue revolved around the interplay between Section 144C, which governs the issuance of draft and final assessment orders in cases involving eligible assessees, and Section 153(3), which lays down the time limits for completing assessments following a remand by the Income Tax Appellate Tribunal. The petitioner, a foreign company, challenged the validity of an assessment order on the ground that the statutory limitation under Section 153(3) had expired, and the time extensions under Section 144C could not override that deadline. This legal battle raised crucial questions about procedural autonomy and legislative hierarchy within the Income-tax Act.
Background of the Assessee’s Case
Shelf Drilling Ron Tappmeyer Ltd., the petitioner in this matter, is a company incorporated in the Cayman Islands and headquartered in Dubai. It is engaged in offshore drilling operations for the oil and gas sector, specifically in shallow waters. For the assessment year 2014–15, the company filed its income tax return in India, declaring a loss of Rs. 120.18 crores under regular computation provisions. It opted not to apply presumptive taxation under Section 44BB(3), which deals with taxation of income for non-residents engaged in oil exploration services.
The company owned and operated a rig named J.T. Angel, which it had acquired under an Asset Purchase Agreement. This rig was deployed to provide drilling services to the Oil and Natural Gas Corporation (ONGC), India’s largest oil exploration entity. These services were rendered through a subcontracting arrangement via its Indian subsidiary, Shelf Drilling Offshore Services (India) Pvt. Ltd.
During scrutiny proceedings, the Assessing Officer rejected the books of account maintained by the company under Section 145 of the Act, citing discrepancies and inconsistencies. Instead of accepting the returned loss, the AO computed income based on presumptive taxation under Section 44BB(1), estimating taxable income at 10 percent of gross receipts. This approach significantly altered the tax liability and resulted in a variation prejudicial to the assessee.
Appeal and ITAT Remand
Aggrieved by the assessment order, the company filed objections before the Dispute Resolution Panel, which upheld the approach adopted by the Assessing Officer. A final assessment order was thereafter passed under Section 143(3) read with Section 144C(13). The assessee, however, challenged this order before the Income Tax Appellate Tribunal, arguing that the rejection of books was not justified and that the AO had erred in applying presumptive taxation when the company had opted for regular provisions.
The ITAT accepted the assessee’s arguments and set aside the assessment order. It remanded the matter back to the Assessing Officer for a fresh determination after properly examining the books of account and supporting documentation. This remand order was issued on 4 October 2019.
Legal Structure of Section 153(3)
Section 153 of the Income-tax Act prescribes time limits within which various types of assessments or reassessments must be completed. Sub-section (3) specifically applies in cases where an order of assessment is set aside or cancelled and a fresh assessment is directed to be made. In such cases, the AO is required to complete the assessment within 12 months from the end of the financial year in which the order of the appellate authority, such as the ITAT, is received.
In the present case, since the ITAT remand order was passed in October 2019, the AO had time until 31 March 2021 to complete the assessment. However, due to the pandemic and resulting administrative difficulties, various time limits under the Act were extended through notifications issued under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020. These extensions pushed the outer deadline for completion of the remanded assessment to 30 September 2021.
Section 144C – Special Procedure for Eligible Assessees
Section 144C provides a procedural mechanism specifically designed for assessment of foreign companies and other eligible assessees. Where the Assessing Officer proposes any variation in the income or loss returned by such an assessee which is prejudicial to its interest, a draft assessment order must be issued before passing a final order. The assessee has the right to file objections to this draft before the DRP within 30 days.
The DRP is then required to issue its directions within nine months from the end of the month in which the draft order is received. The Assessing Officer must thereafter complete the assessment within one month of receiving the directions. If no objections are filed, the AO can proceed to pass the final assessment order within 30 days from the end of the time available to file objections.
This section operates as a special procedural code to facilitate a fair and expedited resolution of assessment disputes involving foreign entities. However, the overlap with limitation provisions under Section 153 raises concerns about the synchronisation of these timelines.
The Draft Order and Limitation Dispute
In compliance with Section 144C, the AO issued a draft assessment order on 28 September 2021, proposing variations prejudicial to the assessee. The draft order was served within the extended time limit prescribed under Section 153(3), which was due to expire on 30 September 2021. The assessee responded to the draft order by filing objections before the DRP within the prescribed time.
However, no final assessment order was passed before the expiration of the extended limitation period under Section 153(3). The assessee, therefore, approached the Court, arguing that the assessment proceedings had become invalid on account of expiry of the limitation period and that the revenue could not rely on Section 144C(13) to extend the time for passing the final assessment order.
Key Legal Questions Before the Court
The Bombay High Court was called upon to decide several important legal questions concerning the interpretation and application of Sections 144C and 153:
- Whether the time limit specified under Section 153(3) for completing assessments post-remand overrides the procedural timelines prescribed under Section 144C for issuing final assessment orders.
- Whether the issuance of a draft assessment order within the extended limitation period is sufficient to initiate valid assessment proceedings, even if the final order is not issued within that period.
- Whether Section 144C operates as a self-contained code that functions independently of the general limitation period laid down in Section 153(3).
- Whether the failure of the AO to pass a final assessment order before the expiry of the limitation under Section 153(3) renders the assessment null and void.
- Whether the assessee’s original return, declaring a substantial loss, must be accepted as final in the absence of a valid assessment order.
Revenue’s Position on Procedural Validity
The revenue authorities argued that Section 144C provides a comprehensive procedural framework for eligible assessees and includes sufficient safeguards against arbitrary assessments. According to the revenue, since the draft assessment order was issued within the limitation period under Section 153(3), the procedural timeline under Section 144C could continue independently beyond the said date.
The department maintained that the process under Section 144C, including DRP directions and the final assessment order, was not constrained by Section 153(3) in cases involving eligible assessees. It was submitted that Section 144C(13) contains its own prescription regarding the timing of final assessment orders and that these timelines must be read harmoniously with Section 153.
Assessee’s Arguments on Limitation
The assessee, on the other hand, asserted that the time limit prescribed under Section 153(3) is an outer cap on the entire assessment process and must apply to cases involving remands. It was contended that the special procedures under Section 144C cannot be used to circumvent or extend the outer limitation set under Section 153(3), especially after an appellate remand.
The company argued that issuance of a draft order cannot be equated with the completion of assessment. Since no final order was passed by 30 September 2021, the entire proceedings stood vitiated. The petitioner also contended that Section 144C(13) cannot be invoked in isolation to justify delay when the primary condition of completing the assessment within limitation was not met.
Statutory Interpretation and Harmonisation
The conflict between the two sections raised a significant issue of statutory interpretation. While Section 144C is a special provision aimed at providing a structured process for eligible assessees, it does not explicitly override Section 153(3) in cases of remand. On the contrary, Section 153(3) is a limitation provision that operates as a substantive safeguard to prevent open-ended assessments.
The question before the Court was whether these two provisions could be harmonised or whether one must prevail over the other in the event of a conflict. The outcome had potential implications not just for this particular assessee but for numerous similar cases involving cross-border taxpayers and remanded assessments.
Understanding the Role of Transfer Pricing and the Dispute Resolution Panel (DRP)
In cases involving international transactions or specified domestic transactions, transfer pricing plays a significant role in determining the arm’s length price of such transactions. The Assessing Officer (AO), after incorporating the transfer pricing officer’s findings under Section 92CA, may propose variations to the income of an eligible assessee. If such variations are prejudicial to the assessee, the AO is required to issue a draft assessment order under Section 144C(1).
The Dispute Resolution Panel (DRP), a collegial body constituted under Section 144C(8), functions as a safeguard mechanism for eligible assessees against high-pitched assessments. An eligible assessee, being a foreign company or a person in whose case the transfer pricing adjustment has been proposed, may file objections with the DRP within 30 days of receipt of the draft assessment order.
Timeline Framework for Final Assessment under Section 144C
When objections are filed before the DRP, the final assessment cannot be completed until the DRP has issued its directions under Section 144C(5). These directions are binding on the AO. Once the AO receives the DRP’s directions, they must pass the final assessment order within one month from the end of the month in which the directions are received, as prescribed under Section 144C(13).
This timeline is not merely procedural but a statutory mandate. Any assessment completed beyond this prescribed period is considered time-barred and hence invalid. The period consumed in DRP proceedings is not deducted from the total time available for completion of assessment under Section 153 but is accounted for under the specific timelines provided in Section 144C(13).
How Section 153(3) Interacts with Post-DRP Proceedings
Section 153(3) of the Income-tax Act prescribes time limits for giving effect to appellate or revisionary orders, including orders issued by the DRP. It stipulates that where a reference has been made to the DRP and directions have been issued under Section 144C(5), the final assessment order in pursuance thereof must be passed within one month from the end of the month in which such directions are received.
This sub-section effectively mirrors the time limit prescribed under Section 144C(13), thereby eliminating any ambiguity about the deadline for finalising assessments in DRP cases. This overlap confirms that both provisions work together to ensure that final orders are passed promptly after the DRP has given its direction.
Judicial View: Final Assessment Must Follow DRP Directions Rigorously
Numerous court rulings have reinforced the mandatory nature of following the DRP’s directions within the statutory time frame. Where the AO fails to pass the final order within one month from receiving DRP directions, the assessment is rendered void.
For instance, High Courts have held that the failure to adhere to the timelines stipulated in Section 144C(13) read with Section 153(3) leads to the quashing of the final assessment order. In such situations, the courts have emphasized that even substantial justice cannot override statutory timelines unless specific condonations or extensions are provided for by the law.
Implication of Delays and Inadvertent Omissions
A delay in passing the final assessment order beyond the prescribed time leads to a fatal flaw in the entire assessment process. Such orders are treated as non est in the eyes of law. Courts have strictly construed this delay as one that strikes at the root of the jurisdiction of the AO to make such an order.
Additionally, there are no inherent powers with the AO or the DRP to extend the statutory time limits. Even if the delay is caused by genuine administrative errors or systemic delays, it cannot be condoned under the Act unless specific relaxation provisions are invoked, which generally do not apply in DRP matters.
Practical Challenges for Revenue and Compliance Officers
In practice, the process of complying with the DRP’s directions and issuing the final order within the one-month deadline can be quite challenging. Once the DRP passes its direction, the AO must evaluate the same, prepare the final order, and ensure its proper service to the assessee within the prescribed time.
Given that these directions are often lengthy and complex, especially in transfer pricing cases involving international transactions, the revenue department must have robust internal systems to ensure prompt action. Any delay or administrative slackness can result in substantial revenue leakage due to time-barred orders.
Difference in Nature of Limitation under Section 144C(13) and Section 153(1)
It is crucial to distinguish between the limitations prescribed under Section 144C(13) and Section 153(1). While Section 153(1) lays down the overall time limit for completion of assessments or reassessments, Section 144C(13) is a special provision that overrides the general limitation, specifically for cases covered by the DRP mechanism.
Section 144C(13) thus has an overriding effect in eligible assessee cases. The limitation under this section starts from the date the AO receives directions from the DRP, and it continues independently of the original assessment timelines under Section 153(1). This separation of timelines ensures that DRP proceedings are not compromised due to outer limitations prescribed under general provisions.
Section 153(3) and Its Scope Beyond DRP Cases
While Section 144C(13) is applicable only in DRP-related assessments, Section 153(3) has a broader scope. It applies to cases where assessment or reassessment is to be made in consequence of or to give effect to any finding or direction contained in appellate or revisionary orders.
This includes orders passed by the Commissioner (Appeals), the Income Tax Appellate Tribunal, the High Court, or the Supreme Court. Therefore, the scope of Section 153(3) is not confined to DRP cases but also accommodates a wide variety of scenarios requiring reassessment or rectification based on higher judicial authority directions.
However, in DRP cases, this provision is particularly relevant in ensuring the timely conclusion of the final assessment after the panel’s decision. Section 153(3) effectively becomes the vehicle for implementing the DRP’s mandate through timely issuance of the final order.
Difference Between Direction and Suggestion Under DRP Order
An important jurisprudential aspect of Section 144C(13) is the binding nature of DRP directions. These are not mere recommendations but statutory directives that must be implemented in full by the AO while passing the final order.
This has been reiterated in several rulings, where courts have rejected attempts by the AO to deviate from or dilute the DRP’s findings. The final order must align precisely with the DRP’s direction and cannot introduce new issues or vary on quantum unless it is due to clerical or arithmetical mistakes.
Non-compliance with DRP’s directions would render the final order invalid and open it up to being challenged before the appellate authority. This underlines the strict nature of both the procedural and substantive compliance required in DRP-involved assessments.
Calculation of Limitation: From DRP Order Receipt to Order Dispatch
Another area of practical importance is the method of calculating the one-month limitation. The limitation begins from the end of the month in which the AO receives the DRP’s directions. This provision provides some buffer to the revenue department to prepare and issue the final order.
However, the timeline must include both preparation and service of the order. Merely signing or uploading the order within the deadline is not sufficient if the order is not communicated to the assessee within time. The law emphasizes both the finalisation and service of the order as essential for meeting the deadline. This has been affirmed in judicial pronouncements that stress the requirement of actual dispatch or deemed service to the assessee within the prescribed period.
Transfer Pricing Adjustments and Directions under Section 92CA
Where transfer pricing adjustments under Section 92CA are incorporated in the draft order, they become a key part of the DRP proceedings. The DRP examines the appropriateness of such adjustments and may reduce, confirm, or enhance them depending on the case’s merits.
The AO, upon receiving the DRP’s direction on these issues, must reflect the exact quantum and rationale of those adjustments in the final assessment order. The time spent by the Transfer Pricing Officer (TPO) in issuing the order under Section 92CA does not count towards the one-month period under Section 144C(13), but it impacts the preparation time before the draft order is issued. Therefore, the coordination between TPO, AO, and DRP is essential to ensure compliance with procedural requirements within the rigid timelines prescribed under the law.
Illustrative Timeline Example for Clarity
To understand the interplay of these provisions better, consider the following scenario:
- The draft assessment order was issued to the assessee on 1st November 2024.
- The assessee filed objections before the DRP on 30th November 2024.
- The DRP issued its directions on 15th February 2025.
- The AO received the directions on 18th February 2025.
In this case, the AO must issue the final assessment order by 31st March 2025 (i.e., within one month from the end of February 2025). If the AO passes the order even on 1st April 2025, it is time-barred and unenforceable. This strict adherence to the timeline underscores the judicial and procedural integrity of Sections 144C(13) and 153(3).
Introduction to Post-DRP Compliance Framework
After the Dispute Resolution Panel (DRP) issues its directions under Section 144C(5), the Assessing Officer (AO) is obligated to adhere strictly to procedural rules prescribed in Section 144C(13). Simultaneously, Section 153(3) governs the time limits within which the AO must complete the assessment or reassessment in accordance with DRP’s directions. We delves into how these two sections interact, ensuring that taxpayers and officers remain within the legal boundaries of the assessment process.
Procedural Pathway Following DRP Directions
Once the DRP has passed its directions, Section 144C(13) mandates that the AO must complete the assessment in conformity with such directions, without providing any further opportunity to the assessee to be heard on the issues decided by the DRP. This aligns with the principle that DRP’s directions are binding.
The steps that follow are generally:
- Receipt of DRP directions under Section 144C(5)
- Completion of assessment under Section 144C(13) in accordance with those directions
- Issuance of final assessment order with demand notice and penalty, if applicable
The AO has no discretion to deviate from the DRP’s instructions. This is crucial in limiting unnecessary litigation and reinforcing the certainty of tax administration.
Integration of Section 153(3) Time Limits with DRP Mechanism
Section 153(3) specifies that when assessment or reassessment is to be made in consequence of, or to give effect to, any finding or direction contained in the order of the DRP, the AO must do so within 12 months from the end of the financial year in which such direction is received by the Principal Commissioner or Commissioner.
This extended time frame accommodates the complexity that might arise from high-pitched transfer pricing or international taxation issues often dealt with by the DRP. For example:
- If the DRP’s directions are received in the financial year 2024-25, then the AO must complete the assessment under Section 144C(13) by 31st March 2026.
- The DRP directions must be passed within nine months from the end of the month in which the draft order was forwarded to the assessee.
These provisions ensure that while the DRP process protects the rights of the taxpayer through a structured redressal mechanism, the department is also granted adequate time to implement its outcome.
Assessment Order After DRP Directions: Legal Characteristics
The final assessment order issued under Section 144C(13) pursuant to DRP directions is treated as a regular assessment order under Section 143(3) or reassessment under Section 147, depending on the case. However, this order is distinct in the sense that:
- The assessee cannot appeal against the draft order.
- The final order can be challenged before the Income Tax Appellate Tribunal (ITAT) under Section 253.
Moreover, since the AO cannot make any independent additions beyond the scope of the DRP’s directions, the final order essentially becomes a reproduction of the DRP’s instructions applied to the computation of income and tax liability.
Case Law Insight: Legal Sanctity of DRP and AO’s Limited Role
Various decisions by tribunals and courts reinforce that the AO is a mere implementing authority post-DRP directions. In cases where the AO tried to go beyond or alter the DRP’s instructions, the courts have struck down such actions. The following principles emerge:
- The AO cannot add new issues or revisit settled issues from DRP directions.
- The DRP’s directions are final and binding for both the AO and assessee, subject only to appellate challenge before the ITAT.
- Non-compliance with timelines under Section 153(3) invalidates the entire assessment order.
Such judicial observations underscore the sanctity of procedural compliance and adherence to legislative timelines.
Scenarios Where DRP May Partially Uphold or Overturn AO’s Draft Order
It is possible for the DRP to modify the AO’s draft order in part, particularly in transfer pricing adjustments or disallowances under specific provisions. In such cases, the final order under Section 144C(13) must incorporate these changes accurately.
For instance, consider a case where the AO proposes an addition of Rs. 50 lakh due to transfer pricing adjustment, and the DRP directs deletion of Rs. 30 lakh after review. The AO’s final order must reflect only the addition of Rs. 20 lakh, and cannot reinstate or re-evaluate the deleted portion.
Thus, the interaction of Section 144C(13) with DRP’s directions ensures the binding nature of this quasi-judicial body while Section 153(3) provides a framework to ensure that assessments are completed within a finite timeline.
Consequences of Non-Compliance with Section 144C(13) or 153(3)
Non-adherence to either Section 144C(13) or Section 153(3) has serious consequences:
- If the AO passes an order beyond the time prescribed under Section 153(3), the order becomes time-barred and is void.
- If the AO disregards the directions of the DRP, the order can be challenged as void ab initio for lack of jurisdiction.
- If the AO fails to issue the order within the scope of DRP’s instructions, it leads to unnecessary litigation and adverse appellate decisions.
Such lapses not only delay the tax recovery process but may also lead to departmental accountability issues under internal audit frameworks.
Impact of Faceless Assessment on DRP and Section 144C(13) Compliance
With the advent of the faceless assessment regime, a centralized mechanism now governs the issuance of draft orders and implementation of DRP directions. This has led to:
- Digitization of all timelines, helping ensure adherence to Section 153(3) deadlines.
- Greater traceability of communication between AO, DRP, and assessee.
- Better internal monitoring of Section 144C(13) compliance due to standardized workflow systems.
However, challenges persist where system glitches or procedural missteps might lead to issuance of orders without incorporating DRP instructions. In such instances, rectification or appellate remedy becomes the only recourse.
Special Cases: Impact on Reassessment under Section 147
Where the reassessment is initiated under Section 147, and a reference to the Transfer Pricing Officer (TPO) is made during the reassessment proceedings, a draft order must still be passed under Section 144C(1) if the assessee is an eligible assessee.
The sequence becomes:
- Reassessment notice issued under Section 148
- Draft reassessment order issued under Section 144C(1)
- DRP directions under Section 144C(5)
- Final reassessment order under Section 144C(13)
- Compliance with time limit under Section 153(3)
This integration ensures that the safeguard of the DRP is not bypassed even during reassessment proceedings and that reassessment orders are time-bound.
Interrelation with Rectification Proceedings under Section 154
If there are apparent mistakes in the final order passed under Section 144C(13), the AO can initiate rectification proceedings under Section 154. However, such rectifications must not violate or override the directions issued by the DRP.
For instance, a computational error or incorrect application of tax rates may be corrected, but not any modification to additions or disallowances already examined and decided by the DRP.
Procedural Checklist for Tax Authorities
To ensure effective compliance with Sections 144C(13) and 153(3), the AO must follow a robust procedural checklist:
- Track the exact date of receipt of DRP directions.
- Calculate and record the deadline for completion of assessment under Section 153(3).
- Prepare the final order strictly as per DRP directions with no variations.
- Issue the order and demand notice within the statutory time frame.
- Ensure that no fresh additions or disallowances are made unless permitted by DRP.
This procedural diligence protects the assessment from being invalidated during appellate proceedings and ensures that the assessment is enforceable.
Recent Trends and CBDT Instructions on DRP Timelines
CBDT has from time to time issued internal circulars and instructions to streamline the functioning of the DRP and avoid unnecessary delays in assessment completions. These include:
- Direction to prioritize cases where DRP directions are due to be implemented near limitation deadlines.
- Encouragement of timely uploading of directions and system tracking.
- Use of automated reminders to ensure adherence to Section 153(3) deadlines.
These developments underscore the importance of technological intervention in facilitating compliance with statutory timelines.
Practical Examples Illustrating the Interplay
Consider the following illustrative situation:
- The AO issues a draft assessment order on 15th January 2024.
- The assessee files objections before the DRP within 30 days.
- The DRP issues directions on 25th October 2024.
- The assessment year in question is AY 2021-22.
In this case:
- The final assessment order must be passed within 12 months from the end of the financial year 2024-25, i.e., by 31st March 2026.
- The AO must pass the order as per Section 144C(13) strictly based on DRP directions.
- Any deviation or delay beyond 31st March 2026 would render the order invalid.
This example demonstrates how Sections 144C(13) and 153(3) combine to create a structured and time-bound assessment regime.
Conclusion
The interplay between Section 144C(13) and Section 153(3) of the Income-tax Act, 1961, lies at the heart of ensuring that assessment proceedings, especially those involving eligible assessees facing transfer pricing or international taxation issues, are conducted in a time-bound and procedurally fair manner. Section 144C(13) mandates that the Assessing Officer must pass the final assessment order within one month from the end of the month in which the directions of the Dispute Resolution Panel are received. Section 153(3), in turn, extends the time limit for completion of such assessments to align with this framework, carving out specific exceptions and establishing the boundaries for valid assessments post-DRP proceedings.
Judicial pronouncements have further illuminated the legislative intent, ensuring that taxpayers are protected from arbitrary extensions of time while reinforcing the responsibility of tax authorities to comply strictly with the procedural timelines. Courts have emphasized that while the DRP process is meant to benefit the assessee through a speedy, alternative dispute resolution mechanism, any failure to adhere to time limits could render the assessment invalid.
The synergistic reading of these two provisions underscores the need for precision and procedural rigor. For taxpayers, understanding this interplay helps in evaluating the validity of final assessment orders and knowing the legal remedies in case of any delay or procedural lapse. For tax professionals and practitioners, this domain continues to demand a nuanced appreciation of timelines, legal interpretations, and their practical implications in litigation and advisory work.
As cross-border transactions grow and the international tax landscape becomes increasingly complex, the importance of Sections 144C(13) and 153(3) will only deepen. Their interplay not only impacts statutory compliance but also reflects the broader commitment to timely justice, transparency, and procedural discipline in India’s tax administration.