Split Verdict in Supreme Court on Tax Assessment Deadlines for Foreign Assessees

A split verdict was delivered by the Supreme Court in a key tax dispute concerning the interpretation of statutory timelines under Sections 144C and 153 of the Income Tax Act, particularly affecting foreign entities and transfer pricing cases.

The dispute arose from a batch of appeals filed by the Income Tax Department challenging a judgment of the Bombay High Court. The High Court had ruled that final assessment orders issued after the expiry of the statutory 12-month limitation period under Section 153(3) were invalid—even in cases involving assessees governed by the Section 144C mechanism. These assessees, including foreign drilling firms such as Shelf Drilling Ron Tappmeyer Ltd, were subject to a special assessment regime that includes draft orders, an opportunity to object, and final orders via a Dispute Resolution Panel (DRP).

The Supreme Court bench, comprising Justices B.V. Nagarathna and S.C. Sharma, delivered opposing views on whether the 12-month cap under Section 153(3) should apply to proceedings under Section 144C.

Justice B.V. Nagarathna endorsed the High Court’s finding, stating that the limitation period under Section 153 remains applicable even if the matter is handled through the Section 144C process. She concluded that assessment proceedings initiated under Section 144C were time-barred when the final assessment order was not finalized within the prescribed period.

Justice S.C. Sharma, on the other hand, ruled in favor of the Income Tax Department. He held that Section 144C provides a self-contained and separate framework with its own timeline for the assessment process, and thus operates independently of Section 153. He noted that Sections 144C(4) and 144C(13)—through their non-obstante clauses—clearly exclude the applicability of Section 153’s outer time limit to Dispute Resolution Panel cases. Justice Sharma observed that subsuming Section 144C within the broader Section 153 timeline would jeopardize tax recovery and undermine statutory procedures for complex assessments, thereby disadvantaging revenue collection efforts.

Under the Section 144C process, eligible assessees first receive a draft assessment order. They then have the opportunity to object, triggering review by the DRP. Following the DRP’s directions, a final assessment order must be issued—either within one month of the draft order if no objections are filed or within 11 months of the draft order if objections are raised. These timelines would become untenable if overlaid by Section 153’s 12-month cap, according to Justice Sharma.

Given the conflicting opinions, the Supreme Court concluded that the matter is fit for consideration by a larger bench. Meanwhile, the system of special timelines under Section 144C remains in limbo for foreign and transfer-pricing assessees until the Supreme Court conclusively resolves the issue.