Direct Tax Alert

BACKGROUND

Section 144C of the Income-tax Act, 1961 (IT Act) was introduced by the Finance Act, 2009, to streamline dispute resolution for certain non-resident taxpayers and transfer pricing cases. It introduced a two-stage mechanism:

• The tax officer issues a draft assessment order,

• The taxpayer may accept the draft order or file objections before the Dispute Resolution Panel (DRP), which can issue binding directions to the tax officer. The tax officer then passes the final assessment order in conformity with the DRP’s directions.

While this mechanism sought to provide speedy resolution and reduce litigation, a question may arise as to whether the time taken for the DRP process under Section 144C of the IT Act shall override the limitation period prescribed under Section 153¹ of the IT Act. In this regard, recently, the Hon’ble Supreme Court (SC)² had an occasion to analyse the said issue. We, at BDO India, have summarised this ruling and provided our comments on the impact of this decision hereunder:

FACTS OF THE CASE

• The taxpayers were non-residents engaged in the business of providing services or facilities in connection with prospecting for or extraction or production of mineral oils. They had an option to compute income on a presumptive basis under section 44BB³ of the IT Act. However, for Fiscal Year (FY) 2013-14 & FY 2017-18, the taxpayers opted out of the option to compute their income on a presumptive basis and declared a loss in their tax return.

• The case was selected for scrutiny, and after a draft assessment order was issued, objections were filed before the DRP, leading to a final assessment order. On appeal, the Tax Tribunal set aside the assessment and remanded the matter for fresh adjudication. Following the remand, the tax officer issued multiple notices and ultimately served a draft assessment order on 28 September 2021—just before the limitation period under Section 153(3) of the IT Act, extended by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA), was due to expire on 30 September 2021. A similar sequence occurred for FY 2017–18, where the draft order was also issued on 28 September 2021 against a limitation deadline of 30 September 2021. The taxpayers argued that no valid final assessment order could now be passed within time, as the DRP process and final order would necessarily extend beyond the statutory limit. Tax authorities claimed that timelines prescribed under Section 144C of the IT Act were in addition to Section 153 of the IT Act. The Bombay HC, while passing the order in favour of the taxpayer, held that the draft order under Section 144C of the IT Act was passed on 28 September 2021, and no final assessment order could forthwith be passed due to the expiry of the due date on 30 September 2021.

• Being aggrieved by the above, the tax authorities filed a Special Leave Petition (SLP) before the Hon’ble Supreme Court.

SUPREME COURT RULING

In order to deliberate on the aforementioned issue, a two-judge bench was constituted. The Hon’ble Supreme Court, constituting two judges, rendered a split decision involving the following observations:

Observations of Justice Satish Chandra Sharma

• Section 144C(1) of the IT Act provides that a tax officer, notwithstanding anything to the contrary contained in the IT Act, shall forward a draft order of assessment to an eligible taxpayer if he proposes to make any variation which is prejudicial to the interest of such taxpayer. Eligible taxpayer means any person in whose case the variation referred to in section 144C(1) of the IT Act arises as a consequence of the order of the Transfer Pricing Officer passed under section 92CA(3) of the IT Act, and any non-resident not being a company, or a foreign company.

• The provisions of section 144C of the IT Act prescribe a specific procedure which contemplates giving the taxpayer a period of 1 month to choose to file objections, as well as provides a taxpayer with an opportunity of hearing, which may take up to 9 months before the DRP.

• Further, these timelines are independent of the timelines contemplated in Section 153 of the IT Act and operate in addition to the timelines contemplated in Section 153 of the IT Act.

• If the entire procedure prescribed in Section 144C of the IT Act is subsumed within the overall time period prescribed under Section 153 of the IT Act, then it would result in a complete catastrophe for recovering lost tax. The time period within which the tax officers would have to pass orders would be negligible.

• The non-obstante clauses contained in Section 144C(4) and Section 144C(13) of the IT Act only extend the timeline for the passing of the final order and not that of the draft order.

• Section 153 of the IT Act, in its operation, does not distinguish between persons who are suffering assessment under Section 144C of the IT Act or otherwise.

• A combined reading of Sections 144C(1), 153, and 144C(4) of the IT Act provides that the tax officer must issue the draft assessment order within Section 153’s limit and, if variations are accepted or the objection time lapses, pass the final order within an additional period of 1 additional month.

• If the procedure under Section 144C of the IT Act and the timelines under sections 144C(4) and  section 144C(13) of the IT Act are subsumed within Section 153’s limits, the tax officers would have to work backwards, assuming every eligible taxpayer would file objections and the DRP would use the full 9 month period to issue any direction, a scenario the Parliament could not have intended when enacting Section 144C of the IT Act.

• Once the procedure under Section 144C(1) gets triggered, the time available with the DRP to carry out the process conceived under Section 144C(5) to Section 144C(12) of the IT Act and the time available with the tax officer under Section 144C(13) of the IT Act, will be over and above the timelines prescribed under Section 153 of the IT Act. This interpretation would ensure the smooth functioning of Section 153 and Section 144C of the IT Act.

• Further, the Hon’ble Supreme Court did not agree with the findings of the Hon’ble Madras HC in Roca Bathrooms⁴ wherein, the Hon’ble High Court held that in absence of any specific carve out under section 144C or 153 of the IT Act and in view of additional time period of 12 months provided under section 153(4) of the IT Act the passing of draft assessment and thereafter final assessment order ought to have taken place within this extended period of limitation.

Observations of Justice B.V. Nagarathna

• A perusal of the speech of the finance minister dated 6 July 2009 in support of the Finance (No.2) Bill, 2009 makes it apparent that the intent of the Parliament behind Section 144C of the IT Act is to expedite the final disposal of tax disputes pertaining to an eligible taxpayer.

• The procedure under Section 144C of the IT Act envisions the procedure to be completed between the tax authorities and the taxpayer, and the import of this abstract approach is a stricter interpretation of the timelines of Section 144C of the IT Act. To read it otherwise would only inflate the timelines for completion of the assessment order of an eligible taxpayer, which would be doing harm to the intent implicit from the text.

• While interpreting a statute, it must be read as a whole, and one provision of the Act should be construed with reference to other provisions in the same Act so as to make out a consistent enactment of the whole statute.

• Section 144C(1) of the IT Act prescribes that the tax officer shall forward a “draft” of the proposed “order of assessment”, which cannot be a final order of assessment.

• The non-obstante clause in Section 144C(1) of the IT Act implies that it overrides any contrary provisions, creating a special procedure for eligible taxpayers; however, Section 153 of the IT Act is not contrary to Section 144C.

• The scope and ambit of the two provisions are distinct inasmuch as section 153 of the IT Act deals with the limitation period with respect to completion of assessments and reassessments, while section 144C of the IT Act deals with a procedure to be complied with for making an assessment order only in the case of eligible taxpayers.

• In the case of an eligible non-resident taxpayer not being a company or a foreign company, there is no extension of the period of limitation beyond 12 months as stipulated under the proviso to section 153(3) of the IT Act.

• A statute cannot be held to be unworkable, or an interpretation said to give rise to absurdity, only because of some asymmetry in time available to the tax officer for passing a draft order in case of an eligible taxpayer under section 144C of the IT Act, as compared to final assessment order in case of an ordinary taxpayer.

• Therefore, within the period of 12 months, the tax officer has to ensure that the entire procedure under section 144C of the IT Act is completed (as and when it is applicable) and pass a final assessment order.

BDO INDIA COMMENTS

With the split verdict by the Hon’ble Supreme Court, the issue still remains unresolved. One of the members has held that the DRP process operates independently of the timelines prescribed in Section 153 of the IT Act, allowing the Revenue additional time beyond the base limitation to complete final assessments. This view overrules contrary High Court rulings and eases procedural constraints in complex cross-border tax cases. In contrast, the dissenting judgment provides that without explicit statutory exclusion in Section 153 of the IT Act, DRP timelines must fit within the prescribed limits, stressing strict interpretation of fiscal statutes. The verdict highlights a legislative gap and calls for further clarification.

While the two-judge bench has delivered conflicting decisions, it is pertinent to note that the Hon’ble Supreme Court has directed the Registry to place the matter before the Hon’ble Chief Justice of India to constitute an appropriate bench to hear this matter.