Summary: Subsequent to a lengthy hiatus, a pivotal judgment from the Madras High Court in the case of Roca Bathroom Products Pvt. Ltd. has been released, concerning Section 153 in conjunction with Section 144C of the Income Tax Act, 1961. This ruling holds considerable implications for tax disputes currently under appeal.
The matter at the heart of the Roca Bathroom case has attracted considerable interest from both legal and business circles, focusing on how Sections 153 and 144C were interpreted and applied before the critical decision by the Honourable Madras High Court which has a farfetched bearing on the ongoing litigations pending before the appellate authorities. To understand the implications of aforementioned ruling, one would need to firstly understand how the transfer pricing assessment proceedings which involved objections before the Dispute Resolution Pannel (“DRP”) functioned prior to issuance of the judgement of the Honourable Madras High Court. Below is an overview using the assessment year 2021-22 as a reference point, which sheds light on the interpretations and practices that were in place:
As seen above, the common interpretation among stakeholders has been that the deadline for issuing a draft assessment order was 31 December 2023, and not for passing the final assessment order. This interpretation has been largely accepted since the option to file objections with the DRP became available under section 144C of the Act. Moreover, it was believed that Section 144C, which details the procedures for DRP proceedings, is distinct and operates separately from Section 153.
However, in the Roca Bathroom case, the argument was put forth that the deadline for issuing the final assessment order should be governed solely by Section 153, without the joint application of Sections 153 and 144C. This implies that the DRP proceedings, as well as the issuance of the final assessment order, should be completed within the timeframe stipulated by Section 153. In the given example, this would mean that all actions, including the conclusion of DRP proceedings and the passing of the final assessment order, would need to be completed by 31 December 2023.
The revenue authorities in Roca Bathroom case contented that upon receiving the TPO order, the AO is empowered to pass a final assessment order. Against this order, the assessee has the right to appeal before the Commissioner of Income Tax (Appeals). However, if the assessee takes issue with the draft assessment order and approaches the DRP, the DRP is then obliged to conduct a hearing with the assessee. Subsequently, the DRP will issue directives to the AO, who must then finalize the assessment proceedings in accordance with these instructions. The AO is authorized to pass such an order despite any conflicting provisions in Section 153. Accordingly, Section 153 does not explicitly mention a time limit for the AO to complete an assessment based on the DRP’s directions. This omission is intentional, as the proceedings before the DRP and those initiated based on the DRP’s directions are considered separate and distinct processes. In support of this view, the Revenue cites Section 144C(13), which suggests that the timeline for actions following the DRP’s directions is not governed by the general limitations set out in Section 153 and the fact that that the limitation prescribed u/s.153 applies only to a draft assessment order and not final assessment order passed u/s.144C.
Verdict of the Hon’ble High Court’s
a. The Hon’ble High Court dismissed the revenue’s argument that Section 144C functions as a self-contained code, thereby implying that the DRP authority to address disputes over additions made by the Transfer Pricing Officer TPO is not limited by Section 153 which is 18 months from the end of the assessment year for AY 2021-22 . The court found that in the absence of explicit time limits set forth in the Act, the deadlines prescribed under Section 153 cannot be imposed on Section 144C.
b. The High Court clarified that the provisions of Section 144C and Section 153 are not mutually exclusive since both sections deal with transfer pricing assessments and have interdependent and overlapping elements.
Consequently, the deadline for issuing the final assessment order must fall within the time limits set by Section 153. In the example provided, this would be by 31 December 2023, which indicates that there is no additional nine-month period allowed for the completion of DRP proceedings. The entire transfer pricing assessment, including the DRP process, must be concluded within the 18-month period stipulated by Section 153, which accounts for an initial nine months plus an additional twelve months in cases involving a transfer pricing reference, counting from the end of the assessment year.
The Bombay High Court’s affirmation of the aforementioned stance in the Shelf Drilling Ron Tappmeyer Ltd. case led to significant anticipation of legislative changes among the legal community, especially the revenue authorities, in light of the interim and latest budgets. However, the budgets have not met these expectations, leading to disappointment within the fraternity.
In the wake of the Madras High Court’s and Bombay High Court’s ruling, a growing number of assessees have begun to challenge the validity of their Assessment orders up to the assessment year 2021-22. The contention arises from the historical interpretation that Sections 153 and 144C are mutually exclusive, leading to the belief that the due date for the completion of an assessment coincided with the due date for issuing the draft assessment order. This interpretation of the revenue authorities has resulted in many final orders being issued after the statutory deadline, potentially rendering them time barred.
Amidst these challenges, the legal community has also observed a trend of adjournments in a considerable number of cases before the Hon’ble Income Tax Appellate Tribunal relating to the aforementioned issue. The pause in proceedings is indicative of the anticipation surrounding the Supreme Court’s impending ruling on the Roca Bathroom case.
Conclusion
Despite expectations of relevant legislative amendments in the latest budget, the absence of such changes has only heightened the attention of legal professionals and stakeholders towards the Supreme Court, as they eagerly await its decision on this critical issue which would throw light on the tax disputes which have the aforementioned legal ground of time barred final AO order.
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