Supreme Court Delivers Split Verdict on Income Tax Assessment Timelines

Introduction 

On August 8, 2025, the Supreme Court of India delivered a pivotal split verdict concerning the interpretation of the limitation period under Section 144C of the Income Tax Act, 1961 (“the Act”), which governs assessment timelines in cases involving foreign companies and transfer pricing disputes. The judgment was rendered by a two-judge bench comprising Justices BV Nagarathna and Satish Chandra Sharma. The central legal issue is whether assessment orders in cases involving eligible assessees must be passed within the statutory time limit prescribed under Section 153 of the Act, or if the specific timelines outlined in Section 144C operate independently. This article provides a structured legal analysis, examining the factual matrix, statutory interplay, judicial reasoning, and the far-reaching implications of the Supreme Court’s decision. 

Background

Foreign companies and transfer pricing matters in India are subject to a specialized assessment procedure under Section 144C of the Income Tax Act, 1961. This section was introduced in 2009 to create a fast-track mechanism for dispute resolution via the Dispute Resolution Panel (“DRP”), particularly for matters involving significant transfer pricing variations or international transactions. The relevant process for eligible assessees follows these steps: 

• Draft Assessment Order: If the Assessing Officer (AO) proposes any variation detrimental to the assessee, a draft order is first issued (Section 144C(1)). 

• Objections and DRP Proceedings: The assessee may accept or object to the draft order before the DRP, which must then issue its directions within nine months (Section 144C(12)). 

• Final Assessment Order: The AO must pass the final order within one month of receiving the DRP's directions (Section 144C(13)). 

A parallel procedural regime exists under Section 153, which prescribes general time limits for completion of various tax assessments, typically 12 months from the end of the financial year in which the order is received from the appellate authority. 

Case Specifics 

The dispute in question arose from assessment proceedings against foreign assessees involving transfer pricing adjustments. In the instant case, the timeline was triggered by an Income Tax Appellate Tribunal (ITAT) remand order. The AO issued a draft assessment order on September 28, 2021, just before the extended limitation deadline; however, no final assessment order was passed by September 30, 2021, the key date for expiry of the limitation period under Section 153(3), including relaxations introduced by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (“TOLA”). The assessees challenged the validity of proceedings, arguing that failure to pass the final order within the limitation period rendered the assessment time-barred, while the Revenue contended that the issuance of the draft order within the prescribed time was sufficient compliance with Section 144C.

Statutory Framework 

• Section 144C (Income Tax Act, 1961): Establishes a unique assessment regime for eligible assessees, prescribing an elaborate process with specified timelines for draft and final assessment orders. Notably, Section 144C(4) and Section 144C(13) contain non-obstante clauses (“notwithstanding anything contained in Section 153”), ostensibly overriding Section 153 when in conflict. 

• Section 153 (Income Tax Act, 1961): Governs general limitation periods for assessment orders, applicable to most other cases, but lacking explicit references to DRP proceedings. 

Key Legal Questions 

• Does the twelve-month limitation prescribed in Section 153(3) apply to proceedings under Section 144C, or does Section 144C function as a “self-contained code” with its own timelines? 

• When must the final assessment order be issued—before the expiry of the limitation period under Section 153, or within the specific sub-periods under Section 144C? 

Judicial Reasoning 

Justice BV Nagarathna 

Justice Nagarathna held that all procedures under Section 144C—including the issuance of draft and final assessment orders—must be completed within the limitation period prescribed under Section 153(3). She ruled that Section 153’s time cap remains governing even when Section 144C procedure is invoked, as both statutes must be construed harmoniously to avoid indefinite assessment proceedings, respecting legislative intent for expeditious dispute resolution. According to this view, if the final order is not passed within the overall period set by Section 153(3), the assessment is invalid and the return filed by the assessee must be accepted. The judgment emphasized statutory amendments aimed at ensuring robust limitation periods and legal certainty for assesses.

Justice Satish Chandra Sharma 

In contrast, Justice Sharma concluded that the specific timelines in Section 144C operate independently of Section 153(3). Section 144C, with its non-obstante clauses, was intended by Parliament to override any conflicting timelines in Section 153, thereby enabling the DRP process to run its full statutory course. According to this interpretation, as long as the draft assessment order is passed within the extended limitation period and the final order is issued within one month of DRP’s directions, the proceedings remain valid—even if this results in a longer overall timeline than prescribed by Section 153(3).

Split Verdict and Reference to Larger Bench 

Given these irreconcilable opinions and absence of a majority view, the Supreme Court directed that the matter be referred to a larger bench for authoritative resolution of: 

• The interrelationship and potential conflict between Section 144C and Section 153. 

• The validity of assessment orders where the draft order is issued in time, but the final order lapses beyond the Section 153(3) deadline.

This referral underscores the jurisprudential complexity and practical significance of the issue, which affects a broad class of cross-border taxpayers and transfer pricing cases. 

Parties’ Arguments 

Assessee’s Arguments: 

• Stressed that the final assessment order must adhere to the Section 153(3) limitation, ensuring legal finality and certainty. 

• Asserted that the draft order alone does not suffice if the final order is not passed within the prescribed outer period. 

Revenue’s Arguments: 

• Maintained that Section 144C is a specialized code for international tax and transfer pricing assessments, with independent timelines. 

• Argued that the procedural steps under Section 144C (draft, DRP, final) render Section 153(3)’s time cap inapplicable. 

Impact on Litigation and Taxpayers 

• Legal Uncertainty: The absence of a definitive ruling on the limitation period leaves both assessees and tax authorities in a state of uncertainty, particularly in ongoing assessments and appeals involving foreign entities and transfer pricing disputes. 

• Increased Litigation: Practitioners anticipate a surge in litigation until the larger bench settles the interpretational conflict, with parties likely to challenge assessment orders based on their preferred statutory construction.

• Delay in Finality: Cases involving high-value cross-border transactions and multinational corporate groups—often characterized by complex transfer pricing arrangements—may see protracted proceedings and delayed tax certainty. 

• Compliance Challenges: Taxpayers and advisors must now factor this interpretational ambiguity into timeline management, risk assessment, and compliance planning across multiple assessment years. 

Consequences for Tax Administration 

• Revenue Collection Risks: Depending on the ultimate decision, significant tax demands could be rendered invalid, impacting the government’s ability to recover revenue from non-resident assessees and multinational groups. 

• Administrative Complexity: Authorities may need to revise instructions and standard operating procedures for handling international tax and transfer pricing assessments, pending judicial clarification. 

Broader Legal and Constitutional Significance 

• Doctrine of Harmonious Construction: The case highlights the challenges in judicial interpretation of overlapping statutes containing non-obstante clauses, and underscores the importance of giving effect to legislative purpose without nullifying statutory safeguards.

• Judicial Accountability and Precedent: The split verdict and consequent reference exemplify the principle that precedent must be clear and authoritative—especially in cases affecting the interpretation of fiscal statutes with far-reaching economic impact. 

Sectoral and International Impact 

• Foreign Direct Investment and Multinational Compliance: The ruling carries potential implications for foreign investment and the global perception of India’s tax administration, especially in light of the OECD/G20 Base Erosion and Profit Shifting (BEPS) project and global transfer pricing benchmarks. Certainty and predictability of assessment timelines are crucial for sustaining India’s attractiveness as an investment destination. 

Conclusion 

The Supreme Court’s split verdict on the interplay of limitation periods under Section 144C and Section 153 of the Income Tax Act, 1961 represents a defining moment in Indian tax jurisprudence relating to international taxation and transfer pricing regulation. The referral to a larger bench testifies to the doctrinal difficulty and real-world importance of the issue. Until a conclusive ruling emerges, both taxpayers and the revenue authorities must contend with legal uncertainty in assessment procedure timelines, preparing for the extended litigation and compliance implications. 

Going forward, the outcome will significantly influence not only the administration of transfer pricing and international tax disputes but also India’s ability to offer a transparent, predictable, and legally robust tax environment for multinational enterprises.