Bombay High Court Ruling on Section 144C: What Taxpayers and Practitioners Must Know

 

In a landmark judgment, the Bombay High Court clarified the authority of the Deputy Commissioner of Income Tax (DCIT) under Section 144C of the Income-tax Act, 1961. Simply put, the Court emphasized that a DCIT cannot exceed the directions issued by the Dispute Resolution Panel (DRP). Even more critically, any assessment order passed after the statutory deadline outlined in Section 144C(13) is deemed invalid and time-barred.

For taxpayers, auditors, and tax practitioners, this is a pivotal ruling. But what does it really mean, and how should it influence your planning and compliance? Let’s break it down step by step.

 

Understanding Section 144C: Legal Framework Explained

Before diving into the Court’s judgment, it’s crucial to understand the legal mechanics of Section 144C, which primarily deals with transfer pricing (TP) cases. These provisions are designed for “eligible assessees”—usually companies engaged in cross-border transactions or multinational operations.

Here’s how the process works:

1. Draft Assessment Order (Section 144C(1))
   The Assessing Officer (AO) issues a draft order if proposed adjustments could adversely impact the assessee. This is essentially a “first warning” about potential tax liabilities.
2. Filing Objections with DRP (Section 144C(2))
   The assessee has 30 days to either accept the draft or submit objections to the Dispute Resolution Panel (DRP).
3. Binding DRP Directions (Section 144C(5) & 144C(10))
   Once objections are considered, the DRP issues directions. These directions are mandatory—the AO cannot ignore or alter them.
4. Strict Timeline for Final Assessment (Section 144C(13))
   The AO must complete the assessment within one month from the end of the month in which DRP directions are received. There’s no wiggle room here—even other provisions like Sections 153 or 153B cannot override this timeline.

You might notice a pattern here: the law emphasizes speed, certainty, and compliance. Delays or deviations aren’t mere technicalities—they can invalidate the entire assessment.

 

Historical Context: Why This Ruling Matters

Previously, disputes under Section 144C often revolved around three recurring issues:

• DRP issuance timelines (Section 144C(12))
• AO adherence to DRP directions
• Completion of assessment within statutory deadlines

While courts occasionally examined these delays, taxpayers rarely succeeded in nullifying assessments. The Archroma International (India) Pvt. Ltd. case has now set a precedent: DRP directions are binding, and statutory timelines are non-negotiable.

 

The Archroma Case: A Timeline of Key Events

Understanding the facts of this case helps illustrate the significance of this ruling:

Date	Event
Filing of Return	Archroma submitted its AY 2010-11 return
12 Mar 2014	AO issued draft assessment proposing TP adjustments
Objection Filing	Archroma raised objections with DRP under Section 144C(2)
13 Nov 2014	DRP issued directions, allowing depreciation on goodwill, emphasizing Section 144C(13) compliance
31 Dec 2014	AO passed final assessment (after statutory window)
19 Mar 2020	Second-round DRP directions issued

This timeline clearly demonstrates deviation from statutory timelines and raised questions about the AO’s authority.

 

Legal Questions Considered by the Court

The High Court examined three central issues:

1. Is the AO strictly bound by DRP directions under Sections 144C(5) and 144C(10)?
2. Is an assessment passed after the one-month statutory period under Section 144C(13) valid?
3. Does the one-month timeline apply even to remand assessments?

 

Court’s Key Observations and Rulings

The Court’s judgment is unequivocal:

• Mandatory Compliance: Section 144C(13) must be followed strictly.
• No Deviation Allowed: AO must act exactly per DRP directions.
• Non-Extendable Timeline: The one-month window applies to both first-round and remand assessments.
• Time-Barred Assessments: Any assessment beyond this period is invalid.

In practical terms, the transfer pricing addition of Rs. 5.26 crore in Archroma’s case could not be sustained because the AO acted outside the statutory timeline.

“The Assessing Officer cannot now invoke the provisions of Section 144C(13)… because the time-frame mandated by the Section has already expired.”

 

Section 144C at a Glance

Section	Provision	Significance
144C(5)	DRP issues directions to AO	AO must follow instructions
144C(10)	DRP directions are binding	Prevents deviation
144C(12)	DRP must issue directions within 9 months	First-stage limitation control
144C(13)	AO must finalize assessment within 1 month	Strict deadline, overrides other provisions

These provisions are jurisdictional obligations, not mere guidelines.

 

Implications for Taxpayers, CAs, and Audit Firms

Who Gains

• Eligible Assessees: Greater legal protection in TP cases.
• Tax Practitioners & CAs: Can challenge assessments passed outside the one-month window.
• Audit Firms: Can flag risks of invalid assessments, advising clients strategically.

Who Faces Risk

• Revenue Authorities/AOs: Higher chances of assessments being struck down if timelines are missed.
• Businesses under TP Scrutiny: Must monitor timelines closely to avoid disputes.

 

Practical Takeaways for Taxpayers and Professionals

For Taxpayers:

• Track the receipt date of DRP directions.
• Challenge any AO delays beyond one month.
• Verify that final assessments strictly follow DRP instructions.
• Maintain a detailed timeline log of draft orders, objections, DRP directions, and AO final orders.

For Auditors & CAs:

• Monitor timelines rigorously in all TP cases.
• Document all DRP communications for legal and compliance purposes.
• Evaluate the risk of invalid assessments and advise clients proactively.

For Revenue Authorities:

• Ensure AO adherence to statutory timelines.
• Implement internal tracking systems for DRP directions.
• Avoid deviations from DRP unless legally justified to prevent judicial invalidation.

 

Broader Impact on Transfer Pricing

This judgment sends a clear signal: DRP directions are binding, not advisory. Multinational corporations now have greater certainty in TP disputes. At the same time, tax authorities face pressure to streamline DRP and AO processes.

For advisors and taxpayers, this is a precedent to challenge procedural lapses as jurisdictional defects, not just minor errors.

 

Common Misunderstandings Clarified

• “DRP directions are advisory.” ❌ Wrong. They are binding.
• “Section 144C(13) timeline is optional.” ❌ Wrong. It’s mandatory.
• “AO can deviate from DRP directions.” ❌ Wrong. Conformity is required.
• “Timeline applies only to first-round assessments.” ❌ Wrong. It includes remand cases.
• “Assessment can be sustained under Section 153.” ❌ Wrong. 144C(13) overrides certain provisions.

 

Expert Insights

According to tax experts:

“This ruling is a watershed moment for transfer pricing litigation. For decades, delays rarely led to invalidation. Now, DRP directions and the one-month timeline provide taxpayers a concrete enforcement tool.”

Revenue authorities must revamp internal procedures, while advisors should treat DRP directions and timelines as strategic tools for both planning and litigation.

 

Actionable Steps for Taxpayers and Advisors

1. Track DRP directions immediately upon receipt.
2. Challenge any delays exceeding the one-month period.
3. Ensure final assessments fully comply with DRP instructions.
4. Maintain a timeline log of all 144C proceedings.
5. Monitor DRP processes proactively to safeguard legal rights.

For tax authorities, this judgment is a wake-up call to enforce discipline and respect statutory deadlines. For taxpayers and advisors, it’s an opportunity to ensure assessments are conducted fairly and lawfully.

 

FAQs: Section 144C Demystified

Q1: What is the significance of Section 144C(13)?
A1: AO must finalize assessments within one month of DRP directions, overriding other limitation provisions.

Q2: Can the AO deviate from DRP directions?
A2: No. DRP directions are binding under Section 144C(10).

Q3: What if an assessment is passed after one month?
A3: It is time-barred and invalid, as seen in the Archroma case.

Q4: Does the one-month timeline apply to remand cases?
A4: Yes. The Court confirmed no distinction between first-round and remand assessments.

Q5: How should taxpayers leverage this ruling?
A5: Track timelines, ensure AO compliance, challenge delays or deviations, log all key dates, and maintain vigilance throughout the DRP process.

 

Conclusion: Ensuring Compliance and Protecting Rights

The Bombay High Court ruling on Section 144C makes it crystal clear: statutory timelines and DRP directions cannot be ignored. Taxpayers, CAs, and audit firms now have a stronger framework to enforce compliance, while authorities must respect deadlines to prevent invalidation.

At Manika TaxWise, we advise clients to track every 144C step meticulously, maintain clear records, and proactively engage with DRP timelines. This approach ensures not just legal compliance but also financial prudence in high-stakes transfer pricing matters.

 

References

1. “Deputy Commissioner acting beyond directions given by DRP is contrary‐in‐law” – TaxGuru
2. “Income Tax Act | DCIT Cannot Act Beyond DRP Directions; Assessment After S.144C(13) Time Limit Invalid: Bombay High Court” – LiveLaw
3. “Commissioner appeals vs DRP route – Litigation Dilemma” – Rödl & Partner Insights