Constitution of Larger Bench Sought Following Split Verdict in Shelf Drilling Ron Tappmeyer on Assessment Timelines

The time barring of the transfer pricing assessment cases has stirred significant debate in the Indian Transfer Pricing landscape (popularly known as the Roca Bathroom or Shelf Drilling case). Though more than sixty years old, the law has gone through numerous litigations, but the periodical changes in the law and the complexity of it have put the tax department and taxpayers at loggerheads. This underscores the Honorable Prime Minister of India’s clarion call to make laws simple, reminding us of his words: “While making laws, our focus should be that even the poorest of the poor can understand the new legislation well.” Yet the present reality is quite the opposite. When two Supreme Court (SC) judges deliver diametrically opposed interpretations of the same provision, it exposes not clarity but confusion. Such judicial divergence may be celebrated as a hallmark of democratic debate, but it simultaneously undermines the ease of doing business and weakens confidence in India’s dispute resolution framework. If the law cannot speak with one voice at the highest court, how can businesses and taxpayers be expected to navigate it with certainty?

To put the issue in simple terms, the dispute arises in transfer pricing cases, when the taxpayer chooses to file objections against the draft order before the Dispute Resolution Panel (DRP), the clock for completing the assessment gets extended. The complexity stems from the interplay of two provisions:

  • Section 153 of the Act, which governs the outer timelines within which assessment, reassessment, or re-computation must be completed (passing the final assessment order)
  • Section 144C of the Act, which governs the procedure and timeline for raising objections before the DRP

To address these anomalies, the majority of High Courts (HCs) across the country refused to accept the revenue’s argument for an extended timeline. Both the Madras High Court (in Roca Bathroom) and the Bombay High Court (in Shelf Drilling) categorically ruled in favor of taxpayers, holding that final assessment orders passed beyond the statutory deadline were time-barred and therefore liable to be quashed.

The ripple effect of these rulings was significant. A large number of similar cases would inevitably have been struck down on the same ground, leading to a substantial setback for the income-tax department. Recognizing the gravity of the issue, particularly given that the disputed additions collectively amounted to nearly INR 1300 Billion, the department escalated the matter to the Supreme Court. The apex court admitted the appeal, framing it as a pure question of law of great consequence, and directed that all related proceedings before lower courts be stayed until its final decision.

After a prolonged wait, when it was widely expected that the controversy would finally be settled, the Supreme Court delivered a split verdict. The two judges on the Bench could not agree on a common interpretation of the law, leaving the issue unresolved and necessitating reference to a larger Bench. Diving into the technical aspects of the ruling, the key takeaways can be summarized as follows:

Technical aspect – non-obstante clause

At the heart of the controversy lies a non-obstante clause in Section 144C(4) which provides:

‘The Assessing Officer shall, notwithstanding anything contained in section 153 or section 153B, pass the assessment order under sub-section (3) within one month …’

Taxpayers interpret this provision to mean that while the Assessing Officer (AO) must pass the final order within one month of receiving the DRP’s directions. This does not extend the outer limitation period laid down under Section 153. In other words, the one-month requirement is a procedural timeline operating within the broader cap of Section 153, and cannot override or extend the statutory deadlines fixed therein. However, the other school of thought (department) says that while the AO is bound to act within one month from the DRP’s directions, the non-obstante clause ensures that the outer limitation in Section 153 automatically stands extended to accommodate this process. Hence, Section 144C timelines prevail over the general cap in Section 153. The SC bench including Justice Nagarathna has sided with taxpayers, and in contrast, Justice Satish Chandra Sharma has sided with the department. Their views are as follows:

Justice Nagarathna (Taxpayer view)

  • Sections 153 and 144C are distinct and not contradictory.
  • Section 144C, introduced in 2009 to attract foreign investment, must be interpreted strictly to ensure speedy dispute resolution.
  • Legislative intent must prevail; specific provisions cannot be diluted or overridden by general timelines.
  • The DRP route is a beneficial option, and taxpayers should not be penalized with an extended limitation merely for exercising it.

Justice Satish Chandra Sharma (Revenue view)

  • The Bombay and Madras HC interpretations are incorrect and unworkable.
  • Section 144C prescribes a self-contained procedure with its own timelines, which must override Section 153.
  • Courts must avoid interpretations that render the law ineffective; adequate time for DRP is necessary to protect natural justice.
  • Since DRP proceedings are initiated at the taxpayer’s option, they cannot claim prejudice from the resulting extension in timelines.

Conclusion

While it is apparent that Judge Nagarathna ruled in favor of taxpayers, quashed the orders, and Justice Satish allowed the appeal of the department. Considering this, the warring parties will again have to put forth the matters before the larger bench, consisting of three SC judges, including the Honorable Chief Justice of India.

Our Comment

  • The case underscores the critical importance of procedural timelines in tax assessments.
  • Tax officers must initiate proceedings promptly rather than waiting until the deadline. If transfer pricing references are made early in the departmental audit, a two-year window remains available, giving the TPO over 14 months to adjudicate, which is sufficient under current practices. Taxpayers, in turn, should prepare for earlier closure of audits.
  • Although conceived as a fast-track remedy, the DRP has in practice become a procedural step before appeal to the Tribunal. Involving a neutral third party could enhance its credibility and effectiveness.
  • The department should prioritize quality over quantity in assessments, focusing on substantive issues rather than volume, to reduce litigation and improve certainty.
  • The upcoming Income-tax Bill offers an opportunity to resolve these anomalies. However, since the matter is sub judice before the Supreme Court, the government has not materially amended Sections 144C and 153 in the current draft.
  • The view of the larger bench is now eagerly awaited, as it will provide much-needed clarity on the interplay between Sections 153 and 144C and set the course for future transfer pricing assessments in India. The larger bench’s ruling will be decisive in restoring certainty to India’s transfer pricing regime and will directly shape the balance between procedural safeguards and the ease of doing business.

1. Income-tax Act, 1961

2. Roca Bathroom Products Private Limited [TS-473-HC-2022(MAD)]

3. Shelf Drilling Ron Tappmeyer Limited [TS-485-HC-2023(BOM)-TP]

Tax Street July 2025