Justice Nagarathna’s 144C-153 Reading: A Rigidity that Stifles DRP

[Tarun and Anamika are students at National Law Institute University Bhopal.]

The Supreme Court’s (SC) ruling in Assistant Commissioner of Income Tax v. Shelf Drilling Ron LLC (2025) has stirred debate over how India’s tax law balances procedural clarity with legislative intent. At the center is a clash between two provisions, the dispute resolution panel (DRP) route under Section 144C of the Income Tax Act 1961 (IT Act), designed to fast-track certain assessments, and the rigid time limits for completing assessments under Section 153 so as to ensure that the rights of the assessees, in having their return scrutinized on a timely basis, must be balanced.

The bench in the present dispute was divided in its interpretation. Justice Satish Chandra Sharma adopted a purposive approach, emphasizing that the DRP mechanism was conceived as a self-contained and independent process, meant to operate without being constrained by the limitation periods under Section 153. He reasoned that this design ensured the mechanism’s effectiveness preserved the legislative intent of providing a specialized forum for resolving complex disputes.

Justice BV Nagarathna, however, placed decisive weight on the statutory language, holding that the timelines in Section 153 are binding unless the Parliament has explicitly created an exception. Such strict reading gave precedence to certainty and finality in tax proceedings, but also prompted a debate on whether such rigidity dilutes the purpose for which the DRP framework was introduced.

This fundamental clash between purposive and textual interpretation lies at the heart of the SC’s split verdict. The article begins by outlining the assessment year (AY) 2018-19 statutory framework governing the DRP mechanism and the assessment timelines. Subsequently, it examines the reasoning behind both Justice Sharma’s purposive reading and Justice Nagarathna’s strict textual approach. Finally, it critically assesses whether adhering rigidly to statutory timelines ultimately weakens the DRP’s effectiveness and suggests what this means for the future of tax dispute resolution in India.

Applicable Statutory Framework (AY 2018-19)

Section 144C of the IT Act lays down a special procedure for cases involving an eligible assessee, such as a foreign company and persons in whose case variation arises as a consequence of the order of the Transfer Pricing Officer (TPO) under Section 92CA(3). Under this provision, the Assessing Officer (AO) issues a draft assessment order. Under Section 144C (2), the assessee has thirty days from receipt of the draft order to either accept the variation or file objections before both the AO and the DRP. In case objections are filed, Section 144C (12) requires the DRP to issue directions within 9 months from the end of the month in which the draft order is forwarded. Furthermore, under Section 144C (13), the AO must pass the final assessment order in conformity with those directions within one month of their receipt. This draft is then reviewed by the DRP, which examines objections raised by the assessee. The DRP issues its directions on how the assessment should be finalized, and the AO is required to pass the final order in accordance with these directions. When the TPO passes an order under Section 92CA(3) determining the arm’s length price, the AO is bound under Section 92CA(4) to compute the assessee’s income in conformity with that determination. Since the AO has no discretion to deviate, any variation to the returned income is consequential to the same. Thus, in order to provide a focused and efficient mechanism for resolving complex valuation disputes before the assessment is finalized, Parliament introduced Section 144C to provide a specialized remedy, i.e. the AO must issue a draft order, allowing the assessee to seek an independent review by the DRP before finalization.  

On the other hand, Section 153 sets an outer limit on the time within which the assessment must be completed. As a general rule, the AO is required to conclude the assessment within twelve months, as per Section 153(1), from the end of the financial year in which the return is filed. If the assessment is reopened or remanded, the timelines can extend but remain tightly prescribed. These limitation periods are designed to bring finality and certainty to tax proceedings.

The intersection of these 2 provisions is particularly significant in transfer pricing and foreign company cases, where DRP proceedings add procedural layers. The challenge arises in ensuring that the DRP’s timeline fits within the rigid outer limits set by Section 153 without sacrificing the mechanism’s effectiveness or undermining statutory certainty. 

Justice Nagarathna’s Reasoning

Justice BV Nagarathna placed primary emphasis on the mandatory nature of limitation under Section 153 of the IT Act, holding that statutory timelines are not merely procedural obligations but substantive safeguards for taxpayers. She noted that the scheme under Section 144C, which applies to eligible assessees in transfer pricing cases, requires the AO to first pass a draft assessment order, obtain directions from the DRP, and then issue the final order. However, she underscored that Section 144C contains no express provision that extends or overrides the limitation period stipulated in Section 153.

Nagarathna’s view was rooted in the view that statutory interpretation must promote harmony between provisions rather than implying repeal by silence. Thus, both Sections 144C and 153 operate cumulatively, where the AO must comply with the procedural sequence under Section 144C while also ensuring that the final order is passed within the outer time limit prescribed under Section 153.

Applying this reasoning to the facts of the dispute in question, Justice Nagarathna found that the limitation under Section 153 had already expired when the final assessment order was issued following the DRP’s directions. As the time limit was breached, the order was rendered invalid, regardless of whether the procedural requirements under Section 144C were fulfilled. This approach emphasizes that in transfer pricing and remand situations, statutory deadlines under Section 153 cannot be diluted merely because the DRP route under Section 144C is being followed, and that under Section 153(3) (AY 2018–19), a remanded assessment must still be completed within twelve months of the year in which the appellate or the tribunal order is received, without any extension of time on account of DRP proceedings. 

Critique of Nagarathna’s Textual Rigidity

Justice Nagarathna’s approach risks rendering the DRP mechanism under Section 144C unworkable, particularly in remand scenarios of a short duration. Applying the general limitation periods without express accommodation for the DRP’s procedural timeline, Nagarathna’s reading could force the revenue into a procedural dead-end where compliance is practically impossible. This concern echoes the SC’s caution in Commissioner of Income Tax v. Mohair Investment and Trading Company (Private) Limited (2011), where the court stressed that statutory schemes must be construed to preserve their practical utility, not undermine their functioning. From the majority’s standpoint, this textual rigidity is flawed on three interconnected grounds: first, it misconstrues the legislative intent underlying Section 144C, which was designed as a self-contained procedural code distinct from the general limitation framework; second, it stands at odds with comparative legislative practice in other common law jurisdictions that explicitly suspend or exclude limitation periods during specialized adjudicatory stages; and third, it creates serious policy risks by enabling procedural abuse and eroding the efficacy of high-value tax adjudication. Each of these dimensions, when examined through the majority’s purposive lens, reinforces the conclusion that the DRP process must operate independently of Section 153’s limitation periods to fulfil the Parliament’s design.

From a legislative intent perspective, Section 144C is read as embodying a deliberate legislative choice to carve out a distinct procedural track for certain complex assessments, particularly in the transfer pricing and international taxation context. The provision’s roadmap, which requires a draft assessment order, permitting the assessee to file objections before the DRP, mandating hearings, and fixing a nine-month cap for the DRP to issue binding directions, reflects the Parliament’s intent to create a thorough yet time-bound process, insulated from the general assessment timelines in Section 153. Justice Sharma, delivering the majority opinion, placed significant weight on the non obstante clause in Section 144C(13) as a textual signal that the DRP mechanism was meant to operate as a self-contained code. Importing Section 153’s limitation into this framework would, in his view, collapse the very procedural space which the Parliament intended, thus frustrating the object of the provision and turning the DRP stage into a nominal safeguard. As recognized in Government. of Kerala v. Mother Superior Adoration Convent (2021), where two interpretations are possible, the one that preserves the statute’s functional purpose is to be preferred, a principle disregarded by Justice Nagarathna’s reading. 

From a comparative perspective, Justice Nagarathna’s refusal to treat Section 144C as operating independently of Section 153 overlooks how other common law jurisdictions resolve such procedural conflicts. In the United Kingdom (UK), the Finance Act 1998, Schedule 18, paragraph 46 prescribes a general four-year limit for company assessments but expressly extends this to six years in cases of careless conduct and twenty years in cases of deliberate tax loss or serious non-compliance. The objections to limitation can only be taken in the course of an appeal, thereby synchronizing limitation with the appellate process. The UK SC in HMRC v. BPP Holdings Ltd (2017) treated such suspension clauses as essential to prevent procedural safeguards from collapsing under rigid timelines. Similarly, Australia’s Income Tax Assessment Act 1936, Section 170(7) contains clear provisions which create express exceptions from those limitation periods. It authorizes the Commissioner to amend an assessment at any time in cases of fraud, evasion, or failure by the taxpayer to make a full and true disclosure of material facts. It further provides that amendments outside the normal limitation window are permissible where they are required to give effect to a decision on objection, review or appeal. The High Court in Commissioner of Taxation v. Ryan (2000) recognized that without such a statutory suspension, special assessment mechanisms would be rendered ineffective. These jurisdictions operate on the premise that the legislature’s creation of a specialized forum or process necessarily demands temporal insulation from general limitation rules; Justice Nagarathna’s refusal to adopt an analogous reading leaves the Indian DRP process uniquely exposed to being undermined by procedural attrition.

Finally, the policy risks of her interpretation are substantial. Through her insistence on rigid adherence to Section 153’s limitation without any suspension or exclusion, her approach effectively incentivizes assessees to delay cooperation or strategically withhold key information until the limitation period lapses. In high-stakes disputes, especially those involving multinational enterprises and complex transfer pricing arrangements, such a loophole could be exploited to avoid substantive scrutiny altogether. 

The SC in Union of India v. Filip Tiago De Gama of Vedem Vasco De Gama (1990) cautioned against adopting interpretations that facilitate procedural abuse. The majority considered this risk to be not hypothetical but probable, given the procedural density of DRP proceedings and the practicalities of gathering and evaluating cross-border financial data. If the DRP’s directions can be rendered meaningless simply because the general limitation period expires mid-process, the result would be a significant erosion of the exchequer’s ability to address complex tax avoidance structures, undermining both fairness and revenue protection.

The majority’s interpretation safeguards that insulation, enabling the specialized forum envisioned by the Parliament to operate as an effective adjudicatory mechanism, unimpeded by procedural deadlines calibrated for a simpler and less demanding assessment framework.  

Conclusion

The split in ACIT v. Shelf Drilling Ron exposes a deeper fault line in Indian tax adjudication: whether courts should privilege the literal boundaries of statutory text or stretch interpretation to preserve the functional life of specialized procedures. Beyond Sections 144C and 153, the ruling illustrates how rigid timelines can undermine the DRP’s purpose, leaving the specialized adjudicatory forum unable to function effectively. This tension between procedural certainty and operational viability underscores the need for clear legislative guidance to ensure that the DRP mechanism can fulfil its intended role without being constrained by general limitation periods.

The way forward should be a clear parliamentary clarification on whether the limitation under Section 153 is to be suspended or excluded during the pendency of DRP proceedings, similar to the stop the clock provisions in the UK and Australia. Such an amendment would not only settle the interpretive conflict but also protect against strategic procedural abuse, ensuring that the DRP remains a meaningful forum for complex, high-stakes tax disputes.

In conclusion, courts and lawmakers must work towards harmonizing textual fidelity with procedural functionality. Limitation safeguards are essential to certainty and taxpayer rights, but they cannot be so rigid as to undermine the very adjudicatory structures Parliament has deliberately created to handle intricate cases. A measured statutory reform, preserving both the DRP’s independence and the discipline of time-bound assessments, would strike that balance.