Written By: Apoorv Agarwal
In a significant ruling on the interplay between assessment proceedings and advance ruling mechanisms under the Income Tax Act, the Delhi High Court has held that the pendency of proceedings before the Board for Advance Rulings (BFAR) does not automatically operate as a bar against the continuation of assessment proceedings on issues not forming part of the advance ruling application.
The judgment was rendered in Mitsubishi Electric India Private Limited v. Deputy Commissioner of Income Tax & Ors., where the Court examined the scope and effect of Section 245RR of the Income Tax Act, 1961.The Income Tax Department was represented by Mr. Apoorv Agarwal, Partner at ASV Legal in his capacity as Standing Counsel, along with Mr. Abhishek Maratha, Senior Standing Counsel, who were assisted by Mr.Bhanukaran Singh Jodha, and Gaurav Singh, Senior Associates at ASV Legal.
Background
The dispute arose during assessment proceedings for Assessment Year 2023-24 concerning Mitsubishi Electric India Private Limited.The petitioner had earlier approached the erstwhile Authority for Advance Rulings (AAR) in 2018 seeking clarity on the deductibility of customs duty paid under protest under Section 43B of the Act. Subsequently, in 2024, the petitioner filed another application before the BFAR, raising questions concerning expatriate arrangements with its Japanese parent entity, Mitsubishi Electric Corporation, Japan.
The questions before the BFAR included whether reimbursement of salary and benefits to expatriate employees constituted “fees for technical services” under Section 9(1)(vii) of the Income Tax Act and the India-Japan Double Taxation Avoidance Agreement, whether the Japanese entity constituted a permanent establishment in India through seconded employees, and whether withholding obligations under Section 195 were attracted.
During the pendency of these proceedings, the Assessing Officer issued notices in the course of assessment proceedings seeking explanations on multiple issues, including relief claimed under Sections 90 and 91, reconciliation of disallowances under Section 40(a)(ia), ICDS adjustments, depreciation claims, reconciliation of receipts reflected in Form 26AS, and transfer pricing adjustments.
The petitioner sought to keep the assessment proceedings in abeyance by relying upon Section 245RR of the Act, contending that once proceedings were pending before the BFAR, continuation of assessment proceedings was impermissible.By order dated 03 March 2026, the Assessing Officer rejected the request, observing that several issues arising in assessment proceedings were independent of the questions pending before the BFAR and therefore could still be examined.
Before the High Court
Before the Delhi High Court, the petitioner argued that the statutory framework governing advance rulings contemplated suspension of assessment proceedings once an application was pending before the BFAR. It was contended that permitting simultaneous assessment proceedings could result in overlapping adjudication and conflicting findings.
Reliance was placed on earlier decisions of the Delhi High Court, including Mother Dairy Fruit and Vegetable Private Limited v. Assessment Unit, National Faceless Assessment Centre and HLS Asia Limited v. Assistant Commissioner of Income Tax.
Appearing for the Revenue, Mr. Apoorv Agarwal and Mr. Abhishek Maratha opposed the petition and argued that the embargo contemplated under Section 245RR was issue-specific and not assessment-specific.It was contended on behalf of the Revenue that the provision merely prohibited adjudication of issues directly pending before the BFAR and could not be interpreted to suspend the entire assessment process. The Revenue further argued that accepting the petitioner’s interpretation would effectively paralyse assessment proceedings for indefinite periods merely because isolated questions had been referred for advance ruling.
Findings of the High Court
The Division Bench examined the scheme of Chapter XIX-B of the Income Tax Act, including Sections 245Q, 245R and 245RR, alongside the statutory timelines prescribed for completion of assessments under Section 153.The Court ultimately accepted the Revenue’s interpretation and held that the pendency of proceedings before the BFAR does not denude the Assessing Officer of jurisdiction to proceed with examination of issues unrelated to the advance ruling application.
The Court observed that Section 245RR was intended to prevent parallel adjudication on issues directly pending before the advance ruling authority. However, the statutory protection could not be expanded to mean that the entire assessment proceedings would remain frozen irrespective of whether several independent issues still survived for consideration.The Bench noted that the Assessing Officer had specifically identified multiple issues which did not overlap with the questions pending before the BFAR. In such circumstances, continuation of assessment proceedings on those issues was held to be legally permissible.
The Court also considered the practical consequences of the interpretation canvassed by the petitioner and observed that such an approach would seriously impede the assessment machinery by enabling assessees to stall proceedings for prolonged periods through limited references before the BFAR.While distinguishing the earlier decisions relied upon by the petitioner, the Court clarified that those judgments did not lay down any absolute proposition that assessment proceedings in their entirety must remain stayed whenever an advance ruling application is pending.
Significance of the Judgment
The ruling assumes significance for multinational corporations and taxpayers engaged in complex cross-border arrangements who frequently invoke the advance ruling mechanism on specialised questions relating to permanent establishment exposure, withholding tax obligations, and characterisation of income.The judgment clarifies that Section 245RR does not create a blanket embargo against assessment proceedings. The restriction operates only to the extent of issues directly pending consideration before the BFAR.
Equally important is the Court’s recognition of the need to balance procedural safeguards available to taxpayers with the statutory obligation of the Revenue to complete assessments within prescribed timelines.The decision is likely to provide considerable guidance in future disputes involving parallel proceedings before the BFAR and assessing authorities, particularly in cases concerning international taxation and transfer pricing.The matter also underscores the importance of nuanced litigation strategy in tax disputes involving overlapping statutory forums and procedural safeguards under the Income Tax Act.
