ITAT Mumbai clarifies DRP conformity, PE attribution and reimbursement taxation in Lubrizol Corporation Vs ACIT

1. Background and appeal framework

The decision in Lubrizol Corporation Vs ACIT (ITAT Mumbai), ITA No.1672/Mum/2022, dated 25/09/2026, concerns the assessment of a non-resident US company for Assessment Year 2017-18. The assessee challenged a final assessment order passed under section 143(3) read with section 144C(13) of the Income Tax Act 1961, in consequence of directions issued by the Dispute Resolution Panel (DRP).

The appeal involved four broad issues:

  • Whether the final assessment order was invalid for not being fully in conformity with DRP directions under section 144C(10) and section 144C(13), and whether such defect could be cured under section 154.
  • Whether Lubrizol India Private Limited (“LIPL”), the Indian subsidiary, constituted a Permanent Establishment (PE) of the assessee in India under Article 5 of the India–USA DTAA, and whether profits could be attributed to such PE.
  • Whether sums recovered from Indian associated enterprises (AEs) described as “reimbursement of expenses” were taxable in India as Fees for Technical Services (FTS) under section 9(1)(vii) and as “Fees for Included Services” (FIS) under Article 12(4)(b) of the India–USA DTAA.
  • What should be the appropriate Arm’s Length Price (ALP) for a corporate guarantee provided by the assessee to an Indian AE, and whether a flat rate approach of 0.5% (post-DRP) was legally sustainable without examining the assessee’s transfer pricing study.

The Tribunal ultimately:

  • Rejected the jurisdictional challenge to the validity of the assessment order based on DRP non-conformity due to subsequent rectification under section 154.
  • Deleted the addition of ₹10,15,85,650 attributed to an alleged PE in India.
  • Deleted the addition of ₹4,74,63,757 in respect of reimbursements treated as FTS/FIS.
  • Restored the transfer pricing adjustment on corporate guarantee commission to the Assessing Officer (AO) for fresh examination.

The appeal was thus partly allowed.

2. Facts relating to assessment and DRP directions

The assessee, a US tax resident, is engaged in manufacturing high-performance chemicals used in transportation and industrial lubricants, as well as undertaking research, development, testing, and production activities. It filed its return of income for AY 2017-18 on 30.11.2017 declaring total income of ₹36,12,27,580.

Given the existence of international transactions with Indian AEs, the AO made a reference to the Transfer Pricing Officer (TPO) under section 92CA(1).

Based on the TPO’s order and his own findings, the AO framed a draft assessment order on 15.06.2021 proposing, inter alia:

  • Attribution of profits to an alleged PE in India:
    • Business profits attributable to PE in India: ₹10,15,85,650.
  • Reimbursement of expenses:
    • Amount received from Indian AEs treated as FTS/FIS: ₹4,74,63,757.
  • Transfer pricing adjustment on corporate guarantee:
    • ALP of guarantee commission determined at 1%, resulting in a TP adjustment of ₹1,67,00,000.

The assessee objected to the draft order before the DRP.

2.1 DRP directions

The DRP granted partial relief and issued directions as follows:

  • On reimbursements:
    • Reduced the amount treated as FTS/FIS by ₹25,63,164, holding that this part represented reimbursement of travel, visa, etc., actually paid by Lubrizol India Private Limited, not received by the assessee.
  • On corporate guarantee:
    • Reduced the guarantee commission rate from 1% to 0.5%, following certain judicial precedents.

However, the DRP:

  • Upheld the AO’s conclusion that Lubrizol India Private Limited constituted a PE of the assessee in India.
  • Confirmed attribution of business profits to this alleged PE.
  • Substantially endorsed the AO’s treatment of the remaining reimbursement amount as FTS/FIS.

2.2 Defect in the final assessment order and rectification under Section 154

While issuing the final assessment order under section 143(3) read with section 144C(13) on 28.02.2022, the AO:

  • Reproduced the DRP’s directions in full in the body of the order; but
  • Omitted to implement the two favourable modifications relating to:
    • Reduction of reimbursements by ₹25,63,164; and
    • Reduction of corporate guarantee commission rate from 1% to 0.5%.

Instead, the AO mechanically repeated the figures as per the draft assessment order.

The assessee, by letter dated 25.05.2022, sought rectification under section 154 to correct this omission. The AO accepted the request and passed a rectification order under section 154 on 05.09.2023, giving effect to the DRP’s directions on:

  • The reduced quantum of reimbursement treated as FTS/FIS; and
  • The reduced guarantee commission rate of 0.5%.

3.1 Assessee’s contention

By way of an additional ground (Ground No. 20), the assessee argued:

  • Under section 144C(10) and section 144C(13), the AO is bound to pass the final assessment order strictly in conformity with DRP directions, within one month from the end of the month in which the directions are received.
  • Since the final order as originally passed on 28.02.2022 did not fully implement the DRP’s directions, it was contrary to section 144C(13), and therefore void ab initio.
  • The jurisdictional defect could not be cured by invoking section 154, which is only meant for rectifying “mistakes apparent from the record”, not for validating an order that itself is non est in law.
  • Allowing rectification would effectively extend the statutory limitation period under section 144C(13), something not contemplated by the Act.

The assessee relied on various judicial precedents, including: