Case Law Details
Bechtel Limited Vs ACIT (ITAT Delhi)
ITAT Delhi held that AO is bound to follow the directions of DRP. Accordingly, final assessment order passed by AO without implementing direction of DRP makes the assessment order void-ab-initio.
Facts- Vide the present appeal, the appellant has filed an additional ground mainly contesting the validity of the final assessment orders on the ground of non-implementation of the directions of learned DRP.
Conclusion- Hon’ble Jurisdictional High Court in the case of M/s. ESPN Star Sports Mauritius S.N.C. ET Compagnie Vs. Union of India has held that non-implementation of directions of DRP in terms of section 144C renders the final assessment order wholly without jurisdiction and void-ab-initio.
Held that we have come across several cases of such non-implementation of directions of learned DRP by the Assessing Officer while passing final assessment orders. There is no gainsaying that in the hierarchy of tax administration, the DRP holds higher position than the Assessing Officer. Therefore, for that reason and as per statutory mandate, the Assessing Officers are bound to follow the directions of DRP. Non-implementation of the directions issued by DRP, either consciously or due to non- application of mind by the Assessing Officers often put the department in an embarrassing situation as the learned counsels appearing for the Revenue find it difficult to defend the action of the Assessing Officers. Such repeated instances of non-implementation of directions of learned DRP by the Assessing Officers expose lack of proper orientation and training. We hope and expect that the authorities concerned would look into this aspect and address the issue with the seriousness it deserves.
FULL TEXT OF THE ORDER OF ITAT DELHI
Captioned appeals by two different assessees challenge the final assessment orders passed in pursuance to the directions of the learned Dispute Resolution Panel (DRP) for the assessment years 2016-17 and 2017-18.
2. Since the facts and issues involved in all these appeals are, more or less, common, they have been clubbed together and are disposed of in a common order for the sake of convenience.
3. Though, multiple grounds have been raised in all these appeals, however, the assessees have filed additional ground challenging the validity of the final assessment orders on the ground of non-implementation of the directions of learned DRP. Since, the issue raised in the additional ground is a purely legal and jurisdictional issue going into the root of the matter and can be decided without requiring fresh investigation of facts, we are inclined to admit the additional ground for adjudication and proceed to address the issue at the very outset.
4. Briefly, the facts relating to this issue are, the first named assessee is a tax resident of United Kingdom (UK). It had entered into a contract with Reliance Industries Limited (RIL) for engineering and procurement services relating to RIL’s plant in Jamnagar Special Economic Zone (SEZ) and DTA area. As stated by the Assessing Officer, in the year 2012, the assessee entered into engineering and procurement support service agreement with RIL in relation to construction of a plant at RIL’s refinery complex at Jamnagar SEZ. As per the terms of the contract, the assessee is responsible for providing certain engineering information, engineering services and support services in relation to procurement of machinery and equipment for construction of the plant at RIL’s refinery. Whereas, the second named assessee is a tax resident of USA. The said assessee entered into an engineering and procurement support services agreement for the captive power plant in RIL plant in Jamnagar, SEZ. As per the terms of contract, the assessee was responsible for providing certain engineering information, engineering services and support services in relation to procurement of machinery and equipment for construction of the power plant.
5. For execution of the contracts, the assessees received certain amount from RIL in the assessment years under dispute. It was the claim of the assessee that since the amount received by them for services rendered under the contract would not qualify as fee for included services (FIS) under Article 12 of India-UK and India-USA DTAAs, they are not taxable in India. The Assessing Officer, however, was not convinced with the submissions of the assessee and proceeded to frame draft assessment orders in respect of both the assessees for the assessment years under dispute holding that the amounts received by the assessees are in the nature of FTS/FIS under Article 12 of India-UK and India-USA DTAAs. Being aggrieved with the decision taken by the Assessing Officer in the draft assessment orders, assessees raised objections before learned DRP. While considering the objections of the assessees, learned DRP analysed the terms of contracts entered with RIL and concluded that since, as per the terms of contract, RIL will provide fully furnished office at Mumbai for the personnel of the assessees and also will provide staffing plan for various projects at Jamnagar, the assessees not only had business connection but had a Permanent Establishment (PE) in India in the form of its employees based in RIL’s office in Mumbai and site premises at Jamnagar in India. Learned DRP directed the Assessing Officer to tax the receipts as business income as provided under the Act and under Article 6 & 7 of India- UK DTAA as well as Article 6 & 7 of India-USA DTAA.
6. Further, insofar as taxability of receipts as FTS/FIS, learned DRP held that the receipts, indeed, are in the nature of FTS/FIS under the respective tax treaties as not only the services are of technical nature but make available condition is also satisfied. However, learned DRP held that since the assessees have business connection and PE in India, FTS/FIS income would be taxable as business income under section 44DA of the Act. In this context, learned DRP relied upon a decision of ITAT, Delhi Bench, in case of PJSC Stroytransgaz Vs. DDIT, reported in [2019] 106 taxmann.com 114 (Delhi – Trib.). Further, learned DRP made it clear that FTS/FIS income can be added only on protective basis. After receiving the directions of learned DRP, the Assessing Officer passed the final assessment orders virtually reproducing the contents of the draft assessment order and again added back the receipts as FTS/FIS.
7. Before us, learned counsel appearing for the assessee submitted that it is a clear case of non-implementation of directions of learned DRP by Assessing Officer while framing the final assessment orders. He submitted, as per the mandate of section 144C of the Act, every direction of learned DRP is binding on the Assessing Officer and he has to pass the final assessment order in conformity with the directions of learned DRP. Drawing our attention to the final assessment orders, he submitted, the Assessing Officer has merely repeated the contents of the draft assessment order without following the specific directions of learned DRP. Thus, he submitted, the final assessment orders are wholly without jurisdiction, hence, unsustainable. In support of such contention, learned counsel relied upon the following decisions:
1. M/s ESPN Star Sports Mauritius S.N.C. ET Compagnie [Now known as ESS Advertising (Mauritius) S.N.C. ET Compagnie)], Writ Petition bearing W.P.(C) 2384/2015, decision dated 23.03.2016 (Delhi High Court).
2. PCIT vs. Flextronics Technologies (India) (P.) Ltd., [2023] 148 com 123 (Karnataka High Court).
4. M/s Olympus Medical Systems Pvt. Ltd. vs. ACIT, appeal bearing ITA No. 873/Del/2021, decision dated 13.01.2022 (Delhi — Trib.).
5. Global One India Pvt. Ltd. vs. DCIT, [2019] SCC OnLine ITAT 24052 (Delhi — Trib.).
6. Tata Power Solar Systems Ltd. vs. DCIT, appeal bearing IT(TP)A No. 709/Bang/2017, decision dated 06.02.2023 (Bang. — Trib.).
7. Software Paradigms Infotech Pvt. Ltd. vs. ACIT, [2018] SCC OnLine ITAT 4761 (Bang. — Trib.).
8. July Systems & Technologies Pvt. Ltd. vs. DCIT, [2018] SCC OnLine ITAT 18763 (Bang. — Trib.).
9. LA.R. System Aktiebolag Deloitte vs. DCIT, appeal bearing ITA No. 598/Mum/2022, decision dated 02.05.2023 (Mum.- Trib.).
10. Sasken Communication Technologies Ltd. vs. Joint Commissioner of Commercial Taxes (Appeals), [2011] 33 STT 507 (Karnataka High Court).
13. DCIT vs. Forum Homes (P.) Ltd., [2022] 192 ITD 184 (Mum.) — Trib.).
14. Bramhacorp Hotels & Resorts Ltd. vs. DDIT, [2015] 70 SOT 25 (Pun. — Trib.).
15. Buro Happold Ltd. vs. DCIT, [2019] 103 com 344 (Mumbai — Trib.).
16. Gera Developments Pvt. Ltd. vs. DCIT, appeal bearing ITA No. 62/Pune/2015, decision dated 20.07.2016 (Pune — Trib.).
8. Learned Departmental Representative, though, agreed that the Assessing Officer has not implemented the directions of learned DRP, however, he submitted, the final assessment orders may be set aside with a direction to the Assessing Officer to pass fresh assessment orders in compliance with the directions of learned DRP.
9. We have given a thoughtful consideration to the rival submissions in the light of decisions relied upon and perused the materials on record. Undisputedly, the assessees in appeal are tax residents of UK and USA respectively. During the assessment years under dispute, the assessees have received fees towards rendering certain services to RIL for its plants situated in Jamnagar SEZ. While framing the draft assessment orders, the Assessing Officer has treated the receipts as FTS/FIS under India-UK and India – USA tax treaties. However, while disposing of objections filed by the assessee, the DRP had given the following two directions:
(i) The assessees have business connection/PE in India in the form of RIL facilities in Jamnagar and in Mumbai. Hence, the receipts, being attributable to the PE, have to be treated as business income under Articles 6 & 7 of the respective address and taxed in India, and;
(ii) The receipts can also be treated as FTS/FIS, however, since, the assessees have business connection and PE in India, the receipts have to be taxed as FTS/FIS under section 44DA of the Act, but on protective basis.
10. On perusal of final assessment orders, which are under challenge in the present appeals, it is observed, though, the Assessing Officer has reproduced the entire directions of learned DRP in the body of the final assessment orders, however, he has again added the receipts as FTS/FIS on substantive basis without implementing the specific directions of learned DRP to first treat the receipts as business income attributable to the PE and tax accordingly in terms with Articles 6 & 7 of the tax treaties and secondly treat the receipts as FTS/FIS to add it as business income on protective basis in terms of section 44DA of the Act. Neither of these directions have been carried out by the Assessing Office in the draft assessment orders.
11. At this stage, we may refer to certain provisions contained under section 144C of the Act. As per sub-section (5) of section 144C of the Act, the DRP after receiving objection shall issue such direction as it thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment. Sub-section (8) of section 144C empowers the DRP to confirm, reduce or enhance the variation proposed in the draft assessment order. Sub-section (10) of section 144C makes it clear that every direction issued by the DRP shall be binding on the Assessing Officer. Whereas, subsection (13) of section 144C mandates that after receiving the directions issued by the DRP under sub-section (5), the Assessing Officer shall complete the final assessment in conformity with the directions issued by learned DRP. Thus, a conjoint reading of the aforesaid provisions make it clear that once the DRP issues certain directions while disposing of objections filed by an eligible assessee, the Assessing Officer is duty-bound to implement such directions in letter and spirit.
12. In the facts of the present appeal, undisputedly, the Assessing Officer has not implemented the directions of learned DRP as mandated under section 144C(10) read with section 144C(13) of the Act. Surprisingly, even though, the Assessing Officer has reproduced the directions of learned DRP in the body of the assessment orders, however, he failed to implement the specific direction of learned DRP and has merely done a cut paste job of the draft assessment order by repeating the additions made therein treating the receipts as FTS/FIS. In our view, this can be due to a conscious disregard to the directions of learned DRP or final assessment orders have been passed mechanically without application of mind.
13. In case of M/s. ESPN Star Sports Mauritius S.N.C. ET Compagnie Vs. Union of India (supra), the Hon’ble Jurisdictional High Court, in judgment dated 23.03.2016, while considering identical nature of dispute relating to non-implementation of directions of DRP in the final assessment order has gone through the entire provision of section 144C, which is a code by itself, and held as under:
“29. The above submissions have been considered. In the first place the Court would like to observe that this is an instance of blatant disregard by the AO of the order of the DRP notwithstanding that the DRP had categorically held that the two Petitioners do not satisfy the conditions of an ‘eligible assessee’ in terms of Section 144 (15) (b) (ii) of the Act. As already noticed under Section 144C (10) of the Act the AO had no option but to comply with the order of the DRP. Even if no direction was issued by the DRP under Section 144C (5) of the Act, the fact that the DRP held that both the Petitioners were not ‘eligible Assessees’ could not have been ignored by the AO.
30. It appears to the Court that it is plain that under Section 144C, the AO should have proceeded to pass an order under Section 143 (3) of the Act. Instead the AO confirmed the draft assessment order passed under Section 144C (1) of the Act. This, therefore, vitiated the entire exercise. The Court has no hesitation in holding that the final assessment order dated 28th January 2015 is without jurisdiction and null and void. The draft assessment order dated 28th March 2014, having been passed in respect of entities which were not ‘eligible assessees’, is also held to be invalid.
31. It is a matter of concern that the AO has in the present case has chosen to label the order of the DRP to be invalid and that is the justification for not complying with the said order.
As already noticed, the DRP, in terms of Section 144C (15) (a) is a collegium of three Principal Commissioners or the Commissioner of Income Tax. The DRP admittedly is the superior authority in relation to an AO who in this case appears to be Additional CIT. Section 144C (10) read with Section 144C (13) makes it abundantly clear that there is no option with an AO but to be bound by orders and subject to review by the DRP. It is bound by the DRP. A reference may also be made to the decision in Zuari Cement Limited (supra) where it was held that an order of assessment which is contrary to the mandatory provisions of Section 144C of the Act was declared as “one without jurisdiction, null and void and enforceable.” It is therefore, for this reason, in the said case, the High Court of Andhra Pradesh set aside the impugned order while allowing the writ petition notwithstanding that the Petitioner had a statutory remedy available to it.
32. The situation as far as the present case is concerned is no different. The said order of the Andhra Pradesh High Court was upheld by the order of the Supreme Court when it dismissed Special Leave Appeal (Civil) 16694 of 2013 by its order dated 27th September 2013.
33. Recently the High Court of Bombay has in International Air Transport Association (supra) held that an assessment order passed by the AO which is contrary to the mandatory requirement of Section 144C of the Act, is entirely without jurisdiction. There, despite the Petitioner being a foreign company, the AO did not record the procedure under Section 144C (1) of the Act and proceeded to pass the final assessment order under Section 143(3) of the Act.
34. In Vijay Television (P) Ltd v. Dispute Resolution Panel, Chennai (2014) 369 ITR 113 (Mad) where again the AO passed the final assessment order under Section 143 (3) of the Act instead of passing a draft assessment order under Section 144C (1) of the Act and then sought to issue a Corrigendum modifying the final order of the assessment to be read as a draft assessment order but beyond the period prescribed for limitation for passing such order. The High Court held the entire exercise to be without jurisdiction.
35. In Pankaj Extrusion Limited v. Assistant Commissioner of Income Tax (2011) 241 CTR (Guj) 390 the Division Bench of Gujarat High Court, in interpreting Section 144C of the Act held that where an Assessee was not an ‘eligible assessee’, the question of passing the draft assessment order under Section 144C of the Act did not arise.
36. As far as the decision of this Court in Honda Cars India Limited v. Deputy Commissioner of Income Tax (supra) is concerned, the question that arose is whether the AO could have passed the draft assessment order when the Assessee did not satisfy the condition ‘eligible assessee’ under Section 144C (15) (b) of the Act. Answering the question is in the negative, the Court held that the draft assessment order of the AO is null and void and quashed on that basis. In para 15 of the said decision, it was observed as under:
“15. Since we have quashed the draft assessment order, the question that the assessment has now become time barred as left open and it is open to the parties to take recourse of such remedy, as may be available to them in law.”
37. As regards the conduct of the AO in the present case, the Court would only like to highlight the lead portion of the decision of the Supreme Court in Union of India v. Kamlakshi Finance Corporation Limited (supra). The facts in that case were that the according to the Assistant Collector (‘AC’), the electrical insulation tapes manufactured by the Assessee, Kamlakshi Finance Corporation Limited (‘KFCL’) fell under the Tariff heading 39.19 of the Schedule to the Central Excise Tariff Act, 1985 whereas the Assessee was claiming they fell under Entry 85.47. The impugned order of the AO was set aside by the Collector (Appeals) who issued a direction to the AC to pass a fresh reasoned and speaking order.
However, the AC declined to follow the order of the Collector (Appeals) and reiterated his earlier decision that was set aside by the Collector (Appeals). The writ petition filed by the Assessee was allowed by the Bombay High Court against which the Union of India went before the Supreme Court.
38. The Supreme Court in Union of India v. Kamlakshi Finance Corporation Limited (supra) took exception to the conduct of the AO in overlooking the binding order of the Collector (Appeals) and reiterating the order passed by him earlier. In response to the plea of the Appellant that the Officer who passed the order was not actuated by any malafide, the Supreme Court observed, in this regard, as under:
“6…. we are not concerned here with the correctness or otherwise of their conclusion or of any factual mala fides but with the fact that the officers, in reaching their conclusion, by- passed two appellate orders in regard to the same issue which were placed before them, one of the Collector (Appeals) and the other of the Tribunal. The High Court has, in our view, rightly criticised this conduct of the Assistant Collectors and the harassment to the Assessee caused by the failure of these officers to give effect to the orders of authorities higher to them in the appellant hierarchy. It cannot be too vehemently emphasised that it is of utmost importance that, in disposing of the quasi-judicial issues before them, revenue officers are bound by the decisions of the appellate authorities. The order of the Appellate Collector is binding on the Assistant Collectors working within his jurisdiction and the order of the Tribunal is binding upon the Assistant Collectors and the Appellate Collectors who function under the jurisdiction of the Tribunal. The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not ‘acceptable’ to the department – in itself an objectionable phrase – and is the subject matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent court. If this healthy rule is not followed, the result would only be undue harassment to Assessees and chaos in administration of tax laws.”
39. In Nav Bharat Impex v . Union of India (supra) the Division Bench of this Court dealt with the case where despite the clear directions given by the CIT (Appeals), the delayed refunds were paid to the Petitioner without any element of interest. It was noted that the Assistant Commissioner was merely required to comply with the directions given by the CIT (A) in the appellate order. However, the Assistant Commissioner look it upon himself to examine the case, as per his own understanding and therefore, had “gone to the extent of overreaching the orders of his superior authority, that is, the Commissioner (Appeals).”
40. Relying on the decision in Union of India v. Kamlakshi Finance Corporation Limited (supra) the Court set aside the rejection of claim of interest by the Petitioner in that case and directed the Assistant Commissioner to comply with the orders passed by the Commissioner Appeals).
41. The language used in the present case by the AO while disagreeing with the binding order of the DRP is wholly unacceptable. In the final assessment order dated 28th January 2015, the AO while discussing the order of the DRP observed inter alia in para 4.2 that “The DRP has not acted in accordance with the provisions of the Act while passing this order which is grossly illegal, against the intent of legislature, without following the basic principles of natural justice and adopting very narrow interpretation of the provisions of the Act.”
42. In the circumstances, the Court, while setting aside the final assessment order dated 28th January 2015, directs that the draft assessment order, the order of the DRP, the final assessment order as well as this order shall be placed before the concerned Commissioner who is administratively supervising the work of Additional CIT who passed the draft and final assessment order. The Commissioner will thereafter proceed in accordance with law after issuing notice to the concerned AO and affording him an opportunity of being heard.
43. Mr. Manchanda then submitted that this Court should clarify that in terms of Section 153 (3) B of the Act, the Revenue can within a period of 30 days pass the final assessment order under Section 143 (3) of the Act. The Court notes that the Revenue has not been able to contest the submission of the Petitioners that in the present case the Revenue has issued a notice to the Petitioner under Section 147 of the Act seeking to reopen the assessment for the AY 2010-11. The question of the Court issuing any clarification as sought by the Revenue therefore does not arise. In any event in the present case, the AO did pass the final assessment order in continuation of draft assessment order under Section 144C (1) of the Act and the said final assessment order has been held by this Court, for the reasons recorded hereinabove, to be invalid.
44. The other plea of the Revenue that the Petitioners ought to have challenged the final assessment order before the CIT (A) is untenable for the reason that it was contrary to the order of the DRP which held in favour of the Petitioners. The order of the DRP was not challenged by the Revenue. In the circumstances, the final assessment order was without jurisdiction and this constitutes sufficient ground for the Court exercise its powers under Article 226 of the Constitution.
45. For the above reasons, the draft assessment order dated 28th March 2014 and the final assessment order dated 28th January 2015 passed by the AO are held to be void ab initio and quashed on that basis. The orders consequential thereto also do not survive. However, it is clarified that the Court has not expressed any opinion regarding the validity of the proceedings against the Petitioners under Section 147/148 of the Act. The rights and contentions of the parties in those proceedings are left open to be urged and decided by the appropriate authority in accordance with law.”
14. . As could be seen from the aforesaid observations of the Hon’ble Jurisdictional High Court, non-implementation of directions of DRP in terms of section 144C renders the final assessment order wholly without jurisdiction and void-ab-initio. The plethora of decisions cited by learned counsel appearing for the assessee express similar view. Therefore, we do not intend to deal in detail with them. Thus, keeping in view the ratio laid down by Hon’ble Jurisdiction High Court, as discussed above, we hold that the impugned assessment orders are wholly without jurisdiction or in excess of jurisdiction, hence, void-ab-initio. Therefore, assessment orders under challenge in these appeals deserve to be quashed. Accordingly, we do so.
15. Before parting, we must observe, this is not a stray instance coming to our notice, wherein, the Assessing Officer has not implemented the directions of DRP. We have come across several cases of such non-implementation of directions of learned DRP by the Assessing Officer while passing final assessment orders. There is no gainsaying that in the hierarchy of tax administration, the DRP holds higher position than the Assessing Officer. Therefore, for that reason and as per statutory mandate, the Assessing Officers are bound to follow the directions of DRP. Non-implementation of the directions issued by DRP, either consciously or due to non- application of mind by the Assessing Officers often put the department in an embarrassing situation as the learned counsels appearing for the Revenue find it difficult to defend the action of the Assessing Officers. Such repeated instances of non-implementation of directions of learned DRP by the Assessing Officers expose lack of proper orientation and training. We hope and expect that the authorities concerned would look into this aspect and address the issue with the seriousness it deserves. We leave the issue at that.
16. In the result, all the four appeals are allowed on this limited issue.
Order pronounced in the open court on 31.01.2024.
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