2020 (1) TMI 1632 - AT - Income Tax

Eligible assessee u/s.144C - Reference to DRP - Necessity of passing of the draft assessment order - AO found that the assessee is not the beneficial owner of the royalties, hence, the assessment order is passed within the time frame consequent to the direction of the DRP - Assessee is aggrieved only by the observation of the Assessing Officer that the assessee is not a beneficial owner of the royalty - HELD THAT - As passing of the draft assessment order itself is not warranted. Section 144C(1) of the Act mandates the AO to pass draft assessment order after first day of October 2009, in case there was any variation in the income or loss returned which is prejudicial to the interests of the assessee. In this case, there was no variation in the income or loss returned by the assessee. Admittedly, the income returned by the assessee was accepted by the AO. Therefore, there is no question of any prejudice to the assessee. Hence the Assessing Officer is not expected to pass any draft assessment order. As rightly submitted by Assessing Officer has to pass an order within 33 months from the end of the relevant assessment order. Admittedly 33 months from the end of the assessment order falls on 31.12.2016. In this case, admittedly the assessment order was passed on 28.09.2017, which is beyond the period of limitation. When the DRP was clear in their mind that the objection of the assessee could not be adjudicated, then there cannot be any question of making further observation with regard to beneficial ownership of the royalty. Therefore this Tribunal is of the considered opinion that the DRP has exceeded its jurisdiction in making such an observation with regard to beneficial ownership of the royalty. Therefore the observation with regard to beneficial ownership of the royalty cannot be a binding precedent in the subsequent years to come. Accordingly the finding / observation of the DRP that the assessee is not a beneficial owner of the royalty and the assessee is not eligible for the benefit of Indo Cyprus DTAA are set aside. However the issue whether the assessee is eligible for benefits of Indo Cyprus DTAA and whether the assessee is a beneficial owner of royalty or not are kept open to be decided by the appropriate authorities in the year in which the variations in the international transactions are to be made. With the above observation, the appeal of the assessee stands allowed.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Eligibility for the benefit under the Indo Cyprus Double Taxation Avoidance Agreement (DTAA).
3. Jurisdiction and power of the Dispute Resolution Panel (DRP) regarding the beneficial ownership of royalty.
4. Timeliness of the assessment order under Section 153 and Section 144C(13) of the Income Tax Act, 1961.

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The Tribunal acknowledged a delay of 31 days in filing the appeal. After considering the arguments from both the assessee's representative and the Departmental Representative (DR), the Tribunal found reasonable cause for the delay. Consequently, the delay was condoned, and the appeal was admitted.

2. Eligibility for the Benefit under the Indo Cyprus Double Taxation Avoidance Agreement (DTAA):
The assessee claimed eligibility for benefits under the Indo Cyprus DTAA. The Assessing Officer (AO) initially accepted the returned income but concluded that the assessee was not eligible for the DTAA benefits. The DRP, while addressing the objection, stated that since no variation was made under Section 144 of the Income Tax Act, the objection was beyond its scope of power. The Tribunal noted that the issue of beneficial ownership of royalties should only be determined when there is a variation in international transactions. Since no such variation occurred, the Tribunal found that the AO should have passed the order by 31.12.2016. The assessment order passed on 28.09.2017 was deemed beyond the prescribed time limit.

3. Jurisdiction and Power of the Dispute Resolution Panel (DRP) Regarding the Beneficial Ownership of Royalty:
The DRP observed that the objection did not relate to any variation made by the AO in the income or loss returned by the assessee, thus falling beyond its jurisdiction. Despite this, the DRP made an observation that the assessee was not the beneficial owner of the royalty, which the Tribunal found to be beyond the DRP's power. The Tribunal held that such an observation should not influence subsequent assessments and set aside the DRP's finding. The issue of beneficial ownership and eligibility for DTAA benefits was left open for determination in future years when variations in international transactions arise.

4. Timeliness of the Assessment Order under Section 153 and Section 144C(13) of the Income Tax Act, 1961:
The Tribunal examined the statutory provisions under Section 144C, which mandates the AO to pass a draft assessment order only if there is a variation in the income or loss returned by the assessee. Since the AO accepted the returned income without any variation, the Tribunal concluded that the draft assessment order was unwarranted. The Tribunal emphasized that the AO should have adhered to the 33-month time frame from the end of the relevant assessment year. The assessment order passed on 28.09.2017 exceeded this period, rendering it invalid.

Conclusion:
The appeal was allowed, with the Tribunal setting aside the DRP's observations regarding the beneficial ownership of royalty. The eligibility for DTAA benefits and the beneficial ownership issue were left open for future adjudication when relevant variations occur. The Tribunal underscored the importance of adhering to statutory timelines and jurisdictional limits in assessment proceedings.