2022 (2) TMI 1419 - AT - Income Tax

Validity of assessment u/s 144C not following the directions of the DRP by the Assessing Officer follow the directions of the DRP by the Assessing Officer - Existence of Permanent Establishment PE - Attribution of profit - HELD THAT - This Tribunal 2021 (12) TMI 545 - ITAT DELHI has held the impugned assessment orders as non-est it is mandatory to follow the directions of the DRP by the Assessing Officer failing which the assessment order would become non-est. In our considered view, the Assessing Officer passed the impugned final assessment orders not carrying out the binding directions of the DRP which is a clear violation of the binding provisions of section 144C(13) of the Act. Therefore, in our humble opinion, the impugned assessment orders are non-est. We are of the further opinion that once the assessment orders have been held to be non-est, the ld. CIT could not have assumed jurisdiction u/s 263 of the Act over a non assessment order which can never be erroneous and prejudicial to the interest of the Revenue. Thus this Tribunal held the impugned assessment order as nonest. Sublato Fundamento Cadit Opus, meaning thereby, that in case the foundation is removed, the super structure falls.

Summary

Issues Involved:
1. Reassessment
2. Existence of Permanent Establishment (PE)
3. Attribution of profit
4. Charging of interest under sections 234A, B, C, D, 244A and initiation of penalty under section 271(1)(c) of the Income-tax Act, 1961

Detailed Analysis:

1. Reassessment:
The appeals concern the reassessment orders framed under section 147 read with sections 143(3) and 144C(13) of the Income-tax Act, 1961 for Assessment Years 2004-05 to 2010-11, 2013-14, and 2014-15. The reassessment was challenged on the grounds that the Assessing Officer (AO) did not follow the binding directions of the Dispute Resolution Panel (DRP), rendering the reassessment orders null and void.

2. Existence of Permanent Establishment (PE):
The issue of whether the assessee had a Permanent Establishment (PE) in India was a significant point of contention. The Tribunal noted that the DRP had directed the AO to attribute profits to the PE based on a cost-plus method. However, the AO deviated from these directions, leading to the conclusion that the reassessment orders were non-est (null and void). The Tribunal referenced the case of Sony Mobile Communications India [P] Ltd, where it was held that failure to follow DRP directions makes the assessment order void.

3. Attribution of Profit:
The DRP had directed the AO to attribute profits to the PE based on a cost-plus method, applying a 20% markup on the salary attributed to Indian operations. The AO, however, reduced the attribution of salary to 25% instead of the 50% agreed upon by the assessee, contrary to the DRP's directions. This deviation was deemed a violation of section 144C(13) of the Act, which mandates following DRP directions, thereby invalidating the assessment orders.

4. Charging of Interest and Penalty:
The assessee also contested the charging of interest under sections 234A, B, C, D, and 244A, and the initiation of penalty under section 271(1)(c) of the Act. Given that the reassessment orders were held to be non-est, these issues were not further examined by the Tribunal.

Additional Ground:
The assessee raised an additional ground, arguing that the assessment order was bad in law as the AO did not carry out the binding directions of the DRP, making the order null and void. The Tribunal admitted this additional ground, citing the judgment in Sony Mobile Communications India [P] Ltd, which supported the admission of new legal grounds arising from existing facts.

Tribunal's Decision:
The Tribunal found that the AO's failure to comply with DRP directions rendered the reassessment orders non-est. Consequently, the appeals were allowed on the additional ground itself, without delving into the merits of the case.

Conclusion:
The Tribunal concluded that the reassessment orders were null and void due to the AO's failure to follow DRP directions. As a result, the appeals for the respective assessment years were allowed, and the reassessment orders were invalidated.

Appeals Allowed:
- ITA No. 4559/DEL/2018 [A.Y 2004-05]
- ITA No. 4560/DEL/2018 [A.Y 2005-06]
- ITA No. 4561/DEL/2018 [A.Y 2006-07]
- ITA No. 1946/DEL/2017 [A.Y 2007-08]
- ITA No. 6916/DEL/2017 [A.Y 2008-09]
- ITA No. 5020/DEL/2018 [A.Y 2009-10]
- ITA No. 5021/DEL/2018 [A.Y 2010-11]
- ITA No. 3327/DEL/2018 [A.Y 2013-14]
- ITA No. 5022/DEL/2018 [A.Y 2014-15]

The order was pronounced in the open court on 07.02.2022.