2024 (1) TMI 1282 - AT - Income Tax

Validity of order passed u/s 144C - non-implementation of directions of DRP in the final assessment - Taxability of receipts as FTS/FIS - assessees have received fees towards rendering certain services to RIL for its plants situated in Jamnagar SEZ - HELD THAT - In the facts of the present appeal, undisputedly, the AO has not implemented the directions of DRP as mandated u/s 144C(10) r.w.s. 144C(13) - Surprisingly, even though, the AO has reproduced the directions of DRP in the body of the assessment orders, however, he failed to implement the specific direction of 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. This can be due to a conscious disregard to the directions of DRP or final assessment orders have been passed mechanically without application of mind. Non-implementation of directions of DRP in terms of section 144C renders the final assessment order wholly without jurisdiction and void-abinitio. 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 in M/s. ESPN Star Sports Mauritius S.N.C. ET Compagnie 2016 (4) TMI 45 - DELHI HIGH COURT 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. 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 AO while passing final assessment orders. There is no gainsaying that in the hierarchy of tax administration, the DRP holds higher position than the AO. Therefore, for that reason and as per statutory mandate, the AO 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 AO. Such repeated instances of non-implementation of directions of learned DRP by the AO 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.

Summary

Issues Involved:

1. Non-implementation of the directions of the Dispute Resolution Panel (DRP) by the Assessing Officer (AO).
2. Taxability of receipts as Fees for Technical Services (FTS)/Fees for Included Services (FIS) under India-UK and India-USA DTAAs.
3. Determination of Permanent Establishment (PE) and business connection in India.

Summary:

Issue 1: Non-implementation of DRP Directions

The primary issue raised by the assessees was the non-implementation of the directions of the DRP by the AO in the final assessment orders. The assessees argued that the AO merely repeated the contents of the draft assessment orders without following the specific directions of the DRP, rendering the final assessment orders wholly without jurisdiction and unsustainable. The Tribunal agreed with the assessees, noting that the AO is duty-bound to implement the directions of the DRP as per section 144C of the Act. The Tribunal cited multiple judicial precedents, including the Delhi High Court's decision in M/s. ESPN Star Sports Mauritius S.N.C. ET Compagnie, to emphasize that non-implementation of DRP directions renders the final assessment orders void ab initio.

Issue 2: Taxability of Receipts as FTS/FIS

The assessees contended that the amounts received for services rendered under the contracts with Reliance Industries Limited (RIL) should not qualify as FTS/FIS under Article 12 of the India-UK and India-USA DTAAs and hence, should not be taxable in India. However, the AO and the DRP held that the receipts were in the nature of FTS/FIS as the services were of technical nature and satisfied the "make available" condition under the respective tax treaties. The DRP directed that the receipts be taxed as business income under section 44DA of the Act on a protective basis, given the existence of a PE in India.

Issue 3: Determination of PE and Business Connection

The DRP concluded that the assessees had a business connection and a PE in India through their employees based in RIL's office in Mumbai and the site premises at Jamnagar. Consequently, the receipts were to be treated as business income attributable to the PE under Articles 6 & 7 of the respective DTAAs. The Tribunal noted that the AO failed to implement these specific directions and instead added the receipts as FTS/FIS on a substantive basis in the final assessment orders.

Conclusion:

The Tribunal quashed the final assessment orders for being without jurisdiction due to the AO's failure to implement the DRP's directions. The Tribunal emphasized the importance of adhering to the statutory mandate under section 144C and highlighted the need for proper orientation and training for AOs to prevent such instances of non-implementation. The appeals were allowed on this limited issue.