2017 (1) TMI 1247 - AT - Income Tax

Transfer pricing adjustments - obligation of the AO to follow the procedure u/s 144C - failure to pass the draft assessment order - Eligible assessee u/s 144C(15) - Held that - The use of the word and instead of or in s. 144C(15) must be regarded as the law prescribing two categories of persons in whose case sec. 144C shall apply. That is, persons falling under sub-clauses (i) and (ii) of clause (b) of section 144C(15). This is apparent from a plain reading of the provision; the identification of a foreign company being preceded by the word means , and followed by the sub-clauses (a) and (b), and not, for example, by the words to the effect or signifying a person satisfying the conditions as set out in the said sub-clauses. As such, a foreign company is an eligible assessee, independent of the variation to its returned of income being by way of a transfer pricing adjustments - the other condition set out in s. 144C(15)(b)(i), or otherwise. Validity of assessment - Held that - The order has been passed by the AO by, in effect, without allowing the assessee the opportunity of being heard by the DRP, i.e., prior to it being finalized. That there is no vested right against procedure is well-settled. Again, it is nobody s case that the same was done to purchase time, or that in the event the said opportunity was allowed, the assessment would get barred by time. In fact, no such contention could in law be raised as s. 144C(13) itself excludes the operation of s. 153 (or s. 153B), stipulating time limit for passing orders order the Act, setting it at one month after the receipt by the AO of the directions by the DRP. There is no question of the assessment getting time barred or having crossed the bar of time by which it could have been passed. Once the Revenue itself admits the order passed to be a draft assessment order, it cannot in law proceed to collect the demand raised, so that the raising of demand would be without the sanction of law. The decision in Vijay Television (P.) Ltd. (2014 (6) TMI 540 - MADRAS HIGH COURT ) is judicially binding on us. The same is directly on the point, and is therefore squarely applicable. In fact, in the present case there is no attempt by the AO to rectify his mistake. We have set out our humble opinion in the matter only with a view of its consideration by the Hon ble Court in a given case. Respectfully following the decision in Vijay Television (P.) Ltd. (supra), we hold the assessment in the present case as bad in law. In consequence, the assessee is only liable for tax on its returned income (refer CIT v. Shelly Products 2003 (5) TMI 4 - SUPREME Court . The assessment failing, we do not consider it relevant or necessary to address the issue arising in quantum assessment on merits.

Summary

Issues:
1. Jurisdictional aspect of the assessment process under section 144C of the Income Tax Act, 1961.
2. Classification of guarantee fee for tax purposes - as interest, fee for technical services, or business income.

Jurisdictional Aspect Analysis:
The case involved an appeal by a foreign company against an assessment order under section 143(3) of the Income Tax Act, 1961. The primary contention was whether the assessment was void due to the Assessing Officer's failure to follow the procedure outlined in section 144C for eligible assesses. The Tribunal analyzed the definition of "eligible assessee" under section 144C(15), emphasizing that a foreign company falls within this category. The Tribunal differentiated the present case from the precedent of Vijay Television (P.) Ltd., asserting that the failure to follow the procedure for draft assessment orders was a procedural irregularity and did not invalidate the assessment order. Citing various legal precedents, the Tribunal concluded that the assessment was not void due to the procedural lapse, and the Assessing Officer had the jurisdiction to pass the assessment order.

Classification of Guarantee Fee Analysis:
The second issue revolved around the classification of the guarantee fee for tax purposes. The foreign company argued that the fee should not be treated as interest or fee for technical services but as consideration for assuming financial risk. The Assessing Officer contended that the guarantee fee constituted a financial service, falling under the ambit of service tax. The Tribunal examined the nature of the guarantee fee and concluded that it was a financial service, aligning with the Assessing Officer's view. The Tribunal highlighted that any service, including financial services, involves inputs as per the Income Tax Act. The foreign company's argument that the fee was for assuming financial risk was dismissed, and the Tribunal upheld the taxability of the guarantee fee as a financial service.

In summary, the Tribunal's judgment addressed the jurisdictional aspect of the assessment process under section 144C and the classification of the guarantee fee for tax purposes. The Tribunal ruled that the procedural irregularity in not following the draft assessment order procedure did not invalidate the assessment order, and the Assessing Officer had jurisdiction to pass the order. Additionally, the guarantee fee was deemed a financial service subject to tax, rejecting the foreign company's argument that it was consideration for assuming financial risk. The appeal by the foreign company was allowed based on these analyses.