2014 (10) TMI 143 - AT - Income Tax

Challenge to the order passed u/s 143(3) pursuance to the direction passed by DRP u/s 144C(5) - Speaking order - Power of DRP to remand - Income from providing services in relation to 3D seismic data acquisition and processing - Applicability of section 44BB - AO was of the view that the income to be taxed u/s 9(1)(vii) read with section 115A - Held that - Provisions of section 144C provides the entire mechanism for making a reference to the DRP - the statute has provided sufficient powers to the DRP for considering all the material placed before it and equipped it with vast powers to conduct enquiry before issuing any direction to the AO - The statute contemplates that after empowering the DRP, with such wide powers the DRP shall give clear and speaking directions to the AO for passing the assessment order and the statute ensures that the said power is not delegated to the AO. - The wide sweeping powers vested in the DRP in order to ensure that remand is not made. Thus, the order of the DRP is in excess of jurisdiction and the challenge posed to the same by the assessee is well founded - the AO is directed to pass a speaking draft assessment order considering the fresh evidences admitted by the DRP and calling for whatever evidences the authority deems fit the order of the DRP is set aside Decided partly in favor assessee.

Issues Involved:
1. Validity of the assessment order passed by the AO.
2. Legality of DRP's directions.
3. Existence of Permanent Establishment (PE) in India.
4. Applicability of Section 44BB vs. Section 115A of the Income Tax Act, 1961.
5. Admissibility of additional evidence under Rule 46A.
6. Jurisdiction and powers of the DRP under Section 144C.

Issue-wise Detailed Analysis:

1. Validity of the Assessment Order Passed by the AO:
The assessee contended that the assessment order was "bad in law" as it was a non-speaking order that disregarded the factual details and submissions provided during the set-aside proceedings. The AO initially denied the applicability of Section 44BB and brought the gross revenue to tax under Section 9(1)(vii) read with Section 115A, which was confirmed by the DRP. The ITAT noted that the AO did not provide adequate opportunity to the assessee before passing the draft assessment order, which was a procedural lapse.

2. Legality of DRP's Directions:
The primary grievance was that the DRP remanded the issue back to the AO instead of deciding the objections raised by the assessee, which was argued to be in violation of Section 144C(8) of the Income Tax Act, 1961. The ITAT observed that the DRP has the power to confirm, reduce, or enhance the variations proposed in the draft order but cannot set aside any proposed variation or issue directions for further enquiry and passing of the assessment order.

3. Existence of Permanent Establishment (PE) in India:
The AO concluded that the assessee did not have a PE in India based on the absence of RBI approval for setting up a Project Office (PO) and lack of evidence that activities were carried out from the PO. However, the assessee argued that it had set up POs in compliance with FEMA regulations and had duly intimated the RBI, which should be considered as conclusive proof of having a PO in India. The ITAT noted that the DRP allowed additional evidence to be submitted, which the AO dismissed without proper consideration.

4. Applicability of Section 44BB vs. Section 115A of the Income Tax Act, 1961:
The assessee applied the deemed profit rate of 10% under Section 44BB for income earned from services related to 3D seismic data acquisition and processing. The AO, however, taxed the income under Section 115A, considering it as Fees for Technical Services (FTS). The ITAT directed the AO to reconsider the applicability of Section 44BB after examining the existence of PE and taking into account the ITAT's previous order in a similar case.

5. Admissibility of Additional Evidence under Rule 46A:
The AO rejected additional evidence submitted by the assessee on the grounds that it was inadmissible under Rule 46A of the Income Tax Rules, 1962. The ITAT clarified that Rule 46A applies to proceedings before the CIT(A) and not the DRP, which is governed by the Income Tax (Dispute Resolution Panel) Rules, 2009. The DRP is empowered to permit the production of any document to issue proper directions, and the additional evidence should have been considered in the interest of justice.

6. Jurisdiction and Powers of the DRP under Section 144C:
The ITAT emphasized that Section 144C provides a detailed mechanism for the DRP to issue directions to the AO. The DRP has wide powers to conduct enquiries and must issue clear and speaking directions without delegating this power to the AO. The ITAT concluded that the DRP's order to remand the issue was beyond its jurisdiction, and the DRP should have provided specific directions to the AO.

Conclusion:
The ITAT set aside the impugned orders of the DRP, directing the AO to pass a speaking draft assessment order considering the fresh evidence admitted by the DRP. The AO was instructed to provide a reasonable opportunity of being heard to the assessee. The appeals were partly allowed for statistical purposes, and the stay petitions filed by the assessee were declared infructuous. The order was pronounced in the open court on 26th September 2014.

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