2021 (12) TMI 545 - AT - Income Tax

Revision u/s 263 by CIT - Assessment in the case of the appellant for the captioned Assessment Years so completed was on the basis of cost plus method on the salary of expat employees, wherein 25% of salary is attributable to operation in India and cost of 20% of salary was applied on the same to determine the profit taxable in India - HELD THAT - As it is mandatory to follow the directions of the DRP by the Assessing Officer failing which the assessment order would become nonest. 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. The contention of the ld. DR that the Assessing Officer has followed the directions of the DRP but somehow over looked the directions issued. We are of the considered view that there is no choice given to the Assessing Officer to follow one part of the directions of the DRP and not to follow the other part. Whether the assessee can challenge the validity of the assessment order in collateral proceedings u/s 263? - In our considered opinion, the assessee can challenge the validity of the assessment order in the collateral proceedings u/s 263 of the Act since the assessment order itself is bad in law. Therefore, such an order cannot be revised u/s 263 of the Act. Our view is fortified by the decision of Krishna Kumar Saraf 2015 (10) TMI 2168 - ITAT DELHI AND Super Sonic Technologies 2018 (12) TMI 912 - ITAT DELHI - Considering all we are of the considered opinion that the ld. CIT has erroneously assumed jurisdiction u/s 263 of the Act when the impugned assessment orders were non-est. - Decided in favour of assessee.

Summary

Issues:
1. Jurisdiction of CIT under section 263 of the Income-tax Act, 1961 regarding assessment orders.
2. Compliance with directions of the Dispute Resolution Panel (DRP) under section 144C.
3. Validity of assessment orders and the scope of challenging them in collateral proceedings.

Analysis:
1. The appeals were related to assessment years 2004-05 to 2006-07, 2008-09 to 2010-11, 2013-14, and 2014-15, where the assessee challenged the jurisdiction of the Commissioner of Income Tax (CIT) under section 263 of the Income-tax Act. The grievance was that the assessment orders were not erroneous or prejudicial to the Revenue's interest. The CIT observed discrepancies in the assessment process, particularly regarding the attribution of Permanent Establishment (PE) income to Indian operations.

2. The CIT found that the Assessing Officer did not comply with the DRP's directions regarding the attribution of PE income. Despite the assessee's agreement on the percentage of salary attributable to Indian operations, the Assessing Officer deviated from the DRP's directive. The CIT held that the assessment orders were not in line with the DRP's directions under section 144C(13) and set them aside for reassessment.

3. The ITAT emphasized the mandatory nature of following DRP's directions by the Assessing Officer, as highlighted in the case law PCIT Vs. Head Strong Services India Ltd. Failure to adhere to DRP's directions rendered the assessment orders non-est, making them void in law. Consequently, the ITAT ruled that the CIT could not assume jurisdiction under section 263 for non-existent assessment orders. The ITAT also clarified that challenging the validity of assessment orders in collateral proceedings under section 263 was permissible when the orders were flawed.

4. The ITAT further cited relevant case law to support its decision and emphasized that concessions made by the assessee in previous years could not be automatically applied to subsequent assessment years. Ultimately, the ITAT allowed the appeals, declaring the Stay Applications as infructuous, and pronounced the order in favor of the assessee on 17.11.2021.