2023 (12) TMI 203 - AT - Income Tax

Revision u/s 263 - as per CIT foreign payments made directly by the Indian Project Owners to Head Office, and the nature/scope of offshore services were not examined either by the TPO or by the AO during the assessment proceedings - HELD THAT - The foreign payments made directly by the Indian Project Owners to Head Office, and the nature/scope of offshore services were not examined either by the TPO or by the AO during the assessment proceedings. TPO, accepted the domestic payments made by the Indian Project Owners to Project Offices to be at arm s length and thereafter, on 30/05/2021 the AO passed Assessment Order u/s 143(3) of the Act accepting the retuned income as assessed income. It is clear that after initial query, no further follow-up query or information was sought by the Assessing Officer. In our view, the AO should have enquired into both the payments made to Project Offices as well as the Head Office. On perusal of notice issued by the Assessing Officer and reply filed by the Appellant, it is clear that only the issue pertaining to domestic payments made by the Indian Project Owners to the Project Offices were examined by the Assessing Officer and by the TPO. According to Explanation 2 to Section 263 of the Act assessment order is deemed to be erroneous in so far as prejudicial to the interest of the Revenue in case in the opinion of CIT such assessment order has been passed allowing any relief without enquiring into the claim. When the material on record reflects that the assessment proceedings were concluded without enquiry/investigation into the scope of services provided by the Head Office, apportionment of payments between Project Office and Head Office as per contract, and the consequent payments made by the Indian Project Owners directly to the Head Office, the question of inferring with these issues would have been examined by the Assessing Officer/TPO during the assessment proceedings does not arise. Therefore, the judicial precedents relied by both the sides relating to computation/allowance/disallowance of deduction do not apply to the facts of the present case. In the present case, the relief under the provisions of tax treaty has been granted to the Appellant without inquiring into the nature and scope of offshore services. AO has also failed to make necessary enquiry/verification regarding the income attributable to the Project offices in India. In our view, the CIT had jurisdiction to exercise power of revision u/s 263 of the Act since AO had failed to carry out necessary enquiry and verification warranted in the facts and circumstances of the present case triggering provisions of Explanation 2 to Section 263 - Thus, we concur with the CIT that the Assessment Order, dated 30/05/2021, passed under section 143(3) of the Act was erroneous insofar as prejudicial to the interest of Revenue, and therefore, we hold that the CIT was justified in setting aside the same. Assessee appeal dismissed.

Summary

Issues Involved:
1. Assumption of jurisdiction under Section 263 of the Income Tax Act, 1961.
2. Taxability of revenue pertaining to offshore services in India.

Summary:

1. Assumption of Jurisdiction under Section 263:
The Appellant challenged the order passed by the CIT under Section 263 of the Income Tax Act, 1961, which set aside the Assessment Order dated 30/05/2021, holding it to be erroneous and prejudicial to the interest of the Revenue. The CIT concluded that the Assessing Officer (AO) failed to conduct necessary inquiries and verification regarding offshore services rendered by the Appellant outside India and the Appellant's claim under the Double Taxation Avoidance Agreement (DTAA) between India and Korea. The CIT noticed that the AO did not properly verify the total receipts, tax treaty benefits claimed, offshore services rendered, and the attribution of income from Indian operations to the Permanent Establishment (PE) in India. The CIT issued a notice under Section 263(1) requiring the Appellant to show cause why the assessment order should not be set aside. Despite the Appellant's detailed submissions, the CIT was not convinced and noted that the AO passed the assessment order without proper application of mind and necessary inquiry.

2. Taxability of Revenue Pertaining to Offshore Services:
The CIT held that no offshore activities were performed by the Appellant and all activities were performed onshore in India. The CIT concluded that the offshore services rendered by the Appellant were provided at the project offices through employees, constituting a service PE in India. Thus, the entire offshore revenue towards such services was attributable to the PE under Article 7 of the DTAA and taxable in India. The Appellant contended that the payments made by Indian Project Owners to the Head Office were not liable to tax in India as they were for offshore services. The Appellant argued that similar payments were examined in earlier years and no additions were made. However, the CIT concluded that the AO failed to make necessary inquiries and verification regarding the payments made to the Head Office, and therefore, the assessment order was erroneous and prejudicial to the interest of Revenue.

Conclusion:
The Tribunal held that the CIT had jurisdiction to exercise power of revision under Section 263 as the AO failed to carry out necessary inquiries and verification. However, the Tribunal found merit in the Appellant's contention that the CIT was not justified in concluding that the payments made by Indian Project Owners to the Head Office were liable to tax in India without confronting the Appellant, leading to a violation of principles of natural justice. The Tribunal directed the AO to examine the issue of taxability of payments made by Indian Project Owners directly to the Head Office afresh as per the provisions of the Act and Tax Treaty, after giving the Appellant an opportunity of being heard. The appeals were partly allowed with the modification that the AO should re-examine the taxability issue.