TII Instant Update - 2017-TII-INSTANT-ALL-463

TII ARTICLE

Tax treaty interpretation - Perspectives from some Asian Countries

CASE LAWS

2017-TII-37-HC-DEL-TP

TURNER INTERNATIONAL INDIA PVT LTD Vs DCIT: DELHI HIGH COURT (Dated: May 17, 2017)

Income Tax - Section 144C (1).

Keywords - Advertisement - draft assessment order - distribution rights.

The assessee is a wholly-owned subsidiary of Turner Broadcasting System Asia Pacific Inc. It is engaged in the business of sub-distribution of distribution rights and sale of advertisement inventory on satellite delivered channels. For the AY 2007-08 & 2008-09 the assessee filed its returns. AO made reference to the TPO. In respect of both the AYs, two separate orders were passed by the TPO. On the basis of the above orders of the TPO, draft Assessment Orders were passed by the AO. These were objected to by the assessee before DRP. After the DRP concurred with the TPO, final assessment orders were passed by the AO. These were appealed against by the assessee before the Tribunal. In both the appeals, Tribunal observed that neither the assessee nor TPO had taken into consideration appropriate comparables and, therefore, the determination of ALP was not justifiable. While setting aside the order of the DRP, the Tribunal remanded the matters to the AO for undertaking a transfer pricing study afresh and framing an assessment in accordance with law. Accordingly, TPO proposed an upward adjustment to the total income of the assessee for each of the AYs. Final assessment order was passed. Accompanying the final Assessment Orders were notices of demand u/s 156 and 271(1)(c) initiating penalty proceedings. The short ground on which the aforementioned final assessment orders and the consequent demand notices have been challenged is that there was non-compliance with the mandatory provision contained in Section 144C(1) requiring the AO to first frame draft assessment orders.

Having heard the parties, the High Court held that,

Whether passing of final assessment order without first passing a draft assessment order u/s 144C(1) would render the final assessment order as invalid and unsustainable - YES: HC

+ in Zuari Cement Ltd. v. ACIT, the Division Bench (DB) of the Andhra Pradesh High Court categorically held that the failure to pass a draft assessment order u/s 144C (1) would result in rendering the final assessment order "without jurisdiction, null and void and unenforceable." In that case, the consequent demand notice was also set aside. The decision of the Andhra Pradesh High Court was affirmed by the Supreme Court. However, Revenue in the present case, contended that the failure to adhere to the mandatory requirement of issuing a draft assessment order u/s 144C (1) would, at best, be a curable defect. The Court refused to accept the above submission. The legal position as explained in the various decided cases is unambiguous. The failure by the AO to adhere to the mandatory requirement of Section 144C (1) and first pass a draft assessment order would result in invalidation of the final assessment order and the consequent demand notices and penalty proceedings.

Assessee's writ petition allowed

2017-TII-28-HC-DEL-INTL

DIT Vs ROLLS ROYCE INDUSTRIAL POWER INDIA LTD: DELHI HIGH COURT (Dated: May 18, 2017)

Income Tax - Sections 147 & 148.

Keywords - opening - reassessment - power plants - TDS - operations and maintenance agreement - India-UK DTAA.

The Assessee company is incorporated under the laws of U.K. and was engaged, inter alia, in the business of erection, commissioning, supervision, operation and maintenance of power plants. The business activities in India were carried out by the Assessee through various projects, offices, located in India. These, according to the Revenue constituted the Assessee's PE in India under Article 5 of the DTAA between India and U.K. The Assessee's returns for the three AYs in question i.e., AYs 1998-99, 1999-2000 and 2001-2002 were picked up for scrutiny and the assessments were completed by the AO by passing assessment orders u/s 143(3). For the FY 2004-2005 , the Assessee filed applications u/s 195(3) for issuance of nil deduction of TDS. The ADIT Circle-II (1), International Transactions, declined the application. He, inter alia, proposed to initiate reassessment/revision proceedings u/s 147/263 in respect of the earlier orders to bring the correct income to tax in accordance with law. The plea taken in this order was that payments received by the Assessee, pursuant to the Operations and Maintenance (O&M) Agreements should be treated as fees for technical services ('FTS') within the meaning of Explanation 2 to Section 9(1)(vii) and Article 13(4) (c) of the DTAA between India and U.K. Assessee applied to the DIT u/s 264. DIT set aside the order of the ADIT, holding that the Assessee here is neither making available technical knowledge, experience nor is developing and transferring technical plan or design." He concluded that the services rendered under the O&M Agreements "cannot be considered as ancillary or subsidiary to the enjoyment of any right prescribed as 'royalty'." Further, under Article 13 therefore the fee for technical services does not fit into the nature of receipt the assessee is having". However, AO proceeded to reopen the assessments u/s 147 r/w 148 for the three AYs in question, i.e., 1998-1999, 1999-2000 and 2001-2002. The Assessee objected to the reopening on the ground that it was based on mere 'change of opinion'. Its objections were rejected. The reassessments were completed by treating the payments as FTS. CIT(A), relying on the decision of the Division Bench ('DB') of this Court in Consolidated Photo and Finvest Ltd. v. Assistant Commissioner of Income-Tax, [2006] 281 ITR 394 (Del), came to the conclusion that since the original assessment orders were silent on the aspect of treating the payments received by the Assessee as FTS, the jurisdictional pre-condition for attracting Section 147 stood fulfilled. Upon further appeal, Tribunal allowed assessee's appeal and set aside reassessment orders.

Having heard the parties, the High Court held that,

Whether reopening of assessment is liable to be set aside if it is not based on any fresh material and the nature of transactions have previously been dealt with in detail by the AO - YES: HC

+ during the course of the original assessments u/s 143 (3), the AO did serve upon the Assessee a detailed questionnaire. The AO examined the nature of the transactions involving the Assessee and the payments received therefor. The reopening was not based on any fresh material. By revisiting the same materials the successor AO now concluded that the payments received by the Assessee pursuant to the O&M Agreements should be treated as FTS. In the circumstances, the view taken by a successor AO on the same material was indeed nothing but a mere change of opinion. It is a well-settled legal proposition, as explained in Calcutta Discount Co. Ltd. v. ITO that once an Assessee has discharged the burden of not only producing the account books and other documents, but also the specific material relevant to the assessment, "it is for the Income-tax Officer to draw the proper inferences of fact and law therefrom and the Assessee cannot further be called upon to do so for him." In Indian Oil Corporation v. ITO, the Court pertinently observed "it is for the taxing authority to draw inference. It is not necessary for the Assessee to draw inference." These observations apply on all fours to the case on hand. Here the Assessee had discharged its burden of disclosing fully and truly all the material facts before the AO during the original assessments. There was no basis for the successor AO to conclude that "no opinion with regard to taxation" of the payments received for the services rendered had been formed by the AO. The pre-condition for invoking Section 147 did not exist. The assumption of jurisdiction u/s 148 was not valid.

Revenue's appeal dismissed