2023 (2) TMI 1002 - AT - Income Tax

Assessment Order Declared Void; Errors in PE Determination; Assessee's Appeal Allowed

The Tribunal held that the assessment order was void ab initio due to incorrect application of Section 144C and lack of fresh material for proceedings ... Draft assessment order u/s 144C(1) - assessee is an LLP - Whether Appellant is a foreign company? - HELD THAT:- AO has framed draft assessment order when the provisions were not applicable to the assessee. “Eligible Assessee” means, any person in whose case variation referred to in sub-section arises as a consequence of an order passed by the TPO u/ss (3) of section 92CA of the Act. Facts of the case in hand show that no order has been passed by the TPO, therefore, there is no question of any variation arising as a consequence of the order of the TPO and since the assessee is an LLP, therefore, it cannot be termed as a foreign company, which means that provisions of section 144C of the Act with all its sub section do not apply to the assessee, which means that the impugned assessment order is void ab initio. As relying on [2019 (4) TMI 2098 - ITAT MUMBAI] and provisions of section 144C of the Act, we have no hesitation in holding that the assessment order is void ab initio. - Decided in favour of assessee. Unexplained Receipts shown in Form No. 26AS - Findings given by AO is totally based upon the findings given in earlier Assessment Years. Even the directions of the DRP are based upon the directions given in earlier Assessment Years and both the authorities grossly erred in not realizing that the assessee has discontinued its business after Assessment Year 2010-11. Therefore, drawing support from earlier year’s order would do no good to the Revenue as the facts are not similar. In fact, the Assessing Officer has put the entire burden on the assessee to show in whose hands the receipts shown in Form 26AS has been declared. By putting the onus on the assessee, the AO has grossly erred as the assessee is not responsible to explain the recipients of the receipts shown in Form No. 26AS. AO should have asked the payer, details of the payee to whom payments have been made by the payer on which it could deduct tax at source . Therefore, on merit also, addition cannot survive as facts are not identical to the facts of earlier Assessment Years - Appeal of assessee allowed. Issues Involved:1. Jurisdiction and validity of the assessment order.2. Eligibility of the assessee under Section 144C of the Income Tax Act.3. Validity of the notice issued under Section 148.4. Existence of Permanent Establishment (PE) in India.5. Computation of total income and the reflection of amounts in Form 26AS.6. Arbitrary addition to income based on notional profit rate.7. Levy of interest under Sections 234A, 234B, and 234C.Issue-wise Detailed Analysis:1. Jurisdiction and Validity of the Assessment Order:The assessee contended that the assessment order dated 21.06.2019 was void ab initio as it was framed under Section 144C(13) read with Sections 147 and 143(3) of the Income Tax Act, 1961. The Tribunal agreed, noting that the Assessing Officer (AO) had erroneously framed a draft assessment order when it was not required, rendering the final assessment order void ab initio.2. Eligibility of the Assessee under Section 144C:The assessee argued that it was not an 'eligible assessee' under Section 144C(15)(b) of the Act, as it was a limited partnership based in the USA, not a foreign company. The Tribunal supported this view, emphasizing that the provisions of Section 144C apply prospectively from AY 2011-12 and that the assessee, being an LLP, did not fit the definition of a foreign company. Thus, the assessment order was void ab initio.3. Validity of the Notice Issued under Section 148:The assessee challenged the jurisdiction of the notice issued under Section 148, arguing there was no failure on its part to disclose material facts. The Tribunal noted that the AO had initiated proceedings without any fresh material or facts, which invalidated the proceedings under Section 147.4. Existence of Permanent Establishment (PE) in India:The AO and DRP concluded that the assessee had a fixed place PE and a dependent agent PE in India, based on previous years' assessments. However, the assessee argued that it had discontinued its business operations in the relevant AY. The Tribunal found that both the AO and DRP erred in not recognizing the discontinuation of business operations, thus invalidating the PE determination.5. Computation of Total Income and Reflection of Amounts in Form 26AS:The AO computed the total income of the assessee at INR 4,97,37,942 based on amounts reflected in Form 26AS, which the assessee claimed did not belong to it but to its subsidiary. The Tribunal agreed with the assessee, noting that the AO should have verified the details with the payer companies rather than placing the burden on the assessee.6. Arbitrary Addition to Income Based on Notional Profit Rate:The DRP made an arbitrary addition of INR 4,97,37,942 to the income of the assessee, taking a notional profit rate of 75%. The Tribunal found no basis for this addition, especially given the discontinuation of the assessee's business operations and the lack of identical facts to previous years.7. Levy of Interest under Sections 234A, 234B, and 234C:The assessee contested the levy of interest under Sections 234A, 234B, and 234C. The Tribunal noted that these were consequential in nature and would not apply given the annulment of the assessment order.Conclusion:The Tribunal held that the assessment order was void ab initio due to the incorrect application of Section 144C and the lack of fresh material to justify proceedings under Section 147. Additionally, on merits, the Tribunal found that the AO and DRP had erred in their determinations regarding the PE and the computation of income. Consequently, the appeal of the assessee was allowed.