2023 (3) TMI 1349 - AT - Income Tax

Tribunal Quashes Assessment Order, Recognizes PE, Upholds Taxability

The Tribunal quashed the final assessment order, ruling it as bad in law due to non-compliance with the directions of the Dispute Resolution Panel (DRP) ... Fixed Place PE - Taxability of offshore supply of goods - Attribution of profits - AO was of the view that the presence of the assessee in India for the purpose of securing the contract and the presence of its employees and equipment indicates a Permanent Establishment (PE) in India - whether DCIT erred in holding that the assessee has a fixed place PE in India and is not following the directions passed by the DRP, wherein the DRP held that the appellant does not have a fixed place PE in India? - HELD THAT:- In the instant case, the reasoning for making the addition in the final assessment order by the ld. AO is by treating the assessee as a Fixed Place PE, which has already been nullified by the ld. DRP. AO in the final assessment order is bound to complete the assessment in conformity with the directions of the ld. DRP as per the provisions of section 144C(13) of the Act. In the instant case, AO had not framed the final assessment order in complete conformity with the directions of the ld. DRP, thereby violating the provisions of section 144C(13) - only the determination of total income as directed by the ld. DRP had been complied with by the ld. AO in the final assessment order. This is a case of ld. AO completing the assessment by determining the total income as directed by the ld. DRP , but did not follow the basis and reasoning of determination of income as directed by the ld. DRP. Hence we are in agreement with the ld. AR that once the basis of determination of total income itself is illegal due to violation of provisions of section 144C(10) and 144C(13) of the Act, the ultimate determination of total income in the final assessment order also becomes bad in law. Moreover, the ld. AO had not even bothered to rectify his order u/s 154 of the Act by conforming to the directions of ld. DRP which forms the basis of determination of total income. We have no hesitation to hold that the final assessment order passed by the ld. AO , which is in appeal before us, is bad in law and accordingly the final assessment order framed is hereby quashed. Appeal of the assessee is allowed. Issues Involved:1. Validity of the final assessment order.2. Determination of Permanent Establishment (PE) - Fixed place PE and Dependent agent PE.3. Taxability of offshore supply of goods.4. Attribution of profits.5. Miscellaneous issues including interest under section 244A and penalty notice under section 271(1)(c).Summary:1. Validity of the Final Assessment Order:The assessee contended that the final assessment order dated 23 October 2019 was bad in law as the Deputy Commissioner of Income-tax (DCIT) did not follow the directions of the Dispute Resolution Panel (DRP). The Tribunal observed that the DCIT's final assessment order contradicted the DRP's directions, particularly regarding the existence of a fixed place PE in India. The Tribunal quashed the final assessment order, holding it as bad in law due to non-conformity with the DRP's binding directions, citing the decision in Olympus Medical Systems (P) Ltd vs ACIT.2. Determination of Permanent Establishment (PE):- Fixed Place PE: The DRP agreed with the assessee that the tests of place of business, permanence, and disposal did not lead to the inference of a fixed place PE in India. The Tribunal noted that the DCIT erroneously held the existence of a fixed place PE despite the DRP's contrary directions.- Dependent Agent PE: The DRP held that a dependent agent PE was established through Mr. Rupam Saikia, who acted on behalf of the assessee in India. The DRP noted that Mr. Saikia had sufficient authority to bind the assessee in contractual negotiations with Reliance Industries Limited (RIL), thus constituting a dependent agent PE.3. Taxability of Offshore Supply of Goods:The DRP upheld the DCIT's view that the contract with RIL was a single composite contract, and the income from offshore supply of weld wires was taxable in India. The DRP rejected the assessee's claim of offshore transactions, holding that the bifurcation of the contract was not genuine but done at RIL's insistence.4. Attribution of Profits:The DRP directed that 7.13% of the total receipts from India be considered as taxable income, with 75% of this income attributed to the PE in India and 25% allocated to the Head Office in the Netherlands. The DRP instructed the DCIT to verify the correct figure of total contract revenue while computing profit margins.5. Miscellaneous Issues:- Interest under Section 244A: The DCIT erred in not granting interest under section 244A to the appellant.- Penalty Notice under Section 271(1)(c): The DCIT issued a penalty notice without appreciating that the income of the appellant was not taxable in India as per a certificate issued under section 197.The Tribunal allowed the appeal of the assessee, quashing the final assessment order and leaving other grounds raised by the assessee on merits open.