2024 (12) TMI 1634 - HC - Income Tax

Foreign-incorporated assessee taxed as Indian resident under Section 6(3)(ii); AO must follow Section 144C(15)(b) procedure

THE COMMISSIONER OF INCOME TAX – INTERNATIONAL TAXATION -3 Versus ROLLAND ENTERPRISES LTD.

HC held the foreign-incorporated assessee to be taxable as an Indian resident since the AO's findings under Section 6(3)(ii) established control and ... “Eligible assessee” as defined u/s 144C(15)(b) - findings of the AO to treat the Assessee as a resident in terms of provision of Section 6(3)(ii) - CIT(A) found that the control and management of the affairs of the Assessee was in the hands of its Board of Directors who were not the residents of India. HELD THAT:- Assessee is taxable as a resident of India. However, it is not disputed that the Assessee is an eligible assessee under Section 144C. There is no dispute that the Assessee is incorporated under the laws of British Virgin Islands. It is thus a foreign company. Since, the Assessee is an eligible assessee within a meaning of Clause (b) of Section 144C(15) AO was required to follow the procedure as prescribed under Section 144C of the Act. ISSUES PRESENTED AND CONSIDERED 1. Whether assessments completed without issuance of a draft assessment order under Section 144C(1) of the Income Tax Act are unsustainable where the assessee falls within the statutory definition of 'eligible assessee'. 2. Whether the Tribunal erred in disregarding statements and seized documents alleged to establish that control and management of the assessee were situated wholly in India, thereby rendering the assessee a resident under Section 6(3) of the Act. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Requirement of draft assessment under Section 144C(1) for an 'eligible assessee' Legal framework: Section 144C provides for reference to a dispute resolution panel and prescribes a procedure including the issuance of a draft assessment order under subsection (1). Section 144C(15)(b) defines 'eligible assessee' to include, inter alia, any foreign company. The statutory scheme mandates the prescribed procedure for eligible assessees when the variation arises as mentioned in Section 144C(1). Precedent treatment: The Court noted authority treating failure to follow the Section 144C procedure (including issuance of a draft assessment order) as a ground invalidating the assessment process; specifically, the decision of this Court in a reported ruling (referred to in the text) was applied in favour of the assessee. Interpretation and reasoning: The Court examined whether the assessee fell within the statutory description of 'eligible assessee'. The assessee being incorporated under foreign law (British Virgin Islands) qualified as a foreign company and therefore as an eligible assessee under Section 144C(15)(b)(ii). Given that status, the Assessing Officer was obliged to follow the procedural requirement of issuing a draft assessment under Section 144C(1) before passing a final assessment. The admitted non-compliance (no draft assessment issued) thus engaged the statutory protection and remedy contemplated by Section 144C. Ratio vs. Obiter: The holding that non-compliance with the mandatory procedure under Section 144C invalidates the assessment where the assessee is an 'eligible assessee' is ratio. The reliance on the previously decided authority of this Court to support that proposition also forms part of the ratio as applied to the facts. Conclusion: The AO's failure to issue a draft assessment order under Section 144C(1) rendered the assessment unsustainable insofar as the assessee was an eligible assessee (a foreign company). The Tribunal's decision allowing the cross-objections on this ground was upheld. (See cross-reference to Issue 2 where residency was contested but did not negate eligibility under Section 144C.) Issue 2 - Whether control and management facts established residency under Section 6(3) and whether Tribunal erred in ignoring seized material and statements Legal framework: Section 6(3) determines residency of a company based on where its control and management is situated. Evidence of board-level control, location of directors, and locus of decision-making are pertinent to the inquiry. Precedent treatment: The CIT(A) and the Tribunal examined the factual matrix regarding locus of control and management; the Court applied appellate standards to the factual findings made below, with reference to established principles governing residency determinations under Section 6(3). Interpretation and reasoning: The Assessing Officer found the assessee resident on the basis that control and management were situated in India, citing statements and seized documents. The Commissioner (Appeals) disagreed, holding that control and management rested with the board of directors who were not residents of India. The Tribunal upheld the appellate findings. On the appeals, the Court observed that, even assuming competing factual inferences, the critical statutory consequence - that the assessee qualified as an 'eligible assessee' under Section 144C(15)(b)(ii) because it was a foreign company - remained undisputed. Hence, the procedural non-compliance under Section 144C could not be cured by recharacterising the assessee as resident for the years in question without following due process. The Court found no reversible error in the Tribunal's treatment of the evidence and no substantial question of law arising from the factual disputes relied upon by the Revenue. Ratio vs. Obiter: The determination that the Tribunal did not err in its factual appraisal and that factual disputes concerning statements and seized documents did not override the statutory requirement of Section 144C is ratio as applied to these appeals. Any detailed commentary on the weight of particular seized documents or statements would be obiter if it did not affect the statutory conclusion regarding Section 144C compliance; however, the Court's endorsement of the Tribunal's factual conclusions is binding for the present determination. Conclusion: The Tribunal did not err in rejecting the Revenue's contention that seized documents and statements established Indian locus of control and management. Even if the Revenue's factual contentions were credited, the assessee's status as a foreign company and thus an eligible assessee under Section 144C(15)(b)(ii) required adherence to the Section 144C procedure, which was not followed. Accordingly, no substantial question of law was made out against the Tribunal's decision. Integrated disposition Because the assessee indisputably qualified as an 'eligible assessee' under Section 144C(15)(b)(ii) and the mandatory draft-assessment procedure under Section 144C(1) was not complied with, the assessments were unsustainable. The Tribunal's dismissal of the Revenue's appeals and allowance of the cross-objections on that ground was affirmed. The appeals were dismissed for lack of substantial questions of law.