2025 (9) TMI 1582 - AT - Income Tax

DRP order set aside; remand for fresh speaking directions to AO - assessment under section 143(3), not reassessment u/s 147

ITAT Mumbai set aside the DRP directions and remanded the issue to the DRP for fresh, speaking directions to the AO, noting the DRP's order was unclear, ... Assessment order u/s. 143(3) r.w.s. 144C (13) determining the total income from royalty taxable @ 10% - Treating the Charter Hire Charges received as 'Royalty Income' instead of Income Offered on presumptive basis u/s 44BB - HELD THAT:- As noted that the order of the DRP is not clear with regard to the issues discussed and decided therein. It is seen that in the draft order, Ld. AO has mentioned in the concluding para that there is no DTAA with BVI of which the assessee is a Tax Resident, but the order of Ld. DRP as discussed the applicability of DTAA in the case at hand. DRP has mentioned about reopening of the assessment u/s. 147 of the Act and have held that the case was rightly reopened under the relevant provisions. We however, note that this is not a case of reassessment but of normal assessment u/s. 143(3) of the Act. DRP has mixed up the facts of the case and made observations not related to the instant case while the core issue has not been properly examined and the findings/directions on merits are also not clear. We deem it appropriate to restore the matter to Ld. DRP with a direction to properly examine all the issues raised by the assessee and issue fresh directions to the AO vide a speaking order after providing due opportunity of being heard to the assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether the Dispute Resolution Panel (DRP) exceeded its scope or manifested non-application of mind by issuing directions on matters not raised by the assessee and by making observations unrelated to the nature of proceedings. 2. Whether receipts characterized as 'charter hire charges' are taxable as royalty/fees for technical services (FTS) under the source provisions (Section 9) and taxed under Section 115A, or are taxable on a presumptive basis under Section 44BB. 3. Whether the services rendered were connected to extraction and exploration of oil (impacting applicability of Section 44BB and related circular guidance). 4. Whether the absence or presence of a Double Taxation Avoidance Agreement (DTAA) with the tax-resident jurisdiction (BVI) affects source-side taxation and whether DTAA principles were correctly applied by revenue authorities. 5. Whether procedural defects (alleged denial of opportunity / natural justice and issues relating to reassessment procedure) vitiate the assessment or the DRP directions. ISSUE-WISE DETAILED ANALYSIS Issue 1 - DRP's scope, application of mind and issuance of irrelevant directions Legal framework: The DRP under the relevant statutory scheme must consider objections raised by the assessee and issue directions within the scope of matters referred; directions must be clear and address the specific grounds raised. Precedent treatment: The judgment references general principles that DRP directions must be relevant and confined to the reference; misdirected observations or factual mix-ups are impermissible. Interpretation and reasoning: The Tribunal observed that the DRP's order contained material inconsistencies - notably discussion of DTAA applicability and reassessment provisions (Sections 147/148/148A) though the case before the Tribunal was a normal assessment under Section 143(3). The DRP thereby mixed factual/legal matrices not germane to the matter and did not clearly adjudicate the core issues raised by the assessee. Ratio vs. Obiter: Ratio - A DRP must not issue directions based on matters irrelevant to the reference and must address the specific issues raised; directions containing factual/legal confusion amount to non-application of mind and render the directions unsustainable. Obiter - The particular lines of reasoning in DRP (e.g., invocation of certain precedents) are noted but not adopted because of the foundational confusion. Conclusion: DRP directions are unclear and demonstrate mixing up of facts/procedural context; matter requires restoration to DRP for fresh, speaking directions after affording opportunity to the assessee. Issue 2 - Characterisation of charter hire charges: royalty/FTS under Section 9 and taxed under Section 115A versus presumptive taxation under Section 44BB Legal framework: Section 9 sets out source rules for deeming income to accrue or arise in India; Explanation 2 to Section 9(1)(vi) defines royalty/consideration for use of commercial equipment; Section 115A prescribes taxation for certain non-resident incomes; Section 44BB provides presumptive taxation for income from an offshore operation connected to extraction/exploration activities. Precedent treatment: DRP and AO relied upon statutory definitions and judicial pronouncements to treat receipts as royalties/FTS taxable in India; the assessee invoked Section 44BB and Circular No.7/2003 in support of presumptive treatment. Interpretation and reasoning: The DRP accepted AO's functional analysis that the receipts fell within statutory definitions of royalty/FTS and upheld taxation under Section 9 and Section 115A; however, the Tribunal found DRP's treatment deficient because it failed to address the assessee's primary contention (application of Section 44BB) in a clear, reasoned manner. The Tribunal did not itself resolve the substantive classification on merits but held that the DRP must re-examine and issue speaking directions addressing (a) the functional characterisation of the receipts, (b) whether the receipts are for use of equipment/technical services within the statutory meaning, and (c) whether Section 44BB's deeming/provisional regime applies. Ratio vs. Obiter: Ratio - Absent clear DRP adjudication on the contest between Sections 9/115A and 44BB, the matter cannot be sustained and must be re-determined by DRP. Obiter - The DRP/AO's initial functional analysis favoring royalty/FTS is recorded but not endorsed by the Tribunal as a final conclusion. Conclusion: Classification dispute is material and unresolved by the DRP; DRP to reconsider and provide reasoned findings on applicability of Section 44BB versus taxation as royalty/FTS. Issue 3 - Connection of services to extraction and exploration of oil and relevance of Circular No.7/2003 Legal framework: Section 44BB targets income from activities in connection with extraction/exploration of mineral oils; ministerial circulars (Circular No.7/2003) provide administrative guidance on characterisation and tax treatment in specific factual scenarios. Precedent treatment: Assessee relied on the charter party agreement and the circular to argue that services were connected to exploration/extraction and thus attract Section 44BB presumptive treatment; DRP/AO recorded the contrary conclusion without fully engaging the contractual and circular-based submissions. Interpretation and reasoning: The Tribunal found that DRP did not properly appreciate or adjudicate the contents of the charter party agreement and the essence of the circular. Because these contentions were core to the assessee's case and not clearly addressed, the Tribunal declined to decide the substantive nexus question and remitted it for fresh consideration. Ratio vs. Obiter: Ratio - The DRP must examine contractual terms and Circular No.7/2003 and render specific findings on whether the services relate to extraction/exploration of oil for purposes of Section 44BB. Obiter - The Tribunal did not make any factual finding on the contract's true nature. Conclusion: Nexus to extraction/exploration remains an open question to be decided by the DRP after detailed consideration of the charter party agreement and the circular. Issue 4 - Applicability of DTAA with the jurisdiction of tax residence (BVI) and its impact on source taxation Legal framework: DTAA principles govern residence/benefits but require fulfillment of residency/substance tests; where no DTAA benefit exists, domestic source provisions operate subject to statutes. Precedent treatment: DRP discussed DTAA applicability (including reliance on judicial decisions) in some detail despite AO's draft indicating no DTAA with BVI; the Tribunal noted this discussion but emphasised that DRP's factual mix-up undermines the reliability of its directions. Interpretation and reasoning: Tribunal did not settle DTAA applicability; instead it held that DRP must properly assess whether DTAA benefits are claimable (including residency/substance criteria) and whether, in any event, the source nexus under Section 9 suffices to tax the receipts independently of DTAA analysis. Ratio vs. Obiter: Ratio - DRP must address DTAA-related contentions only insofar as they are relevant to issues genuinely in dispute and based on correct factual foundation. Obiter - Specific conclusions reached by DRP on DTAA were not adopted due to procedural/factual confusion. Conclusion: DTAA issues to be re-examined by DRP in proper factual and legal context and with explicit findings. Issue 5 - Procedural fairness, alleged denial of opportunity and reassessment procedural references Legal framework: Principles of natural justice require reasonable opportunity to be heard; reassessment (Sections 147/148/148A) has distinct procedural safeguards which differ from normal assessment provisions. Precedent treatment: DRP concluded AO complied with procedural requirements and that reassessment was valid; Tribunal observed that because the matter is a normal assessment, DRP's commentary on reassessment procedures is misplaced. Interpretation and reasoning: Tribunal found no cogent finding by DRP demonstrating prejudice to the assessee from procedural acts; however, the DRP's invocation of reassessment machinery where a normal assessment is on record indicates factual/legal conflation, necessitating remediation. Ratio vs. Obiter: Ratio - Procedural complaints must be decided on the correct statutory footing; mischaracterisation of the proceeding type undermines the DRP's directions. Obiter - The Tribunal did not determine whether any specific notice/ opportunity defect occurred on the merits. Conclusion: Procedural issues must be re-addressed by DRP in the proper statutory context and after affording the assessee an opportunity to be heard. Overall Disposition The Tribunal found that the DRP's order contained factual and legal confusions, failed to address core issues raised by the assessee, and issued directions that were unclear and, in part, irrelevant to the nature of the proceedings. In the interest of justice the matter is restored to the DRP with directions to examine all issues raised by the assessee, provide fresh, reasoned (speaking) directions on (inter alia) classification of receipts (Section 9/115A v. Section 44BB), nexus to extraction/exploration and relevance of Circular No.7/2003, DTAA applicability, and procedural objections, after affording the assessee a proper opportunity of being heard.