2026 (1) TMI 75 - AT - Income Tax

Non-resident service fees from Indian customer taxed via alleged PE; protective-only income computation u/s44DA enforced, assessment quashed.

Where the DRP held the non-resident's receipts from services to an Indian customer taxable in India on the footing of a PE, but specifically directed the ... Income taxable in India or not? - services rendered by the assessee to M/s RIL as taxable in India in terms of Article 13 of India-UK DTAA and further directed that the receipt can also be treated as FTS - DRP has held that the income received is taxable in India as the assessee is having PE in India however, directed the AO to compute the income of the assessee on protective basis u/s 44DA HELD THAT:- As observed above in Assessment Years 2016-17 and 2017-18, DRP has held that the income received is taxable in India as the assessee is having PE in India however, directed the AO to compute the income of the assessee on protective basis u/s 44DA of the Act but the AO had not followed such directions in true spirit and completely ignored them and computed the income of the assessee on substantive basis. As observed above, facts are identical and AO has computed the income of the assessee on substantive basis though there is specific directions given by ld. DRP to charge income in the hands of assessee on “protective basis”, therefore, in our view, the AO has exceeded his jurisdiction and flouted the directions given by the Ld. DRP, thus, the final order was passed in violation of such directions of ld. DRP is void ab initio and is hereby quashed. In the result, the additional ground of appeal taken by the assessee is allowed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the final assessment orders were void ab initio for non-adherence to binding directions of the DRP, contrary to the mandate of section 144C(10) read with section 144C(13) of the Act, where the DRP had directed taxation on a 'protective basis' but the Assessing Officer taxed on a 'substantive basis'. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Non-implementation of binding DRP directions-validity/jurisdiction of final assessment orders Legal framework (as discussed by the Tribunal): The Tribunal examined the statutory scheme of section 144C and noted that (a) the DRP issues directions for guidance to complete the assessment; (b) such directions are binding on the Assessing Officer under section 144C(10); and (c) the Assessing Officer must complete the final assessment in conformity with the DRP directions under section 144C(13). The Tribunal treated these requirements as mandatory. Interpretation and reasoning: The Court found as a matter of record that the DRP explicitly proceeded on the footing that the factual matrix remained the same as earlier years and therefore followed its earlier directions. Those directions included that, while receipts could be treated as FTS, the taxation under section 44DA was to be on a 'protective basis'. Despite reproducing the DRP directions in the final assessment order, the Assessing Officer computed and taxed the receipts on a substantive basis. The Tribunal held this to be a failure to implement the DRP directions 'in letter and spirit', amounting to the Assessing Officer exceeding jurisdiction and flouting binding directions. Conclusions: The Tribunal held that the final assessment orders were passed in violation of binding DRP directions and therefore were wholly without jurisdiction/void ab initio, and quashed them for both assessment years. Having quashed the assessments on this jurisdictional ground, the Tribunal held that all other grounds on taxability/PE/FTS merits became academic and were not adjudicated.