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 AO to compute income only on a protective basis under s. 44DA, the AO was bound by those directions. By assessing the same income on a substantive basis and ignoring the DRP's protective-assessment direction, the AO exceeded jurisdiction and acted in violation of binding directions, rendering the final assessment order void ab initio; the order was quashed and the assessee's additional ground was allowed.

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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.

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