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2017 (11) TMI 132 - HC - Income TaxReopening of assessment - Income earned from the Scorpio agreement would be taxable in the hands of the Petitioner, as royalty under Section 9 (1) (vi) and also under DTAA - difference between Form 26 AS and assessed income - Held that:- In respect of these very Assessee and for the same AY 2010-11, the earlier draft assessment order passed by the AO under Section 144C of the Act has already been set aside by its judgment dated 23rd March 2016. That judgment referred to the order of the DRP which had held that both the Assessees were not eligible Assessee under Section 144C (15) of the Act and that order of the DRP was binding on the AO. It was further held by this Court that the AO could not have disregarded the finding directions of the DRP and passed the final assessment order. This was an issue of jurisdiction of the AO to proceed under Section 144C of the Act against an entity which is a partnership firm incorporated outside India. The fact that is undeniable is that the AO continues to be bound by the order of the DRP which was by this Court by its decision dated 23rd March 2016 in respect of the same Assessees for the same AY 2010-11. Since the Revenue has not challenged that judgment, the AO had no option but follow the DRP's order. Further, the AO was aware that the earlier attempt at disobeying the DRP's order led to invalidation of the draft and the final assessment order. What is surprising is that while disposing of the objections to the reopening of the assessment, the AO again chose to only record that the DRP held that both the Assessees were not eligible Assessees. The AO did not refer to this Court's order dated 24th March 2016. This is despite the fact that the AO was disposing of the objections more than nine months after the judgment of this Court. This conduct of the AO is simply unacceptable. The passing of the draft assessment order pursuant to reopening of the assessment under Section 147/148 of the Act, in respect of both the Assessees and for the same AY 2010-11, is clearly in the teeth of the order of the DRP as well as judgment of this Court and is therefore, unsustainable in law. On this ground, both the draft assessment orders in respect of ESS Distribution and ESS Advertising for AY 2010-11 dated 19th December 2016 are liable to be set aside. Referring to reason for reopening that that the amount received by ESS Distribution from Scorpio, pursuant to the agreement entered into between them, was taxable under Section 9 (1) (i) of the Act read with the relevant provisions of the DTAA, the Court has been shown a computation of income and notes to computation filed by ESS Distribution in the original assessment proceeding. It is clearly mentioned therein that during the year in question ESS Distribution has not conducted any business with Scorpio and accordingly, there were no receipts from Scorpio. Therefore, the said reason recorded for reopening the assessment was apparently invalid. Even as regards the second reason viz., the difference between form 26 AS and the assessed income of the Assessee, all this forms part of the assessment proceeding. There was no new material for the AO to come into the conclusion that any other income arose during the AY in question that was left out from consideration. There was no nexus between the reasons to believe that income has escaped assessment and any new tangible material placed on record before the AO. As regards ESS Advertisement, there was only one reason for reopening of the assessment which is that 30% of the gross advertising revenue was assessed as an attributable income to Indian PE amounting to USD 418,939 had been left out for being considered - The determination of business income attributable to the India PE on an estimated percentage basis was deemed to have considered and taken into account all business income and expenses into its fold. There was no occasion for lifting any particular item reflected in the accounts for a specific treatment. Further the above aspect was already a part of the original assessment and there was no fresh tangible material available with the AO to form reasons to believe that any income of the Assessee escaped assessment. This order, therefore, is mere change of opinion. Existence of PE in India - Held that:- When the Assessee had filed their respective returns for 2009-10 and intimation was sent under Section 143 (1) of the Act, it is difficult to believe that the Revenue was unaware of the Assessees having a PE in India particularly when in each of the other AYs the matter was contested and is pending at various levels of the hierarchy. All this goes to show that the Revenue was unable to point out any fresh tangible material which could form the basis for believing the argument on this aspect. Assessee appeal allowed.
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