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2016 (4) TMI 45 - DELHI HIGH COURT

2016 (4) TMI 45 - DELHI HIGH COURT - TMI - Validity of assessment order passed by the AO - Dispute Resolution Panel (DRP) declared that the AO lacked jurisdiction to deal with an issue - AO nevertheless proceeded to pass a final assessment order in the teeth of the order of the DRP. - Eligible assessee in terms of Section 144C(15)(b) - Matter was referred to Transfer Pricing Officer (‘TPO’) for determination of the arm’s length price (‘ALP’) - Held that:- In the first place the Court would like .....

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oth the Petitioners were not ‘eligible Assessees’ could not have been ignored by the AO.

It appears to the Court that it is plain that under Section 144C, the AO should have proceeded to pass an order under Section 143 (3) of the Act. Instead the AO confirmed the draft assessment order passed under Section 144C (1) of the Act. This, therefore, vitiated the entire exercise. The Court has no hesitation in holding that the final assessment order dated 28th January 2015 is without jurisdi .....

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nitio and quashed on that basis. The orders consequential thereto also do not survive. - W. P. (C) 2384/2015 & CM No. 4277/2015, W.P.(C) 2397/2015& CM No. 4298/2015 - Dated:- 23-3-2016 - S. Muralidhar And Vibhu Bakhru, JJ. For the Petitioner : Mr. Porus Kaka, Senior Advocate with Mr. Prakash Kumar and Mr. Divesh Chawla, Advocates For the Respondents : Mr. Bhagvan Swarup Shukla, CGSC and Mr. Dev P. Bhardwaj, CGSC with Mr. Jitendra Tripathi, Advocate for UOI. Mr. Ashok K. Manchanda, Senior Standin .....

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M/s. ESPN Star Sports Mauritius S.N.C. ET Compagnie (now known as ESS Advertising (Mauritius) S.N.C et Compagnie) (hereinafter referred to as ESPN Star Sports ) is a partnership firm established under the laws of Mauritius. It was established by ESPN Mauritius Limited (now known as Worldwide Wickets, Mauritius) having 99.9% share in profit and ESS Asian Network Pvt. Limited (incorporated in Singapore) having 0.1% share. ESPN Star Sports is engaged in the business of allotting advertising time an .....

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stablished under the laws of Mauritius. It was also established by ESPN Mauritius Limited (now known as Worldwide Wickets, Mauritius and also incorporated in Mauritius) having 99.9% share in profit, and ESS Asia Limited (incorporated in Malaysia) having 0.1% shares. ESS Distribution is engaged in the business of distribution of sports and sports related television programmes broadcast by ESPN Star Sports, Singapore. ESS Distribution has also entered into agreements with ESPN Software India Priva .....

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ereinafter referred to as the Treaty ) since there was no permanent establishment (PE) of either Petitioner in India in terms of Article 5 of the said Treaty. It is stated that in the notes to the return of income filed by the Petitioners, it was clearly mentioned that each of them was a partnership firm incorporated on 29th March 2002 under the laws of Mauritius. 5. Both the returns were picked up for scrutiny by the AO. Since both the Petitioners had entered into international transactions dur .....

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the course of the assessment proceedings, the AO, i.e., the Additional Director of Income Tax, Range 1 (ADIT), International Taxation specifically asked each of them as to why the status of the firm should not be treated as foreign company and taxed accordingly. 7. By a separate letter dated 27th March 2014 each of the Petitioners filed submissions before the AO pointing out the difference between a foreign company and a foreign partnership firm. It was pointed out that neither Petitioner could .....

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h eligible assessee . 9. Section 144C (15) (b) defines eligible assessee as: (i) any person in whose case the variation referred to in sub-Section (1) arises as a consequence of the order of the Transfer Pricing Officer passed under sub-Section (3) of Section 92CA; and (ii) any foreign company. 10. The proceedings envisaged under Section 144C (2) is that the eligible assessee shall, within 30 days of the receipt of the draft order, either file his acceptance of the variations to the AO or file h .....

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nt. The DRP, under Section 144C (8) of the Act, has the power to confirm, reduce or enhance the variation proposed in the draft assessment order. Section 144C (10) of the Act provides that every direction issued by the Dispute Resolution Panel shall be binding on the Assessing Officer. 12. Further Section 144C (13) of the Act provides that the AO shall, upon receipt of the directions issued under Section 144C (5), complete the assessment in conformity with the said directions issued under Sectio .....

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5) (b) of the Act. It was pointed out that neither of them were the person in whose case the variation arose as the consequence of the order of the TPO passed under Section 92CA (3) of the Act. Further, neither of them were a foreign company . 14. The AO passed the draft assessment order in the case of each of the Petitioners on 28th March 2014. In para 1.2 of the draft assessment order for ESS Distribution and Para 2 of the draft assessment order for ESPN Star Sports, the AO noted the fact that .....

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ss, the AO, i.e., the ADIT, computed the total taxable income as ₹ 406,95,60,867 in the case of ESS Distribution and ₹ 94,93,95,777 in the case of ESPN Star Sports. In the above draft assessment orders, each of the Petitioners was informed that if it intends to file objections with the DRP, it should do so within 30 days of the receipt of the order or file an acceptance of the order within the same period. If no objections are received during that period, the assessment would be comp .....

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etitioners to represent their case and file their respective submissions. A copy of the notices were also sent to the AO, i.e, ADIT to represent his case. 17. Pursuant to the above notices, the Petitioners filed their respective written submissions. In each of the case, the DRP passed a separate order dated 26th December 2014 accepting the plea of the Petitioners that neither of them was eligible assessee in terms of Section 144C (15) (b) of the Act. Para 4.2 of both the orders of DRP reads as u .....

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Commissioner of Income Tax-I, International Tax, New Delhi as well as the Additional Commissioner of Income Tax, Range-I, International Transactions, New Delhi and the Assessee. The above orders were binding on the AO under Section 144C (10) of the Act. He, therefore, ought to have, consistent with the said orders, not proceeded to pass final assessment orders on the basis of the draft assessment orders passed by him. However, the AO proceeded to pass final assessment orders on 28th January 201 .....

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order which is grossly illegal, against the intent of legislature, without following the basic principles of natural justice and adopting very narrow interpretation of the provisions of the Act. Learned DRP has held that the Assessee is not an eligible assessee as per Act. 19. It was further stated in the final assessment orders passed by the AO that the DRP did not give the AO any opportunity prior to deciding to dismiss the proceedings in limine . The AO proceeded to analyse the scope of the .....

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he case of each of the Petitioners. 21. In these circumstances, the Petitioners have approached this Court under Article 226 of the Constitution of India challenging the final assessment order passed by the AO, i.e., ACIT. 22. At the first hearing of the writ petitions, i.e., on 11th March 2015 this Court, while directing notice to issue in these writ petitions, stayed the operation of the final assessment order dated 28th January 2015 issued by the AO. 23. At the subsequent hearing on 15th July .....

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4 accepting the plea of the Petitioners that neither of them was an eligible assessee within the meaning of Section 144C (15) of the Act. Mr. Kaka submitted that under Section 144C (13) of the Act, the AO was bound to issue an order in conformity with the order of the DRP. Mr. Kaka further submitted that although the DRP declined to issue any direction, its finding that neither of the Petitioners was eligible assessee was binding on the AO and he could not have proceeded to pass the final assess .....

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. Deputy Commissioner of Income Tax (decision dated 18th February 2016 in W.P. (L) No. 351 of 2016) and decision of this Court dated 17th February 2016 in W.P. (C) No. 4262 of 2015 [Honda Cars India Limited (Formerly - M/s. Honda Siel Cars India Limited) v. Deputy Commissioner of Income Tax] . 27. Mr. Kaka drew attention to the deliberate disobedience by the AO of the order of the DRP and also questioned the validity and legality of the said order. According to Mr. Kaka, this course of action wa .....

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bove arguments, Mr. Ashok K. Manchanda, learned Senior counsel appearing for the Revenue, submitted that while the final assessment order cannot be justified in law, the AO ought to have passed the assessment order under Section 143 (3) of the Act against the Petitioners and the appeal could have been filed by the Petitioners before the Commissioner of Income Tax (Appeals) [ CIT (A) ]. While he was not aware that the Petitioners have been issued notice under Section 147 of the Act, Mr. Manchanda .....

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o Petitioners do not satisfy the conditions of an eligible assessee in terms of Section 144 (15) (b) (ii) of the Act. As already noticed under Section 144C (10) of the Act the AO had no option but to comply with the order of the DRP. Even if no direction was issued by the DRP under Section 144C (5) of the Act, the fact that the DRP held that both the Petitioners were not eligible Assessees could not have been ignored by the AO. 30. It appears to the Court that it is plain that under Section 144C .....

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also held to be invalid. 31. It is a matter of concern that the AO has in the present case has chosen to label the order of the DRP to be invalid and that is the justification for not complying with the said order. As already noticed, the DRP, in terms of Section 144C (15) (a) is a collegium of three Principal Commissioners or the Commissioner of Income Tax. The DRP admittedly is the superior authority in relation to an AO who in this case appears to be Additional CIT. Section 144C (10) read wi .....

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t of Andhra Pradesh set aside the impugned order while allowing the writ petition notwithstanding that the Petitioner had a statutory remedy available to it. 32. The situation as far as the present case is concerned is no different. The said order of the Andhra Pradesh High Court was upheld by the order of the Supreme Court when it dismissed Special Leave Appeal (Civil) 16694 of 2013 by its order dated 27th September 2013. 33. Recently the High Court of Bombay has in International Air Transport .....

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ed the final assessment order under Section 143 (3) of the Act instead of passing a draft assessment order under Section 144C (1) of the Act and then sought to issue a Corrigendum modifying the final order of the assessment to be read as a draft assessment order but beyond the period prescribed for limitation for passing such order. The High Court held the entire exercise to be without jurisdiction. 35. In Pankaj Extrusion Limited v. Assistant Commissioner of Income Tax (2011) 241 CTR (Guj) 390 .....

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eligible assessee under Section 144C (15) (b) of the Act. Answering the question is in the negative, the Court held that the draft assessment order of the AO is null and void and quashed on that basis. In para 15 of the said decision, it was observed as under: 15. Since we have quashed the draft assessment order, the question that the assessment has now become time barred as left open and it is open to the parties to take recourse of such remedy, as may be available to them in law. 37. As regard .....

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Assessee was claiming they fell under Entry 85.47. The impugned order of the AO was set aside by the Collector (Appeals) who issued a direction to the AC to pass a fresh reasoned and speaking order. However, the AC declined to follow the order of the Collector (Appeals) and reiterated his earlier decision that was set aside by the Collector (Appeals). The writ petition filed by the Assessee was allowed by the Bombay High Court against which the Union of India went before the Supreme Court. 38. T .....

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ctual mala fides but with the fact that the officers, in reaching their conclusion, by-passed two appellate orders in regard to the same issue which were placed before them, one of the Collector (Appeals) and the other of the Tribunal. The High Court has, in our view, rightly criticised this conduct of the Assistant Collectors and the harassment to the Assessee caused by the failure of these officers to give effect to the orders of authorities higher to them in the appellant hierarchy. It cannot .....

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ire that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not acceptable to the department - in itself an objectionable phrase - and is the subject matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent court. If this healthy rule is not followed, the result would only be undue harassment to Assessees and chaos in .....

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his own understanding and therefore, had gone to the extent of overreaching the orders of his superior authority, that is, the Commissioner (Appeals). 40. Relying on the decision in Union of India v. Kamlakshi Finance Corporation Limited (supra) the Court set aside the rejection of claim of interest by the Petitioner in that case and directed the Assistant Commissioner to comply with the orders passed by the Commissioner Appeals). 41. The language used in the present case by the AO while disagr .....

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ircumstances, the Court, while setting aside the final assessment order dated 28th January 2015, directs that the draft assessment order, the order of the DRP, the final assessment order as well as this order shall be placed before the concerned Commissioner who is administratively supervising the work of Additional CIT who passed the draft and final assessment order. The Commissioner will thereafter proceed in accordance with law after issuing notice to the concerned AO and affording him an opp .....

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