Delhi HC: On failure to arrive at logical conclusion under Sec 144C of I-T Act, AO cannot initiate reopening proceedings in absence of material to conclude escapement of income

Read Judgement: M/s ESS ADVERTISING MAURITIUS SNC ET COMPAGNIE versus ASSISTANT COMMISSIONER OF INCOME TAX

Pankaj Bajpai

New Delhi, July 9, 2021: The Delhi High Court has ruled that failure to arrive at a logical conclusion in proceedings under section 144C of the Income Tax Act cannot become the ruse for initiating proceedings under sections 147/148 of the Act in the absence of new material emerging before Assessing Officer which gives reason to believe income escaping assessment. 

A Division Bench of Justice Rajiv Shakdher and Justice Talwant Singh observed that when an assessee was not ‘eligible assessee’ within the meaning of Sec 144C(15)(b) and its declared status was non-resident foreign partnership firm, then AO cannot take recourse to procedure for assessment provided u/s 144C. 

Going by the background of the case, the assessee i.e., ESSD, is a partnership firm established under the laws of Mauritius and engaged in the business of distribution of sports and sports-related television programmes broadcast by ESPN Star Sports, Singapore via non-standard television. Noticing international transaction of assessee with its Associated Enterprise SSIPL regarding receipt towards gross subscription remittance, the matter was referred to the TPO. 

Although, the TPO stated that SSIPL was being subjected to a transfer pricing audit and that necessary action, if any, would be taken in its case, the AO passed a draft assessment order u/s 144C(1)/143(3) of Income tax Act, proposing addition on account of the subscription fee received by ESSD, which, according to the AO took the character of royalty. This proposal by AO was taken as the alternate route of treating the subscription income as royalty as the net tax effect was higher and therefore beneficial to the Revenue Department.

When the matter reached before the Dispute Resolution Panel (DRP), it was concluded that ESSD was not an “eligible assessee” within the meaning of Section 144C(15)(b). This order triggered the proceedings u/s 147 and reopening notice u/s 148 was issued by the AO qua ESSD.

While reiterating that once a scrutiny notice was issued u/s 143(2), the route open, if at all, to the AO for framing an assessment order was the one provided u/s 143(3), the High Court observed that when Transfer Pricing Officer (TPO) has concluded that no action is called for qua assessee though their AE was being subjected to TP Audit, then the AO cannot take aid of assessment regime prescribed u/s 144C. 

The Court further observed that the AO cannot continue with the proceedings based on the same material which was examined and qua which opinion was rendered by the AO while passing the draft assessment orders. 

There is no rebuttal that before the draft assessment orders for the AY in issue were passed, there was in place the order of the DRP concerning the assessees, which noted that the petitioners were not eligible assesses within the meaning of Section 144C(15)(b). Pertinently, the assessee’s declared status, even then, was a non-resident foreign partnership firm. Therefore, at the relevant time, the AO could not have taken recourse to the procedure for assessment provided u/s 144C, opined the Bench. 

The Bench also found that despite their previous rulings that assessment procedure provided u/s 144C was only available against eligible assessees, the AO chose to ignore the dicta; although the AO knew, that the TPO had not ordered any variation in income and that the status of the assessee was not in doubt. 

“There can be no dispute that the material that has been used for triggering the proceedings is the same material that was available to the AO while passing the draft assessment orders. The only argument advanced is that the exercise did not culminate in the passing of the orders u/s 143(3). Clearly, the AO took recourse to Section 147/148 as she found that she did not have any room to vary the taxable income declared by the assessee, as proposed, under the provisions of Section 143(3) of the Act”, noticed the Bench. 

The Division Bench of this Court in KLM Royal Dutch Airlines vs. Assistant Director of Income-tax also held that the AO has no power to carry out an assessment based on a mere change of opinion on the same set of facts and materials which was available on record. 

Hence, the High Court allowed the assessee’s petition and quashed the reopening proceedings.