SA WINONA VENTURES LIMITED,MUMBAI vs. DEPUTY COMMISIONER OF INCOME TAX INTERNATIONAL TAXATION 4(2)(1), MUMBAI

In ground no.1.1, the assessee has raised a legal issue pertaining to the validity of the impugned assessment order.

Brief facts are, the assessee is a non–resident company incorporated in Cyprus and is also a tax resident of that Country. For the assessment year under dispute, the assessee filed its return of income on 25th November 2015, declaring total income of ` 6,97,37,520. The income declared by the assessee represented interest income. Claiming benefit under India–Cyprus Tax Treaty, the assessee paid tax @ 10% as per Article–11(2) of the Tax Treaty. In the course of assessment proceedings, the Assessing Officer while examining assessee’s claim of benefit under Article–11(2) of the Treaty relating to concessional rate of tax, ultimately, concluded that the assessee would have been entitled to the beneficial rate of tax if it is the beneficial owner of the interest income. Thus, he held that the assessee not being a beneficial owner is not entitled to concessional rate of tax under the Tax Treaty. Accordingly, rejecting assessee’s claim, the Assessing Officer, though, did not vary the income returned by the assessee, however, he taxed such income @ 40% while framing the draft assessment order under section 143(3) r/w section 144C(1)of the Act on 22nd December 2017. Against the draft assessment order so passed, the assessee raised objections before learned DRP, inter–alia, on the ground that there being no variation in the income returned by the assessee, the draft assessment order passed under section 144C(1) of the Act is invalid. The learned DRP

While reiterating the submissions made before learned DRP, the learned Counsel for the assessee submitted, since, the Assessing Officer has not varied the income returned by the assessee, he could not have proceeded under section 144C(1) of the Act. Thus, he submitted, not only the draft assessment order passed by him is invalid, but for the very same reason, the impugned assessment order has also no legs to stand. Further, he submitted, the amendment made to section 144C(1) by Finance Act, 2020, enlarging the scope of the aforesaid provisions is prospective and will apply from 1st April 2020 and not to any period prior to 1st April 2020. In support of such contention, the learned Counsel for the assessee relied upon the following decisions:–

We have considered rival submissions and perused the material on record. Facts on record clearly reveal that the assessee had filed its return of income for the impugned assessment year declaring total income of ` 6,97,37,520. Admittedly, in the draft assessment order dated 22nd December 2017, passed under section 143(3) r/w section 144C(1), the Assessing Officer has neither varied nor disturbed the income returned by the assessee. This is evident from the computation of income made by him in Para–18 of the draft assessment order. The only variation made by the Assessing Officer is with regard to the applicable tax rate. Denying assessee’s claim of concessional rate of tax under the Tax Treaty the Assessing Officer has taxed the income @ 40%. Provisions of section 144C of the Act which provides for reference to the DRP was introduced to the statute by Finance (no.2) Act, 2009, with retrospective effect from 1st April 2009. A careful reading of section 144C(1) of the Act makes it clear that in case of an eligible assessee if the Assessing Officer intends/proposes to make any 5 Firstsource Solutions Ltd. variation in the income or loss returned which is prejudicial to the interests of the assessee, then he should pass a draft assessment order and forward a copy of such order to the assessee for enabling him to either accept the variation or contest the variation in the mode and manner prescribed under sub–section (2) of section 144C of the Act. Therefore, the conditions which need to be satisfied for framing the draft assessment order are, firstly, the person in respect of whom the assessment order is to be passed must be an eligible assessee and secondly, there must be a variation in the income or loss returned which is prejudicial to the interests of such assessee. Insofar as the facts of the present appeal are concerned, no doubt, the first condition is fulfilled, as, in course of hearing before us no arguments have been made challenging the status of the assessee as an eligible assessee in terms of section 144C(15)(b) of the Act. However, the second condition is not fulfilled as the Assessing Officer has not made any variation qua the income returned by the assessee which is prejudicial to the assessee. That being the case, in our considered opinion, the Assessing Officer could not have proceeded to pass a draft assessment order under section 144C(1) of the Act. Though, learned DRP has tried to justify the action of the Assessing Officer by observing that even a variation in tax rate which is prejudicial to the assessee would amount to variation in income, thereby, fulfilling the condition of section 144C(1) of the Act, however, we are unable to agree to such view. The 6 Firstsource Solutions Ltd. language used in section 144C(1) of the Act prior to its amendment by Finance Act, 2020, with effect from 1st April 2020, is plain and simple and does not leave room for any ambiguity in interpreting the same. The language used in section 144C(1) of the Act specifically says “any variation in the income or loss returned which is prejudicial to the interests of such assessee”. Thus, going by the plain meaning of the language used in the aforesaid provisions, there cannot be any other interpretation than to hold that only in a case where the variation in income or loss returned by the assessee is prejudicial to the interests of such assessee, the Assessing Officer can frame a draft assessment order. In the facts of the present appeal, admittedly, the Assessing Officer has not made any variation to the income returned by the assessee which can be considered to be prejudicial to the interests of the assessee. Notably, the Co–ordinate Bench in IPF India Property Cyprus (no.1) Ltd. (supra), while dealing with the factually identical situation involving similar issue has held as under:– “ We have heard the rival submissions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.

So far as the first issue is concerned, we find that, in the present case, there are no variations in the returned income and the assessee income. The controversy is thus confined to the question as to what will be the rate on which income returned by the assessee is to be taxed. While the assessee has claimed taxation @ 10% under article 11(2) of the India Cyprus DTAA, the Assessing Officer has declined the said treaty protection on the ground that the assessee was not beneficial owner of the said interest, and, accordingly, brought the income is to tax@ 40% thereof. There is, quite clearly, no variation in the quantum of income. The question whether it was a case in which the Assessing Officer could have issued the draft assessment order, on the facts of this case, needs to be examined in the light of provisions of Section 144C(1) which provides that, “The Assessing 7 Firstsource Solutions Ltd. Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward5 a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee [Emphasis, by underlining, supplied by us]. The assessee before us is a non-resident company incorporated, and fiscally domiciled, in Cyprus. Accordingly, in terms of Section 144C(15)(b)(ii), the assessee is an eligible assessee but then there is no change in the figure of income returned by the assessee vis-a-vis the income assessed by the Assessing Officer. Clearly, there is no variation in the income returned by the assessee. There is, therefore, no question of a draft assessment order being issued in this case. It is also important to note that the Finance Bill proposes to make the issuance of draft assessment orders in the case of eligible assessees mandatory even when there is no variation in the income or loss returned by the assessee but then this amendment seeks to amend the law with effect from 1st April 2020. Explaining this amendment, Memorandum Explaining Amendments in the Finance Bill 2020 states as follows: Amendment in Dispute Resolution Panel (DRP). Section 144C of the Act provides that in case of certain eligible assessees, viz., foreign companies and any person in whose case transfer pricing adjustments have been made under sub-section (3) of section 92CA of the Act, the Assessing Officer (AO) is required to forward a draft assessment order to the eligible assessee, if he proposes to make any variation in the income or loss returned which is prejudicial to the interest of such assessee. Such eligible assessee with respect to such variation may file his objection to the DRP, a collegium of three Principal Commissioners or Commissioners of Income tax. DRP has nine months to pass directions which are binding on the AO. It is proposed that the provisions of section 144C of the Act may be suitably amended to:- (A) include cases, where the AO proposes to make any variation which is prejudicial to the interest of the assessee, within the ambit of section 144C; (B) expand the scope of the said section by defining eligible assessee as a non-resident not being a company, or a foreign company. This amendment will take effect from 1st April, 2020. Thus, if the AO proposes to make any variation after this date, in case of eligible assessee, which is prejudicial to the interest of the assessee, the above provision shall be applicable.

Before parting, we must deal with the contention of the learned Departmental Representative regarding a direction to the Assessing Officer for re–opening of assessment under section 147 of the Act. We are afraid we cannot entertain such a plea made by the Revenue. Presently, we are only concerned with the validity of the assessment orders passed under section 144C(1) and 144C(13) of the Act. That being the case, we have to confine our decision only to that issue. Ground no.1.1, is allowed.

In the result, appeal is allowed as indicated above. Order pronounced through notice board under rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1963, on 05.08.2020