Loading judgment…
Facts
Bechtel Limited, a UK resident, provided engineering and procurement services to Reliance Industries Limited (RIL) in India, declaring the income as non-taxable. The Assessing Officer (AO) held the assessee had a Permanent Establishment (PE) in India and treated the receipts as Fees for Technical Services (FTS) under Section 9(1)(vii) and Article 13 of the India-UK DTAA, taxing them on a substantive basis. The Dispute Resolution Panel (DRP) confirmed the PE and FTS treatment but directed the AO to tax the income on a "protective basis" under Section 44DA of the Income Tax Act, 1961. The AO, however, issued the final assessment order taxing the income on a substantive basis, disregarding the DRP's specific binding direction.
Held
The Income Tax Appellate Tribunal (ITAT) observed that the facts were identical to earlier assessment years where a coordinate bench had quashed similar assessment orders. It held that the AO's final assessment order, which failed to comply with the binding directions of the DRP (to tax income on a protective basis), was void ab initio and without jurisdiction, as mandated by Section 144C of the Income Tax Act. Consequently, the assessment orders for both Assessment Years 2018-19 and 2020-21 were quashed.
Key Issues
Whether the Assessing Officer's final assessment order, passed by taxing income on a substantive basis despite the Dispute Resolution Panel's binding direction to tax it on a protective basis, is void ab initio for non-adherence to the mandatory provisions of Section 144C of the Income Tax Act, 1961.
Sections Cited
143(2), 143(3), 144C, 144C(1), 144C(5), 144C(8), 144C(10), 144C(13), 144C(15)(b), 9(1)(vii), 44DA, 270A(9)(a), 153(3)B, 147, 148, Article 13 (India-UK DTAA), Article 6 (India-UK DTAA), Article 7 (India-UK DTAA)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH ‘D’: NEW DELHI
Before: SHRI VIKAS AWASTHY & SHRI MANISH AGARWAL
O R D E R [ PER MANISH AGARWAL, AM: Captioned appeals are filed by the assessee against the order passed by the Assessing Officer u/s 143(3) r.w.s. 144C dated 09.06.2022 in term of the directions given by the DRP dated 02.05.2022 for Assessment Years 2018-19 and 2020-21.
2. Since the issues involved in both the appeals are common and interlinked, they are heard together and decided by a common order. First, we take the assessee’s appeal in AY 2018-19.
1. vs. ACIT 3. Briefly stated the facts are that the assessee had filed its return of income on 09.10.2018 declaring total income at Rs.5,13,10,473/- and claimed the same as non- taxable in India. The assessee is engaged in the business of designing and building projects including power plants, refineries, railway systems and communication networks. The case of the assessee was selected for scrutiny and notice u/s 143(2) of the Act was issued on 22.09.2019.
4. The assessee company was awarded a contract by Reliance Industries Limited (RIL) for engineering and procurement services related to its plant at Jamnagar SEZ and DTA area for off-side and utilities and an Engineering and Procurement Support Services Agreement. The agreement was entered into with M/s Reliance Industries Limited in the year 2012 and as per the terms of the contract, the assessee company is responsible for providing certain engineering information, engineering services, and support services in relation to procurement of machinery and equipment in relation to the construction of plant at RIL’s refinery. The assessee declared total Revenue of Rs.5,13,10,473/- received during the year from engineering and procurement support services provided to RIL which is not taxable in India as it has no Permanent Establishment (PE) in India. However, the AO was of the view that as per section 9(1)(vii) of the Act, consideration received by any non-resident taxpayer for rendering any technical, managerial or consultancy services shall quality as FTS and shall be liable to tax in India. AO further observed that the assessee is having office at the plant of RIL thus it has PE in India. Accordingly, the AO passed the draft assessment order following the same observation and conclusion drawn in immediate preceding assessment years i.e. in AY 2016-17 and AY 2017-18, wherein receipts from RIL were held as taxable in Inida and thus the AO proposed to tax these receipts taxable as FTS @ 10% alongwith applicable surcharges as per Clasue-2 to Article 13 of India-UK DTAA.
Against the said order, assessee filed objections before the Ld. DRP who vide order dated 02.05.2022 followed its orders in preceding assessment years and disposed-off the objections filed by the assessee by giving the same directions as were given in preceding assessment years.
The Ld. DRP in para 4 of the order has categorically observed that the factual matrix of the case continues to be the same for Assessment Year under consideration as were in Assessment Year 2016-17 and 2017-18 where the DRP has already given the directions and accordingly did not deviate from its earlier view which are followed in the year also. In preceding assessment years, Ld. DRP has confirmed the action of AO in holding the services rendered by the assessee to M/s RIL as taxable in India in terms of Article 13 of India-UK DTAA and further directed that the receipt can also be treated as FTS, however, since the assessee has PE in India, such receipts have to taxed as FTS u/s 44DA of the Act on “protective basis”. Thereafter, Assessing Officer passed the final assessment order dated 09.06.2022 wherein it had reproduced the entire draft assessment order and the order of Ld. DRP and computed the income of the assessee by taxing the receipts of Rs.5,13,10,473/- as taxable in terms of Article 13 of Inida-UK treaty @ 10% alongwith surcharges on substantive basis.
Against the said order, the assessee is in appeal before the Tribunal by taking the following grounds of appeal:
1. That on the facts and in the circumstances of the case and in law, the order passed try the Ed. ND under Section 143(3) read with Section 144C(13) of the Act is wrong and bad in law and should be quashed and the order passed by the Hon’ble Dispute Resolution Panel-1. Delhi (‘DRP’) and the directions given therein are erroneous.
Bechtel Limited vs. ACIT 2. That on the facts and circumstances of the case and in law, the Ld. AO has erred in proposing and the DRP has erred in confirming the completion of assessment at a total income of INR 5.13,10,473 against "NIL" income declared.
3. That on the facts and circumstances of the case and in law, the Ld. AO has erred in proposing and the Hon'ble DRP has erred in confirming that the entirety of the service receipts of the Appellant from Reliance Industries Limited (RIL) are taxable in India as per the provisions of the Act and the Double Taxation Avoidance Agreement between India and UK (India-UK DIAA) 4. That on the facts and circumstances of the case and in law, the DRP has erred in holding that the Appellant had a Permanent Establishment in India.
5. That on the facts and circumstances of the case and in law, the Ld. AO has cred in proposing and the Hon'ble DRP has erred in confirming that the service receipts of the Appellant frown RII, are taxable in India as Fee for Technical Services (FIS) under Section 901(vi) of the Act.
6. That on the facts and circumstances of the case and in law. the Ld. AO has erred in proposing and the Hon'ble DRP has erred in confirming that the service receipts of the Appellant from RIL are taxable in India as FTS under para 4(e) of Article 13 of the India-UK DIAA, as the services make-available technical knowledge, experience, skill, know-how, or processes to RIL are taxable in India as FTS under para 4© of Article 13 of the India-UK DTAA, as the services make available technical knowledge, experience, skill, know-how, or processes to RIL.
7. That on the facts and circumstances of the case and in law, the Ld. AO has erred in holding that service receipts of the Appellant from RIL are taxable as FTS under para 4(c) of Article 13 of the India-UK DTAA. as the services consist of the development and transfer of a technical plan or technical design.
That on the facts and circumstances of the case and in law, the DRP has erred in making factually incorrect statements in the order passed by it.
9. That on the facts and the circumstances of the case and in law, the Ld. AO has erred in proposing to levy penalty under Section 270A(9)(a) of the Act.
10. The above grounds of appeal
are independent and without prejudice to one another.
11. The Appellant prays for leave to add, alter, amend and or modify any of the grounds of appeal at or before the hearing of the appeal.”
Bechtel Limited vs. ACIT 8. During the course of hearing in terms of letter dated 10th August, 2023 filed on 16.08.2023, assessee has taken additional ground of appeal which reads as under: “ That on facts and circumstances of the present case, the Final Assessment Order dated 09.06.2022 passed by the AO, is void and illegal and therefore, the same deserves to be quashed, owing to non-adherence by the AO of binding DRP directions, against the mandate of section 144C(10) read with section 144C(13) of the Act.”
Before us, Ld. AR of the assessee first made submissions on additional ground of appeal
wherein Ld. AR submits that the Ld. DRP in para 4 of the order has made following observations:
4. DRP’s directions: The DRP has carefully considered the assessee’s submissions filed on 25.10.2021 being volume 1,2&3 and the summary of arguments filed on 04.03.2022. This case came up before the DRP for AYs2016-17 & 2017-18 also and the Panel had issued directions on issues which continue to be almost same for AY 2018-19. The factual matrix of the case continues to be same for the AY under consideration. Accordingly, the panel shall not deviate from its earlier views and the same shall be basis of the directions for the year under consideration also.”
10. The Ld. AR submits that ld. DRP has followed its directions given in preceding assessment years i.e. in AY 2016-17 and 2017-18. The directions given in para 3 to 7.3 are relevant, according to which, ld. DRP has held that assessee is having PE in India, therefore, the services rendered by it to RIL are taxable in India in terms of Article 13 of India-UK DTAA. The Ld. AR further drew our attention to para 7.3 of the orders of ld. DRP wherein ld. DRP observed that taxation of the income as FTS under Article 13 should be only on protective basis. However, from the perusal of the final assessment order under appeal, it could be seen that the AO has taxed the income on substantive basis, therefore, ld. AR submits that under identical circumstances in the case of assessee itself for Assessment Year 2016-17 and 2017-18 in and 795/Del/202 respectively, the coordinate bench of ITAT Delhi, vide its order dated 31.01.2024 quashed the assessment orders by observing that the AO has not followed the directions of the Bechtel Limited vs. ACIT DRP. He thus, prayed that in the present appeal since the final assessment order was passed without following the directions of the DRP, therefore, the same deserves to be quashed. He prayed accordingly.
11. On the other hand, the Ld. CIT DR filed written submissions which reads as under: “1. In this case the assessee has produced an order of ITAT for AY 2016-17 and 2017-18, wherein the Hon'ble ITAT had quashed the final assessment order on a jurisdictional ground that the final assessment order was not in conformance to the DRP directions, when it was mandatory as per the scheme of the act. The facts need to be considered in those orders wherein Para 9 is reproduced below. 9. We have given a thoughtful consideration to the rival submissions in the light of decisions relied upon and perused the materials on record. Undisputedly, the assessors in appeal are tax residents of UK and USA respectively. During the assessment years under dispute, the assessees bave received fees towards rendering certain services to RIL. for its plants situated in Jamnagar SEZ While framing the draft assessment orders, the Assessing Officer has treated the receipts as FTS/FIS under India UK and India - USA tax treaties. However, while disposing of objections filed by the assessee, the DRP had given the following two directions: (i) The assessees have business connection/PE in India in the form of RII. facilities in Jamnagar and in Mumbai. Hence, the receipts, being attributable to the PE, have to be treated as business income under Articles 6 & 7 of the respective address and taxed in India, and; (ii) The receipts can also be treated as FTS/FIS, however, since, the assessees have business connection and PE in India, the receipts have to be taxed as FTS/FIS under section 44DA of the Act, but on protective basis. 10. On perusal of final assessment orders, which are under challenge in the present appeals, it is observed, though, the Assessing Officer bas reproduced the entire directions of learned DRP in the body of the final assessment orders, however, he has again added the receipts as FTS/FIS on substantive basis without implementing the specific directions of learned DRP to first treat the receipts as business income attributable to the PE and tax accordingly in terms with Articles 6 7 of the tax treaties and secondly treat the receipts as FTS/FIS to add it as business income on protective basis in terms of section 44DA of the Act. Neither of these directions have been carried out by the Assessing Office in the draft assessment orders.
Bechtel Limited vs. ACIT In the above DRP directions, there were specifically two directions: one on PE, which was the substantive addition, while the I'TS/FIS taxation was to be done on the protective basis. But in the current AY 2018-19 and AY 2020-21, the directions of the DRP are not ambiguous. 2 Facts of the case for AY 2018-19: The AO went through in great detail on how the engineering fees of Rs. 51,310,473/- satisfied the make available clause and were taxed the same as FIS under the act and DTAA. In the DRP order, the directions are not ambiguous. In Pam 4.2 and 4.3, DRP concluded that the receipts were in the nature of FTS and there is no PE question to be mised at all. In Para 4.5, the AO's view on treating them as FIS is upheld. There is no direction given to AO to treat them as part of a PE The AO has treated the receipts as FTS, while the DRP has upheld the AO's order, and the final assessment order also taxes the receipts as FTS. AO has passed the order in conformance to the DRP's order.
Facts of the case for AY 2020-21: In the draft order, AO treated the receipts as FTS under the act and DTAA. Again in para 4.3, the panel upheld the AO's draft order and did not propose it to be taxed as PE. Even in the final assessment order, AO has passed the order in conformance to the DRP. AO has passed the order in conformance to the DRP's order. In view of the same, the Hon'ble ITAT order for AY 2016-17 and AY 2017-18 cannot be extrapolated into the current assessment years.
4. Arguments on Merit a. The first argument in favor of the department is how the assessee treated these receipts till AY 2016-17. The assessee had not been claiming any refund by filing a return till AY 2016-17, and this clearly shows that the assessee had accepted the fact that the receipts were FTS, since TDS of 10% was already deducted on the same and the tax liability was met. b. Secondly, the nature of services provided are engineering services. In the paper book for AY 2020-21, where the contracts have been filed, it is stated that the services provided are in the nature of engineering services to the end customer, Reliance Industries. Refer to page 17 of the paper book. On page 25 the services offered are engineering and engineering information services, procurement support services, and technical services. c. Thirdly, the technical explanation to the India-US DTAA provides a detailed explanation of which all services make available technical plans, skills, experience. etc. In this case engineering services are clearly classified as satisfying the make available clause. The extracts of the technical explanation are provided below: As described in the memorandum of understanding, typical categories of services that generally involve either the development and transfer of Bechtel Limited vs. ACIT technical plant or technical designs, or making technology available as described in paragraph 4(6), include: 1. engineering services (including the subcategories of bioengineering and aeronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical, and industrial engineering); 2. architectural services, and 3. computer software development As explained in the memorandum of understanding, technical and consultancy services could make technology available in a variety of settings, activities and industries. Such services may, for example, relate to any of the following areas: 1. bio-technical services; 2. food processing; 3. environmental and ecological services; 4. communication through satellite or otherwise; 5. energy conservation; 6. exploration or exploitation of mineral oil or natural gas; 7. geological surveys, 8. scientific services; and 8. technical training d. AO on page 7 of 20 of the final assessment order for AY 2020-21 clearly brought out many case laws in favor of the department on how engineering services satisfy the make-available clause. In view of the same the department has rightfully taxed the amount as FIS
12. In rejoinder, the assessee has filed following written submissions and further placed reliance on the judgment of Hon’ble Delhi High Court in the case of Tungsten Automation England Ltd. vs. DCIT, [2025] 176 taxmann.com 497 (Delhi High Court) and prayed that even otherwise transfer on any technical services under the domestic laws such services cannot be held as FTS.
“It is undisputed that the Appellant is a resident of United Kingdom ("UK") for tax purposes and the Double Taxation Avoidance Agreement between India and UK (India UK DTAA") applies in its case. Further, it is an admitted position of the Revenue that the nature of services rendered by Appellant during the captioned years are identical. The only difference, without distinction, however, is that whereas during Assessment Year ("AY") 2018- 19, the said services were rendered under a contract between the Appellant Bechtel Limited vs. ACIT and Reliance Industries Limited ("RIL") directly, during AY 2020-21, the same were rendered under a contract between the Appellant and Bechtel Engineering and Construction Private Limited. For present purposes, reference is made to the appeal for AY 2018-19 only, since conclusions thereunder would apply mutatis mudandis to AY 2020-21. The solitary issue involved in the captioned appeals is whether receipts by the Appellant for rendition of "Engineering and Procurement Support Services" rendered from outside India are in the nature of "Fees for Technical Services" ("FTS") as set out under Article 13(4)(c) of the India - UK DTAA. The said Article is reproduced below, for the sake of convenience: “4. For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term "fees for technical services" means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which (c) make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design." RE: "Make Available" On facts, the "make available" condition in the above set out definition is not satisfied. Satisfaction of the make available requires that the service provider transmits technology such that the service recipient is enabled to apply the same in the future, without the aid of the Service Provider. The mere fact that rendition of a service entails use of technology or technical skill, does not ipso facto imply that the make available condition is satisfied. Reference in this regard is made to Tungsten Automation England Ltd. vs. DCIT, [2025] 176 taxmann.com 497 (Delhi High Court) [Paras 36, 40; 43; 46 and 51]. Certain terms of the Engineering and Procurement Support Services Agreement dated 16.10.2012 ("Agreement") [Page No. 21 of the Paper Book for AY 2018-19], which evidence that the make available condition is not satisfied, are tabulated below: S. No. Particulars Reference in the 1. Consideration to the Appellant is for Recitals; Articles II,1.; 11.3.1 performance of “Engineering and III.1.; V.1.a. and 2.a. as well Procurement Support Services” as Clause 1.1.3. to Annexure- simpliciter. A.
2. The relevant services have been Article II. rendered by the Appellant from outside India.
3. The relevant services are specific to the Articles 1.hh.; II.a.; II.2.a.; c.; peculiarities of the refinery plant at II.4.; II.1.a.; and b.
Bechtel Limited vs. ACIT Jamnagar. For any new project to be undertaken by RIL in the future, RIL would invariably have to avail the services of Contractors, such as the Appellant. It cannot be that provision of Engineering and Procurement Support Services by the Appellant to RIL equips RIL to perform the same independently in the future Intellectual Property Rights of the Articles 1.k.and XIII. Appellant, which are involved in the rendition of the relevant services, remain vested in the Appellant alone. Hence, in terms of Tungsten Automation (Supra), the make available condition does not stand satisfied [Paras 21: 51; and 55] The Appellant is responsible to re- Article II.4.; III.1.a.; III.2.; perform and/ or vary a service; VIII.2.; 3.; XI.5.; XIV.4.; and respond to and/or clarify a query 6. related to a service; and complete the conceptualised services even upon termination of the Agreement 6. RIL is entitled to make claims Article VIII. 3.; and7. concerning services for 24 months after achievement of Mechanical Completion or 12 months after performance of testing of systems.
RE: “Transfer of a Technical Plan or Design” Further, without prejudice, the definition of FTS under Article 13(4)(c) of the India UK DTAA also envisions "development and (emphasis supplied) transfer of a technical plan or design". On facts, there is no "transfer (emphasis supplied) of a technical plan or design" by the Appellant to RIL, since such technical plans and designs belonged to RIL since their creation or inception. Refer in this regard, Articles IV.1.(1).; IV.3.; V1.2.; X1.5; XIII.1.; and Clause 1.14.14 to Annexure A to the Agreement. Therefore, since technical plans and designs belonged to RIL since their creation or inception, there was no question of the same being transferred by the Appellant to RIL. Additionally, the averments of the Ld. Departmental Counsel are rebutted as under Bechtel Limited vs. ACIT 1. The point made in Para 4.a. of the Written Submissions is patently incorrect, since the Appellant has been filing Returns of Income and claiming refunds until AY 2016-17, however, the Revenue has not processed the said Returns of Income till date. This issue was taken up before the Hon'ble Delhi High Court, where the Revenue has been directed to forthwith process the Returns of Income.
The contention of the Revenue at Paras 4.b. and 4.d. of the Written Submissions, that the services are in the nature of Engineering Services provided by the Appellant to RIL, is of no consequence, since that has no bearing on the determination of the term "make available". Without prejudice, even otherwise, sans transfer of any technology, even under the domestic law, such services cannot be FTS.
3. The reliance placed on the Technical Explanation to the Double Taxation Avoidance Agreement between India and the United States of America at Para 4.c. of the Written Submissions is dealt with in Tungsten Automation (Supra) [Refer Para 49].
Foster Wheeler France S.A. vs. DDIT, [2016] 67 taxmann.com 120 (Income Tax Appellate Tribunal, Chennai) is factually distinguishable, since in the said case the specifications and procedures "made available" enabled the Assessee therein to render services independently to its customers. This has been recognised in Outotec Oyj vs. DDIT. [2016] 76 taxmann.com 33 (Income Tax Appellate Tribunal, Kolkata)
Heard both the parties and perused the materials available on record. Admittedly the facts as existed in the year under appeal are identical to the facts of the case of the assessee for Assessment Years 2016-17 and 2017-18. From the perusal of the draft assessment order as well as final assessment order passed in the present appeal, it could be seen that the AO in both the occasions followed the orders passed in preceding assessment years in the case of assessee. Further, the Ld. DRP has categorically observed that the facts are identical in the year under appeal with the facts of Assessment Year 2016-17 and 2017-18 and followed its directions given in those assessment years. As observed above in Assessment Years 2016-17 and 2017-18, the Ld. DRP has held that the income received is taxable in India as the assessee is having PE in India however, directed the AO to compute the income of the assessee on protective basis u/s 44DA of the Act but the Assessing Officer had Bechtel Limited vs. ACIT not followed such directions in true spirit and completely ignored them and computed the income of the assessee on substantive basis. For these assessment years, Co-ordinate Bench of the Tribunal vide its order dated 31.01.2024 quashed the assessment order by making following observations: “9. We have given a thoughtful consideration to the rival submissions in the light of decisions relied upon and perused the materials on record. Undisputedly, the assessee in appeal are tax residents of UM and USA respectively. During the assessment years under dispute, the assessee have received fees towards rendering certain services to RIL for its plants situated in Jamnagar SEZ. While framing the draft assessment orders, the Assessing officer has treated the receipts as FTS/FIS under India-UK and India-USA tax treaties. However, while disposing of objections filed by the assessee, the DRP had given the following two directions: (i) The assessees have business connection/PE in India in the form of RIL facilities in Jamnagar and in Mumbai. Hence, the receipts, being attributable to the PE, have to be treated as business income under Articles 6 & 7 of the respective address and taxed in India, and; (ii) The receipts can also be treated as FTS/FIS, however, since, the assessees have business connection and PE in India, the receipts have to be taxed as FTS/FIS under section 44DA of the Act, but on protective basis.
On perusal of final assessment orders, which are under challenge in the present appeals, it is observed, though, the Assessing Officer has reproduced the entire directions of learned DRP in the body of the final assessment orders, however, he has again added the receipts as FTS/FIS on substantive basis without implementing the specific directions of learned DRP to first treat the receipts as business income attributable to the PE and tax accordingly in terms with Articles 6 & 7 of the tax treaties and secondly treat the receipts as FTS/FIS to add it as business income on protective basis in terms of section 44DA of the Act. Neither of these directions have been carried out by the Assessing Office in the draft assessment orders.
At this stage, we may refer to certain provisions contained under section 144C of the Act. As per sub-section (5) of section 144C of the Act, the DRP after receiving objection shall issue such direction as it thinks fit for the guidance of the Assessing Officer to enable him to complete the assessment. Sub-section (8) of section 144C empowers the DRP to confirm, reduce or enhance the variation proposed in the draft assessment order. Sub-section (10) of section 144C makes it clear that every direction issued by the DRP shall be binding on the Assessing Officer. Whereas, subsection (13) of section 144C mandates that after receiving the directions issued by the DRP under sub-section (5), the Assessing Officer shall Bechtel Limited vs. ACIT complete the final assessment in conformity with the directions issued by learned DRP. Thus, a conjoint reading of the aforesaid provisions make it clear that once the DRP issues certain directions while disposing of objections filed by an eligible assessee, the Assessing Officer is duty-bound to implement such directions in letter and spirit.
In the facts of the present appeal, undisputedly, the Assessing Officer has not implemented the directions of learned DRP as mandated under section 144C(10) read with section 144C(13) of the Act. Surprisingly, even though, the Assessing Officer has reproduced the directions of learned DRP in the body of the assessment orders, however, he failed to implement the specific direction of learned DRP and has merely done a cut paste job of the draft assessment order by repeating the additions made therein treating the receipts as FTS/FIS. In our view, this can be due to a conscious disregard to the directions of learned DRP or final assessment orders have been passed mechanically without application of mind.
13. In case of M/s. ESPN Star Sports Mauritius S.N.C. ET Compagnie Vs. Union of India (supra), the Hon'ble Jurisdictional High Court, in judgment dated 23.03.2016, while considering identical nature of dispute relating to non- implementation of directions of DRP in the final assessment order has gone through the entire provision of section 144C, which is a code by itself, and held as under: “29. The above submissions have been considered. In the first place the Court would like to observe that this is an instance of blatant disregard by the AO of the order of the DRP notwithstanding that the DRP had categorically held that the two 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 1440 (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.
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 jurisdiction and null and void. The draft assessment order dated 28th March 2014, having been passed in respect of entities which were not 'eligible assessees', is also held to be invalid.
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.
Bechtel Limited vs. ACIT As already noticed, the DRP, in terms of Section 144C (15) (0) is a collegium of three Principal Commissioners of 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 1440 (10) read with Section 144C (13) makes it abundantly clear that there is no option with an AO but to be bound by orders and subject to review by the DRP. It is bound by the DRP. A reference may also be made to the decision in Zuari Cement Limited (supra) where it was held that an order of assessment which is contrary to the mandatory provisions of Section 144C of the Act was declared as "one without jurisdiction, null and void and enforceable." It is therefore, for this reason, in the said case, the High Court 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.
Recently the High Court of Bombay has in International Air Transport Association (supra) held that an assessment order passed by the AO which is contrary to the mandatory requirement of Section 144C of the Act, is entirely without jurisdiction. There, despite the Petitioner being a foreign company, the AO did not record the procedure under Section 144C (1) of the Act and proceeded to pass the final assessment order under Section 143(3) of the Act.
In Vijay Television (P) Ltd v. Dispute Resolution Panel, Chennai (2014) 369 ITR 113 (Mad) where again the AO passed 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.
In Pankaj Extrusion Limited v. Assistant Commissioner of Income Tax (2011) 241 CTR (Guj) 390 the Division Bench of Gujarat High Court, in interpreting Section 144C of the Act held that where an Assessee was not an eligible assessee', the question of passing the draft assessment order under Section 144C of the Act did not arise.
As far as the decision of this Court in Honda Cars India Limited. Deputy Commissioner of Income Tax (supra) is concerned, the question that arose is whether the AO could have passed the draft assessment order when the Assessee did not satisfy the condition 'eligible assessee' under Section 144C (15) (b) of the Act. Answering the question is in the negative, the Court held Bechtel Limited vs. ACIT 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."
As regards the conduct of the AO in the present case, the Court would only like to highlight the lead portion of the decision of the Supreme Court in Union of India v. Kamlakshi Finance Corporation Limited (supra). The facts in that case were that the according to the Assistant Collector ('AC'), the electrical insulation tapes manufactured by the Assessee, Kamlakshi Finance Corporation Limited ('KFCL') fell under the Tariff heading 39.19 of the Schedule to the Central Excise Tariff Act, 1985 whereas the 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.
The Supreme Court in Union of India v. Kamlakshi Finance Corporation Limited (supra) took exception to the conduct of the AO in overlooking the binding order of the Collector (Appeals) and reiterating the order passed by him earlier. In response to the plea of the Appellant that the Officer who passed the order was not actuated by any malafide, the Supreme Court observed, in this regard, as under: "6....... we are not concerned here with the correctness or otherwise of their conclusion or of any factual 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 be too vehemently emphasised that it is of utmost importance that, in disposing of the quasi-judicial issues before them, revenue officers are bound by the decisions of the appellate authorities. The order of the Appellate Collector is binding on the Assistant Collectors working within his jurisdiction and the order of the Tribunal is binding upon the Bechtel Limited vs. ACIT Assistant Collectors and the Appellate Collectors who function under the jurisdiction of the Tribunal. The principles of judicial discipline require 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 objectionable phrase and is the subject matter of an in itself 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 administration of tax laws."
In Nav Bharat Impex v. Union of India (supra) the Division Bench of this Court dealt with the case where despite the clear directions given by the CIT (Appeals), the delayed refunds were paid to the Petitioner without any element of interest. It was noted that the Assistant Commissioner was merely required to comply with the directions given by the CIT (A) in the appellate order. However, the Assistant Commissioner look it upon himself to examine the case, as per his own understanding and therefore, had "gone to the extent of overreaching the orders of his superior authority, that is, the Commissioner (Appeals)."
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).
The language used in the present case by the AO while disagreeing with the binding order of the DRP is wholly unacceptable. In the final assessment order dated 28th January 2015, the AO while discussing the order of the DRP observed inter alia in para 4.2 that "The DRP has not acted in accordance with the provisions of the Act while passing this 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"
In the circumstances, 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 opportunity of being heard Bechtel Limited vs. ACIT 43. Mr. Manchanda then submitted that this Court should clarify that in terms of Section 153 (3) B of the Act, the Revenue can within a period of 30 days pass the final assessment order under Section 143 (3) of the Act. The Court notes that the Revenue has not been able to contest the submission of the Petitioners that in the present case the Revenue has issued a notice to the Petitioner under Section 147 of the Act seeking to reopen the assessment for the AY 2010-11. The question of the Court issuing any clarification as sought by the Revenue therefore does not arise. In any event in the present case, the AO did pass the final assessment order in continuation of draft assessment order under Section 144C (1) of the Act and the said final assessment order has been held by this Court, for the reasons recorded hereinabove, to be invalid.
The other plea of the Revenue that the Petitioners ought to have challenged the final assessment order before the CIT (A) is untenable for the reason that it was contrary to the order of the DRP which held in favour of the Petitioners. The order of the DRP was not challenged by the Revenue. In the circumstances, the final assessment order was without jurisdiction and this constitutes sufficient ground for the Court exercise its powers under Article 226 of the Constitution.
For the above reasons, the draft assessment order dated 28th March 2014 and the final assessment order dated 28th January 2015 passed by the AO are held to be void ab initio and quashed on that basis. The orders consequential thereto also do not survive. However, it is clarified that the Court has not expressed any opinion regarding the validity of the proceedings against the Petitioners under Section 147/148 of the Act. The rights and contentions of the parties in those proceedings are left open to be urged and decided by the appropriate authority in accordance with law."
14. As could be seen from the aforesaid observations of the Hon'ble Jurisdictional High Court, non-implementation of directions of DRP in terms of section 144C renders the final assessment order wholly without jurisdiction and void-ab-initio. The plethora of decisions cited by learned counsel appearing for the assessee express similar view. Therefore, we do not intend to deal in detail with them. Thus, keeping in view the ratio laid down by Hon'ble Jurisdiction High Court, as discussed above, we hold that the impugned assessment orders are wholly without jurisdiction or in excess of jurisdiction, hence, void-ab-initio. Therefore, assessment orders under challenge in these appeals deserve to be quashed. Accordingly, we do so.”
As observed above, facts are identical and AO has computed the income of the assessee on substantive basis though there is specific directions given by ld. DRP to charge income in the hands of assessee on “protective basis”, therefore, in our Bechtel Limited vs. ACIT view, the AO has exceeded his jurisdiction and flouted the directions given by the Ld. DRP, thus, the final order was passed in violation of such directions of ld. DRP is void ab initio and is hereby quashed. In the result, the additional ground of appeal taken by the assessee is allowed.
Since we have already allowed the additional ground of appeal and quashed the assessment order passed in the instant case, the other grounds of appeal become academic.
In the result, appeal of the assessee is allowed.
In this year also the assessee has taken additional grounds of appeal
which reads as under: “That on facts and circumstances of the present case, the Final Assessment Order dated 19.01.2023 passed by the AO, is void and illegal and therefore, the same deserves to be quashed, owing to non-adherence by the AO of binding DRP directions, against the mandate of section 144C(10) read with section 144(13) of the Act.”
18. Admittedly the facts are identical and the DRP has also followed its earlier directions for Assessment Year 2016-17, 2017-18 and 2018-19. It is also seen that though the DRP in AY 2016-17 has directed the AO to compute the income of the assessee on protective basis which are followed in this year also however, the AO in the final assessment order dated 19.01.2023 has computed the income of the assessee on substantive basis. Before us both the parties have placed reliance on the arguments made in AY 2018-19 and facts being identical, therefore, by following our observations made in AY 2018-19 which are mutatis mutandis applied to the facts of present appeal we hold assessment order as void ab Bechtel Limited vs. ACIT inito and is hereby quashed. Accordingly, additional ground taken by the assessee is allowed. and other grounds of appeal become academic in nature.
Since we have already allowed the additional ground of appeal and quashed the assessment order passed in the instant case, the other grounds of appeal become academic.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 31.12.2025.