Daewon Kang Up Co. Limited, Thiruvallur V. DDIT, CHENNAI

ITA 818/CHNY/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 7716 (ITAT-CHENNAI)
• Duration Of Justice: 11 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-03-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 21-10-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 13-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MURUGA BOOPATHY JT
• Keywords: Opportunity of being heard; Advance ruling; Procedural lapse
• Section: 143(3); 154

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , ! ' #! ' $ . %, & '( BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ITA N0.818/M DS /2015 & 5 !65 / ASSESSMENT YEAR : 2010-11 DAEWON KANG UP CO. LIMITED 16-5, NAMDAEMUNNO 5-GA, CHUNG-GU SEOUL, KOREA 100 095. [PAN:AADCD 7280P] (89/ APPELLANT ) V. DEPUTY DIRECTOR OF INCOME TAX, INTERNATIONAL TAXATION-I, CHENNAI. (:;89/ RESPONDENT ) 89 < = /APPELLANT BY : SHRI LALITH KUMAR, CA & SHRI GIRISH KUMAR, CA :;89 < = /RESPONDENT BY : SHRI MURUGA BOOPATHY, JT. CIT ' ! < > /DATE OF HEARING : 21.10.2016 ?6 < > /DATE OF PRONOUNCEMENT : 30.12.2016 / O R D E R PER SANJAY ARORA, ACCOUNTANT MEMBER : THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-16, CHENNAI (C IT(A) FOR SHORT) DATED 23.01.2015, DISPOSING ITS APPEAL CONTESTING ITS AS SESSMENT U/S. 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) DATED 2 8.03.2013 FOR ASSESSMENT YEAR (AY) 2010-11. 2 ITA. NO.818/MDS/2015 (AY 2010-11) DAEWON KANG UP CO. LTD. V. DDIT 2. THE BACK GROUND FACTS OF THE CASE ARE THAT THE AS SESSEE, A KOREA BASED FOREIGN COMPANY, DID NOT RETURN ITS INCOME BY WAY O F GUARANTEE FEE, CHARGED AT 1% OF THE AMOUNT OF THE BORROWINGS OF ITS INDIAN SUBSI DIARY GUARANTEED BY IT. WHILE THE ASSESSING OFFICER (AO) BROUGHT IT TO TAX AS IN TEREST, THE LD. CIT(A) CONFIRMED THE SAME, ALBEIT ON THE GROUND THAT IT WAS FEE FOR TECHNICAL SERVICES. AGGRIEVED, THE ASSESSEE IS IN SECOND APPEAL. 3. BEFORE US, THE ASSESSEES PLEA WAS TWO-FOLD. TH AT GUARANTEE FEE, THOUGH INTEREST WITHIN THE MEANING OF THE TERM AS DEFINED UNDER SECTION 2(28A) OF THE ACT, IS NOT SO AS DEFINED UNDER ARTICLE 5 OF THE INDO-KO REAN TAX TREATY, EVEN AS HELD BY THE TRIBUNAL IN ASST. CIT V. GMAC FINANCIAL SERVICES INDIA LTD . [2012] 16 ITR (TRIB) 422 (CHENNAI). THOUGH RENDERED IN THE CONTEXT OF INDO-US TREATY, INTEREST STANDS DEFINED IDENTICALLY THEREIN AS IN INDO-KOREA TREATY. GUARANTEE FEE IF ALSO NOT TECHNICAL FEE AS NO SERVICES, MANAGERIAL OR TECHNIC AL IN NATURE, AS HELD BY THE AUTHORITY FOR ADVANCE RULINGS IN INVENSYS INTERNATIONAL HOLDINGS LTD . (IN AAR NO. 959/2010 DATED 13/7/2015/COPY ON RECORD). THE O NLY HEAD UNDER WHICH, THEREFORE, THE SAME IS TAXABLE IS AS BUSINESS OF I NCOME, WHICH IS LIABLE TO TAX IN THE CASE OF A NON-RESIDENT ONLY IN CASE OF A PERMAN ENT ESTABLISHMENT (PE) IN INDIA; WHICH IS ADMITTEDLY ABSENT, THE INDIAN COMPANY BEIN G A SEPARATE PERSON. THE SECOND GROUND ON WHICH THE ASSESSMENT IS ASSAILED I S THAT IT IS WITHOUT JURISDICTION. THE ASSESSEE BEING A FOREIGN COMPANY, IS AN ELIGIBL E ASSESSEE UNDER SECTION 144C OF THE ACT AND, ACCORDINGLY, THE AO WAS BOUND TO PA SS A DRAFT ORDER, AGAINST WHICH THE ASSESSEE COULD RAISE OBJECTIONS BEFORE THE DISP UTE RESOLUTION PANEL (DRP), WHICH ARE REQUIRED TO BE DISPOSED BY IT, AND WHOSE DECISION IS BINDING ON THE AO. THE PROCEDURE PRESCRIBED HAVING NOT BEEN OBSERVED, T HE ASSESSMENT FAILS, AS EXPRESSED BY THE HONBLE JURISDICTIONAL HIGH COURT IN VIJAY TELEVISION (P) LTD. V. DRP [2014] 369 ITR 113 (MAD). THE LD. DR WOULD SUBMIT THAT THE TERM ELIGIBLE ASS ESSEE IS DEFINED UNDER SECTION 144C (15) AS A PERSON IN WHOSE CASE A VARIA TION IS PROPOSED UNDER SECTION 3 ITA. NO.818/MDS/2015 (AY 2010-11) DAEWON KANG UP CO. LTD. V. DDIT 92CA AND A FOREIGN COMPANY, SO THAT ONLY WHERE BOTH THE CON DITIONS ARE SATISFIED WOULD THE PERSON CONCERNED QUALIFY TO BE AN ELIGIBL E ASSESSEE. FURTHER, EVEN IF CONSIDERING THE ASSESSEE AS ONE, SO THAT THE AO OUG HT TO HAVE FOLLOWED THE PROCEDURE ENVISAGED IN SEC. 144C BEFORE PASSING THE ASSESSMENT ORDER, THE ONLY CONSEQUENCE OF NOT DOING SO IS THAT THE ASSESSMENT IS TO BE RESTORED TO THE STAGE WHERE THE PROCEDURAL LAPSE HAS OCCURRED. THE DECISIO N IN THE CASE OF VIJAY TELEVISION (P.) LTD. (SUPRA) IS DISTINGUISHABLE IN-AS-MUCH AS IN THAT CA SE THE AO LACKED THE INHERENT JURISDICTION TO PASS THE ORDER AND, FURTHER, THERE WERE INCIDENTS INDICTING THE ORDER, VITIATING IT. IT WAS UNDER THE SE CIRCUMSTANCES THAT THE SAME WAS CONSIDERED AS A NULLITY. ON MERITS, GUARANTEE FEE I S CLEARLY A FINANCIAL SERVICE, EVEN AS HELD BY THE AO; ANY SERVICE INVOLVES INPUTS, BEI NG EVEN OTHERWISE WIDELY DEFINED UNDER EXPLANATION 2 TO SECTION 9(1)(VII). IN FACT, SERVICE-TAX IS ALSO LEVIABLE IN RESPECT OF SUCH SERVICES. THE LD. AR WOULD SUBMIT THAT RATHER THAN A FINANCIA L SERVICE, IT IS A CONSIDERATION FOR ASSUMPTION OF FINANCIAL RISK OF I TS 100% INDIAN SUBSIDIARY. THE SAME GETS EXCLUDED FROM THE DEFINITION OF INTEREST WHICH IS ONLY IN RESPECT OF A DEBT CLAIM. 4. WE HAVE HEARD PARTIES, AND PERUSED THE MATERIAL ON RECORD. WE SHALL FIRST CONSIDER THE JURISDICTIONAL ASPECT. IN OUR CONSIDERED VIEW, THE ASSESSEE, A FOREIGN COMPANY, IS AN ELIGIBLE ASSESS EE UNDER SECTION 144C(15) OF THE ACT. ACCORDINGLY, ASSESSMENT IN ITS CASE, WHER E ANY VARIATION IN THE INCOME RETURNED PREJUDICING THE ASSESSEE IS SOUGHT TO BE M ADE BY THE AO (S.144C(1)) COULD BE FRAMED ONLY BY OBSERVING THE PROCEDURE ENS HRINED THEREIN. SEC.144C(15) READS AS: REFERENCE TO DISPUTE RESOLUTION PANEL S. 144C 1 TO 14 ------ (15) FOR THE PURPOSE OF THIS SECTION,- (A) DISPUTE RESOLUTION PANEL MEANS A COLLEGIUMS COMPRISING OF THREE PRINCIPAL COMMISSIONERS OF COMMISSIONERS OF INCOME- TAX CONSTITUTED BY THE BOARD FOR THIS PURPOSE. 4 ITA. NO.818/MDS/2015 (AY 2010-11) DAEWON KANG UP CO. LTD. V. DDIT (B) ELIGIBLE ASSESSEE MEANS,- (I) ANY PERSON IN WHOSE CASE THE VARIATION REFERRE D TO IN SUB-SECTION (1) ARISES AS A CONSEQUENCE OF THE ORDER OF THE TRA NSFER PRICING OFFICER PASSED UNDER SUB-SECTION (3) OF SECTION 92- CA; AND (II) ANY FOREIGN COMPANY. THE USE OF THE WORD AND INSTEAD OF OR IN S. 144C (15) MUST BE REGARDED AS THE LAW PRESCRIBING TWO CATEGORIES OF PERSONS IN WH OSE CASE SEC. 144C SHALL APPLY. THAT IS, PERSONS FALLING UNDER SUB-CLAUSES (I) AND ( II) OF CLAUSE (B) OF SECTION 144C(15). THIS IS APPARENT FROM A PLAIN READING OF THE PROVISION; THE IDENTIFICATION OF A FOREIGN COMPANY BEING PRECEDED BY THE WORD MEANS, AND FOLLOWED BY THE SUB-CLAUSES (A) AND (B), AND NOT, FOR EXAMPLE, BY T HE WORDS TO THE EFFECT OR SIGNIFYING A PERSON SATISFYING THE CONDITIONS AS SE T OUT IN THE SAID SUB-CLAUSES. AS SUCH, A FOREIGN COMPANY IS AN ELIGIBLE ASSESSEE, IN DEPENDENT OF THE VARIATION TO ITS RETURNED OF INCOME BEING BY WAY OF A TRANSFER PRICI NG ADJUSTMENTS - THE OTHER CONDITION SET OUT IN S. 144C(15)(B)(I), OR OTHERWIS E. THE NEXT QUESTION TO CONSIDER IS THE CONSEQUENCE O F THE AO FAILING TO OBSERVE THE PROCEDURE SET OUT IN S.144C, FALLING UN DER CHAPTER-XIV, TITLED PROCEDURE FOR ASSESSMENT. TOWARD THIS, THE ASSESSE E HAS RELIED ON VIJAY TELEVISION (P.) LTD. (SUPRA) BY THE HON'BLE JURISDICTIONAL HIGH COURT, W HICH IS BINDING ON US. THE SAME HAS BEEN PERUSED, SO AS TO D ISCERN ITS RATIO. IN THAT CASE, THE AO PASSED THE ASSESSMENT ORDER WITHOUT FIRST PA SSING A DRAFT ASSESSMENT ORDER PROPOSING ADDITIONS, TO ENABLE THE ASSESSEE TO, AT ITS OPTION, FILE OBJECTIONS WITH THE DRP, WHOSE OPINION IN THE MATTER, AFTER HEARING THE ASSESSEE, WOULD BE FINAL AS FAR AS AO IS CONCERNED, SO THAT HE WOULD PASS THE FINAL ASSESSMENT ORDER IN CONFORMITY WITH THE DIRECTIONS ISSUED BY THE DRP. THE AO IN THA T CASE, REALIZING HIS MISTAKE ON IT BEING POINTED OUT, PASSED AN CORRIGENDUM ON 1 5.04.2013, STATING THAT THE EARLIER ORDER DATED 26.03.2013 IS ONLY A DRAFT ASSE SSMENT ORDER. THE SAID, SUBSEQUENT ORDER WAS STATED AS PASSED U/S. 154 OF T HE ACT, AND WHICH COULD THEREFORE RELATE BACK TO 26.03.2013, SO THAT THE FI RST ORDER WAS IN EFFECT AND SUBSTANCE ONLY A DRAFT ASSESSMENT ORDER. THE HON'BL E HIGH COURT UPHELD THE WRIT PETITION DATED 16.04.2013 BY THE ASSESSEE AGAINST T HE ORDER DATED 15.04.2013, ON 5 ITA. NO.818/MDS/2015 (AY 2010-11) DAEWON KANG UP CO. LTD. V. DDIT PRINCIPALLY TWO GROUNDS. FIRSTLY, RELYING ON DEEPAK AGRO FOODS V. STATE OF RAJASTHAN [2008] 16 VST 454 (SC), IT WAS HELD THAT THE ORDER D ATED 15.04.2013 COULD NOT EXTEND THE LIMITATION FOR PASSING THE ASS ESSMENT ORDER, WHICH STANDS ALREADY EXPIRED ON 31.03.2013. THE SAME, I.E., THE ORDER DATED 26.03.2013, HAVING BEEN PASSED CONTRARY TO S. 144C WAS, THEREFORE, BAD IN LAW. FURTHER, ANY ORDER THAT WOULD NOW STAND TO BE PASSED BY THE AO, I.E., TREAT ING THE ORDER DATED 26.03.2013 AS A DRAFT ORDER, WOULD BE, BEING BEYOND 31.03.2013 , A NULLITY IN LAW. THAT BEING SO, THE ORDER DATED 26.03.2013 WAS ONLY A FINAL ASS ESSMENT ORDER. WHY, THE DEPARTMENT HAD EVEN RAISED A DEMAND ON THE ASSESSEE ON THAT BASIS, WHICH HAD NOT BEEN WITHDRAWN, AS WELL AS ISSUED PENALTY NOTICE IN PURSUANCE THERETO. THE SECOND REASON THAT PREVAILED WITH THE HONBLE HIGH COURT, RELYING ON SEVERAL AUTHORITIES, WAS THAT THE ORDER PASSED WITHOUT OBSERVING THE MAN DATORY PROCEDURE IN ITS RESPECT COULD NOT BUT BE BAD IN LAW, TO WHICH NO SANCTION I N LAW COULD BE GIVEN. OMISSION ON THE PART OF THE AO TO FOLLOW THE MANDATORY PROCE DURE COULD NOT BE SAID TO BE A PROCEDURAL IRREGULARITY, WHICH COULD BE CURED. THE REVENUES RELIANCE ON L.HAZURI MAL KUTHIALA V. ITO [1961] 41 ITR 12 (SC) WAS FOUND MISPLACED AS IN THA T CASE AN OMISSION BY THE AO TO CONSULT THE CENTRAL BOARD OF THE REVENUE UPON PASSING, SIMILARLY, A DRAFT ASSESSMENT ORDER U/S. 5(3) OF TH E PATIALA ACT WAS CONSIDERED AS MERELY DIRECTORY AND NOT MANDATORY. IN THE PRESENT CASE, THE HONBLE COURT HELD THAT THE PROCEDURE WAS MANDATORY, AND THE AO HAD NO JURISDICTION TO PROCEED WITHOUT PASSING A DRAFT ASSESSMENT ORDER. IN OUR CONSIDERED VIEW, THE LAPSE COMMITTED BY THE AO IN PASSING THE ASSESSMENT ORDER WITHOUT FIRST PASSING A DRAFT ORDE R, AGAINST WHICH THE ASSESEE MAY FILE OBJECTIONS WITH THE DRP, SEEKING ITS DIRECTION S TO THE AO, IS ONLY A PROCEDURAL IRREGULARITY, WHICH DOES NOT IMPINGE ON THE JURISDI CTION ON THE AO TO PASS THE ASSESSMENT ORDER, WHICH HE ASSUMES ON THE ISSUE OF NOTICE U/S. 143(2), EVEN AS OBSERVED BY THE HONBLE JURISDICTIONAL HIGH COURT I TSELF IN A NUMBER OF CASES, REFERENCE TO ONE OF WHICH, I.E., R.V. SAROJINI DEVI V. IAC [2000] 242 ITR 329 (MAD) STANDS MADE IN THE DECISION ITSELF (ALSO REFE R ASST. CIT V. HOTEL BLUE MOON [2010] 321 ITR 362 (SC)). REFERENCE IN THIS REGARD M AY BE MADE TO THE DECISION IN 6 ITA. NO.818/MDS/2015 (AY 2010-11) DAEWON KANG UP CO. LTD. V. DDIT GUDUTHUR BROS. V. ITO [1960] 40 ITR 298 (SC), WHEREIN THE APEX COURT CLAR IFIED THAT THE AO ASSUMES JURISDICTION TO ASSESS ON ISSUE OF A VALID NOTICE, AND WHICH OBTAINED TILL THE SAME REMAINED TO BE DISPOSED OF. THE PROCEEDINGS COMPLETED WITHOUT ALLOWING THE ASSESSEE AN OPPORTUNITY OF BEI NG HEARD WAS AN ILLEGALITY, VITIATING THE PROCEEDINGS, WHICH WOULD RELATE BACK IN TIME, HAVING OCCURRED DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS ITSELF. THE IMPUGNED ORDER WAS TO BE SET ASIDE, AND THE PROCEEDINGS TO COMMENCE FROM THE STA GE THE ILLEGALITY OR THE IRREGULARITY HAD OCCURRED. IN THE PRESENT CASE TOO, THE ORDER HAS BEEN PASSED BY THE AO BY, IN EFFECT, WITHOUT ALLOWING THE ASSESSEE THE OPPORTUNITY OF BEING HEARD BY THE DRP, I.E., PRIOR TO IT BEING FINALIZED. THAT T HERE IS NO VESTED RIGHT AGAINST PROCEDURE IS WELL-SETTLED. AGAIN, IT IS NOBODYS CA SE THAT THE SAME WAS DONE TO PURCHASE TIME, OR THAT IN THE EVENT THE SAID OPPORT UNITY WAS ALLOWED, THE ASSESSMENT WOULD GET BARRED BY TIME. IN FACT, NO SU CH CONTENTION COULD IN LAW BE RAISED AS S. 144C(13) ITSELF EXCLUDES THE OPERATION OF S. 153 (OR S. 153B), STIPULATING TIME LIMIT FOR PASSING ORDERS ORDER THE ACT, SETTING IT AT ONE MONTH AFTER THE RECEIPT BY THE AO OF THE DIRECTIONS BY THE DRP. THERE IS NO QUESTION OF THE ASSESSMENT GETTING TIME BARRED OR HAVING CROSSED TH E BAR OF TIME BY WHICH IT COULD HAVE BEEN PASSED. THE DECISION IN DEEPAK AGRO FOODS (SUPRA) WOULD ALSO THUS NOT APPLY IN THE FACTS AND CIRCUMSTANCES OF THE CASE, I .E., EVEN ASSUMING NON- APPLICATION OF THE DECISION IN GUDUTHUR BROS . (SUPRA). WHY, IN MANY A CASE, AS IN GKN DRIVE SHAFTS (INDIA) LTD. V. ITO [2003] 259 ITR 19 (SC), THE APEX COURT, FINDING THE ASSESSMENT TO BE PROCEDURALLY DEFICIENT , SET ASIDE THE SAME TO THE FILE OF THE AO TO PASS A FRESH ASSESSMENT ORDER COMPLYING W ITH THE CONDITIONS OR THE PROCEDURE AS PRESCRIBED OR LAID DOWN. FURTHER, ONCE THE REVENUE ITSELF ADMITS THE ORDER PASSED TO BE A DRAFT ASSESSMENT ORDER, IT CAN NOT IN LAW PROCEED TO COLLECT THE DEMAND RAISED, SO THAT THE RAISING OF DEMAND WOULD BE WITHOUT THE SANCTION OF LAW. SO, HOWEVER, THE DECISION IN VIJAY TELEVISION (P.) LTD. (SUPRA) IS JUDICIALLY BINDING ON US. THE SAME IS DIRECTLY ON T HE POINT, AND IS THEREFORE SQUARELY APPLICABLE. IN FACT, IN THE PRESENT CASE T HERE IS NO ATTEMPT BY THE AO TO RECTIFY HIS MISTAKE. WE HAVE SET OUT OUR HUMBLE OPI NION IN THE MATTER ONLY WITH A 7 ITA. NO.818/MDS/2015 (AY 2010-11) DAEWON KANG UP CO. LTD. V. DDIT VIEW OF ITS CONSIDERATION BY THE HONBLE COURT IN A GIVEN CASE. RESPECTFULLY FOLLOWING THE DECISION IN VIJAY TELEVISION (P.) LTD. (SUPRA), WE HOLD THE ASSESSMENT IN THE PRESENT CASE AS BAD IN LAW. IN CONSEQUENCE, THE ASSESSEE IS ONLY LIABLE FOR TAX ON ITS RETURNED INCOME (REFER: CIT V. SHELLY PRODUCTS [2003] 261 ITR 367 (SC)). THE ASSESSMENT FAILING, WE DO NOT CONSIDER IT RELEVA NT OR NECESSARY TO ADDRESS THE ISSUE ARISING IN QUANTUM ASSESSMENT ON MERITS. WE DECIDE ACCORDINGLY. 5. IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED ON DECEMBER 30 TH , 2016 AT CHENNAI . SD/- SD/- ( ' #! ' $ . % ) ( ) (DUVVURU RL REDDY) ( SANJAY ARORA ) & / JUDICIAL MEMBER / ACCOUNTANT MEMBER / CHENNAI, @ / DATED, THE 30 TH DECEMBER, 2016 . EDN. A < :&>BC DC6> / COPY TO: 1. 89 / APPELLANT 2. :;89 / RESPONDENT 3. ' E> () / CIT(A) 4. ' E> / CIT, 5. C!GH :&>& / DR 6. H5 I / GF.