Madhucon Sino Hydro Jv, Hyderabad, ... vs Assessee

This is an appeal by assessee Company against the order of Hon'ble Dispute Resolution Panel (DRP), Hyderabad, dated 24.04.2014 for the Assessment Year (AY) 2006-07, raising the following Grounds of Appeal:

1 (1) The order of the Assessing Officer is erroneous, unjust and contrary to the facts of the case.

(2) The learned Assessing Officer erred in holding that the assessee Madhucon Sino Hydro JV, as the Agent of Sino Hydro Corporation and in holding that the assessee is liable for payment of tax when the appellant deducted tax at source at the prevailing rates as required u/s. 195 of the I.T. Act. The learned DRP erred in confirming the same while passing the order.

(3) The learned DRP erred in holding that the notice u/s. 147 is valid and further erred in holding that the assessment made by the Assessing Officer is valid.

(4) The Assessing Officer and the DRP are not justified in treating the amount paid by the Joint Venture to Sino Hydro Corporation as the business income assessable u/s. 44DA of the Act.

(5) The learned Assessing Officer and the DRP ought to have seen that the provisions contained in Article XII of the DTAA between India and China would apply to the payments made and the appellant deducted tax at source correctly in accordance with the provisions of the DTAA.

Both the Assessing Officer and DRP ought to have seen that the correct amount of tax was deducted at source in view of Article 12 of the DTAA between India and China and, therefore, no further assessment is required to be made on the appellant treating it as an Agent.

(6) Without prejudice to the contention of the appellant that no part of the amount paid by the Joint Venture is assessable as the business income, the Assessing Officer and the DRP are 2 not justified in holding that 70% of the amount paid is taxable as the business income of the foreign company.

(7) The learned Assessing Officer and the DRP ought to have seen that the amount represents part of the contract receipts and the rate of profit for the contractor is normally estimated at 8% to 12.5% and, therefore, the DRP erred in directing the Assessing Officer is to estimate the profit at 70% of the amount.

(8) The learned DRP erred in confirming the action of the Assessing Officer in charging interest u/s. 234A, 234B and 234C of the I.T. Act. The Assessing Officer and DRP ought to have considered the fact that the assessee is an NRI and the amount is to be subjected to tax u/s. 195 of the I.T. Act and, therefore, the provisions u/s. 234B and 234C have no application.

(9) Any other ground or grounds that may be urged at the ti;me of hearing.

2. M/s. Madhucon Sino Hydro JV (the Appellant) had been declared as an agent of non-resident M/s. Sino Hydro Corporation, China, vide Order dated 30-03-2013 by the Assistant Director of Income Tax (International Taxation)-II, Hyderabad (hereinafter called "Assessing Officer"). The Appellant had challenged this order before the Commissioner of Income Tax (Appeals), Hyderabad. While the matter stood thus, the Assessing Officer had proceeded with the re- assessment proceedings to assess the payment of consultancy fees to Sino Hydro Corporation, China in the capacity of Representative

3 Assessee of the said concern u/s 163 vide Order dated 26.03.2014 by issue of notice u/s. 148 of the Act.

3. The order was appealed before the Hon'ble DRP, Hyderabad, who, vide order dated 24.12.2014, who had dismissed the Grounds of Appeal. Hence, the present appeal.

4. The Appellant had raised the preliminary ground challenging the very validity of re-assessment proceedings. Since this ground goes to the very root of the matter, we shall now first deal with this ground of appeal.

5. The Learned Counsel for Appellant had urged that the re- assessment proceedings initiated were bad in law inasmuch as the reassessment proceedings were initiated after the expiry of the 4-years from the end of the relevant assessment year without the sanction of the concerned Principal C.I.T. or C.I.T., as the case may be. He filed a copy of sanction obtained by the Asst. Director of Income Tax (International Taxation)-II, Hyderabad vide Proceedings No. ADIT(IT(I)/AAMFM1451G/2012-13, dated 30.03.2013, which reveals that Additional D.I.T. (International Taxation), Hyderabad accorded the sanction for issue of notice u/s 148 of the Act with the stamp of "YES" on 30.03.2013. He submitted that there was no approval given by the concerned C.I.T., in the case. Therefore, he submitted that the reassessment proceedings were null and void ab initio.

4 6. On the other hand, the learned CIT DR placed reliance on the orders of the lower authorities.

7. We heard the rival parties and perused the material on record. A mere perusal of the reasons recorded by the Assessing Officer reveals that the basis for initiating the reassessment proceedings is the order of this Hon'ble Tribunal in I.T.A.Nos.646&701/Hyd/2010 dated 27.11.2012 in the case of M/s. Madhucon Sino Hydro JV, at para `12, which reads as under:

"However, it has to be verified whether the Chinese concern has offered this income for tax in India. If the Chinese concern has not filed Income Tax return and offered this amount as part of their income in computing their taxable income in India the Assessing Officer may take suitable action for bringing the amount to tax in accordance with provisions of the I.T. Act, 1961."

8. The ITO, Ward-6(3), Hyderabad had passed on this information to the Assessing Officer of M/s. Sino Hydro Corporation. He informed that M/s. Sino Hydro Corporation does not have PAN and is not assessed to tax in India.

9. Therefore, based on this information, the Assessing Officer had come to the conclusion that payments made by the Appellant to M/s. Sino Hydro Corporation, China are assessable in the hands of the Appellant in the capacity of Representative Assessee. Therefore, we are called upon to examine whether the above information would constitute reasons as contemplated u/s. 148 of the Income Tax Act, 5 1961. The fact that the Hon'ble Tribunal made observation that the Assessing Officer may take suitable action for bringing the amount to tax in accordance with the provisions of the Act cannot be construed to be a direction to reopen the assessment so as to issue reassessment notice even after expiry of period of four years from the end of the relevant assessment year. The above observation made by the Hon'ble Tribunal can at best be said to be a suggestion made to the Assessing Officer to consider as to whether the addition of said sum can be made or not. Therefore, the contention of the Assessing Officer that the Hon'ble Tribunal had directed the reassessment proceedings cannot be accepted. In this context It is very apt to extract the observation of Hon'ble Supreme Court in the case of Rajinder Nath [1979] 120 ITR 14, "the observations of the Commissioner of Income-tax (Appeals) that the Income-tax Officer is free to look into and consider the disallowances, would simply mean, giving an option and discretion to the Income-tax Officer to take or not to take action as he deems fit and such an observation cannot be said to be a "direction" given by the Commissioner of Income-tax (Appeals) as contemplated under section 150 of the Act."

Drawing support from the above decision, we are of the opinion that the direction of the Tribunal cannot be construed as a direction to the Assessing Officer to reopen the assessment proceedings. In fact, from the perusal of the Order of the Hon'ble Tribunal, it is clear that there is no positive direction to this effect. Therefore, the order of the Hon'ble Tribunal cannot form a basis for initiation of reassessment 6 proceedings. Even assuming that there is such a finding or direction as assumed by the Assessing Officer, such a finding or direction is illegal and beyond the power of the Tribunal. The term "finding or direction"

has been well defined by the Hon'ble Supreme Court in the case of Rajinder Nath vs. CIT 120 ITR 14 as follows:-

"The expression 'finding' and 'direction' in section 153(3) are limited in meaning. A finding given in an appeal, revision or reference arising out of an assessment must be a finding necessary for the disposal of the particular case, that is to say, in respect of the particular assessee and in relation to the particular assessment year. To be a necessary finding, it must be directly involved in the disposal of the case. It is possible in certain cases that in order to render a finding in respect of A, a finding in respect of B may be called for. For instance, where the facts show that the income can belong either to A or B and to no one else, a finding that it belongs to B or does not belong to B would be determinative of the issue whether it can be taxed as A's income. A finding respecting B is initially involved as a step in the process of reaching the ultimate finding respecting A. If, however, the finding as to A's liability can be directly arrived at without necessitating a finding in respect of B, then a finding made in respect of B is an incidental finding only. It is not a finding necessary for the disposal of the case pertaining to A.

"As regards the expression 'direction' in section 153(3)(ii) of the Act, it is now well-settled that it must be an express direction necessary for the disposal of the case before the authority or court. It must also be a direction which the authority or court is empowered to give while deciding the case before it. The expression 'finding' and 'direction' in section 153(3)(ii) must be accordingly confined. Section 153(3)(ii) is 7 not a provision enlarging the jurisdiction of the authority or court.

"The Supreme Court remanded the case to the High Court for deciding the question whether section 147(a) was applicable to the case."

"

10. Therefore, we are of the considered opinion that the Assessing Officer is not bound to blindly follow the order of Hon'ble Tribunal without applying his mind independently to the facts of the case, as to whether the ingredients that are required to be satisfied before initiation of reassessment proceedings are satisfied or not. The Assessing Officer, in this case, had not applied mind of his own at all and proceeded with reassessment proceedings solely based on the order of the Hon'ble Tribunal. It is trite law that the reassessment proceedings are valid in law only when the Assessing Officer applied his mind independently to the information on hand. In the present case, it is not at all discernible as to whether the Assessing Officer had applied his mind independently and arrived at a belief that on the basis of material, which he had before him, income had escaped assessment. The Assessing Officer had not even recorded his satisfaction about the correctness or otherwise of the finding given by the Hon'ble Tribunal. What is recorded by the Assessing Officer as his "reasons to believe" is nothing but reproduction of a portion of order of Hon'ble Tribunal. The Hon'ble Apex Court in Chhugamal Rajpal [1971] 79 ITR 603 held that "the submission of a report is not the same as recording of reasons to believe for issuing a notice.

8 11. The Assessing Officer has clearly substituted form for the substance and, therefore, the action of the respondent falls foul of the law laid down by the Supreme Court in Chhugamal Rajpal [1971] 79 ITR 603", which is clearly applicable to the facts of this case. Therefore, the reassessment proceedings cannot be upheld as the condition precedent for exercise of jurisdiction u/s. 147 of the Act is not fulfilled.

12. We further notice that this order of assessment also suffers from the vice of illegality for want of sanction from the competent authority. Admittedly, in this case, the reassessment notice was issued after the expiry of 4-years from the end of the relevant assessment year and, therefore, as per provisions of Section 151 of the Act; the sanction of the Commissioner of Income Tax is required before issue of the notice u/s. 148 of the Act. Whereas in the present case, it is only the Addl. Commissioner of Income-tax (International Taxation), Hyderabad, who accorded sanction vide proceedings No.ADIT(IT(I)/AAMFM1451G/2012-13, dated 30.03.2013, that too, without there being a satisfaction, application of mind on his part. Therefore, the requirements of Section 151 of the Act were not complied with by the Assessing Officer. There is long line of authorities in support of the proposition that non-compliance of the provisions with Sec. 151 of the Act would vitiate the notice issued u/s. 148, as well as the resultant reassessment proceedings, relying on the decision of Hon'ble Supreme Court in CIT vs. Maharaja Pratap Singh (1961) 41 ITR 421. Accordingly, the present reassessment proceedings are also not valid in law, in as much as, the 9 sanction of the concerned Commissioner of Income Tax is not obtained.

13. We also notice from the material on record, one more fundamental flaw in the reassessment proceedings of this case, which is not even pointed out by the Appellant, is barred by limitation prescribed under provisions of sub-section (3) of Sec. 149 of the Act. The provisions of sub-section (3) of Section 149 of the Act as they stood at the relevant point of time read as follows:-

"(3) If the person on whom a notice under section 148 is to be served is a person treated as the agent of a non-resident under section 163 and the assessment, reassessment or re-

computation to be made in pursuance of the notice is to be made on him as the agent of such non-resident, the notice shall not be issued after the expiry of a period of *[six] years from the end of the relevant assessment year.

[Explanation.--For the removal of doubts, it is hereby clarified that the provisions of sub-section (1) and (3), as amended by the Finance Act, 2012, shall also be applicable for any assessment year beginning on or before the 1st day of April, 2012.]"

*Substituted for "two" by the Finance Act, 2012, w.e.f. 1-7- 2012.

Thus, the provisions of sub-section (3) of Section 149 mandates that where the income escaping the assessment belongs to a non-resident, and the reassessment is to be made on agent of non-resident in accordance with the provisions of Sec. 163 of the Act, the notice u/s.148 should be issued only within the period of two years from the end of the relevant assessment year up to 30.06.2012 or within a 10 period of six years subsequent to 30.06.2012. In this case, the relevant assessment year is 2006-07. Reassessment notice was required to be issued on or before 31.3.2008. Whereas, in the case on hand the reassessment notice was issued on 30.03.2013, which is clearly beyond the period of limitation prescribed under sub-section (3) of Section 149 of the Act. The amended period of six years is applicable only from the assessment year 2012-13 onwards as per the Explanation to the above sub-section.

The Hon'ble Supreme Court in the case of Claggett Branchi Co. Ltd. v. CIT [1989] 177 ITR 409 (para 9) had held as under:-

"......The issue of notice under section 148 of he Act to the agent after the expiry of two years from the end of the relevant assessment year is prohibition by the statute."

The same ratio was followed in the following two cases :-

(i) CIT v. S.G. Sambandam & Co., (2000) 242 ITR 708, 718 (Mad);

(ii) Ingram Micro India Ltd. v. Deputy CIT (2012) 347 ITR 221 (Bom)."

14. Respectfully following the ratio laid down in the above cases, we hold that the re-assessment proceedings in this case are also barred by limitation and therefore void ab initio.

15. Thus, viewed from any angle, the reassessment proceedings launched by the Assessing Officer cannot be upheld and, therefore, we allow the ground of appeal, challenging the validity of the reassessment proceedings and hereby quash the reassessment proceedings.

11 16. Since we held in the paragraphs (supra) that the reassessment proceedings are null and void, we do not consider it necessary to adjudicate upon the other grounds of appeal raised by the Appellant.

17. In the result, the Appeal is allowed in full.

Order pronounced in the open Court on 15.07.2015.

Sd/- Sd/- ( SAKTIJIT DEY) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated 15th July, 2015

Copy to

1. Madhucon Sino Hydro JV, C/o Sri S. Rama Rao, Advocate, Flat No. 102, Shriya's Elegance, H. No. 3-6- 643, St. No. 9, Himayat Nagar, , Hyderabad - 500 029

2. DCIT-2, International Taxation, Hyderabad

3. DRP, Hyderabad

4. CIT, International Taxation, IT Towers, 10-2-3, AC Guards, Hyderabad - 500 004.

5. DR, ITAT, Hyderabad

6. Guard File

12 Sl. Description Date Initials No.

1. Date of dictation by the Author on Sr.PS computer

2. Draft placed before the Dictating Member Sr.PS

3. Draft placed before the Second Member A.M.

4. Draft approved by the Second Member J.M.

5. Date of approved order comes to the Sr. PS Sr.PS

6. Date of pronouncement of order Sr.PS

7. Date of file sent to the Bench Clerk Sr.PS

8. Date on which files goes to the Head Clerk

9. Date of dispatch of order

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