AO Must Pass Draft Assessment If He Proposes Variation In Returned Income: Chennai ITAT Explains Scope Of Sec 144C

Section 144C of the Income Tax 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, the 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.

The Bench of Manu Kumar Giri (Judicial Member) and Manoj Kumar Aggarwal (Accountant Member) while expanding the scope of Sec 144C by defining eligible assessee as a non-resident not being a company, observed that AO is quite empowered to issue draft assessment order even in cases where he proposes to make any variation which is prejudicial to the interest of the assessee.

Facts of the case:

The assessee, a non-residential company fiscally domiciled in Cyprus, was mere intermediary and not the beneficial owner of the royalty as received by it from RPPL. The assessee computed tax of 15% on its royalty income based on DTAA instead of 25% as prescribed under Income Tax Act. Later, based on findings in AY 2013-14, the case was reopened and notice was issued u/s 148. It was noted by AO that assessee entered into an agreement with Vensys Energy AG, Germany for provision of know-how, license and technical assistance on certain terms and conditions. The assessee was to pay lump sum payment of Rs.6.5 million Euros and a variable payment per WEC produced by the licensee. However, lump sum payment was paid by assessee out of equity capital and share premium infused by RPPL. Similarly, the quarterly royalty was also paid by the assessee to Vensys out of royalty paid by the RPPL.

The AO, referring to Article 12 of the India Cyprus DTAA, held that such royalty which were incurred as equity share capital and share premium invested by RPPL may also be taxed in the contracting state in which the same arises. Since the assessee was not beneficial owner of royalties, it was to be taxed in contracting state. Hence, the AO denied treaty benefit and passed assessment by applying tax rate of 25%.

Observations of the Tribunal:

The Bench noted that there was no variation in the returned income and the assessed income and therefore, final assessment order was time-barred.

Observing that the controversy is confined to the question as to what will be the rate on which income returned by the assessee is to be taxed, the Bench found that the assessee has claimed taxation @ 15% under India Cyprus DTAA, whereas AO has declined the said treaty protection on the ground that the assessee was not beneficial owner of the royalty income.

Since there is no variation in the quantum of income, the Bench emphasized that the assessee being a non-resident company and fiscally domiciled in Cyprus, in terms of Section 144C(15)(b)(ii), is an eligible assessee.

Going further, the Bench elaborated that the Finance Bill, 2020 has amended the law and propose issuance of draft assessment orders in the case of eligible assessees mandatorily even when there is no variation in the income or loss returned by the assessee.

Since the application of higher rate of tax is certainly prejudicial to the assessee and the same, in fact, is the grievance of the assessee, the Bench pointed that the AO should verify whether assessee has to be treated as beneficial owner of royalty income and the income should be subjected to tax at rates specified in DTAA.

The Bench therefore partly allowed Assessee's appeal and restored the matter to the AO to re-examine whether the assessee could be considered as beneficial owner of royalty.

Counsel for Appellant/ Assessee: B. Ramakrishnan

Counsel for Respondent/ Revenue: Jyothi Lakshmi Nayak

Case Title: M/s Regen Renewable Energy Generation Global Limited verses ACIT

Case Number: ITA No.684/Chny/2022 & ITA No.685/Chny/2022

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