India – Overzealous Revisionary Proceedings Nullify Original Assessment.

22 December 2021

 

Recently, the Income-tax Appellate Tribunal (‘Tribunal’) quashed a revisionary order passed by the Commissioner of Income-tax (‘CIT’) which resulted in an unforeseen outcome as not only the revisionary proceedings were quashed, but even the underlying assessment orders were held to be non-est.

 

As a background, the Department initiated assessment proceedings on the assessee, being a non-resident company (‘Foreign Enterprise’) by alleging that the Indian subsidiary of such Foreign Enterprise constituted a Permanent Establishment (‘PE’).[1] While the findings in the draft assessment order (‘Draft Order’) pertaining to the existence of PE were confirmed by the Dispute Resolution Panel (‘DRP’), the methodology for attributing profits to such PE was modified in terms of a concession[2] filed by the assessee. What is interesting to note is that the DRP only modified the mark-up and did not comment on the cost on which such mark-up was to be applied. However, while passing the final assessment order, the Assessing Officer (‘AO’), though adopted the mark-up directed by the DRP but it reduced the cost on which such mark-up was to be applied.

 

Subsequently, CIT initiated revisionary proceedings under Section 263 of the Income-tax Act, 1961 (“IT Act”) on the ground that AO erred in reducing such attribution, and thus, the assessment orders were not in compliance with the directions issued by the DRP and, therefore, were erroneous and prejudicial to the interest of the Revenue.

 

The assessee challenged the revisionary order before the Tribunal[3] and argued that in terms of the revisionary order, the assessment orders were non-est as the AO had failed to follow the mandatory directions of the DRP. It was also argued that owing to the non-compliance of the DRP direction, the resulting assessment orders were non-est and could not form basis for the revisionary proceedings. The Department tried to defend the revisionary orders by arguing that there was only partial non-compliance with the DRP directions and same would not nullify the entire order.

 

The Tribunal, while quashing the revisionary orders, went on to hold that the AO did not have the option to follow the directions issued by the DRP in piece-meal, and thus, even partial failure to adhere to the DRP directions rendered the assessment orders non-est.