[2020] 115 taxmann.com 192 (Pune - Trib.

)[21-01-2019]

[2020] 115 taxmann.com 192 (Pune - Trib.)

IN THE ITAT PUNE BENCH 'A'
Deputy Commissioner of Income-tax (International Taxation) Circle-1, Pune
v.
Magna International Inc.*
MS. SUSHMA CHOWLA, JUDICIAL MEMBER
AND D. KARUNAKARA RAO, ACCOUNTANT MEMBER
IT APPEAL NO. 2098 (PUN) OF 2016
C.O. NO. 54 (PUN) OF 2018
[ASSESSMENT YEAR 2013-14]
JANUARY  21, 2019 

Section 144C of the Income-tax Act, 1961 - Transfer pricing - Reference to

DRP (Eligible assessee) - Assessment year 2013-14 - Whether in terms of
section 144C(1), Assessing Officer has to forward a draft of proposed order of
assessment to 'eligible assessee' if he proposes to make any variation in
income or loss returned, which is prejudicial to interest of such assessee -
Held, yes - Whether, therefore, where any addition is made to returned income
of eligible assessee on account of suo motu offer by said assessee in respect of
certain amount received which was not offered to tax earlier due to an
inadvertent error, it fails test of prejudicial to interest of assessee and, thus,
in such a case, assessment order can not be quashed on ground that draft
assessment order was not passed prior to passing of final assessment order -
Held yes [Paras 12 and 14] [In favour of revenue]
CASES REFERRED TO
 
International AIR Transport Association v. Dy. CIT [2016] 68 taxmann.com 246/241
Taxman 249 (Bom.) (para 7).
Kishore Phadke and Vinay Ghanekar for the Appellant. Sanjeev Ghei for the
Respondent.
ORDER
 
Ms. Sushma Chowla, Judicial Member- The appeal filed by Revenue is against
order of CIT(A)-13, Pune, dated 02.06.2016 relating to assessment year 2013-14
against order passed under section 143(3) of the Income-tax Act, 1961 (in short „the
Act?). The assessee has filed Cross Objections against the appeal of Revenue.
2. The appeal filed by Revenue and Cross Objections filed by the assessee were heard
together and are being disposed of by this consolidated order for the sake of
convenience.
3. The Revenue in ITA No.2098/PUN/2016 has raised the following grounds of
appeal:—
 1.   The Ld. CIT(A) erred in law and on facts in deleting the addition on the
ground the no draft order is passed u/s 144C(1) ignoring the fact that during
the course of scrutiny assessment proceedings, the assessee offered the above
income sue moto for taxation @ 10% and that the assessee had disclosed
other income of Rs. 11,75,89,902/- and had taxed the same @ 10% and that
the AO had applied 25% plus SC & EC which was applicable for the relevant
period u/s 115A(1) of the Act. Since the variation in the income/loss was not
prejudicial to the interest of the assessee as prescribed in section 144C(1), no
draft assessment order was required to be passed.

2.   The Ld. CIT(A) erred in law and on facts in deleting the addition ignoring the
fact that in this case the draft order u/s 143(3) r.w.s. 144C(1) was not required
to be passed since the criteria mentioned in the provisions of section 144C(1)
are not fulfilled in this case.
4. The assessee in CO No.54/PUN/2018 has raised the following grounds of
objections:—

1.   The Assessee contends that the learned Assessing Officer erred in applying an
incorrect rate of tax at 25% (plus surcharge and education cess) u/s 115A of
Income Tax Act, 1961 on the income offered to tax by the assessee, instead of
the correct tax at the rate of 10% (plus applicable surcharge and cess) as
prescribed under section 115A of the Act applicable for AY 2013-14.

2.   Alternately and without prejudice to the above ground, the Assessee contends
that, the learned Assessing Officer erred in not applying the tax rate of 15%
prescribed under the India-Canada Double Taxation Avoidance Agreement.
5. The Revenue is in appeal against the order of CIT(A) in holding that since no draft
order was passed under section 144C(1) of the Act, no addition is to be made in the
hands of assessee. The assessee has also filed Cross Objections and has raised the
issue against the rate to be applied on the income offered to tax by the assessee.
6. Briefly, in the facts of the case, the assessee is foreign company and for the year
under consideration had furnished return of income declaring income of Rs.
11,75,89,802/-. The Assessing Officer at page 2 of assessment order has tabulated the
transactions entered into by the assessee during the year with several concerns.
During the year under consideration, the assessee had provided certain automotive
engineering and project related support services to Cosma India, for which it had
charged sum of Rs. 62,12,060/-. TDS was deducted @ 10.506% on the income under
the head „Engineering Charges?. The assessee during the course of assessment
proceedings stated that by an error, the said income was not offered to tax in the
return of income filed. However, the amount was offered to tax during assessment
proceedings which was after gap of approximately three years from the end of
financial year. The Assessing Officer was of the view that such an offer was not in good
faith. The assessee had neither filed revised return of income nor filed any
submissions prior to selection of case. The Assessing Officer was of the view that the
assessee had concealed the income to the tune of Rs. 62,12,060/- which was added in
the hands of assessee. The Assessing Officer also noted that the assessee had filed
belated return on 25.03.2015 and had offered income to the tax in India on gross basis
under section 115A of the Act and not as per DTAA at the prevailing rate of 10%. The
Assessing Officer on verification found that the prevailing rate was 25% effective from
01.04.2014. The assessee was informed about the said rate and subsequently the
income was taxed @ 25% as per A of the sub-clause (b) of section 115A(1) of the Act
along with surcharge and education cess. Thus, the Assessing Officer passed
assessment order under section 143(3) of the Act by making an addition of Rs.
62,12,060/- and by assessing the assessee?s total income at Rs. 12,38,01,862/-
7. The CIT(A) observed that the assessee was foreign company and hence, was
„eligible assessee? under section 144C(15)(b)(ii) of the Act. The CIT(A) further noted
that the Assessing Officer had made addition of Rs. 62,12,060/- and assessed the
income in the hands of assessee at Rs. 12.38 crores and along with assessment order,
had also issued demand notice under section 156 of the Act. The CIT(A) observed that
hence the assessment order passed by Assessing Officer was final assessment order
and not draft assessment order. The CIT(A) was of the view that the Assessing Officer
ought to have passed draft assessment order first, in accordance with provisions of
section 144C(1) of the Act, before passing final assessment order. Since the Assessing
Officer had failed to do so and hence, the assessee was denied the opportunity to
defend against the addition made by Assessing Officer, before the Dispute Resolution
Panel (DRP). The assessment order passed by the Assessing Officer was thus, quashed
by the CIT(A) in turn, relying on the decision of the Hon?ble Bombay High Court in the
case of International Air Transport Association v. Dy. CIT [2016] 68 taxmann.com
246/241 Taxman 249.
8. The Revenue is in appeal against the order of CIT(A).
9. The first issue by way of ground of appeal raised by the Revenue is jurisdictional
issue. The learned Departmental Representative for the Revenue pointed out that the
assessee himself had admitted the said additional income and offered it to tax @ 10%
++ but the Assessing Officer taxed it at @ 25% and now before the Tribunal the
assessee alleges that since no draft assessment order was passed, then assessment
made in the hands of assessee be quashed.
10. The learned Authorized Representative for the assessee pointed out that by
genuine bonafide mistake, the assessee had failed to offer the said income which was
noted by the Assessing Officer at para 5 of assessment order. Then, he relied on the
ratio laid down by the Hon?ble Bombay High Court in International Air Transport
Association (supra) for the proposition that when the moment there was variation in
the income to be assessed in the hands of assessee, it was incumbent upon the
Assessing Officer to pass draft assessment order and thereafter, follow the provisions
of the Act and pass final assessment order.
11. We have heard the rival contentions and perused the record. The assessee is a
foreign company. For the year under consideration, the assessee had furnished return
of income declaring total income at Rs. 11,75,89,802/- on 25.03.2015. The said fact is
mentioned in the statement of facts filed by the assessee before the CIT(A). On the
other hand, the Assessing Officer starts assessment order with a remark that the
assessee had furnished the return of income at nil, which is incorrect. The assessee
being a Non-resident had offered the said income to tax under section 115A of the Act
at 10% (plus surcharge and cess), which was applicable for the year under
consideration. The assessee during the course of assessment proceedings discovered
that sum of Rs. 62,12,060/- was inadvertently not offered to tax in the income tax
return so filed. TDS was deducted on the same @ 10% ++. The said income related to
certain engineering services rendered to an Indian subsidiary i.e. Cosma International
(India) Pvt. Ltd. The assessee offered the same to tax vide written submissions filed on
11.01.2016 during assessment proceedings. The case of assessee before us is that the
said income was offered before any questionnaire seeking information was issued. The
Assessing Officer issued the questionnaire on 01.03.2016, for which reply was filed on
08.03.2016. The Assessing Officer then informed the assessee that since return of
income was filed on 25.03.2015, the rate of income was amended in the Act from 10%
to 25% w.e.f. 01.04.2014 and hence, the income is to be assessed @ 25% plus
surcharge and cess. The plea of assessee before the Assessing Officer was that the
amendment increasing tax rate to 25% would apply only to assessment year 2015-16
and subsequent assessment years; whereas the appeal under assessment was
assessment year 2013-14. As the assessee was Resident of Canada and as per the
benefits under Canada-India Income Tax Convention (Treaty), the rate which
prescribed was 15%. However, the Assessing Officer rejecting the plea of assessee
issued assessment order and applied rate of 25% to the income of assessee instead of
10%. The assessment order was passed including additional income voluntarily offered
by the assessee at Rs. 62,12,060/-. The CIT(A) held that since the Assessing Officer
had not passed any draft assessment order and had only passed final assessment
order, he had violated the provisions of section 144C(1) of the Act and applying the
ratio laid down by the Hon?ble Bombay High Court in International Air Transport
Association (supra) had quashed the assessment order passed by the Assessing
Officer.
12. The relevant provisions of the Act are in section 144C(1) of the Act, which provide
that the Assessing Officer in the first instance forward a draft of the proposed order of
assessment 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 term
"eligible assessee" is defined under section 144C(15)(b) of the Act. As per definition,
"eligible assessee" means any person (i) in whose case variation referred to in sub-
section (1) arises as a consequence of the order of Transfer Pricing Officer passed
under section 92CA(3); and (ii) in foreign company.
13. The issue which arises before us is whether in the present set of facts is there any
variation in the income or loss returned by the assessee and the Assessing Officer not
having passed draft assessment order had violated the provisions of section 144C(1) of
the Act. Admittedly, the assessee is a foreign company and is "eligible assessee". As
pointed out in the paras hereinabove, the assessee had filed the return of income
declaring total receipts of Rs. 11.76 crores (approx.) in the return of income filed on
25.03.2015. Thereafter, on its own motion the assessee had offered additional income
of Rs. 62,12,060/- i.e. on account of receipts which were received by the assessee
during the year but by an inadvertent error, were not offered in the return of income.
We have already referred to the statement of facts in the paras above; the assessee
suo motu and in good faith claims to have offered additional income to tax at the
beginning of assessment proceedings itself. The assessee claims that the said offer
was made even before the questionnaire was raised. In such scenario, when the
Assessing Officer passes the order after including sum of Rs. 62,12,060/- to the
receipts offered in the return of income, then income totals to Rs. 12,38,01,862/-. The
Assessing Officer has assessed the aforesaid income in the hands of assessee under
section 143(3) of the Act. In such facts and circumstances, variation in the income is
not on account of any addition made by the Assessing Officer but is on account of
voluntary offer of additional income by the assessee and it cannot be said that the
Assessing Officer has made variation in the income returned, which is prejudicial to
the interest of such assessee. The variation in the income is qualified by the words
which is prejudicial to the interest of such assessee.
14. In the facts of present case, addition, if any is made to the returned income is on
account of suo motu offer by the assessee of the receipts received by the assessee
during the year under consideration from an Indian entity and by an inadvertent error,
the same were not offered in the return of income. So, it does fail the test of
prejudicial to interest of assessee. Hence, there is no merit in the order of CIT(A) in
quashing the assessment order. The same is thus, reversed. The grounds of appeal
raised by the Revenue are thus, allowed.
15. Now, coming to the next aspect of the issue which is raised by way of Cross
Objections by the assessee i.e. the rate to be applied at the relevant time under
section 115A(BB) of the Act. The amount of income tax calculated on the income by
way of fees for technical services, if any, included in the total income were to be taxed
@ 10%. The year under appeal is assessment year 2013-14. On the other hand, the
Assessing Officer refers to an amendment to the Act which is w.e.f. assessment year
2014-15, under which tax is to be charged @ 25%. The Assessing Officer was of the
view that since the return of income was filed on 25.03.2015, then rates which are
prescribed w.e.f. 01.04.2015, the same are applicable. First of all, we hold that there is
no merit in the order of Assessing Officer in not applying the rate of 10% to the
income returned by the assessee under specific provisions of section 115A(BB) of the
Act for the relevant year. It may be pointed out herein itself that the Finance Act, 2015
w.e.f. 01.04.2016 had re-substituted the rate of tax @ 10% as against 25%.
Accordingly, we find no merit in the order of Assessing Officer in applying rate of tax
@ 25%. Without prejudice to the same, the learned Authorized Representative for the
assessee has pointed out that the rate as per DTAA is 15% to such receipts and in view
of provisions of section 90(2) of the Act, beneficial provisions are to be applied; so at
best the rate which could be applied was 15%. Accordingly, we allow the plea of
assessee and direct the Assessing Officer to apply the rate of tax at 10% plus
surcharge and cess as prescribed under section 115A of the Act. The grounds of
objections raised by assessee are thus, allowed.
16. In the result, appeal of Revenue and Cross Objections of assessee are allowed.
■■

*In favour of revenue.