AO must Forward Draft Assessment to assessee u/s 144 C of Income Tax Act if he proposes to make any variation in ITR: ITAT [Read Order]

The Chennai bench of the Income Tax Appellate Tribunal ( ITAT ) held that as per section 144 C of the Income Tax Act, 1961 the Assessing Officer ( AO ) must pass 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.

Regen Renewable Energy Generation Global, the assessee is a non-residential company fiscally domiciled in Cyprus, was a mere intermediary and not the beneficial owner of the royalty as received by it from RPPL. The assessee computed a tax of 15% on its royalty income based on DTAA instead of 25% as prescribed under the Income Tax Act.

The case was reopened and issued notice under section 148 of the Act. It was noted by AO that the 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.

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%.

There was no variation in the returned income and the assessed income and therefore, final assessment order was time-barred. It was evident 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 Tribunal viewed 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 two member 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.

The Bench 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.

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M/s Regen Renewable Energy Generation Global Limited vs ACIT , 2024 TAXSCAN (ITAT) 818 , Ramakrishnan , Jyothi Lakshmi Nayak