Delhi High Court Quashes Tax Assessment Orders Against Bechtel For Ignoring DRP Directions

The Delhi High Court has held that an income tax assessment order passed by an Assessing Officer (AO) in violation of the binding directions issued by the Dispute Resolution Panel (DRP) is without jurisdiction and void.

The Division Bench of Justices Subramonium Prasad and Renu Bhatnagar upheld an ITAT order quashing the assessment orders passed against UK-based Bechtel Limited for the assessment years 2016-17 and 2017-18, after finding that the AO had failed to implement the DRP's directions.

The Court reiterated that under Section 144C of the Income Tax Act, 1961, the directions issued by the DRP are binding on the Assessing Officer, who cannot disregard them while passing the final assessment order.

Relying on the Delhi High Court's earlier decision in ESPN Star Sports Mauritius S.N.C. v. Union of India, the Court observed that the present case was squarely covered by the principle that non-compliance with the DRP's binding directions renders the final assessment order without jurisdiction and void.

The Court consequently dismissed two appeals filed by the Income Tax Department challenging the ITAT's decision.

The dispute arose from an engineering and procurement support services agreement entered into between Bechtel Limited, a tax resident of the United Kingdom, and Reliance Industries Limited (RIL) in 2012.

Under the agreement, Bechtel was responsible for providing engineering information, engineering services and procurement-related support for the construction of a plant at RIL's refinery complex in the Jamnagar Special Economic Zone. The services also related to RIL's facilities in the Domestic Tariff Area.

For the assessment years 2016-17 and 2017-18, Bechtel filed income tax returns declaring nil income.

During scrutiny proceedings, the AO examined the receipts earned by Bechtel from RIL. The company contended that these receipts did not qualify as Fees for Included Services (FIS) under Article 13 of the India-UK Double Taxation Avoidance Agreement (DTAA) and were therefore not taxable in India.

However, the AO rejected this contention and proposed to treat the receipts as Fees for Technical Services (FTS)/FIS under Article 13 of the treaty.

Aggrieved, Bechtel approached the Dispute Resolution Panel.

The DRP examined the agreement and noted that RIL was required to provide furnished office facilities in Mumbai for Bechtel's personnel, besides staffing plans for projects at Jamnagar.

Based on these arrangements and the presence of Bechtel's employees in India, the DRP concluded that the company had a business connection as well as a Permanent Establishment (PE) in India.

Accordingly, it directed the AO to tax the receipts as business income under the Income Tax Act and Articles 6 and 7 of the India-UK DTAA.

The DRP also found that the services were technical in nature and satisfied the conditions for classification as FTS/FIS. However, in view of Bechtel's Permanent Establishment in India, it directed that the income be taxed as business income under Section 44DA of the Income Tax Act.

Despite these directions, the AO passed the final assessment orders treating the receipts as FTS on a substantive basis.

Bechtel challenged the orders before the ITAT, which allowed its appeals on January 31, 2024.

The Tribunal found that although the AO had reproduced the DRP's directions, he had failed to implement them in letter and spirit.

It noted that the DRP had directed the receipts to be treated as business income attributable to Bechtel's Permanent Establishment in India, while the treatment as FTS was to be adopted only on a protective basis.

ITAT held that Sections 144C(10) and 144C(13) made the DRP's directions binding on the Assessing Officer. It consequently quashed the final assessment orders as being without jurisdiction and void from inception.

Challenging the Tribunal's decision, the Income Tax Department argued that the DRP had issued two directions concerning the same receipts, namely, their taxation as business income in view of Bechtel's Permanent Establishment and their treatment as FTS/FIS under the applicable tax treaty.

The Department contended that the ITAT should have examined the appropriate method of taxation and determined whether the receipts were taxable as technical service fees or business income under Section 44DA.

However, the High Court rejected the Department's challenge. It referred to ESPN Star Sports Mauritius (supra), where a coordinate Bench had held that “under section 144C(10) of the Act the Assessing Officer had no option but to comply with the order of the Dispute Resolution Panel."

It had also held that failure to follow the statutory assessment procedure vitiated the entire exercise and rendered the final assessment order without jurisdiction and null and void.

As such, the Court dismissed the appeals.

For Appellant: Advocates Karan Sachdev SSC, Mr. Anmol Jagga JSC, Mr. Sumit Khadaria, Mr. Abhinav Mishra, Advocates.

For Respondent: Senior Advocate Deepak Chopra with Advocate Priya Tandon, Adv.