Draft Reassessment Quashed Where Filed Return Was Ignored: Madras High Court in Global Publishing Solutions Limited Vs DCIT

Background and Context

The Madras High Court in Global Publishing Solutions Limited Vs DCIT examined the validity of a draft reassessment order and a subsequent corrigendum issued for Assessment Year 2018-19. The controversy revolved around:

• Cross-border service payments made by an Indian company to its foreign subsidiary
• Non-deduction of tax at source under Section 195
• Parallel proceedings against both the Indian company (for TDS default) and the foreign assessee (for reassessment)
• A draft assessment framed on a best judgment basis under Section 144, despite a return of income having been filed in response to reassessment proceedings

The Court ultimately set aside the draft assessment order and corrigendum, directing that the assessment be re-done in accordance with law, while also clarifying how limitation under Section 153(2) would be computed in light of the pending writ.

Parties and Transaction Structure

Corporate Relationship

• The petitioner-assessee, Global Publishing Solutions Limited, is a foreign company.
• It is a subsidiary of Newgen Digitalworks Private Limited (Newgen Digitalworks), which is:
  • Incorporated in India
  • Resident in India for purposes of the Income-Tax Act, 1961 (the I-T Act).

Nature of Payments

• The assessee provided services to Newgen Digitalworks.
• In consideration of such services, Newgen Digitalworks remitted payments to the assessee.
• On these remittances, no tax was deducted at source under Section 195 of the I-T Act.

Parallel Proceedings

1. TDS proceedings against Indian entity

   • Non-deduction of tax under Section 195 led to initiation of proceedings against Newgen Digitalworks (Indian resident payer).
   • These proceedings relate to the payer’s obligation to withhold tax and are pending before the appellate authority.

2. Reassessment proceedings against assessee

   • Independently, the Department reopened the assessment of the assessee-foreign company:
     • Notice under Section 148A was first issued.
     • Thereafter, notice under Section 148 was served for AY 2018-19.
   • In response to the reassessment notice, the assessee filed its return of income.

The dispute before the High Court concerned the legality of the resultant draft assessment order and its corrigendum.

Procedural History Leading to the Writ Petition

Initiation of Reassessment

1. Notice under Section 148A
   Initial step signalling the Department’s intent to reopen the assessment of the assessee.

2. Notice under Section 148

   • Formal reassessment notice was issued.
   • After receipt of this notice, the assessee filed its return of income for AY 2018-19.

3. Notice under Section 142(1)

   • On 27.03.2023, a notice under Section 142(1) called upon the assessee to furnish its return and details.
   • The assessee filed the return on 28.03.2023.

Draft Assessment and Corrigendum

Despite the filing of return:

1. Draft Assessment Order dated 30.03.2023

   • Passed under Section 144 on a best judgment basis.
   • The Assessing Officer recorded that no return of income had been filed by the assessee.
   • Assessment was thus framed on the premise of non-compliance/non-filing.

2. Corrigendum dated 31.03.2023

   • Issued the very next day.
   • Acknowledged the fact that the return of income had indeed been filed.
   • However, all substantive conclusions in the original draft order were retained.
   • There was no fresh application of mind to the contents of the filed return; only the factual mistake was corrected.

Writ Petition Before the Madras High Court