2019 (2) TMI 1125 - AT - Income Tax

Reopening of assessment - materials collected/impounded during survey operation established business connection of assessee with its Indian subsidiary as per provisions of section 9(1)(i) and existence of permanent establishment of assessee through its Indian subsidiary - AO/ Ld. DRP was of opinion that income attributable to permanent establishment in India has escaped assessment - HELD THAT - Notice issued under section 148 could not be sustained once arm s length price procedure has been followed. Validity of notice u/s 148 was issued to assessee for assessment years under consideration wherein AO in draft assessment order held that assessee had fixed place of business PE in India in terms of Article 5(1) and 5(2) of DTAA between India and Japan which was being used by its employees-expatriates as premises (at their disposal) for business of assessee. As Hon ble Supreme Court in assessee s own case for years under consideration has quashed and set-aside notice of reassessment u/s 148 of the Act ground No.2 raised by assessee stands automatically allowed. As the notice has been quashed by Hon ble Supreme Court reassessment proceedings pursuant to the said notice and the impugned orders passed by the AO stand automatically cancelled.

Summary

Issues Involved:
1. Validity of reassessment proceedings under Section 147 of the Income Tax Act.
2. Existence of Permanent Establishment (PE) under Article 5 of the Indo-Japan DTAA.
3. Taxability of off-shore supplies made by the Appellant to its subsidiary.
4. Taxation of export commission and reimbursement of expenses.
5. Allocation of income for activities in India and attribution study.
6. Application of global profit ratio and disallowance of research and development expenses.
7. Levy of interest under various sections of the Income Tax Act.
8. Initiation of penalty under Section 271(1)(c) of the Act.

Detailed Analysis:

1. Validity of Reassessment Proceedings:
The assessee challenged the initiation of reassessment proceedings under Section 147 of the Act. The Assessing Officer (AO) had issued a notice under Section 148 based on a belief that income had escaped assessment. The Hon'ble Supreme Court quashed the notice, stating that once the arm's length price procedure had been followed, no further profit could be attributed to the assessee, even if it had a permanent establishment in India. Consequently, the reassessment proceedings were canceled.

2. Existence of Permanent Establishment (PE):
The AO and Dispute Resolution Panel (DRP) concluded that the Appellant had a PE in India, based on transactions and statements of expatriate employees. However, the assessee argued that the necessary requisites for creating a PE under the DTAA were lacking. The Hon'ble Supreme Court held that the notice under Section 148 could not be sustained once the arm's length price procedure had been followed, thereby invalidating the reassessment proceedings.

3. Taxability of Off-shore Supplies:
The AO and DRP brought to tax the off-shore supplies made by the Appellant to its subsidiary in India. The assessee contended that since the title and risk of the goods were transferred outside India, no portion of the profit could be taxed in India. Additionally, the international transactions had already been subjected to transfer pricing assessment and found to be at arm's length basis.

4. Taxation of Export Commission and Reimbursement of Expenses:
The AO and DRP taxed export commission and reimbursement of expenses as 'income' under the Income Tax Act. The assessee argued that CBDT circulars should have been followed, and reimbursement of expenses should not be considered as income.

5. Allocation of Income and Attribution Study:
The AO and DRP attributed a portion of the global income to the activities of the appellant in India. The assessee disputed this attribution, highlighting that selling operations were not carried out in India. The DRP's rejection of the attribution study was also contested.

6. Application of Global Profit Ratio:
The AO and DRP applied a global profit ratio and made disallowances of research and development expenses. The assessee argued that the disallowance was not justified, especially considering the global operating profit ratio and the prohibition on further income allocation once transactions met the arm's length basis.

7. Levy of Interest and Penalty:
The AO and DRP levied interest under various sections of the Income Tax Act and initiated a penalty under Section 271(1)(c) for alleged concealment of income. The assessee challenged these levies and penalties, citing reasons related to non-residency, deduction of tax, and lack of refund.

In conclusion, the appeals filed by the assessee were allowed primarily on the legal question of the validity of the reassessment proceedings, as determined by the Hon'ble Supreme Court. The judgment emphasized the importance of following the arm's length price procedure and the provisions of the DTAA in determining tax liabilities for international transactions.