2025 (2) TMI 1177 - HC - Income Tax

Reopening of assessment u/s 147 - reason to believe - tangible material for the AO to conclude that the petitioner had a PE in India or not? - HELD THAT - Entire action of reassessment was based solely on the past surveys which had been conducted. There has been an abject failure on the part of the AO to record any finding on how the material gathered in the course of those surveys would impact the assessment of income for the years in question. As was observed by us in Grid Solutions OY PE 2025 (1) TMI 911 - DELHI HIGH COURT is a fact specific issue and that facts gathered in the course of a survey cannot be mechanically adopted or applied as relevant to an assessment wholly unconnected and separate. AO also fails to record any satisfaction to the effect that the facts gathered in the course of those past surveys have been on a prima facie evaluation found to exist in the AYs in question. and for all the aforesaid reasons we allow the instant writ petitions and quash the following impugned notices issued under Section 148.

Summary

Issues Presented and Considered

The core legal questions considered by the Court in these writ petitions challenging reassessment notices under Section 148 of the Income Tax Act, 1961 (the Act) for Assessment Years (AY) 2013-14, 2014-15, and 2015-16 were:

• Whether the reassessment notices issued based on survey reports conducted in 2007 and 2019 on entities related to the petitioner's group were valid and supported by material specific to the relevant AYs.
• Whether the existence of a Permanent Establishment (PE) of the foreign petitioner in India was established for the relevant AYs, thereby justifying reassessment.
• Whether income from offshore supplies made by the petitioner was taxable in India, particularly in light of the Supreme Court's ruling in Ishikawajma-Harima Heavy Industries Ltd and principles of attribution of income to a PE.
• Whether the Assessing Officer (AO) had recorded valid reasons and applied mind to the facts of the relevant AYs to form a reason to believe that income had escaped assessment.
• The applicability and limits of adopting findings from surveys and judicial decisions pertaining to other years to the AYs under consideration.
• The extent to which principles of consistency, res judicata, and fact-specific inquiry apply in income tax reassessment proceedings.

Issue-wise Detailed Analysis

1. Validity of Reassessment Notices Based on Survey Reports

Legal Framework and Precedents: Section 148 of the Act empowers reopening of assessments if the AO has reason to believe that income chargeable to tax has escaped assessment. The Supreme Court in GKN Driveshafts (India) Ltd. v. Income Tax Officer laid down procedural safeguards and the need for recording reasons to form such belief. The principle that reassessment must be based on material relevant to the AY in question is well established. The Court also referred to the Supreme Court's decision in Raymond Woollen Mills Ltd. v. ITO, which held that reopening on mere assumptions without material specific to the AY is impermissible.

Court's Interpretation and Reasoning: The reassessment notices were issued relying primarily on survey reports conducted in 2007 and 2019 on entities related to the petitioner's group. The AO had not recorded any finding or satisfaction that the facts found in those surveys existed or were applicable to the AYs 2013-14 to 2015-16. The Court emphasized that PE and income escaping assessment are fact-specific issues that require examination of facts prevailing in the relevant AY.

Key Evidence and Findings: The reasons recorded for reopening largely reproduced findings from surveys and earlier judicial decisions without fresh application of mind to the facts of the AYs in question. The AO assumed, without evidence, that the business model and facts remained unchanged.

Application of Law to Facts: The Court held that the AO's failure to record reasons specific to the AYs and reliance on past surveys without factual nexus to the relevant years rendered the reassessment notices invalid. The principle that reassessment cannot be based on mere suspicion or assumption was underscored.

Treatment of Competing Arguments: The respondents argued that the survey findings and earlier judicial rulings justified reassessment. The Court rejected this, noting that the AO must independently verify that the facts found in surveys apply to the AYs under consideration.

Conclusion: The reassessment notices were quashed on the ground that the AO did not apply mind to the facts of the relevant AYs and relied on material unrelated to those years.

2. Existence of Permanent Establishment (PE) and Its Tax Implications

Legal Framework and Precedents: The concept of PE under domestic law and Double Taxation Avoidance Agreements (DTAA) is central to determining taxability of foreign entities. The Court referred to the OECD Commentary on Article 5, which states that PE determination is fact-specific and must be made for each tax period. The Delhi High Court's decisions in GE Energy Parts Inc. and others were cited, which held that activities of Indian personnel that are not merely auxiliary can constitute agency PE.

Court's Interpretation and Reasoning: The AO relied on survey findings that foreign companies in the group had Dependent Agent PE and Fixed Place PE in India. The Court noted that while the petitioner admitted to having a Project Office for onshore supplies, it contended that offshore supplies were outside India and not taxable. The Court emphasized that PE determination requires detailed factual inquiry for each AY.

Key Evidence and Findings: Statements of employees and email correspondence from the survey were relied upon by the AO to establish PE. However, these were not linked specifically to the petitioner's activities in the relevant AYs. The petitioner's Project Office and business model were described, and prior judicial findings on PE for related group companies were discussed.

Application of Law to Facts: The Court reiterated that PE is a question of fact and must be determined based on the scope, nature, and duration of activities in each AY. The AO failed to demonstrate that the facts justifying PE in prior years or other entities applied to the petitioner in the AYs under challenge.

Treatment of Competing Arguments: The petitioner argued that offshore supplies were not taxable in India and that the PE did not exist for the relevant AYs. The AO dismissed reliance on Ishikawajma-Harima Heavy Industries Ltd and other precedents, differentiating facts and rejecting the petitioner's contentions. The Court, however, found the AO's approach flawed for lack of fact-specific findings.

Conclusion: The Court held that the existence of PE must be established by facts applicable to the relevant AYs and cannot be presumed or extrapolated from other years or entities without proper findings.

3. Taxability of Offshore Supplies

Legal Framework and Precedents: The Supreme Court in Ishikawajma-Harima Heavy Industries Ltd held that only income attributable to operations carried out in India is taxable. Transfer of title and payment outside India for offshore supplies does not give rise to taxable income in India. The distinction between business connection and PE was recognized, with only income attributable to PE being taxable.

Court's Interpretation and Reasoning: The petitioner contended that offshore supplies made outside India with title transfer abroad did not attract Indian tax. The AO disputed this, alleging that insurance costs borne by foreign companies indicated that sales were not offshore. The Court noted that bearing insurance cost does not affect ownership transfer or taxability, citing rulings of the Authority for Advance Rulings (AAR).

Key Evidence and Findings: Contractual terms showing transfer of ownership outside India were presented. AAR decisions in Technip France SAS and Mitsubishi Electric Corporation were cited to support the petitioner's position.

Application of Law to Facts: The Court found that no income from offshore supplies could be attributed to the alleged PE in India and hence was not taxable. The AO's reliance on insurance cost borne by foreign entities was insufficient to establish taxability.

Treatment of Competing Arguments: The AO rejected reliance on Ishikawajma-Harima and other precedents, citing factual differences and past assessment history. The Court, however, emphasized the need for fact-specific inquiry and proper application of legal principles.

Conclusion: Income from offshore supplies where title and payment occur outside India is not taxable in India, and no income can be attributed to an alleged PE for such supplies without factual basis.

4. Application of Principles of Consistency, Res Judicata, and Fact-Specific Inquiry

Legal Framework and Precedents: The Court reiterated the settled legal position that each AY is distinct and res judicata does not apply in income tax proceedings. Decisions in National Petroleum Construction Co. v Dy. CIT and Galileo Nederland BV v ADIT were cited, emphasizing that findings in one year are not binding on another unless facts remain unchanged and there are compelling reasons for consistency.

Court's Interpretation and Reasoning: The AO's reliance on survey findings and judicial rulings from other years without establishing that facts remained unchanged was found to be legally untenable. The Court underscored that PE determination and escaped income assessment require fresh application of mind for each AY.

Key Evidence and Findings: The Court noted absence of any recorded satisfaction by the AO that facts from surveys conducted in 2007 and 2019 applied to AYs 2013-14 to 2015-16. The AO's approach was characterized as mechanical adoption of prior findings.

Application of Law to Facts: The Court held that the AO's failure to demonstrate that facts remained unchanged or that the business model was identical across years invalidated the reassessment. The principle of certainty and consistency requires following earlier decisions unless good reasons exist to deviate.

Treatment of Competing Arguments: The respondents contended that the AO was justified in assuming unchanged facts and applying prior findings. The Court rejected this, clarifying that assumptions cannot substitute for reasons based on facts applicable to the relevant AY.

Conclusion: The principle of fact-specific inquiry prevails, and reassessment cannot be sustained on assumptions or extrapolations from other years without specific findings.

5. Adequacy of Reasons Recorded and Application of Mind by AO

Legal Framework and Precedents: The Supreme Court in GKN Driveshafts and other rulings mandates that the AO must record cogent reasons based on material relevant to the AY and apply mind before initiating reassessment. Mere suspicion or reliance on unrelated facts is insufficient.

Court's Interpretation and Reasoning: The Court found that the reasons recorded by the AO were largely a reproduction of survey findings and earlier judicial rulings, lacking any analysis or findings specific to the petitioner's income and activities in the relevant AYs.

Key Evidence and Findings: The AO's reasons did not demonstrate how the material gathered in surveys impacted the assessment for AYs 2013-14 to 2015-16. The Court noted absence of any prima facie satisfaction or application of mind to the facts of these years.

Application of Law to Facts: The Court held that the AO's failure to record reasons based on facts relevant to the AYs rendered the reassessment invalid. The AO's reliance on assumptions and prior findings was inadequate.

Treatment of Competing Arguments: The respondents argued that the AO's reasons were sufficient and that reassessment was justified. The Court disagreed, emphasizing legal requirements for specific and relevant reasons.

Conclusion: The reassessment notices were quashed due to the AO's failure to record valid reasons and apply mind to the facts of the relevant AYs.

Significant Holdings

"The entire action of reassessment was based solely on the past surveys which had been conducted. There has been an abject failure on the part of the AO to record any finding on how the material gathered in the course of those surveys would impact the assessment of income for the years in question."

"PE is a fact specific issue and that facts gathered in the course of a survey cannot be mechanically adopted or applied as relevant to an assessment wholly unconnected and separate."

"The principle that reassessment cannot be based on mere suspicion or assumption was underscored."

"Each assessment year is separate and distinct and principle of res judicata does not apply to proceedings for subsequent or other years."

"Income from offshore supplies where title and payment occur outside India is not taxable in India, and no income can be attributed to an alleged PE for such supplies without factual basis."

"The AO's failure to record reasons based on facts relevant to the AYs rendered the reassessment invalid."

Core Principles Established

• Reassessment under Section 148 must be based on material relevant to the specific AY and supported by recorded reasons showing application of mind.
• Findings from surveys or judicial decisions relating to other years or entities cannot be mechanically applied to different AYs without factual nexus.
• Permanent Establishment is a question of fact that must be determined for each AY based on the nature, scope, and duration of activities in India.
• Income from offshore supplies where title and payment occur outside India is not taxable in India absent attribution to a PE.
• The principle of res judicata does not apply in income tax proceedings across AYs, but consistency and certainty require following earlier findings unless valid reasons exist to deviate.

Final Determinations on Each Issue

• The reassessment notices for AYs 2013-14, 2014-15, and 2015-16 were quashed for lack of valid reasons and failure to apply mind to facts specific to those years.
• The AO's reliance on survey reports from 2007 and 2019 without establishing their applicability to the AYs in question was improper.
• The existence of PE and taxability of income must be established on a fact-specific basis for each AY; assumptions or extrapolations are insufficient.
• Income from offshore supplies with title transfer outside India is not taxable in India and cannot be attributed to an alleged PE without factual basis.
• The reassessment action was held to be without jurisdiction and bad in law due to procedural and substantive infirmities.