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2025 (5) TMI 285 - HC - Income TaxReopening 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 - As reasons were undated; survey report findings and the statements recorded were not supplied; and a valid sanction was not taken for issuance of notice u/s 148 of the Act. More importantly the petitioner also objected to initiation of the reassessment proceedings on the ground that there was no tangible material for the AO to conclude that the petitioner had a PE in India. However the objections raised by the petitioner were rejected. A plain reading of the reasons as recorded clearly indicates that there was no tangible material in respect of the petitioner for forming a belief that the petitioner had a dependent PE or a Fixed Place PE in India during the previous years relevant to the said assessment years in respect of which the impugned notices u/s 148 of the Act were issued. Concededly the question involved in the present petitions is covered in favour of the petitioner. See Grid Solutions OY (Ltd.) 2025 (1) TMI 911 - DELHI HIGH COURT
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Court in these petitions are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of AO's Reasons to Believe under Section 147 for Reassessment Relevant legal framework and precedents: Section 147 of the Income Tax Act authorizes reopening of assessments if the AO has "reasons to believe" that income chargeable to tax has escaped assessment. The validity of reopening depends on the existence of tangible material justifying such belief. The Court has consistently held that mere suspicion or change of opinion is insufficient; there must be concrete material indicating escapement of income. Court's interpretation and reasoning: The Court examined the reasons recorded by the AO and found them to be undated and lacking tangible material specifically relating to the petitioner. The reasons primarily stemmed from a survey conducted on GE Power India Ltd., a related Indian entity, rather than direct evidence against the petitioner. The Court noted that the reasons recorded did not demonstrate any independent or specific material to form a belief that the petitioner's income had escaped assessment. Key evidence and findings: The AO relied on survey findings under Section 133A(1) on GE Power India Ltd., statements of its employees, and the assertion that the petitioner had a PE in India. However, these materials were not supplied to the petitioner, and the AO's reasons did not reference any direct evidence linking the petitioner to a PE in India. Application of law to facts: The Court held that the AO's belief was not supported by tangible material in respect of the petitioner. The survey findings pertained to a different entity, and the AO failed to establish a direct nexus or material indicating escapement of income by the petitioner. Treatment of competing arguments: The petitioner argued that the reasons were undated, incomplete, and that no valid sanction was obtained. The AO rejected these objections, but the Court found merit in the petitioner's submissions, emphasizing the absence of tangible material and procedural lapses. Conclusion: The AO lacked valid reasons to believe that the petitioner's income had escaped assessment, rendering the issuance of notices under Section 148 invalid. Issue 2: Existence of Permanent Establishment (PE) in India Relevant legal framework and precedents: Under the Income Tax Act and the India-US Double Tax Avoidance Agreement (DTAA), a PE is a fixed place of business or a dependent agent through which business is carried on in India. Income attributable to a PE is taxable in India. The determination of PE requires factual and legal analysis of the petitioner's activities in India. Court's interpretation and reasoning: The AO alleged the existence of a Dependent Agent PE and Fixed Place PE based on survey findings and statements of employees of GE Power India Ltd. However, the Court found that the AO did not produce tangible material or evidence directly linking the petitioner to a PE in India during the relevant years. Key evidence and findings: The survey was conducted on a related Indian company, and the statements recorded pertained to that company's operations. No direct evidence was adduced to establish that the petitioner had a dependent agent or fixed place PE in India or that the petitioner conducted business through such PE. Application of law to facts: The Court observed that the AO's reliance on survey findings of a related entity was insufficient to establish a PE of the petitioner. The Court noted that the petitioner did not have any taxable presence or income attributable to a PE in India for AYs 2013-14 and 2014-15, and only limited income chargeable as FTS/royalty for AYs 2015-16 and 2016-17 was declared and assessed. Treatment of competing arguments: The petitioner contended that there was no tangible material to form a belief of a PE and that the reassessment was based on surmises. The AO's contrary stance was rejected due to lack of evidence. Conclusion: The Court concluded that the petitioner did not have a PE in India during the relevant years, and therefore, no income was chargeable to tax on that basis. Issue 3: Compliance with Procedural Requirements for Reassessment Relevant legal framework and precedents: The law mandates that the AO must provide reasons recorded for reopening, supply copies of survey reports and statements relied upon, and obtain valid sanction before issuing notices under Section 148. Non-compliance with these procedural safeguards vitiates the reassessment proceedings. Court's interpretation and reasoning: The petitioner raised objections that the reasons recorded were undated, survey reports and statements were not supplied, and valid sanction was not obtained. The AO rejected these objections without adequate justification. Key evidence and findings: The Court found that the petitioner was not supplied with the survey report or statements recorded during the survey, which were material to the AO's belief. The reasons recorded were undated, and the sanction for issuance of notices was not validly obtained as per the petitioner's submissions. Application of law to facts: The Court emphasized the importance of procedural compliance and transparency in reassessment proceedings. The failure to provide material evidence and valid sanction undermined the validity of the reassessment notices. Treatment of competing arguments: The AO's rejection of the petitioner's objections was not supported by evidence of compliance. The Court sided with the petitioner on procedural grounds. Conclusion: The reassessment proceedings were procedurally flawed and invalid. Issue 4: Applicability of Precedents Favoring the Petitioner Relevant legal framework and precedents: The Court referred to several earlier decisions of the same Court in similar matters involving related entities, where reassessment notices based on alleged PE and survey findings were quashed due to lack of tangible material. Court's interpretation and reasoning: The Court noted that the present case was squarely covered by prior decisions in favor of the petitioner, including cases involving UK Grid Solutions Ltd., GE Hydro France, and GE Grid (Switzerland) GmbH. Application of law to facts: The Court applied the principles and findings from these precedents to the facts of the present petitions, reinforcing the conclusion that the reassessment notices were invalid. Conclusion: The Court relied on binding precedents to uphold the petitioner's contentions and set aside the impugned notices. 3. SIGNIFICANT HOLDINGS The Court held:
Core principles established include:
Final determinations on each issue were in favor of the petitioner, leading to the setting aside of the impugned notices under Section 148 of
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