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2025 (5) TMI 1333 - HC - Income TaxReopening of assessment beyond limitation period - Amounts paid by the petitioner to its AEs - HELD THAT - As apparent from the information enclosed with the impugned notice that the amounts that have been remitted which the AO alleges have escaped assessment were paid by the petitioner to its AEs for rendering of services. The question whether the services have been rendered and whether the same were at Arm s Length Price ALP is a contentious issue. However it is apparent that the income alleged to have escaped assessment is not based on a single occasion or an event spanning over the period in question. It is an amount that is being regularly paid by the petitioner to its AEs overseas on account of the services which the petitioner claims to have received. It is also not disputed that the payments made by the petitioner were subject matter of the assessments during various previous assessment years and reference for determining the ALP had also been made to the Transfer Pricing Officer TPO . In view of the above the present case does not fall within the exception to Sub-section (1A) of Section 149 of the Act. The issue involved is squarely covered by the decision of this court in M/s. L-1 Identity Solutions Operating Company Private Limited 2025 (4) TMI 1363 - DELHI HIGH COURT The petition is accordingly allowed.
1. ISSUES PRESENTED and CONSIDERED
- Whether the notice issued under Section 148 of the Income Tax Act, 1961 (the Act) for reopening the assessment for Assessment Year (AY) 2018-19 was valid and within the prescribed limitation period under Section 149(1)(a) of the Act. - Whether the cumulative income alleged to have escaped assessment over multiple years (FY 2016-17 to 2022-23) can be aggregated as a "singular event or occasion" under Section 149(1A) of the Act to satisfy the threshold limit of Rs. 50,00,000/- as stipulated under Section 149(1)(b) for reopening assessments beyond the normal limitation period. - Whether the payments made by the petitioner to its Associated Enterprises (AEs) for management and IT services, which formed the basis for reopening, were justified and at arm's length price (ALP), or whether they were a conduit for profit shifting and tax evasion. - Whether the impugned notice and consequent proceedings should be quashed on the ground of limitation and lack of sufficient justification. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity and Limitation of Notice under Section 148 The legal framework governing reopening of assessments is primarily contained in Sections 147, 148, and 149 of the Income Tax Act, 1961. Section 148 empowers the Assessing Officer (AO) to issue a notice for reopening an assessment if there is reason to believe that income has escaped assessment. However, Section 149 prescribes the limitation period within which such reopening can be initiated. Under Section 149(1)(a), the notice must be issued within four years from the end of the relevant assessment year unless certain exceptions apply. In the present case, the impugned notice dated 21.03.2024 was issued for AY 2018-19, which ordinarily would be barred by limitation as more than four years had elapsed. The AO invoked the exception under Section 149(1A), which allows aggregation of escaped income relating to multiple years if they arise from a singular event or occasion, to extend the limitation period. The Court examined the nature of the alleged escaped income and found that the payments were made regularly over several years to AEs for management and IT services. These payments were not one-off transactions but recurring payments, each subject to assessment in respective years. The Court held that such recurring payments cannot be treated as a single event or occasion for the purpose of aggregating escaped income under Section 149(1A). Precedent relied upon includes a recent decision of the same Court which held that regular payments over multiple years do not constitute a singular event for aggregation under Section 149(1A). The Court rejected the Revenue's contention that the entire quantum of payments should be aggregated to exceed the threshold of Rs. 50,00,000/-. Accordingly, the impugned notice was held to be barred by limitation and invalid. Issue 2: Nature and Justification of Management Fees Paid to Associated Enterprises The AO's reasons for reopening were based on findings from a search conducted on 21.03.2023 and subsequent investigations. The AO alleged that the petitioner paid excessive management fees to Idemia France SAS and other AEs during FY 2016-17 to 2022-23, which were not commensurate with the actual services rendered, thereby facilitating profit shifting outside India. The AO's analysis included a detailed tabulation of management fees paid year-wise, showing a total of Rs. 2.38 crores over the period. The AO compared these payments with the petitioner's total revenue and gross profit, noting that intra-group service charges ranged from approximately 2% to 6% of total revenue annually. The petitioner's business being a service concern providing biometric identity solutions domestically, the AO found these payments suspicious and disproportionate. Further incriminating evidence included emails retrieved during the search, revealing:
No formal management service agreement was found or filed, and no methodology or cost allocation keys for the management fees were produced by the petitioner or AEs. Even top management could not justify the large payments. The Court noted that these findings pointed to the management fees being a mere conduit for profit shifting rather than genuine payments for services. However, the Court did not finally adjudicate on the arm's length nature of these payments, as the issue before it was limited to the validity of the reopening notice. Issue 3: Application of Law to Facts and Treatment of Competing Arguments The petitioner argued that the notice was barred by limitation and that the AO's reliance on the exception under Section 149(1A) was misplaced as the payments were recurring and not a singular event. The petitioner also contended that the payments were disclosed in returns and had been subject to transfer pricing assessments previously. The Revenue contended that the entire quantum of payments over multiple years should be aggregated as a singular event to meet the threshold for reopening beyond four years. The Court considered the statutory language and judicial precedents, concluding that recurring payments over multiple years cannot be aggregated as a single occasion under Section 149(1A). The Court emphasized that the exception is meant for singular events or occasions, not a series of transactions. Regarding the management fees, the Court acknowledged the incriminating evidence but held that the question of whether the payments were at arm's length or genuine services was a substantive issue to be decided in assessment proceedings, not at the stage of issuance of notice. Therefore, the Court applied the law strictly to the facts and rejected the Revenue's contention on aggregation and the validity of reopening. 3. SIGNIFICANT HOLDINGS "It is apparent that the income alleged to have escaped assessment is not based on a single occasion or an event spanning over the period in question. It is an amount that is being regularly paid by the petitioner to its AEs overseas, on account of the services which the petitioner claims to have received." "The present case does not fall within the exception to Sub-section (1A) of Section 149 of the Act." "The impugned notice as well as all the proceedings pursuant thereto, including an assessment order, that may have been passed, are set aside." The Court established the core principle that recurring intra-group payments over multiple years cannot be treated as a singular event for the purpose of extending limitation under Section 149(1A) of the Income Tax Act. The Court also clarified that the validity of reopening notices is to be judged on the basis of limitation and the nature of the alleged escaped income, and not on the merits of the substantive tax dispute regarding arm's length pricing or profit shifting, which are to be decided in assessment proceedings. Consequently, the Court quashed the notice issued under Section 148 for AY 2018-19 and all consequential proceedings, holding them to be barred by limitation.
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