2025 (5) TMI 2058 - HC - Income Tax

Reopening of assessment - Whether tangible material to form a belief were available that the Petitioners non-resident companies had a Permanent Establishment (PE) in India? - HELD THAT - A plain reading of the reasons as recorded clearly indicates that there was no tangible material for forming a belief that the Petitioners 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 are issued was sustainable. Concededly the question involved in the present petitions is covered in favour of the Petitioners by earlier decisions of this court in Grid Solutions OY 2025 (2) TMI 1175 - DELHI HIGH COURT GE Hydro France 2025 (2) TMI 1177 - DELHI HIGH COURT AND GE Renewables Grid LLC 2025 (5) TMI 285 - DELHI HIGH COURT Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in these petitions are:

• Whether the Assessing Officer (AO) had sufficient tangible material to form a belief that the Petitioners, non-resident companies, had a Permanent Establishment (PE) in India during the relevant previous years, thereby justifying reopening of assessments under Section 148 of the Income Tax Act, 1961.
• Whether the AO's reliance on survey proceedings under Section 133A(1) of the Act conducted at the premises of related Indian entities was adequate to conclude the existence of a Dependent Agent PE or Fixed Place PE of the Petitioners in India.
• Whether the reopening notices issued under Section 148 of the Act for Assessment Years 2013-14 to 2017-18 were valid and sustainable in light of the material available to the AO.
• Whether the Petitioners' objections to reopening on the ground of lack of tangible material were rightly rejected by the AO.
• Whether the Petitioners' income attributable to the alleged PE in India was chargeable to tax in India.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of reopening notices under Section 148 of the Income Tax Act based on existence of Permanent Establishment (PE) in India

Relevant legal framework and precedents: Section 148 of the Income Tax Act empowers the AO to reopen assessments if there is a reason to believe that any income chargeable to tax has escaped assessment. The existence of a PE in India is a critical factor in determining taxability of non-resident income under the Act and relevant Double Taxation Avoidance Agreements (DTAA). The AO must have tangible material to form a bona fide belief to justify reopening. The principles regarding reopening and PE determination have been considered in multiple precedents, including earlier decisions of the Delhi High Court in cases involving related entities within the GE/Alstom group.

Court's interpretation and reasoning: The Court noted that the AO's reasons to believe were primarily based on a survey conducted under Section 133A(1) at the premises of Indian companies within the GE group. The AO alleged that the survey revealed the existence of a Dependent Agent PE and Fixed Place PE of the Petitioners in India. However, the Court observed that the reasons recorded by the AO did not constitute tangible material sufficient to form a valid belief that the Petitioners had a PE in India during the relevant years.

Key evidence and findings: The AO relied on statements of employees of Indian entities and the survey report to conclude the existence of PE. The Petitioners challenged the sufficiency and reliability of this material, emphasizing that no concrete evidence was produced to establish the PE.

Application of law to facts: The Court applied the legal standard that reopening under Section 148 requires tangible material indicating escaped income. The Court found that mere survey findings and statements without corroborative evidence did not meet this threshold. The Court also noted that the Petitioners had filed returns declaring their income and that the AO's material was insufficient to overturn the initial assessments.

Treatment of competing arguments: The AO argued that the survey and statements were adequate to form a reason to believe. The Petitioners contended that the AO's belief was based on conjecture and lacked concrete material. The Court sided with the Petitioners, holding that the AO's material was inadequate.

Conclusions: The Court concluded that the reopening notices issued under Section 148 were not sustainable due to lack of tangible material establishing the existence of a PE in India.

Issue 2: Taxability of income attributable to alleged PE in India

Relevant legal framework and precedents: Income attributable to a PE in India is taxable under the Income Tax Act and relevant DTAA provisions. The existence of a PE is a prerequisite for such taxation. The Court referenced earlier decisions involving related entities where similar issues of PE and taxability were adjudicated.

Court's interpretation and reasoning: Since the Court found no tangible material to establish the existence of PE, the question of income being taxable on account of PE did not arise. The Court implicitly held that without PE, the Petitioners' income was not chargeable to tax in India beyond what was already declared.

Key evidence and findings: The Petitioners had filed returns declaring income where applicable and had not filed returns where no income was chargeable. The AO's reopening was premised on the PE theory, which was rejected.

Application of law to facts: The Court applied the legal principle that taxability depends on PE existence. Since PE was not established, the income was not taxable beyond the declared returns.

Treatment of competing arguments: The AO's assertion of taxability was contingent on PE existence. The Petitioners' denial of PE negated the AO's claim. The Court accepted the Petitioners' position.

Conclusions: The income of the Petitioners attributable to the alleged PE was not taxable in India.

Issue 3: Objections to reopening and adequacy of material for forming belief under Section 148

Relevant legal framework and precedents: The law mandates that reopening must be based on tangible material and a valid reason to believe. The AO's rejection of objections must be justified by sufficient material. Earlier decisions of the Delhi High Court have emphasized the requirement of tangible material and have invalidated reopenings based on mere suspicion or inconclusive evidence.

Court's interpretation and reasoning: The Court found that the AO's rejection of the Petitioners' objections was not justified due to absence of tangible material. The Court held that the AO's belief was not bona fide and was based on insufficient evidence.

Key evidence and findings: The AO's reasons to believe were largely based on survey findings and statements without corroborative documentary evidence or detailed analysis.

Application of law to facts: The Court applied the principle that reopening must be supported by tangible material and that objections must be considered on merits. The AO failed to meet this standard.

Treatment of competing arguments: The AO maintained that survey findings sufficed; the Petitioners argued for lack of material. The Court agreed with the Petitioners.

Conclusions: The AO's rejection of objections was unsustainable and reopening was invalid.

3. SIGNIFICANT HOLDINGS

The Court held:

"A plain reading of the reasons as recorded clearly indicates that there was no tangible material for forming a belief that the Petitioners 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 under Section 148 of the Act are issued, was sustainable."

"The question involved in the present petitions is covered in favour of the Petitioners by earlier decisions of this court..."

Core principles established include:

• Reopening of assessment under Section 148 must be based on tangible material indicating escaped income.
• Survey proceedings under Section 133A(1) alone, without corroborative evidence, are insufficient to establish a PE or justify reopening.
• The existence of a PE is a prerequisite for taxing non-resident income attributable to business operations in India.
• Objections raised by taxpayers against reopening must be considered on the basis of tangible material and cannot be rejected on conjecture.

Final determinations on each issue:

• The impugned notices under Section 148 were quashed as the AO lacked tangible material to form a reason to believe.
• The Petitioners did not have a PE in India for the relevant years; hence, their income was not taxable beyond declared returns.
• The AO's rejection of objections was unsustainable.
• The petitions were allowed and the notices set aside.