TMI Blog2011 (5) TMI 853X X X X Extracts X X X X X X X X Extracts X X X X ..... he hands M/s. M. Ct. M. Global Investments. The demerged company M. Ct. M. Corporation had business assets in India and in Malaysia. In pursuance of the scheme of demerger, the assessee-company was vested with a part of the assets and liabilities of M/s. M. Ct. M. Corporation P. Ltd. The assignment of the assets and liabilities as stated above was with effect from April 1, 1999. The assets vested in the hands of the assessee-company with effect from April 1, 1999 included investments like fully convertible debentures in various companies, call deposits in international companies situated outside Malaysia. The assessee-company earned interest income from the above financial assets. The assessee was also vested with immovable properties in Malaysia from which the assessee-company enjoyed rental income. Apart from the above properties transmitted from M. Ct. M. Corporation P. Ltd. the assessee-company has also acquired another property at Singapore. For carrying out the above business strategy the assessee-company has been incorporated in India as an investment company. The foreign investments were looked after by the Malaysian branch of the assesseecompany. In matters of investme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee's taxable income for all the impugned assessment years. The assessments for the assessment years 2000-01, 2001-02 and 2002-03 have been completed under section 147 after issuing notices under section 148 of the Act as required under law. When the impugned assessments were taken in first appeals, the assessee had raised two sets of grounds. The first set related to the jurisdiction of the assessing authority to issue notices under section 148 and thereafter to complete the assessments under section 147 in respect of the three assessment years 2000-01, 2001-02 and 2002-03. The second set of grounds related to the arguments of the assessee that the Malaysian income of the assessee-company cannot be brought to tax in view of the provisions contained in the Double Taxation Avoidance Agreement entered into between India and Malaysia. The Commissioner of Income-tax (Appeals) in paragraphs 4 to 18 of his order running from pages 2 to 9 has considered the arguments of the assessee-company against the reopening of the assessments. The assessee contended before the Commissioner of Income-tax (Appeals) that the reason recorded by the assessing authority to reopen the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned by the Assessing Officer. In support of the above crucial contention the assessee has placed reliance on the judgment of the hon'ble Gujarat High Court in the case of Desai Brothers v. Deputy CIT (Assessment) [1999] 240 ITR 121 (Guj). But the Commissioner of Income-tax (Appeals) observed that the tax treaty between India and Malaysia would apply only to income generated in India or Malaysia and will not apply to a foreign income of the Malaysian branch where income was derived from investments made in third countries. Therefore, he held that the assessee's claim that such foreign incomes were exempt from Indian tax law becomes prima facie an erroneous and baseless claim. Thereafter, relying on the judgment of the hon'ble Gujarat High Court in the case of Praful Chunilal Patel v. M. J. Makwana, Asst. CIT [1999] 236 ITR 832 (Guj), the decision of the Punjab and Haryana High Court in the case of Happy Forging Ltd. v. CIT [2002] 253 ITR 413 (P H) and that of the hon'ble Supreme Court in the case of Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd. [2007] 291 ITR 500 (SC), the Commissioner of Income-tax (Appeals) held that the reopening of the assessments was in accordance with la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of CIT v. Revathi Equipment Ltd. [2008] 298 ITR 67 (Mad). He also deleted the levy of interest under section 234D on the ground that the said provision of law is not retrospective in operation, for which he has relied on the decision of the hon'ble Madras High Court in the case of Sitalakshmi Mills Ltd. v. CIT [2000] 241 ITR 545 (Mad). Interest under section 234D was also thus deleted. The Revenue is aggrieved on the orders of the Commissioner of Income-tax (Appeals) deleting the levy of interest under sections 234B and 234D. That is why they have come in appeals before us. We heard Shri R. Rajasekaran, the learned chartered accountant appearing for the assessee, along with Shri S. Thyagarajan. Shri K. E. B. Rengarajan, the learned standing counsel, appeared for the Revenue. The learned chartered accountant appearing for the assessee presented the case before us in the same pattern as the case was presented before the Commissioner of Income-tax (Appeals), drawing support from almost the same set of judicial pronouncements. The first contention of the learned chartered accountant appearing for the assessee is that the reason recorded by the Assessing Officer to reopen the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also relied on the judgment of the hon'ble Supreme Court in the case of CIT v. P. V. A. L. Kulandagan Chettiar [2004] 267 ITR 654 (SC), wherein the apex court has upheld the Special Bench decision of the Madras "A" Bench of the Tribunal in the case of P. V. AL. Kulandayan Chettiar v. ITO [1983] 3 ITD 426 (Mad) [SB]. The learned chartered accountant further relied on the decision of the Chennai Bench "D" of the Tribunal in the assessee's own case in I. T. A. No. 834(Mds)/2008 dated February 9, 2009, where the Tribunal has upheld the decision of the Commissioner of Income-tax (Appeals) that the income of the assessee's branch in Malaysia cannot be brought to tax in India. He reiterated that the said order of the Tribunal is directly on the point in the assessee's own case and therefore as judicial discipline demands, the issue raised in these appeals must be decided in the light of the said decision of the co-ordinate Bench. The learned chartered accountant has invited our attention to the order of the Chennai "B" Bench of the Tribunal passed in the case of M. Ct. M. Global Investments P. Ltd. in I. T. A. No. 659(Mds)/ 2005 dated December 19, 2007, in which case the Tribunal has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxed in India. (iii) The assessee has not paid tax on its Malaysian income because income was not brought to Malaysia. Under the Malaysian tax laws such foreign income would be taxable in Malaysia only when it is brought to Malaysia and not before. (iv) The concept of liability for taxation and that of actual payment of tax is entirely different, as highlighted by the hon'ble Supreme Court in various judgments. The Malaysian income does not become taxable in India only for the reason that tax was not paid by the assessee in Malaysia on that income. Once the income is found attributable to Malaysian branch office, the jurisdiction of Indian taxation disappears and it is immaterial to look into whether actually tax has been paid or not, by the assessee in Malaysia. (v) By operation of the above legal position the reasoning recorded by the Assessing Officer to reopen the assessments is erroneous and unsustainable in law and therefore the reassessments completed for the first three assessment years are ab initio void. Shri K. E. B. Rengarajan, the learned standing counsel appearing for the Revenue, on the other hand replied in detail, placing reliance on the detailed order pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he books of Malaysian branch is essentially a part of the assessee's global income and therefore the assessing authority has rightly brought the Malaysian income as part of the assessee's taxable income in India. Regarding the reopening of the assessments, the learned standing counsel explained that the Commissioner of Income-tax (Appeals) has discussed the issue in a detailed manner on the basis of the relevant judicial pronouncements. The learned standing counsel also explained that what is necessary to issue notice under section 148 is a reason to believe that income has escaped assessment. That reason need not be a final conclusion. Without issuing notice and calling for explanation from the assessee it is not possible to come to the conclusion that whether income has escaped assessment or not. Section 148 notice is issued only to initiate such an enquiry. Therefore it is futile to argue that the Assessing Officer should come to the conclusion even before starting the enquiry. Therefore what is contemplated in law is a prima facie impression of the Assessing Officer that there is ground for a reasonable belief that income has escaped assessment. In the present case the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are not available. The above discussion is relevant because the lower authorities have relied on the said decision of the Tribunal passed in the case of M. Ct. M. Global Investments P. Ltd. to decide the issue raised in the case of the present assessee before us. The Commissioner of Income-tax (Appeals) has held that the Malaysian branch of the assessee-company cannot be treated as a permanent establishment mainly relying on the said order of the Tribunal. It is on the basis of such a finding that the management control of the business of the assessee-company is exercised in India by its board of directors that the lower authorities have held that the income accounted in the books of Malaysian branch has to be treated as part of the assessee's global income, liable for taxation in India. But the fact is that the Assessing Officer had no quarrel with the question of place of management and control and the nature of the Malaysian branch of the assessee-company at the time when he issued notices under section 148. This is evident from the reason recorded by the Assessing Officer. In spite of repetition, we are reproducing the reason recorded by the Assessing Officer in his files ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not the case of the assessing authority that the Malaysian branch of the assessee-company is not a permanent establishment in Malaysia. The said branch of the assessee-company has been registered in Malaysia as a company under the Companies Act of that country. The Malaysian branch has been registered as an assessee for the purpose of income-tax in Malaysia. The Malaysian branch of the assesseecompany is working after obtaining all the necessary licences and permits prescribed by the laws of that country. The Malaysian branch is managing the affairs of investment of the company made outside India. The Malaysian branch is also managing the properties in Malaysia and Singapore. The situs of the branch company is in Malaysia, which is outside India and that office is dealing in the affairs of the foreign investments of the assessee-company and the branch office has been established as an independent legal entity in accordance with the Malaysian laws and in such circumstances there is no much force in the argument of the Commissioner of Income-tax (Appeals) that the assessee is not a permanent establishment in Malaysia. The question as to whether the Malaysian branch is a permanent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s true that the prime motivating factor in developing the concept of the Double Taxation Avoidance Agreement is the genuine grievance of the international assessees that the same amount of income became subject of taxation both in the home state and in the Contracting State. It is to alleviate this burden of double taxation that the instrument of the Double Taxation Avoidance Agreement has been evolved through a process of law. But that does not mean that an assessee should invariably pay tax at least in one country. There is no such compulsion apparent in the scheme of the Double Taxation Avoidance Agreement administration. It is not possible to make out a general proposition that the income of an international assessee must be invariably taxed at least in one of the States ; either in the home state or in the Contracting State. In this context it is worthwhile to refer to the judgment of the hon'ble Supreme Court of India in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC). The hon'ble Supreme Court at page 741 of the report has observed as under : "In our view, the contention of the respondents proceeds on the fallacious premise that liability to ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n branch of the assessee-company has not brought its foreign income to Malaysia. It is because of that fact that the assessee was not supposed to pay tax in Malaysia. When the assessee brings the foreign income to Malaysia it is possible that the assessee may be liable for taxation. Therefore, the reason stated by the Assessing Officer for bringing to tax in India, the income of the Malaysian branch of the assessee-company on the ground that the said income has not been assessed in Malaysia, is not a sound proposition of law. The hon'ble Gujarat High Court in the case of Emmerich Jaegar v. CIT [2005] 274 ITR 125 (Guj), relying on the judgment of the hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC), has held that the approach of the authorities to treat the liability to tax as being actually taxed is not warranted by the language of the provision. There is a judgment of the hon'ble jurisdictional High Court straightaway on the issue. The case under reference is CIT v. Lakshmi Textile Exporters Ltd. [2000] 245 ITR 521 (Mad). In that case the assessee had a permanent establishment in Sri Lanka and that the entire income accruing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o between the U A E and India. The Tribunal found that as per the terms of the Double Taxation Avoidance Agreement income accruing to the shipping company is liable for taxation only in Dubai. The assessing authority has taxed the income in India for the reason that the shipping company has not paid tax in Dubai. The Tribunal held that even if the assessee has not paid any tax in Dubai, it is still protected by the Double Taxation Avoidance Agreement and its income cannot be taxed in India. The Tribunal made it clear that tax liability and actual payment of tax are different, one being legal concept and the other being a factual incidence, as explained by the hon'ble Supreme Court in the case of Azadi Bachao Andolan [2003] 263 ITR 706 (SC). The above discussion brings home the point that the income of the Malaysian branch of the assessee-company cannot be brought to tax in India only for the reason that the assessee has not paid tax in Malaysia on that income. The question is whether the assessee is governed by the Double Taxation Avoidance Agreement entered into between India and Malaysia. The fact is that the assessee is governed by the said Agreement. The assessee has claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is successful in its appeals. Regarding the appeals filed by the Revenue the question is that of levy of interest under sections 234B and 234D. In the light of the judgment of the hon'ble Madras High Court in the case of CIT v. Revathi Equipment Ltd. [2008] 298 ITR 67 (Mad), the Commissioner of Incometax (Appeals) is justified in deleting the levy of interest under section 234B. There is no dispute that interest is compensatory in nature and therefore levy of interest is compulsory. This proposition is applicable only in a situation where an assessee is liable for interest. Where the assessee is not at all liable for interest on the ground that the assessee was not liable for advance tax, there cannot be any question of compulsory levy of interest under section 234B. In the case of interest under section 234D the hon'ble Madras High Court has held in the case of Sitalakshmi Mills Ltd. v. CIT [2000] 241 ITR 545 (Mad) that amendment is not retrospective. Operation of section 234D is only prospective. Obviously the period of levy in these appeals falls prior to the date of amendment. Therefore, as rightly held by the Commissioner of Income-tax (Appeals), the assessee is not l ..... 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