TMI Blog2014 (8) TMI 210X X X X Extracts X X X X X X X X Extracts X X X X ..... rvey and documents so impounded revealed the existence of a permanent establishment of the petitioner and its business operations in India through its permanent establishment without disclosing its taxable income - the order of the TPO is not binding at the stage of issuance of notice and, in any case, it would be open to the petitioner to take a stand that the transactions with the subsidiary company and/or with the permanent establishment, being the same, no further tax could be levied – thus, there was no infirmity in the issuance of the notice u/s 148 of the Act – Decided against Revenue. - Civil Misc. Writ Petition (Tax) No. 1363 of 2012 to 1367 of 2012, 1373 of 2012, 60 of 2013, 61 of 2013 to 73 of 2013, 75 of 2013, to 96 of 2013, 98 of 2013 to 102 of 2013 - - - Dated:- 5-8-2014 - Hon'ble Tarun Agarwala And Hon'ble Dinesh Gupta,JJ. JUDGMENT (Per: Tarun Agarwala, J.) In this group of writ petitions, the petitioner's have challenged the validity and legality of the notice issued under Section 148 of the Income Tax Act, 1961 (hereinafter referred to as the Act). For facility, the facts of Writ Petition No.1366 of 2012 are being taken into considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the petitioner was existing in India. The petitioner contended that the transactions in respect of which it is alleged that there has been an escapement of income had already been disclosed by the Indian subsidiary, which has been considered by the Transfer Pricing Officer (TPO) and found to be at arm's length basis. The objection of the petitioner was duly considered and was disposed of by the Assistant Director of Income Tax, respondent no.1 by an order dated 2nd November, 2012 contending that the survey clearly indicated that the petitioner had a permanent establishment in India and, consequently, the profits were required to be attributed to the permanent establishment in India in terms of the functions performed, risks assumed and assets deployed by the permanent establishment. The petitioner, being aggrieved by the initiation of the proceedings under Section 148 of the Act has consequently, filed the present writ petition. We have heard Sri S. Ganesh, the learned Senior Counsel assisted by Sri Deepak Chopra, Sri Gaurav Mahajan and Sri Amit Mahajan, the learned counsels for the petitioner and Sri G.C. Srivastava along with Sri Ashok Kumar, the learned counsel for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder Section 92CA. The learned Senior Counsel further contended that the reasons recorded by the first respondent in issuing the impugned notice under Section 148 of the Act is, that the petitioner's Indian subsidiary LGIL is in fact a permanent establishment (PE) of the petitioner company and, consequently, the transactions between the petitioner and its permanent establishment gives rise to income attributable to the permanent establishment, which is assessable in the hands of the petitioner company in India. The learned Senior Counsel contended that the belief that the subsidiary company of the petitioner is in fact a permanent establishment is based on no evidence rather is based on surmises and conjectures. The learned Senior Counsel contended that even assuming without admitting that the petitioner had a permanent establishment in India, even then no income or profit could be determined or taxed in India in view of the order of the TPO. The learned Senior Counsel contended that this reasoning of the Assessing Officer was contrary to the decision of the Supreme Court in DIT (International Taxation) Vs. Morgan Stanley and Co. Inc., 292 ITR 416 wherein the Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lready disclosed by the Indian subsidiary and was accepted by the tax authorities and, consequently, the tax authorities having themselves accepted the same transactions in the subsidiary company's case were precluded from attributing any further income in the hands of the petitioner so as to allege that any income chargeable to tax had escaped assessment for the assessment year under consideration. The learned Senior Counsel further submitted that the respondents have patently ignored the provisions of the DTAA between India and Korea, which is applicable in the instant case, as the petitioner is a tax resident of Korea and entitled to be governed by the provisions of such DTAA and the laws of Korea. The learned Senior Counsel submitted that the cardinal principle is that if a transaction has been submitted by one arm of the government then it was not open to the income tax authorities to question the same. On the other hand, Sri G.C. Srivastava, the learned counsel for the Income Tax department submitted that the Assessing Officer has reopened the assessment proceedings on the basis of the material uncovered in survey proceedings dated 24th June, 2010, which indicated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some activity through a permanent establishment and if income arises through a permanent activity, the principle of arm's length are required to be applied. The mandate of the provisions of Section 10 empowers the tax authorities to scrutinise all related transactions. In support of their submissions, the learned counsel for the parties have placed reliance on several decisions, which would be referred hereinafter at the appropriate place. Income chargeable to tax that has escaped assessment has been provided under Section 147 of the Act. With effect from 1st April, 1989, Section 147 underwent an amendment to the effect that if the Assessing Officer had reasons to believe that any income chargeable to tax had escaped assessment, the Assessing Officer could assess or reassess such income. Reasons to believe has been a subject matter of interpretation by various Courts in various decisions. A Division Bench of this Court in Indra Prastha Chemicals Pvt. Ltd. and others Vs. Commissioner of Income Tax and another, 271 ITR 113, after considering various decisions of Supreme Court and other High Court, culled out the following:- Under Section 147 of the Act the proceedin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat condition would vitiate the entire proceedings as held by the apex Court in the case of Johri Lal (HUF) v. CIT, (1973) 88 ITR 439 (SC) and Sheo Nath Singh v. AAC of I.T., (1971) 82 ITR 147 (SC). The reasons for the formation of the belief must have rational connection with or relevant bearing on the formation of belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Assessing Officer and the formation of his belief that there has been escapement of income of the assessee from assessment in the particular year. It is not any and every material, howsoever vague and indefinite or distant, remote and farfetched, which would warrant the formation of the belief relating to escapement of income of the assessee from assessment, as held by the Hon'ble Supreme Court in the case of ITO v. Lakhmani Mewal Das (1976) 103 ITR 437. If there is no rational and intelligible nexus between the reasons and the belief, so that on such reasons, no one properly instructed on facts and law could reasonably entertain the belief, the conclusion would be inescapable that the Assessing Officer could not have reason to belie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct or material was not disclosed by the assessee fully and truly necessary for assessment of that assessment year, so as to establish vital link between the reasons and evidence. That vital link is the safeguard against arbitrary reopening of the concluded assessment. The reasons recorded by the assessing officer cannot be supplemented by filing affidavit or making oral submission, otherwise, the reasons which were lacking in the material particulars would get supplemented, by the time the matter reaches to the Court, on the strength of affidavit or oral submissions advanced. In Jamna Lal Kabra Vs. Income Tax Officer, 'B' Ward, Bareilly and others, 69 ITR 461, a Division Bench of the Allahabad High Court held: It is clear that the Income-tax Officer is bound to record the reasons for issuing a notice under section 148. The requirement is mandatory. Before the assessment can be had, the Income-tax Officer must issue a notice under section 148 and before that notice can be issued, he must record his reasons for doing so and must also upon those reasons obtain the satisfaction of the Board or the Commissioner. The recording of the reasons is, in my opinion, a pre-requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion or failure to disclose fully or truly all material facts necessary for the assessment must be based on some material facts which according to the Assessing Officer is based on some reasonable belief and which would have a material bearing on the question of under assessment. If there is no material for the formation of any belief or where the purported belief was nothing but a mere change of opinion, in that case, the Assessing Officer would have no jurisdiction to initiate proceedings u/s 147 and 148 of the Act. The Assessing Officer has the power to reopen the assessment where he has reasons to believe that income chargeable to tax has escaped assessment but such re-assessment cannot be initiated on a mere change of opinion to merely re-examine an issue on the basis of information or material which was already available to the Assessing Officer at the time of the completion of the original assessment. It is settled principle of law that reason to believe could never be an outcome of a change of opinion. Consequently, before taking any action, the Assessing officer is required to substantiate his satisfaction in the reasons recorded by him. In Commissioner of Sales Tax, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court in Raymond Woollen Mills Ltd. Vs. Income Tax Officer and others, 236 ITR 34. Reasons to believe is on the basis of tangible material which must have a live link with the formation of belief. The reasons given by the Assessing Officer for initiating action under Section 148 of the Act is, that the petitioner had entered into various transactions with its Indian subsidiary with regard to export of raw materials, export of finished goods, capital goods, receipts of royalty, receipts of fees for technical services, receipts of alleged commissions and receipts of reimbursement. The subsidiary company had deducted the tax as source at payment made to it under the head royalty and fees for technical services. The petitioner had not paid any taxes on income earned by it from the supply of raw materials, finished goods, etc. The survey conducted under Section 133A of the Act revealed: i) The Indian company, LGIL, is a 100% subsidiary company of the petitioner and it does not function as an independent corporate entity and is totally dependent on the petitioner. ii) All the senior employees i.e. heads of all departments are Koreans. The hiring of these Korean expatriates is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to what part can be localized or procured locally. xv) Once the imported parts are decided by the petitioner, the quantity is decided by LGIL and order is placed through the portal without any price negotiation as price is strictly decided by the the petitioner. xvi) The contract for sale is concluded in India once the orders are placed. No agreements are signed and no negotiation takes place. However, employees of the petitioner visit India to finalise the deal and in order to estimate th total sale to be made by them during a particular period. xvii) As per the petitioner the sale is on C F basis and therefore, the sale is concluded in India. xviii) The MD of LGIL reports to the HQ at Singapore and Korea and is responsible to the petitioner. xix) For the imports made by the Indian company, it has not done any analysis of comparative pricing or the price at which it can get the product from any other company. On the basis of the aforesaid, the Assessing Officer reasoned that the assessee's income from the above transaction was taxable in India as per Section 9(1)(i) of the Act. The Assessing Officer found that the employees of the petitioner were using t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Article 7 of the DTAA as the petitioner has a permanent establishment in India. The Assessing Officer, in view of the facts, concluded that the petitioner has a fixed place of business available to it in the office of its subsidiary company and is carrying on its business in India. This fixed place of business was available to the employees of the petitioner, who are either stationed permanently or visited India for business purposes. The Assessing Officer submitted that under normal circumstances, a subsidiary cannot be recorded as a permanent establishment if a subsidiary has its own independent business function. But in the instant case, the subsidiary company is also functioning as a permanent establishment and since the functions of the subsidiary company are not independent of the business of the parent company, namely, the petitioner, the Assessing Officer concluded that from the extracts of statements and documents impounded during the survey operation it was established that the petitioner not only had business connection but had a permanent establishment in India and since no returns were filed, its income had escaped assessment as per the provisions of Section 147 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness solely for any combination of activities mentioned in sub-paragraphs (a) to (e) of this paragraph, provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character. 5. Notwithstanding the provisions of paragraphs (1) and (2) if a person - other than an agent of independent status t whom paragraph (6) applies - is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise unless the activities of such person are limited to those mentioned in paragraph (4) which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment by virtue of that paragraph. 6. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carried on business in that State through a broker, general commission agent or any other agent of an independent status, where s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of those articles shall not be affected by the provisions of this article. Section 9 of the Income Tax Act is similar to Article 7 of the DTAA. Section 9 provides that income accruing directly or indirectly, through or from any business connection in India shall be deemed to be Income accruing or arising in India. Hence, where the person entitled to such income is a non-resident, it would be included in his total income. However, Article 7 of the DTAA further stipulates that a permanent establishment must exists in India before income accrues and is taxable in India. Once a permanent establishment exist and business is being carried out through a permanent establishment then profits, being a necessary consequence, needs to be attributed and taxed in India as per Rule 10 of the Income Tax Rules. The establishment of a permanent establishment presupposes that business operations are being carried out for profit. Clause (1) of Article 7 provides that if an income arises in Korea, which shall be taxable in that country unless the enterprise carries on business in other contracting state i.e. in India through a permanent establishment situated therein. From the afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al before the Assessing Officer to come to a belief that income had escaped assessment is patently erroneous. The analysis made from the survey report and the documents so impounded has led the Assessing Officer to reasonably believe that income had escaped assessment on account of the fact that the petitioner was carrying on business operation in India through a permanent establishment. The contention that there was no application of mind is patently erroneous. The reasons to believe recorded by the Assessing Officer clearly shows that an in depth study and analysis was made and reasons were recorded in detail in arriving at a belief that income had escaped assessment. The contention that as per the provisions of Chapter X of the Act, the Indian subsidiary, in terms of the provisions of Section 92E of the Act had disclosed all the transactions with the petitioner relating to purchase of raw materials, finished goods, commission and reimbursements and further, in terms of Section 92CA of the Act, the TPO of the Indian subsidiary had already examined the said transaction and by its order dated 20th December, 2006 found the same to be meeting the arm's length principle, conseq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lect the function performed and the risk assumed by the petitioner, the situation would be different and, in such a situation, there would be a need to attribute profits to the permanent establishment for those functions/risk that have not been considered. This is precisely what was considered in Morgan Stanley's case (supra) wherein the Supreme Court held: As regards attribution of further profits to the PE of MSCo where the transaction between the two are held to be at arm's length, we hold that the ruling is correct in principle provided that an associated enterprise (that also constitutes a P.E.) is reimbursed on arm's length basis taking into account all the risk-taking functions of the multinational enterprise. In such a case nothing further would be left to attribute to the P.E. The situation would be different if the transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a case, there would be need to attribute profits to the P.E. for those functions/risks that have not been considered. The entire exercise ultimately is to ascertain whether the service charges payable or paid to the serv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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