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M/s E-INFOCHIPS LIMITED Versus DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4

2015 (4) TMI 979 - GUJARAT HIGH COURT

Reopening of assessment - non deduction of tds on payment credit to foreign companies, on account of ‘software services‘ - Held that:- In the original assessment, full particulars with respect to “Software License Fees” by the assessee to the foreign companies was disclosed. Not only that the assessee claimed the same as revenue expenditure. The notice was issued under section 143(3) of the Act and the Assessing Officer also vide communication / notice dated 12/11/2010 called upon the assessee t .....

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lose fully and truly all material facts necessary for the assessment with respect to Software License Fees paid to foreign companies and therefore, the income chargeable to tax has been escaped due to the failure on the part of the assessee to disclose fully and truly all material facts. Under the circumstances, the condition precedent for invoking powers under section 147 of the Income Tax Act to initiate reassessment proceedings beyond the period of 4 years are not at all satisfied. Once the c .....

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Niko Resources Ltd. (2014 (9) TMI 892 - GUJARAT HIGH COURT) as well as Gujarat Lease Financing Limited (2013 (10) TMI 101 - GUJARAT HIGH COURT) - Decided in favaour of assessee. - SPECIAL CIVIL APPLICATION NO. 13859 of 2014 - Dated:- 7-4-2015 - MR. M.R. SHAH AND MR. S.H.VORA, JJ. FOR THE PETITIONER : MR B S SOPARKAR, ADVOCATE FOR THE RESPONDENT : MRS MAUNA M BHATT, ADVOCATE JUDGMENT (PER : HONOURABLE MR.JUSTICE M.R. SHAH) 1.00. By way of this petition under Article 226 of the Constitution of In .....

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ioner is a Company engaged in I.T. Enabled Services and Software Development. The petitioner filed its return of income for A.Y. 2007-2008 on 21/10/2007 declaring total income at ₹ 5,52,52,210/-. 2.02. That the case was selected for scrutiny and notices under section 142(1) and under section 143(2) of the Income Tax Act were issued and served upon the petitioner - assessee. It appears that in the notice dated 12/11/2010, specific query regarding Software License Fees was raised. 2.03. That .....

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quested for the reasons recorded for reassessment the assessment vide letter / communication dated 28/4/2014. That vide letter / communication dated 20/5/2014, the assessing officer recorded reasons for reopening of the assessment (Annexure-E to the petition). 2.06. That it appears that on receipt of the reasons recorded for reassessment, the assessee raised various objections submitting that there was no omission or failure on the part of the assessee to disclose truly and fully all material fa .....

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dings for the A.Y. 2007-2008. 3.00. Mr.B.S. Soparkar, learned advocate appearing on behalf of the petitioner - assessee has vehemently submitted that the ground for reopening of the assessment is completely misconceived and baseless. It is submitted that in the present case reassessment proceedings have been initiated after a period of four years. It is submitted that therefore, escapement of income must also be occasioned by a failure on the part of the assessee to disclose fully and truly all .....

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s submitted that therefore, now having allowed the claim, it is not open to the respondent - Assessing Officer to reopen the assessment, merely for the re-computation taking a different view on the same material available with him. 3.02. Mr.B.S. Soparkar, learned advocate appearing on behalf of the petitioner - assessee has further submitted that the only query which was raised by the Assessing Officer at the time of framing the original assessment was whether the Software License Fees was reven .....

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on and more particularly, the condition precedent for initiation of the reassessment proceedings beyond the period of four years are not satisfied. 3.03. Mr.B.S. Soparkar, learned advocate appearing on behalf of the petitioner - assessee has heavily relied upon the decision of this Court in the case of Niko Resources Ltd. Versus Assistant Director of Income Tax, reported in (2014) 51 Taxman.com 568 (Gujarat) in support of his above submissions and request to quash and set aside the impugned reas .....

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4.00. Present petition is opposed by Mr.M.R. Bhatt, learned counsel appearing on behalf of the revenue. 4.01. An Affidavit-in-reply is filed on behalf of the respondent justifying the reopening of the assessment for the A.Y. 2007-2008, in exercise of powers under section 147 of the Income Tax Act. 4.02. Mr.M.R. Bhatt, learned counsel appearing on behalf of the revenue has vehemently submitted that as such the present petition is filed at premature stage, as only a notice under section 148 read .....

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assessment proceedings are absolutely just and proper and in accordance with the provisions of the Act, more particularly section 147 read with section 148 of the Income Tax Act. 4.04. Mr.M.R. Bhatt, learned counsel appearing on behalf of the revenue has further submitted that in the case of the petitioner, the assessment was completed under section 143(3) of the Income Tax Act at the total income of ₹ 6,47,90,040/- on 29/12/2010. It is submitted that subsequently it was noticed that the i .....

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d assessment, reopening of the assessment is justified. It is submitted that the case of the petitioner has been reopened on the issue of non-deduction of TDS under section 195 read with section 40(A)(i) of the Income Tax Act amounting to ₹ 85,96,923/-. It is submitted that, therefore, the case of the petitioner has been reopened, as the income chargeable to tax has escaped assessment on account of failure on the part of the assessee to disclose fully and truly all material facts necessary .....

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mitted that though foreign remittance was in nature of royalty, on which tax was to be deducted at source, the assessee failed to do so. 4.06. Mr.M.R. Bhatt, learned counsel appearing on behalf of the revenue has further submitted that in the present case deduction of TDS under section 195 of the Income Tax Act on foreign remittance on Software License Fees was not scrutinized during the assessment proceedings under section 143(3) of the Income Tax Act. It is submitted that the Assessing Officer .....

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y in the nature of Royalty . 4.07. Mr.M.R. Bhatt, learned counsel appearing on behalf of the revenue has further submitted that the assessee company simply availed the Software Services from the foreign companies and these Companies granted the assessee company only right to use Software License , as the the Software was owned by the parent Company itself. It is submitted that it is an admitted fact that the payment made by the assessee as Software License Fees is in the nature of Royalty and th .....

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arly section 147 read with section 148 of the Income Tax Act. Submitting accordingly it is requested to dismiss the present Special Civil Application. 5.00. Heard the learned advocates appearing on behalf of the respective parties at length. 5.01. At the outset, it is required to be noted that what is challenged in the present Special Civil Application by the petitioner - assessee is the reopening of the assessment for the A.Y. 2007-2008 and initiation of the reassessment proceedings for the A.Y .....

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ent even in the event of his having reasonable belief that any income chargeable to tax has escaped assessment for any assessment year. As per the first proviso to section 147, assessment can be reopened under section 147 after expiry of 4 years only if (1) assessee failed to make a return under section 139 or in response to the notice under section 142(1) or under section 148 and he failed to disclose truly and fully all material facts necessary for the assessment. Once the case of the assessee .....

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.02. Now, in the backdrop of the above legal provisions, challenge to the impugned reassessment proceedings are required to be considered. 5.03. In the present case, reassessment proceedings under section 147 of the Income Tax for the A.Y. 2007-2008 are initiated beyond the period of 4 years. The reasons recorded for reopening of the assessment for A.Y. 2007-2008, which are communicated to the petitioner - assessee vide communication dated 20/5/2014 are as follows :- ...It has been observed that .....

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Carla. 01/11/06 24,39,160 4 Megma Designs Automation Inc. Bayfront Plaza, Santa Carla. 31/03/2007 23,66,144 5 Texas Instruments Inc. Dollas TX 75266, USA. 18/09/2006 03,45,900 Total 85,96,923 It has been noted that the payment was made without withholding of tax at source though the payment is exclusively in nature of royalty . Assessee Company has simply availed software services from these above named foreign companies and these companies have granted the assessee company the only the right t .....

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under the Act. It is further to be noted that, in the assessee s own case for the A.Y.2008-09 an order u/s.201(1) and 201(1A) r.w.s. 195 of the Act dated 02/12/2011 was passed wherein remittance to the tune of ₹ 23,02,240/- to one M/s. Magma Design Automation Inc., USA was considered. This resulted into demand of ₹ 3,61,463/ , which is paid by the assessee company and even its appeal was dismissed by the CIT(A). Accordingly, I have reason to believe that income to the tune of Rs,85,9 .....

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e A.Y. 2007-2008 is sought to be reopened on the ground that the Software License Fees paid to the foreign companies was in nature of Royalty and thus, Capital Expenditure and therefore, it attracts section 195 of the Income Tax Act and therefore, TDS was required to be deducted. However, it is required to be noted that in the original assessment, full particulars with respect to Software License Fees by the assessee to the foreign companies was disclosed. Not only that the assessee claimed the .....

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ied its claim that the Software License Fees is in the nature of revenue expenditure and not capital expenditure. The assessee replied to the said query as under:- We have enclose herewith in Annexure C , the copy of Suppliers' Bills of each transaction. Please note that the license fees / expenses is not a Capital Expenditure. There is no enduring benefit in usage of these licenses. The ownership of license has not passed on to the assessee. The assessee has a limited right to use only for .....

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evenue expenditure and allowed the deductions claimed. 5.05. Now, subsequently on reopening of the assessment, it is the case of the Assessing Officer that the payment of Software License Fees is in the nature of royalty and thus in the nature of Capital Expenditure, as the assesses has simply availed the Software Services from the named foreign companies and the said foreign companies have granted the the assessee company the only right to user Software License , as the Software was owned by th .....

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nder section 147 of the Income Tax Act to initiate reassessment proceedings beyond the period of 4 years are not at all satisfied. 5.07. Identical question came to be considered by the Division Bench of this Court in the case of Niko Resources Ltd. (supra) and while considering the scope and ambit of powers to be exercised under section 147 of the Income Tax Act by the Assessing Officer, while reopening the assessment beyond the period of 4 years, the Division Bench of this Court while consideri .....

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turn under section I39 of the Act or in response to notice issued under section 142(1) or under section 148 of the Act, he failed to disclose truly and fully all material facts necessary for the assessment. Once all primary facts are before the assessing authority, no further assistance is required by way of disclosure. All inferences of facts and legal inference need to be drawn by the Assessing Officer. It is not for any one to guide the Assessing Officer in respect of inference "factual .....

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on the issue in case of Gujarat Lease Financing Ltd. (supra), has held thus: "l0. It can be clearly noted from the reasons recorded that there is no mention at all of the assessee having not disclosed fully or truly material facts which were necessary for the purpose of computing the income of the assessee. Assuming that in the notice for reopening. such wordings are not specifically mentioned and they can be supplemented either while rejecting the objections or by way of affidavit of the A .....

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o any such other income chargeable to tax, which has escaped the assessment. However, no such action is permissible after lapse of 4 years from the end of the relevant assessment year unless income chargeable to tax has escaped assessment on account of failure on the part of the assessee to disclose fully and truly all material facts necessary for the purpose of such assessment. The onus is on the assessee to reveal the primary facts and to draw the inferential facts would be the responsibility .....

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