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2015 (10) TMI 2380 - DELHI HIGH COURT

2015 (10) TMI 2380 - DELHI HIGH COURT - [2016] 380 ITR 232 - Reopening of assessment - royalty payments received by the assessee from its Indian subsidiary (Oracle Indian Private Limited OIPL) - INDIA USA DTAA - allegation of AO that since the assessee has a Permanent Establishment (PE) in India and that the receipts by the assessee from licensing of the duplicate software has been treated as "royalty" the "force of attraction rule" would be attracted and that the income in the nature of royal .....

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ned Article 12 of the DTAA in its entirety, which also contained the exception mentioned in clause (6) thereof.

When a regular assessment is completed in terms of Section 143(3), a presumption can be raised that such an order has been passed upon a proper application of mind. See CIT vs. Kelvinator of India Ltd [2002 (4) TMI 37 - DELHI High Court] . Therefore, in our view, what the Assessing Officer is now seeking to do amounts to a clear change of opinion and that is not permissible. .....

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ment under section 143(3), there could not be any reopening of assessment. See Swarovski India Pvt. Ltd. Vs. Deputy Commissioner of Income Tax (2014 (9) TMI 4 - DELHI HIGH COURT) - Decided in favour of assessee. - W.P.(C) 12856/2009 & CM No. 13676/2009, W.P.(C) 12870/2009 & CM No. 13692/2009 - Dated:- 8-10-2015 - MR. BADAR DURREZ AHMED AND MR. SANJEEV SACHDEVA, JJ. For The Petitioner : Mr M.S. Syali, Sr. Advocate with Mr Mayank Nagi, Advocate For The Respondents : Mr Rahul Chaudhary, Senior Stan .....

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ctions. The section 148 notice was issued on 10.12.2008 in respect of assessment year 2002-03 and on 22.09.2008 in respect of assessment year 2003-04. The orders disposing the objections both dated 11.09.2009 in respect of both the assessment years were passed by the Dy. Assistant Director, Department of Income Tax rejecting the objections. Being aggrieved thereby, the present writ petitions have been filed. 2. The facts and circumstances are virtually identical in respect of both the assessment .....

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been rejected by virtue of the impugned order dated 11.09.2009. The learned counsel for the petitioner/assessee submitted that the impugned notices and the orders rejecting the objections are liable to be set aside, primarily on two grounds. First of all, it is contended that there has been a change of opinion and, secondly, it has been contended that the pre-conditions as stipulated in the first proviso under Section 147 have not been satisfied. Particularly, there is no failure on the part of .....

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e assessee is a company incorporated in USA and into the business of supplying and replication of software. The assessment order u/s 143(3) of the Act was passed for the relevant assessment year on March 28, 2005 wherein it was established that the assessee has PE in India under Article 5 of the DTAA as well as business connection‟ u/s 9(1)(i) of the Act. The receipts of the assessee i.e. receipts from software‟ have been treated as royalty‟. The receipts from software were tre .....

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20% in place of 15% as done in the assessment order. In view of the foregoing, I have reasons to believe that income chargeable to tax amounting to more than ₹ 1 lakh has escaped assessment within the meaning of section 147 of the Act. The case is covered under deemed escapement of income under Explanation - 2 to section 147 of the Act. In view of the above, I further have the reasons to believe that the income of the assessee for the relevant year has escaped assessment by reason of failu .....

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ed as royalty‟ the force of attraction rule‟ would be attracted and that the income in the nature of royalty should also be attributed to the Permanent Establishment by virtue of the said rule. It is therefore, alleged that as per Section 44D of the said Act, no expenses would be allowable and the receipts are to be taxed as royalty under section 115A of the Act at the rate of 20% in place of 15% as was done and accepted in the assessment order. On the basis of this, it has been reco .....

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racted in this case or not. In fact, we have proceeded on the basis that there is escapement of income as alleged by the Revenue although that may not have happened. 5. It is further noted in the recorded reasons that the escapement of income had occurred by reason of the failure on the part of assessee to disclose fully and truly all material facts necessary for assessment for that year . It would be pertinent to point out that no so-called material fact has been specified which, according to t .....

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7 - Business profits - 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment; (b) sales in the other State of goods or merchandise of the same o .....

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s which it might be expected to make if it were a distinct and independent enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly at arm‟s length with the enterprise of which it is a permanent establishment and other enterprises controlling, controlled by or subject to the same common control as that enterprise. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the .....

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nt Establishment situated here. It is further clear that if the assessee carries on business as aforesaid, the profits of the assessee may be taxed in India but only so much of them as are attributable to; (a) that permanent establishment; (b) sales in USA of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in USA of the same or similar kind as those effected through that permanent establishment. This .....

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racting State may be taxed in that other State. 2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed : (a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Arti .....

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other cases ; and (ii) during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services ; and (b) in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services as defined in this Article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this Article, 10 per cent of the gross amount of the royalties or fees for included services. xxxxx xxxxx xxxxx .....

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le to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as the case may be shall apply. 9. Article 12 (1) clearly indicates that Royalty and Fees for included services arising in India and paid to a resident of United States may be taxed in USA. However, by virtue of the provisions of Article 12(2) such royalty and fees for included service could also be taxed in India. But there is a cap on the .....

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ng State (USA) carries on business in the other Contracting State (India), in which the royalties or fees for included services arise, through a permanent establishment situated therein . 10. To appreciate the submissions made by the learned counsel for the petitioner, it is necessary to clarify that the assessee has paid 15% tax in terms of Article 12 (2) (a) (ii) of the DTAA and this has been accepted by the Assessing Officer at the time of original assessment under 143(3) of the said Act. It .....

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r examined the attribution of income to the Permanent Establishment and while doing so attributed only that part of the income of the assessee which falls within Article 7. This was on the basis of the consideration that the assessee carried on two distinct businesses: (1) through its distribution unit and 2) its development unit. This fact is noticed in the assessment order itself. The royalties were attributable to the distribution unit whereas the profits and gains of business arising out of .....

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e submitted that the Assessing Officer has not examined this aspect at all and, had he done so, the force of attraction rule‟ would have been applied. We are unable to agree with the submissions made by the learned counsel for the Revenue for the simple reason that clause (6) of Article 12 itself carves out an exception. When the Assessing Officer has accepted the assessee‟s contentions that the royalty was to be taxed under Article 12 (2) (a) (ii) at the rate of 15%. It has to be pr .....

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ly observed that there may be cases where the Assessing Officer does not and may not raise any written query but still the Assessing Officer in the first round/original proceedings may have examined the subject matter, claim, etc., because the aspect or question may be too apparent and obvious. The court also observed that in such cases it would be contrary and opposed to normal human conduct to hold that the Assessing Officer in the first round did not examine the question or subject-matter and .....

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writing had been raised by the Assessing Officer. It is also observed that the aspects and questions examined during the course of assessment proceedings itself may indicate that the Assessing Officer must have applied his mind on the entry, claim or deduction, etc. In the present case, in the circumstances narrated above, it is evident that the when the Assessing Officer was examining the entire issue of royalty and its taxability the Assessing Officer must have examined Article 12 of the DTAA .....

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n 147 of the Act. The said submission is fallacious. An order of assessment can be passed either in terms of sub-section (1) of section 143 or sub-section (3) of section 143. When a regular order of assessment is passed in terms of the said sub-section (3) of section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act ju .....

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on can be raised that such an order has been passed upon a proper application of mind. 14. Therefore, in our view, what the Assessing Officer is now seeking to do amounts to a clear change of opinion and that is not permissible. 15. Apart from this the second point urged by the learned counsel for the petitioner/assessee has also to be accepted. The point was that the Revenue has been unable to point out as to which material fact had not been disclosed fully or truly. Even the reasons do not spe .....

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