TMI Blog2016 (2) TMI 713X X X X Extracts X X X X X X X X Extracts X X X X ..... ion ought to have been applied; he now infers that income by way of royalty can also be taxed under Section 44D of the Act as business income in terms of paragraph 1 of Article 7 of the Indo-US DTAA read with paragraph 6 of Article 12 of the Indo-US DTAA. Plainly, this is a change of opinion. It is now well settled that it is impermissible to re-open concluded assessments on the basis of such change of opinion This Court in a recent decision in Sun Pharmaceuticals Industries Ltd. v. Deputy Commissioner Of Income Tax & Anr.[2016 (1) TMI 788 - DELHI HIGH COURT] had examined the CBDT Instruction No. 9 of 2006 and held that the same could not over-ride the statutory powers exercised by an AO in terms of Section 147 of the Act. The said CBDT instruction cannot be understood to compel the AO to re-open assessments that are inconsistent with his views. In the present case, the letter dated 1st September, 2009 clearly indicates that the AO had not accepted the view that the royalty paid to the Petitioner was liable to be taxed at the rate of 20% under Section 44D of the Act. He had expressly stated that ‘no inference may be drawn that the royalty income has accrued to the petitioner fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riefly stated, the relevant facts necessary to consider the controversy are as under: 3.1 The Assessee is engaged in the manufacture and production of business support software. The Assessee has a wholly owned subsidiary in India, namely, Oracle India Private Limited ( OIPL ). 3.2 The Assessee filed its return of income for AY 2005-2006 on 30th November, 2006 declaring an income of ₹ 1,79,27,09,864/-. Along with its return of income, the Assessee also filed a statement of computation of income, TDS certificates and a Chartered Accountants report in Form 3CEB specifying the international transactions carried out by the Petitioner. The return was picked up for scrutiny and notices under Section 143(2) of the Act were issued on 30th November, 2007 and 9th July, 2008, which were duly responded to by the Assessee. After culmination of the proceedings, an assessment order was passed on 21st November, 2008. 3.3 The Assessee has entered into a Software Duplication and Distribution License Agreement with OIPL pursuant to which OIPL sub-licenses software products to various customers in India. The Assessee offered the royalty received under the Software Duplication and Distrib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s income chargeable to tax under the Act has escaped assessment but for the purposes of the present petition, the learned counsel for the Petitioner has, without prejudice to other contentions, restricted his arguments to (a) the applicability of the first proviso to Section 147 of the Act, that is, the Petitioner has not failed to disclose fully and truly all material facts necessary for its assessment; and (b) that the re-opening of assessment has been occasioned by change in opinion, which is impermissible. 5. Accordingly, we are proceeding to address the controversy urged on the assumption - although it may not be correct - that the Revenue s contention that the Petitioner s income for AY 2005-06 has escaped assessment, is correct. However, in order to address the issue at hand, it is necessary to understand the Revenue s contention with regard to the merits of its claim that the Assessee s income has escaped assessment. 6. The dispute essentially revolves around the royalty payments received by the Petitioner from its Indian subsidiary - IOPL. The Petitioner had filed the return declaring an annual income of ₹ 1,79,27,09,864/- for the AY 2005-06. It was duly disclo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso concluded that the Petitioner was liable to pay tax on Royalty on what he termed as Global Deals . The Petitioner had disputed that it had a PE in India and continued to agitate the issues by filing appeals before CIT (A). Further, the Petitioner had also invoked the Mutual Agreement Procedure (MAP) as per Article 27 of the Indo-US DTAA for avoidance of double taxation in respect of transactions which were sought to be taxed in USA as well as in India. 10. It is not in dispute that the Petitioner had produced all the relevant documents pertaining to the international transactions entered into by it. During the assessment proceedings, the AO also examined the other activities of the Petitioner in India and concluded that the Petitioner was also liable to pay tax on income by way of royalty on the total revenues transferred to OIPL in respect of global deals , that is, the software licensed to various Multi National Corporations ( MNCs ) which were utilized by the said MNCs in India and the revenue pertaining to it was transferred to OIPL. Further, the AO was also of the view that in respect of software development business, the Petitioner had a Permanent Establishment in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence of PE in India and income earned/linked to it have not been disclosed. This has led to underassessment of income. Therefore, I have reasons to believe that income of more than ₹ 1 lakh of the assessee company for AY 2005-06, has escaped assessment. I am therefore satisfied that it is a suitable case to be reopened for reassessment. 13. A bare perusal of the reasons indicate that the disputes relating to the income of the Petitioner escaping assessment are twofold: The first being whether the tax payable on royalty is chargeable at the rate of 20% instead of 15% as accepted earlier; and the second being, whether the interest payable on royalty is chargeable to tax at the rate of 41.82% instead of 15% as accepted earlier. 14. The Revenue contends that the royalty payable to the Petitioner is taxable as business profits in terms of Article 7 of the Double Tax Avoidance Agreement between India and USA (hereafter Indo-Us DTAA ) and not as royalty in terms of Article 12 of the Indo-US DTAA. 15. At this stage it is necessary to refer to Article 7 and Article 12 of the Indo-US DTAA and the relevant paragraphs of Article 7 and Article 12 of the DTAA are reproduced her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss amount of the royalties or fees for included services. xxxx xxxx xxxx 6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties or fees for included services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for included services are attributable 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. 16. By virtue of paragraph 6 of Article 12 of DTAA, the provisions of paragraph 1 and 2 of the said Article would not be applicable if the beneficial owner of royalties being a resident of a contracting state carries on business in the other contracting state in which the royalties arise, through a PE situated therein. Thus, by virtue of paragraph 1 of Article 7 of the DTAA, the income of the Petitioner which is attributabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he inference which the Income Tax Officer would draw from the facts. The said view was again reiterated by the Supreme Court in ITO v. Madnani Engineering Works Ltd: (1979) 118 ITR 1 (SC). 21. It is not in dispute that the Assessee has produced all relevant material that was required. The AO had further examined the transactions in question and had accepted that the royalty payable to the Petitioner was chargeable to tax at the rate of 15%. The AO had concluded that the software development centres in Hyderabad and Bangalore constituted the Petitioner s PE in India insofar as the Petitioner s income from software development is concerned. However, the AO accepted that the ordinary course of business of OIPL is replication and licensing of software Accordingly, the Petitioner s income from royalty was taxed in accordance with Article 12 of the Indo - US DTAA. The AO now wants to tax this royalty as income from business by applying the principle of force of attraction to the Petitioners alleged PE in India. 22. The principle of force of attraction of the Permanent Establishment - as explained by Klaus Vogel on Double Taxation Conventions - is a principle where the state i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was no other primary fact which was material to the assessment and not disclosed by the Petitioner. The question whether the royalty receivable by the Petitioner is chargeable to tax at the rate of 20% is dependent on the AO s inference as to (a) whether the principle of force of attraction is applicable to the royalty payable to the Petitioner, that is, whether the royalty can be attributed to business activities similar to those carried on through the Petitioner s PE in India; and (b) whether the royalty receivable by the Petitioner falls within the exclusion of paragraph 6 of Article 12 of the Indo-US DTAA. 26. Insofar as the interest on royalty is concerned, the same was clearly disclosed by the Petitioner in the audit return (form 2 CEB). Further, the TPO has also recorded the same as a disclosed international transaction in his order dated 29th September, 2008. Thus, the contention that the Petitioner had failed to fully and truly disclose any material fact relevant for assessment of that income is plainly unsustainable. The question whether such income was to be taxed as interest income and not as royalty is again a matter of inference. The earlier decision of the AO to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 147. 31. In view of the settled legal position as aforesaid, even if the proviso under Section 147 of the Act is not pressed into service, the re-opening of assessment for the reasons as disclosed would be impermissible as it merely reflects an endeavour to charge enhanced tax on the basis of a change in opinion. 32. Mr Syali, learned Counsel for the Petitioner had also contended that the assessments were sought to be re-opened on the basis of audit objections which had not been accepted by the Department. He contended that the Revenue was seeking to re-open the assessment based on CBDT Instruction No. 9 of 2006. He also drew attention of this Court to a letter dated 1st September, 2009 sent by the AO to the Audit Officer wherein the AO had not accepted the objection of the Audit party that royalty ought to have been taxed at the rate of 20% by virtue of section 44D read with section 115A (b) (A) of the Act. 33. Mr Rahul Chaudhary disputed the aforesaid contention and contended that the AO s decision to re-open was not pursuant to any audit objection but pursuant to facts that came to the knowledge of the AO subsequently. He pointed out that whereas the audit obje ..... X X X X Extracts X X X X X X X X Extracts X X X X
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