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2016 (2) TMI 713 - DELHI HIGH COURT

2016 (2) TMI 713 - DELHI HIGH COURT - [2016] 383 ITR 434 - Reopening of assessment - Taxation on royalty payment -taxable as business profits and not as royalty under Article 12 of DTAA - Held that:- 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 h .....

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the rule of “force of attraction”, the present incumbent apparently feels that the rule of force of attraction 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 su .....

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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 from its PE in India’.

Mr. Syali is probably correct in assuming that the Petitioner’s assessment for AY 2005-06 is being re-opened only on the basis of CBDT Instruction No. 9 o .....

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re-opening of assessment on account of change in opinion is also impermissible. - Decided in favour of assessee - W. P. (C) 2156/2013 & CM No. 4100/2013 - Dated:- 18-2-2016 - S. Muralidhar And Vibhu Bakhru, JJ. For the Petitioner : Mr M. S. Syali, Senior Advocate with Mr Mayank Nagi and Mr Husnal Syali, Advocate For the Respondents : Mr Rahul Chaudhary, Senior Standing Counsel with Mr Raghvendra Singh, Junior Standing Counsel with Mr Sharad Agarwal, Advocate ORDER Vibhu Bakhru, J. 1. The Petiti .....

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n controversy in the present petition is whether the conditions as laid down under Section 147 of the Act for re-opening the assessment for the Assessment Year ( AY ) 2005-06 were satisfied. The principal contention advanced by the Assessee is that there was no failure on its part to disclose fully and truly all material facts necessary for assessment; consequently, the condition as stipulated in the Proviso to Section 147 is not satisfied. It is further pleaded that the concluded assessment is .....

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f 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 .....

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d by the Assessee, the AO concluded that the software development centres of OIPL located at Hyderabad and Bangalore constituted the Assessee s Permanent Establishment (hereafter PE ) in India. Accordingly, the AO taxed the income of the Petitioner in respect of business of development of software as profits of the Assessee attributable to its PE in India. The AO also assessed income of the Petitioner from what he termed as Global Deals , as chargeable to tax under the Act. 3.5 Aggrieved by the .....

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on 147 of the Act and consequently, he proposed to re-assess the Assessee s income for the said year. 3.7 The Assessee requested for the reasons for re-opening and pursuant to its request, the AO provided the reasons as recorded. The Assessee objected to the reasons which were disposed of by an order dated 21st March, 2013. 4. Section 147 of the Act provides that where an AO has reason to believe that any income chargeable to tax has escaped assessment, he may assess or re-assess such income tha .....

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on to re-open the assessment principally on the ground that there has been no failure on the part of the Petitioner to fully and truly disclose all material facts necessary for its assessment. The Petitioner also disputes the claim of the Revenue that any of its 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 applicabi .....

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rrect. 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 disclosed that the aforesaid sum comprised of (a) r .....

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ment with its Indian Subsidiary, OIPL, in terms of which OIPL was granted a license for duplication and distribution of Oracle Software in India. In consideration for the said license, the Petitioner charged royalty @ 56% of the revenue being the actual sales price, updates and product support revenue. In addition, the Petitioner had also entered into a Software Support Services Agreement with OIPL in terms of which the Petitioner was entitled to receive royalty @ 56% of the new revenue recogniz .....

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several cases the associate concerns of Petitioner had granted software license abroad and the software was used in India by the associated concerns of Multi National Corporations (MNCs) who had obtained the licenses abroad. The Petitioner contended that royalty on such global deals was not exigible to tax in India as the same would amount to double taxation. 8. The AO also concluded that the Petitioner was carrying on software development activity through its PE in India and sought to tax so mu .....

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nd 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 .....

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r had a Permanent Establishment in India in the shape of software development centres at Hyderabad and Bangalore which were operated by OIPL. The AO held that OIPL being a wholly owned subsidiary of the Petitioner had undertaken the core activities relating to software development in India. The AO held that the taxable income of ₹ 2,80,03,95,306/- was attributable to the Petitioner s PE in India. The AO did not accept the Petitioner s contention that OIPL was an independent agent and was a .....

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ideration. 12. Whist the proceedings are pending as aforesaid, the AO issued a notice under Section 148 of the Act on 28th March 2012, which is impugned in this petition. At the request of the Petitioner, the AO provided the reasons for his belief that income of the Petitioner had escaped assessment. At this stage, it is relevant to refer to those reasons and the same are reproduced as under: The assessee is a foreign company. For the AY 2005-06, assessment was completed after scrutiny in Novemb .....

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s linked to the PE. Therefore, this royalty income must be taxed @ 20% gross instead of 15%. Further, the royalty income offered by the assessee includes ₹ 4,18,51,933/- towards interest on delayed royalty which should be taxed @ 41.82 percent. It was the duty of the assessee to disclose fully and truly all material facts necessary for the assessment but it has not done so. The facts pertaining to existence of PE in India and income earned/linked to it have not been disclosed. This has led .....

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ed 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 .....

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tributable to (a) that permanent establishment; (b) sales in the other State 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 the other State of the same or similar kind as those effected through that permanent establishment. xxxx xxxx xxxx ARTICLE 12 - Royalties and fees for included services - 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of .....

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d in this Article [other than services described in sub-paragraph (b) of this paragraph] : (i) during the first five taxable years for which this Convention has effect, (a) 15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political subdivision or a public sector company ; and (b) 20 per cent of the gross amount of the royalties or fees for included ser .....

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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 attrib .....

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ated therein. Thus, by virtue of paragraph 1 of Article 7 of the DTAA, the income of the Petitioner which is attributable to (a) its PE; (b) sale of goods or merchandise which is similar to those sold through the PE; and (c) business activities carried on by the Assessee which are similar to the business activity carried on through its PE, is taxable as business profits. 17. According to the Revenue, the royalty payable to the Petitioner by OIPL is linked to its PE in India and by applying the p .....

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e meaning of the expression omission or failure to disclose fully and truly all material facts necessary for his assessment and observed as under: The words used are "omission or failure to disclose fully and truly all material facts necessary for his assessment for that year". It postulates a duty on every assessee to disclose fully and truly all material facts necessary for his assessment. What facts 'are material and necessary for assessment will differ from case to case. In eve .....

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her facts inferred from them, the authority has to draw the proper legal inferences, and ascertain on a correct interpretation of the taxing enactment, the proper tax leviable. 20. In a later judgment, CIT v. Burlop Dealers Ltd.: AIR (1971) SC 1635, the Supreme Court referred to the above quoted passage from Calcutta Discount Company (supra) and explained that if an Assessee had disclosed the primary facts relevant for the assessment, he was under no obligation to instruct the Income Tax Officer .....

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ent 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 Peti .....

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le in the State where it carries on business through a PE. However, only so much of its income that is attributable to the PE is liable to be taxed in that State. However, the UN Model Convention accepts the principle of force of attraction to a limited extent and also includes a non residents income that is attributable to sale of goods in the other State which are similar to those as sold through a PE in that State as well as from any business activities carried on in that State which are simi .....

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ht to contend that the facts discovered by the AO subsequently indicated that a PE of the Petitioner existed in the context of the income taxed as royalty; and, the Petitioner s receipt of royalty was attributable to its PE in India. However, a closer examination of the counter affidavit expressly affirms that the Revenue is seeking to tax the royalties received by the Petitioner by applying the principle of force of attraction which is embodied in paragraph 1 of Article 7 of the Indo-US DTAA. I .....

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is observed that such royalty is linked to the Petitioner PE. 25. Clearly, there 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 s .....

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r 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 assess the same as royalty cannot be traced to any failure on the part of the Petitioner to disclose fully and truly any primary fact. 27. The next aspect that needs to be examined is whether the AO had any tangible materia .....

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agraph 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. 29. In Oracle Systems Corporation v. Assistant Director of Income-tax, Circle 2(1), International Taxation, New Delhi [2015] 235 Taxman 337 (Delhi), a Co-ordinate Bench of this Court considered the Petitioner s challenge to re-opening of asse .....

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h in CIT v. Usha International Ltd. 2012 348 ITR 485 held that what the Assessing Officer is now seeking to do amounts to a clear change of opinion and that is not permissible. 30. The Supreme Court in the case of CIT v. Kelvinator of India Limited:[2010] 320 ITR 561 (SC) had held that the expression reason to believe as used in Section 147 of the Act must be given an schematic interpretation. The Court held that an assessing officer had no power to review but only to re-assess an Assessee s inc .....

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ed 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 .....

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