9911796707
TMI Blog2023 (6) TMI 1294X X X X Extracts X X X X X X X X Extracts X X X X ..... s are as under : The petitioner claims that it is engaged in providing information technology and information technology enabled services, besides India also in countries across the globe. It is stated that as a part of its business, it provides on-site services to its clients for which employees have to be deputed and in this particular case to the United States of America ("USA"). The employees of the company are sent on deputation and a deputation agreement is executed between the petitioner and the concerned employees, as per which the tax payable in India would be borne by the employee and the tax payable in USA by that employee was to be borne by the employer company i.e. the petitioner. It is stated that contractual obligations were discharged by the petitioner company by paying taxes in USA on the income of the employees deputed in that country. It is stated that on certain occasions the employees were held entitled to deductions and rebates in regard to the tax returns filed by such employees, which would result in a refund to an employee from out of the tax so deposited by the petitioner as an employer. The said amount of refund in respect of the tax paid in USA on ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation was sought by the Assessing Officer were answered vide communication dated 28th November 2016 in the following manner : "8. Note on class action suit : During the year, the Company entered into an agreement to settle for a sum of Rs. 161.63 crores (USD 29.75), a class action suit filed in the United States of America Court relating to payments to employees on deputation. Based on the settlement TCS is relieved from all past and present litigation made by the company. Thus, the amount paid by TCS is towards settlement of employee litigation." 7. An additional reply was submitted on 16th November 2016, wherein it was yet again reiterated that the payment made under the settlement agreement was a cost incurred by TCS to put an end to the ongoing litigation for purposes of ensuring smooth functioning of the business in USA and further that expenses were neither penal in nature nor in respect of any wrongdoing committed by TCS US Branch but were expenses incurred during the course of carrying out the business. It was, therefore, stated that payments made were deductible expenditure in the hands of TCS for tax purpose under section 37 (1) of the Act. As they were recovered wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payments made in the USA against the Law suit in their books of accounts as an expense under the head "Other Expenses" for the FY 2012-13. Further Assessee was asked to explain the nature and allowability of the said expenses and was asked to submit the computation of income. However, it is seen that assessee has claimed it as "allowable expense" and has claimed that the said expense is paid by the TCS is towards the settlement against the class action suit and not the penalty. The amount incurred is towards the settlement cost is a cost incurred by the TCS to put an end to the on-going litigation and to ensure smooth functioning of its business in the USA. Thus, the assessee has claimed the said expenditure as deductible expenditure. Under section 37(1) of the Income Tax Act 1961. Further as per information available with the department, Class action Law suit was over the wages dispute and breach of contract and US federal laws. TCS was facing the class Suit action and was made to pay Rs 161.63 crores (29.75 million USD) settlement over its' practice of forcing its' employees to sign over their tax refunds cheques when they finished working in the USA. Also, no response ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the investigation wing of the department. Even otherwise it was highlighted stated that there was no legal basis for the Assessing Officer to believe that income had escaped assessment. 11. The objections to the reopening were rejected by virtue of order dated 3rd January 2022. The basis for rejecting the contentions of the petitioner can be found in paragraph No. 2 of the order, which reads as under : (d). The re-opening is on the basis of a mere change of opinion: All the three above noted objections are dealt collectively and found not tenable in the light of the information available NOW with the department that Class action Law suit was over the wages dispute and breach of contract and US federal laws. You were facing the class Suit action and were made to pay Rs 161.63 crores (29.75 million USD) settlement over your 'practice of forcing your employees' to sign over their tax refunds cheques when they finished working in the USA. The documents submitted by you during the course of original assessment proceedings u/s 143(3) were furnished in routine course in compliance to regular notices. THE REAL NATURE OF SO-CALLED SETTLEMENT AMOUNT was of a penalty for settlemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the scrutiny assessment proceedings was otherwise not allowable in terms of the provisions of section 37 of the Act inasmuch as the amount paid by the petitioner to settle the class action suit was in the nature of the penalty and therefore could not have been claimed as 'operational expenses', which ought to have been disallowed under section 37 of the Act. It is stated that the assessee had not filed a copy of the suit in support of its claim during the course of assessment proceedings, and therefore, there was a failure on the part of the assessee to disclose fully and truly all material facts. It was further asserted that the facts which have now been highlighted, based upon the report received from the investigation wing of the department, could not have otherwise been discovered by the Assessing Officer during the earlier assessment proceedings despite due diligence, and therefore, it was urged that the reopening was perfectly legal and justified. 14. We have heard learned counsel for the parties. 15. It is not denied that the notice that has been issued under section 148 of the Act, dated 31st March 2021 seeks to reopen an assessment for the assessment year 2013-14. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be furnished, and therefore, must be deemed to have been considered. In such a case, it cannot by any stretch of imagination, be said that there was any failure to disclose fully and truly any of the material facts. 18. The argument that the petitioner had failed to provide to the Assessing Officer a copy of the plaint/suit filed against the petitioner before the Court in USA which it is alleged constitutes a failure on the part of the assessee to disclose fully and truly a material fact, in our opinion, does not at all impress or appeal to us in any manner. Nothing could have prevented the Assessing Officer from calling for a copy of the pleadings which were filed before the Court in USA if at all it was found to be necessary. Therefore, the argument advanced clearly deserves to be rejected. 19. Mr. Mistri, learned senior counsel for the petitioner urged that the re-assessment is nothing but a change of opinion. It was contended that the Assessing Officer could not be said to have any reason to believe that income had escaped assessment as there was no tangible material to come to a conclusion that there was an escapement of income from assessment and that in the garb of reop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e class action suit, did not at any point of time, admit any wrong doing or violation of any of the laws which were applicable to the litigating parties. On the other hand, the petitioner, as a defendant, while reiterating that it had strong defences on merits to the class action suit expressed a desire to settle the issues to avoid expense, risk and uncertainty of continuing the proceedings. The agreement further records as under : ".....Nothing in this Agreement should be, is intended to be, or will be construed as an admission by Defendants of any wrongdoing, or that Plaintiff's claims in this Action have merit or that Defendants have any liability of Plaintiff's or the Class Members on those claims....." 22. On a reading of the settlement agreement as also the order of US Court it cannot remotely be suggested that the payment made for settling the litigation was a penalty. A penalty, as defined by the Black Law Dictionary (9th Edition), is "punishment imposed on a wrongdoer, usually in the form of imprisonment or fine." 23. According to Corpus Juris, penalty is imposed in exercise of the police powers of the legislature, which has the power to subject any particular viola ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". [Explanation 1.- For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. [Explanation 2.- ....... [Explanation 3.- ....... 25. In fact if the settlement agreement and consequent payment made by the Petitioner were indeed in violation of any law, the same would certainly not have been accepted by the concerned Court in the U.S.. The fact that the settlement had the approval of the Court in the U.S. itself suggests that the payment made was for a lawful purpose. In any case we would find it perverse to even think or hold that an amount paid towards settling a civil class action suit would be either an offence or one prohibited by law so as to disallow a claim of deduction in terms of Explanation to Section 37 of the Act. In any case a penalty imposed for breach of a civil ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and hence the absence of jurisdiction in the Assessing Officer to initiate the proceedings under Section 147/148 of the Act." 27. In the backdrop of aforementioned law as stated in Jindal Photo Films Ltd.(Supra) it can be seen that other than the information which was received by the A.O. from the DDIT (Investigation) Unit-2(4), Mumbai that the Petitioner had paid a penalty of Rs. 161.63 crores in USA, there was no material available with the A.O. in support of such an information that the payment made was in fact 'as a result of a penalty imposed'. A plain piece of information without any cogent material in support thereof in our opinion would not justify the reopening of the assessment more so when the A.O. in the regular assessment under Section 143(3) of the Act had gone into the allowability of the claim for such a deduction in the said assessment proceedings. Apart from the bare information received by the A.O., there was no material received by the said A.O. as the same is not reflected in the reason so recorded which would justify the reopening of the assessment, the A.O. in fact seeks to accord a fresh consideration to an issue which already stands concluded in the reg ..... X X X X Extracts X X X X X X X X Extracts X X X X
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