DCIT, Intl. Taxation, New Delhi V. M/s NEC Corporation, New Delhi

ITA 1194/DEL/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 82202 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 9 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-12-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 26-11-2014
• Assessment Year: 2004-2005
• Appeal Filed On: 01-03-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Audit objection; Permanent establishment; Difference of opinion; Assessment record; Change of opinion; Reassessment proceedings
• Section: 143(3); 147; 148; 12; 154

Judgement Text

DELHI BENCH E : NEW DELHI BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SHRI A. T. VARKEY, JUDICIAL MEMBER ITA NO. 1194 /DEL/ 2013 (ASSESSMENT YEAR: 2004 - 05 ) C.O. NO.104/DE/2013 (IN ITA NO. . 1194 /DEL/ 2013) DCIT INTERNATIONAL TAXATION, CIRCLE 2(1) NEW DELHI VS. NEC CORPORATION C/O. MAYUR BATRA & CO. C.A. 7, BARAKHAMBA ROAD, NEW DELHI (APPELLANT) (RESPONDENT) O R D E R PER A. T. VARKEY, JUDICIAL MEMBER THIS IS AN APPEAL BY REVENUE AGAINST AN ORDER ARISING FROM AN ORDER OF LD CIT(A - XXIX DATED 17.12.2012 FOR THE ASSESSMENT YEAR 2004 - 05. 2. GROUND NO.1 IS GENERAL AND DOES NOT REQUIRE ANY ADJUDICATION. 3. GROUND NO.2 CHALL ENGES THE QUASHING OF PROCEEDING S U/S 147/148 OF THE INCOME TAX ACT , 1961 (HEREIN AFTER THE ACT) BY LD CIT(A) ON THE GROUND THAT AO WAS NOT JUSTIFIED TO REOPEN THE ASSESSMENT PROCEEDING ON THE MERE CHANGE OF OPINION. 4. BRIEFLY STATED FACTS ARE THAT THE ASSESSEE IS A COMPANY INCORPORATED UNDER LAWS OF JAPAN. IT IS ENGAGED IN BUSINESS OF SUPPLYING ELECTRONIC PRODUCTS MAINLY COMMUNICATION SYSTEM & EQUIPMENTS, COMPUTERS AND INDUSTRIAL PRODUCTS. THE APPELLANT WAS MAINTAINING A LIAISON OFFICE (HEREIN AFTER LO) IN INDIA DURING THE YEAR UNDER CONSIDERATION. THE APPELLANT FILED ITS RETURN OF INCOME ON 30.06.2005 DECLARING THEREIN INCOME OF RS.10,31,03,126 / - AS FTS (FEE FOR TECHNICAL SERVICE) SUBJECT TO 20% TAX ON GROSS BASIS. IN ASSESSMENT ORDER DATED 18.07.2006 U/S 143(3), THE AO HELD THAT LO OF THE APPELLANT REPRESENTS ITS PE (PERMANENT ESTABLISHMENT) IN INDIA AND INCOME FROM SUPPLY OF EQUIPMENT IS IN NATURE OF BUSINESS INCOME. ACCORDINGLY, THE APPELLANT BY : PIYUSH KAUSHIK, ADV. RESPONDENT BY : VIVEK KUMAR, SR. DR PAGE 2 OF 5 AO DETERMINED PROFITS ATTRIBUTABL E TO PE AFTER APPLYING GLOBAL PROFIT RATE TO SUPPLIES MADE TO INDIAN CUSTOMERS. THE AO ATTRIBUTED 45% OF ABOVE SAID PROFITS TO PE IN INDIA AND ALLOWED AL L THE EXPENSES AMOUNTING TO RS. 3,47,45,871/ - CLAIMED IN LO. THE INCOME WAS COMPUTED AS UNDER: - 1. INCOM E DECLARED IN RETURN AS FTS RS.10,31,03,126/ - 2. BUSINESS INCOME FROM SUPPLIES RS.84,92,493/ - RS.11,15,95,619/ - VIDE ORDER U/S 154 DATED 13.05.2008, THE ASSESSED INCOME WAS REDUCED TO RS.10,98,77,614/ - . THE ASSESSED INCOME WAS FURTHER RED UCED TO RS.10,96,95,170/ - VIDE ORDER U/S 154 DATED 09.09.2008. 3.1 SUBSEQUENTLY, THE AO INITIATED REASSESSMENT PROCEEDINGS VIDE NOTICE U/S 148 DATED 28.03.2011. IN ORDER U/S147, THE AO HELD THAT A PORTION OF EXPENSES CLAIMED IN LO/PE PERTAINS INCOME TAXABLE AS FTS. THE AO ACCORDINGLY DISALLOWED RS. 3,26,57,845/ - OUT OF EX PENSES CLAIMED IN LO ON PROPORTIONATE BASIS AND RECOMPUTED THE BUSINESS INCOME AT RS. 2,12,88,075. THE TAXABLE INCOME HAS BEEN COMPUTED IN ORDER U/S 147 AS UNDER: 1. INCOME DECLARED IN RETURN AS ITS RS.10,31,03,126/ - 2. BUSINESS INCOME FROM SUPPLIES RS .2,12,88,075 / - RS.12,43,91,201 / - 5. DURING IN THE APPELLATE PROCEEDING BEFORE THE LD CIT(A), THE ASSESSEE SUBMITTED THAT INITIATION OF PROCEEDING IS INVALID, AS IT IS BASED ON MERE CHANGE OF OPINION AND THERE HAS BEEN NO FAILURE ON THE PART OF THE ASSESSEE, TO MAKE FULL AND TRUE DISCLOSURE OF THE RELEVANT MATERIAL FACTS. 6. HAVING CONSIDERED THE ABOVE SUBMISSION, THE LD CIT(A), HAS HELD AS UNDER: - 6.1 I HAVE CAREFULLY GONE THROUGH VARIOUS CONTENTIONS OF THE APPELLANT, FACTUAL MATRIX AND OTHER MATER IAL PLACED ON RECORD. THE VITAL FACTS ARE THAT ORIGINAL ASSESSMENT U/S 143(3) WAS COMPLETED ON 18.07.2006 WHEREIN ALL THE EXPENSES INCURRED IN AO WERE ALLOWED AS DEDUCTION AGAINST BUSINESS PROFITS. NOTICE U/S 148 WAS ISSUED ON 28.03.2011 I.E. AFTER FOUR YE ARS FROM END OF THE RELEVANT AY. IN REASSESSMENT ORDER U/S 147, THE AO DISALLOWED EXPENSES ON PROPORTIONATE BASIS HOLDING THAT THESE PERTAIN TO RENDERING OF TECHNICAL SERVICES WHICH ARE TAXABLE ON GROSS BASIS. 6.2 DURING ORIGINAL ASSESSMENT PROCEEDING, T HE APPELLANT HAS FURNISHED DETAIL OF ALL THESE EXPENSES BEFORE AO WHO HAS EXAMINED THE ALLOWABILITY OF SUCH EXPENSES AND HAS HELD ON PAGE 8 OF THE ORDER THAT THESE EXPENSES ARE ALLOWABLE IN FULL. THEREFORE, IT CAN SAFELY BE INFERRED THAT THE AO HAS MADE A REASONED OPINION ABOUT THE ISSUE. NOTICE U/S 148 WAS ISSUED WITH REASON AS BELOW: PAGE 3 OF 5 'FOR THE YEAR UNDER REVIEW, THE ACTIVITIES OF LO OF THE APPELLANT WERE IN CONNECTION WITH SUPPLIES AS WELL AS PROVISION OF TECHNICAL SERVICES LEADING TO STREAM OF REVENUE FR OM TWO SEPARATE SOURCES - SUPPLIES AND SERVICES. HOWEVER, NO BIFURCATION OF THE EXPENSES INCURRED BY LO TOWARDS THESE TWO ACTIVITIES WAS FURNISHED. IN THE ABSENCE OF THIS, THE PROPORTIONATE EXPENSES OF LO MUST BE DISALLOWED WHILE CALCULATING INCOME FROM SUP PLIES.' THE APPELLANT HAS CONTENDED THAT ON INSPECTION OF ASSESSMENT RECORD, IT WAS FOUND THAT REASSESSMENT PROCEEDINGS HAVE BEEN INITIATED ON BASIS OF AUDIT OBJECTION, WHEREIN AUDIT PARTY WAS OF THE VIEW THAT ENTIRE EXPENSES WERE RELATED TO FEE FROM TECH NICAL SERVICES. 6.3 IT APPEARS THAT THERE WAS NO NEW INFORMATION/MATERIAL AVAILABLE BEFORE AO. IT IS SETTLED PRINCIPLE OF LAW THAT AO HAS TO MAKE A REASONED BELIEF BEFORE ISSUING NOTICE U/S 148. ONCE AN ISSUE HAS BEEN EXAMINED AND DECIDED BY THE AO, THE AO CANNOT REOPEN THE ISSUE UNLESS THERE IS SOME NEW INFORMATION OR MATERIAL AVAILABLE BEFORE HIM ON THE BASIS OF WHICH IT COULD BE REASONED OUT THAT SOME INCOME CHARGEABLE TO TAX HAS ESCAPED ASSESSMENT. THE AO IS NOT PERMITTED TO RESORT TO REASSESSMENT PRO CEEDING MERELY BY CHANGING THE OPINION HE HAS ALREADY FORMED ABOUT AN ISSUE. HONBLE SUPREME COURT HAS REITERATED THIS PRINCIPLE IN CIT VS KELVINATOR INDIA LTD. 320 ITR 561. FURTHER, PROVISIONS OF PROVISO TO SECTION 147 ARE APPLICABLE IN THE PRESENT CASE A CCORDING TO WHICH THE AO IS REQUIRED TO ALLEGE THAT ESCAPEMENT OF INCOME IS BECAUSE OF FAILURE OF THE ASSESSEE TO DISCLOSE FULLY AND TRULY ALL THE MATERIAL FACTS. IN PRESENT CASE, THIS PRE - REQUISITE IS NOT SATISFIED. DURING ORIGINAL ASSESSMENT STAGE, THE A PPELLANT HAD FURNISHED DETAIL OF ALL THE EXPENSES AND THE AO AFTER EXAMINING THEM HAD CONCLUDED THAT THESE EXPENSES ARE ALLOWABLE IN FULL. HENCE, IT CANNOT BE SAID THAT THERE WAS A FAILURE ON PART OF THE APPELLANT TO DISCLOSE ALL THE MATERIAL FACTS FULLY A ND TRULY. 7. THE LD D R, SUPPORTED THE ACTION OF THE AO AND THE LD AR SUPPORTED THE ORDER OF THE LD CIT(A). 8. WE FIND THAT IN THE COURSE OF ORIGINAL ASSESSMENT PROCEEDINGS , THE AO HAD EXAMINED THE ISSUE OF ALLOCATION OF EXPENSES AND THEREAFTER COMPUTED THE PROFIT ATTRIBUTABLE TO SUPPLIES AT RS.84,92,493/ - . HE HAS HELD IN THE ORDER OF ORIGINAL ASSESSMENT ORDER AS UNDER: - THE ASSESSEE HAS GIVEN FIGURES OF SUPPLIES MADE TO INDIAN CUSTOMERS ON 10.07.2006, AS PER WHICH THE TOTAL VALUES OF SUPPLIES DURING THE YEAR IS USD 43,05,022 CONVERTING THE SAME INTO INR @ 47.61 THE SAME COMES TO RS.20,49,62,075. THE ASSESSEE HAS NOT GIVEN ANY INDIA SPECIFIC ACCOUNTS EITHER AUDITED OR OTHERWISE. THEREFORE THE PROFIT IS TO BE DETERMINED ON THE BASIS OF GLOBAL ACCOUNTS OF T HE ASSESSEE. AS PER GLOBAL ACCOUNTS FOR THE RELEVANT FINANCIAL YEAR, THE GROSS PROFIT IN RESPECT OF SALES IS AT 26.16% (THIS IS ARRIVED AT BY DIVIDING NET SALES BY COST OF SALES). SO THE GROSS PROFIT IN INR COMES TO RS.5,36,18,079/ - . THE PAGE 4 OF 5 EXPENSES INCURRED IN INDIA IS RS.3,47,45,871/ - . THESE EXPENSES ARE ALLOWABLE IN FULL. SO THE NET INCOME IS RS.1,88,72,208. SINCE ALL THE PROFIT CANNOT BE ATTRIBUTED TO INDIA AS MANUFACTURING AND PART OF THE SELLING ACTIVITIES ARE UNDERTAKEN IN JAPAN. IN VIEW OF THE SUBMISSI ON OF THE ASSESSEE THAT VARIOUS ACTIVITIES HAVE BEEN UNDERTAKEN BY THE ASSESSEE IN JAPAN IT IS DEEMED REASONABLE THAT 55% OF ITS NET PROFIT IS PROFIT ATTRIBUTABLE OUTSIDE INDIA AND REMAINING 45% IS ATTRIBUTABLE TO ITS ACTIVITIES IN INDIA AND THEREFORE BECO MES THE TAXABLE INCOME OF THE ASSESSEE IN INDIA WHICH WORKS OUT TO BE RS.84,92,493/ - . 9. FURTHERMORE FROM THE REASON RECORDED FOR RE - OPENING IT IS APPARENT THAT THERE IS NO FRESH MATERIAL WHICH HAS SURFACED SO AS TO DRAW A DIFFERENT CONCLUSION OTHER THAN ACCEPTED IN THE ORIGINAL ORDER OF ASSESSMENT. IN VIEW OF THE SAID FACTS , IT FALL WITHIN THE RATIO LAID DOWN BY THE APEX COURT IN THE CASE OF CIT VS. KELVINATOR INDIA LTD. 320 ITR 561 WHEREIN IT WAS HELD AS UNDER: - REASSESSMENT MUST BE BASED ON' FRESH INFORMATION/ MATERIAL COMING TO THE POSSESSION OF THE ASSESSING OFFICER SUBSEQUENT TO THE COMPLETION OF ORIGINAL ASSESSMENT. IF THERE IS NO FRESH INFORMATION OF MATERIAL, REOPENING CANNOT BE SUSTAINED. THERE BEING NO FRESH M ATERIAL INFORMATION WHICH CAME TO THE POSSESSION OF ASSESSING OFFICER SUBSEQUENT TO 'FRAMING OF THE ORIGINAL ASSESSMENT, THE PRESENT REASSESSMENT PROCEEDINGS ARE IMPERMISSIBLE. 10. IN VIEW OF THE ABOVE, WE DECLINE TO INTERFERE WITH THE CONCLUSION OF THE LD CIT(A) AND REJECT THE GROUND RAISED BY THE REVENUE. 1 1. GROUND NO. 3 CHALLE N GES THE CONCLUSION OF THE LD CIT(A) THAT THE EXPENSES INCURRED OF RS.3,47,45,871/ - WERE INCURRED FOR LIASON OFFICE (LO) AND NOT RENDERING OF TECHNICAL SERVICES DURING THE YEAR UNDER CONSIDERATION, EXPENSES OF RS. 3,47,45,871/ - HAVE BEEN INCURRED IN LO UNDER HEADS SALARY, RENT , TRAVELLING & CONVEYANCE AND POSTAGE & TELECOMMUNICATION. DURING ASSESSMENT U/S 143(3), THE AO HELD THAT L O REPRESENTS PE IN INDIA AND THEREFORE INCOME FROM SUPPLIES OF TELECOMMUNICATION EQUIPMENT BECOMES TAXABLE IN INDIA. WHILE WORKING OUT PROFITS ATTRIBUTABLE TO PE, THE AO ALLOWED DEDUCTION OF EXPENSES INCURRED IN LO/PE. HOWEVER, DURING REASSESSMENT PROCEEDIN GS, THE AO HELD THAT TECHNICAL SERVICES HAVE ALSO BEEN RENDE RED THROUGH LO/PE AND THEREFORE, HE DISALLOWED PROPORTIONATE AMOUNT OF EXPENSES IN RATIO OF FTS TO BUSINESS PROFIT. PAGE 5 OF 5 12. HAVING CONSIDERED THE RIVAL SUBMISSION WE ARE OF THE VIEW, THE AO HAS IN A M ECHANICAL MANNER PROCEEDED TO APPORTION THE EXPENSES. HE HAS NOT LED ANY MATERIAL AND COULD LINK THE SAID EXPENDITURE, WITH THE RENDERING OF SERVICES. WE THEREFORE FIND JUSTIFICATION IN THE FINDING OF THE LD CIT(A), WHO HAS CORRECTLY HELD AS UNDER: - 9.2 THE CASE OF THE APPELLANT IS THAT TECHNICAL SERVICES HAD BEEN RENDERED BY PERSONNEL OF HEAD OFFICE WHO CAME TO INDIA TO RENDER REQUIRED TECHNICAL SERVICES IN RELATION TO TELECOMMUNICATION EQUIPMENT SUPPLIED BY THE HEAD OFFICE TO CUSTOMERS IN INDIA. THE AO HAS NOT ESTABLISHED THAT SUCH TECHNICAL PERSONNEL OPERATED THROUGH LO. THE APPELLANT HAS FURNISHED COMPLETE DETAIL OF EXPENSES INCURRED IN LO. THE SALARY EXPENSES PERTAIN TO EMPLOYEES OF THE LO. RENT PERTAINS TO PREMISES OF LO. THE APPELLANT HAS FURTHER AR GUED THAT TRAVELLING AND OTHER EXPENSES ALSO PERTAIN TO LO. IT HAS BEEN CONTENDED THAT SIMILAR EXPENSES HAVE BEEN ALLOWED BY THE AO IN SUBSEQUENT YEAR ALSO. THE AO HAS SIMPLY DISALLOWED EXPENSES ON PROPORTIONATE BASIS WITHOUT ESTABLISHING ANY LINK BETWEEN THESE EXPENSES AND RENDERING OF TECHNICAL SERVICES. THEREFORE, I FIND NO JUSTIFICATION IN ACTION OF THE AO. ALTHOUGH GROUND OF APPEAL REGARDING INITIATION OF REASSESSMENT PROCEEDING HAS BEEN DECIDED IN FAVOUR OF THE APPELLANT, EVEN ON MERITS, THE APPELLANT DESERVES TO SUCCEED. THE AO IS ACCORDINGLY DIRECTED TO ALLOW THE EXPENSES CLAIMED IN LO/PE. THE GROUND OF APPEAL IS ALLOWED ACCORDINGLY. 13. IN THE RESULT THE GROUND IS REJECTED AND THE APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 3 0 . 12 .20 14. - S D / - - S D / - ( PRAMOD KUKMAR ) (A. T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 3 0 / 12 / 2014 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI