MPHASIS AUSTRALIA PTY LTD V. THE ASSISTANT COMMISSIONER OF INCOME TAX

WP/45711/2017

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Mphasis Australia Pty. Ltd. filed a writ petition challenging the reassessment proceedings initiated by the Income Tax Department under Section 148 of the Income Tax Act, 1961, for the Assessment Year 2008-2009. The reassessment was based on the grounds that payments made to Associated Enterprises (AEs) for on-site services and marketing were not subjected to tax deduction at source, and thus, there was an escapement of income. The petitioner argued that the reassessment was without jurisdiction and that their objections were not adequately considered by the Assessing Authority. The court, however, found the petition to be premature, noting that the proceedings were still ongoing and the objections raised did not render the proceedings as patently without jurisdiction.

• Counselvise Citation: [2017] 140 COUNSELVISE.COM (IT) 755233 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 21-11-2017
• Assessment Year: misc
• Other Referred Cases: Chhugamal Rajpal v. S.B.Chaliha, Calcutta Discount Co. Ltd. v. Income-Tax Officer, Companies District I, Calcutta, Commissioner of Income-Tax, Jabalpur (MP) v. S.Goyanka Lime & Chemical Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Assessee Lawyers: ANNAMALAI
• Keywords: Fees For Technical Services; Foreign company; Income Tax; Jurisdiction; Reassessment; Tax deduction at source
• Section: 147; 148; 9(1)(vii)

Judgement Text

" 1/13 IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 21ST DAY OF NOVEMBER 2017 BEFORE THE HON'BLE Dr.JUSTICE VINEET KOTHARI WRIT PETITION No.45711 OF 2017 (T-IT) BETWEEN: MPHASIS AUSTRALIA PTY. LTD. REP. BY ITS AUTHORISED REPRESENTATIVE SRI K.R.GIRISH SON OF SRI RATNA KRISHNA KALPATHI AGED ABOUT 59 YEARS C/O SEMONA CONSULTANTS SHOP NO.5, 17-19, EAST PARADE SUTHERLAND – NSW 2232 AUSTRALIA. …PETITIONER (BY:MR.ANNAMALAI.S, ADVOCATE FOR MR.SHANKAR.A, ADVOCATE) AND: 1. THE ASSISTANT COMMISSIONER OF INCOME TAX INTERNATIONAL TAXATION CIRCLE 1(2), BMTC BUILDING 80 FEET ROAD, KORAMANGALA VI BLOCK BENGALURU 560 095. 2. THE ADDITIONAL COMMISSIONER OF INCOME TAX RANGE-I, INTERNATIONAL TAXATION BMTC BUILDING, 80 FEET ROAD KORAMANGALA VI BLOCK BENGALURU 560 095. 3. THE DEPUTY COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION) CIRCLE 1(1), BANGALORE Date of Order -21-11-2017 W.P.No.45711/2017 Mphasis Australia Pty Ltd. vs. The Assistant Commissioner of Income Tax and Others. . 2/13 ROOM NO.441, 4TH FLOOR BMTC BUILDING, 80 FEET ROAD KORAMANGALA BENGALURU 560 095. …RESPONDENTS THIS W.P. IS FILED UNDER ARTICLES 226 & 227 OF THE CONSTITUTION OF INDIA PRAYING TO QUASH THE NOTICE ISSUED UNDER THE PROVISION OF SECTION 148 OF THE ACT ISSUED BY THE R1 AS ENCLOSED AND MARKED AS ANNEXURE-A VIDE DATED 16.3.2015 FOR THE A.Y.2008-09 AS ONE WITHOUT JURISDICTION AND ETC. THIS W.P. COMING ON FOR PRELIMINARY HEARING THIS DAY, THE COURT MADE THE FOLLOWING:- ORDER Mr.Annamalai.S, Advocate for Mr.Shankar.A, Advocate for Petitioner. The petitioner – assessee M/s.Mphasis Australia Pty. Ltd. has filed this Writ Petition in this Court on 4.10.2017 challenging the initiation of reassessment proceedings for the Assessment Year 2008-2009 under Section 148 of the Income Tax Act, 1961 (‘the Act’). 2. The reasons recorded for the said reassessment proceedings and as communicated to the petitioner-assessee by the Respondent No.1 – Assistant Commissioner of Income Tax, International Taxation, Date of Order -21-11-2017 W.P.No.45711/2017 Mphasis Australia Pty Ltd. vs. The Assistant Commissioner of Income Tax and Others. . 3/13 Circle 1(2), Koramangala Bengaluru, vide Annexure-G dated 16.3.2015 are quoted below for ready reference:- “Mphasis Ltd., Bengaluru (“ML”/“Payer Company”) is engaged in the business of providing information technology solutions and services specifically tailored to meet the requirements of industries such as Financial Services, Retail, Logistics & Transportation and Technology. The Company enters into contracts for software development work with customers outside India and engages services of its overseas group companies i.e. Associated enterprises (“AEs”) for the onsite portion of software development work. In respect of the offshore portion, the Assessee Company executes the same in India whereas the onsite portion is the responsibility of the AEs. In respect of onsite portion, the AEs are remunerated accordingly. 1.1 ML has made payments to its foreign Associated Enterprises (“AEs) for on-site services which are in the nature of software development services and for marketing of its products & services in overseas countries. On winning a contract for a project Date of Order -21-11-2017 W.P.No.45711/2017 Mphasis Australia Pty Ltd. vs. The Assistant Commissioner of Income Tax and Others. . 4/13 ML subcontracts a certain part of the project to its AEs and in turn the AEs are paid for the services rendered to the Assessee company. The AEs also render marketing services in overseas countries and due to marketing efforts of the AEs, if a contract is won by ML, a certain percentage of contract value is paid as selling commission to the AEs for the services rendered. It was noticed that the payments, both for on- site services and marketing services were made by ML to the AEs without deduction of tax at source to the AEs. Further the AEs had also not filed any application before the Department for lower or NIL rate of deduction of tax at source. No application was also filed by the AEs nor ML before the Hon’ble AAR seeking a ruling on the issue of deduction of tax at source on the payments made to the AEs for on-site services and selling commission. It was observed that the payments made by ML to the AEs for on- site services and marketing services (a.k.a. “Selling Commission’) were covered by the definition of Fees for technical services (“FTS”) as defined in Explanation 2 to Section 9(1)(vii) of the Income Tax Act, 1961 (“Act”). The sums paid by ML to the AEs are therefore chargeable to tax under the Act. The assessee Date of Order -21-11-2017 W.P.No.45711/2017 Mphasis Australia Pty Ltd. vs. The Assistant Commissioner of Income Tax and Others. . 5/13 is also one of the AE of the Payer company and was in receipt of FTS during the previous year relevant to assessment year 2008-09. Such payments amounts to `79,17,685/-. Though the payee was under obligation to file return and pay taxes as the income accrued or arised in India the same has not been done. Therefore I have a reason to believe that due to omission or failure on the part of the assessee there is an escapement of income and the case is a fit case to invoke the provisions of sec.147. Issue notice U/s.148.” 3. Mr.Annamalai.S, learned counsel for the petitioner–assessee submitted before the Court that these objections of the assessee have been perfunctorily decided by the Assessing Authority vide communication Annexure-M dated 28.11.2016. The relevant extract of that communication is also quoted below for ready reference:- “5. Without prejudice to the above, the objections raised by the assesse are countered as under: Date of Order -21-11-2017 W.P.No.45711/2017 Mphasis Australia Pty Ltd. vs. The Assistant Commissioner of Income Tax and Others. . 6/13 \u0001 The assessing officer is empowered to assess the Income of a foreign Company as per the Relevant Notifications in this regard. The reopening proceedings in terms of section 147 of the IT Act 1961 does not mandate that the Departmental notification empowering the Assessing officer to assess the income of a foreign company should be provided to the Company. \u0001 The Approval of the Addl CIT is based on the proposal of the Assessing officer wherein elaborate reasons have been given. The reason to belief had already been formed by the Assessing officer while sending the proposal for proceedings U/s 147 of the IT Act. The Sanction given on the elaborate reasons for reopening in his report by an endorsement “YES” would amount to his satisfaction (P.Munnirathanm Chetty Vs ITO (AP) 101 ITR 385. \u0001 The proceedings in reassessment begins only with the issue of Notice u/s 148. It is only after the service of Notice assesse becomes a party to the proceedings. Consequently assesse is not entitled to get a copy of the same at the stage of issuance of notice (Vishnu Borewell Vs ITO (ORI) 257 ITR 512. Date of Order -21-11-2017 W.P.No.45711/2017 Mphasis Australia Pty Ltd. vs. The Assistant Commissioner of Income Tax and Others. . 7/13 \u0001 There is no statutory format prescribed for Notice u/s 148. The notice sent is valid since it mentions that it is a notice u/s 148 and section 148 clearly mandates that a return is to be filed in response to the said Notice. The typographical error in the notice will not vitiate the proceedings. \u0001 Section 147 prescribes the time limit to issue Notice u/s 148, which is validly done in the instant case. There is no requirement to furnish the reasons within the limitation period. \u0001 The material facts with regard to chargeability of the Income received by the assesse were there before the assessing officer at the time of recording the reasons. The information gathered during the course of proceedings u/s 201 of the IT Act, 1961 can be the basis for initiating proceedings u/s 147 of the IT Act. Held to be valid (Raymond Woolen Mills Ltd. Vs ITO (SC) 236 ITR 34, Muljimal N Raghavanshi (Bom) 225 ITR 586). 6. The draft proposal for completing the assessment u/s 144 is separately sent. Your objection, if any should be furnished by 07-12-2016, failing which the assessment shall be completed accordingly.” Date of Order -21-11-2017 W.P.No.45711/2017 Mphasis Australia Pty Ltd. vs. The Assistant Commissioner of Income Tax and Others. . 8/13 4. The learned counsel for the petitioner urged that the petitioner-assessee had to file further objections before the said Assessing Authority, as the objections raised by the petitioner–assessee earlier, were not considered entirely and the question of jurisdiction, etc. for initiation of these reassessment proceedings were raised by the assessee again vide objection letter Annexure-N dated 6.12.2016, though the said document, as produced does not bear any date. The reassessment proceedings for the Assessment Year 2008-2009 are admittedly pending even now before the said Assessing Authority. 5. Learned counsel for the petitioner relying upon the following decisions, however, urged that these reassessment proceedings being without jurisdiction, deserve to be quashed by this Court. (i) ITR Vol.79 603 – Chhugamal Rajpal v. S.B.Chaliha (S.C.). Date of Order -21-11-2017 W.P.No.45711/2017 Mphasis Australia Pty Ltd. vs. The Assistant Commissioner of Income Tax and Others. . 9/13 (ii) ITR Vol.XLI 191 – Calcutta Discount Co. Ltd. v. Income-Tax Officer, Companies District I, Calcutta and Another. (iii) [2015] 64 taxmann.com 313 (SC – Commissioner of Income-Tax, Jabalpur (MP) v. S.Goyanka Lime & Chemical Ltd. (iv) [2015] 64 taxmann.com 390 (SC – Commissioner of Income-Tax, Jabalpur v. S.Goyanka Lime & Chemical Ltd. 6. Having heard the learned counsel for the petitioner-assessee, this Court is satisfied that the present Writ Petition is premature and does not require any interference by this Court at this stage. This Court has dismissed a similar Writ Petition filed by the same Parent Company of U.S.A. M/s.Mphasis Corporation, New York, U.S.A., by a separate order today (21.11.2017), viz., W.P.No.45709/2017. The relevant portion of that order is quoted below for ready reference:- Date of Order -21-11-2017 W.P.No.45711/2017 Mphasis Australia Pty Ltd. vs. The Assistant Commissioner of Income Tax and Others. . 10/13 “4. Having heard learned counsel for the petitioner- assessee, this Court is satisfied that it is premature for this Court to interfere at this stage in the present reassessment proceedings. Firstly, not only the proceedings have been initiated way-back in the year 2015 and the proceedings are still pending before the said Assessing Authority, who is yet to decide all these objections raised by the assessee by an appropriate order, but also because the nature of objections raised before this Court do not render the proceedings as patently without jurisdiction. The question of approval by higher authority is an administrative job. Even if there is difference of dates in such approval, vide Annexure-E dated 13.3.2015 on the reasons recorded by the Assessing Authority on 16.3.2015, prima facie, it may reflect premature approval on the part of the Additional Commissioner but it need not render the very initiation of proceedings as non-est or void. These proceedings cannot be quashed merely on this ground, as no prejudice is caused to the petitioner by such an administrative approval. 5. On the contrary, the reasons for initiation of the proceedings as assigned by the Respondent- Assessing Authority and quoted above, prima facie, indicates that the Assessing Authority had sufficient Date of Order -21-11-2017 W.P.No.45711/2017 Mphasis Australia Pty Ltd. vs. The Assistant Commissioner of Income Tax and Others. . 11/13 and reasonable reasons to initiate such proceedings, as certain payments were made to the Associate Enterprises (A.Es.) of the parent Company of U.S.A. without making suitable Tax Deduction at Source (TDS) rendering such expenses as non-admissible in the hands of the assessee. The said reasons cannot be said to be irrelevant or non-germane for the formation of a reasonable belief about escapement of income as required under Section 147/148 of the Act or initiation of such proceedings for bringing to the tax the income which has escaped assessment. 6. Therefore, this Court cannot pre-judge as to how the objections of the assessee in this regard will be met by the Respondent-Assessing Authority. Since, admittedly, the proceedings are pending as of now, no pronouncement with regard to merit of such objections can be made at this stage. 7. The other objections raised by learned counsel for the petitioner assessee are also peripheral in nature and do not want to go to the root of the matter to render such proceedings as being without jurisdiction. The question whether U.S.A. Company has a Permanent Establishment in India or not is certainly a mixed question of fact and law and that depends upon several facts to be established by the Date of Order -21-11-2017 W.P.No.45711/2017 Mphasis Australia Pty Ltd. vs. The Assistant Commissioner of Income Tax and Others. . 12/13 assessee upon being questioned by the Respondent – Assessing Authority. The process of adjudication of these facts is still underway to be established before the Respondent Assessing Authority. Therefore, this Court cannot render any findings in this regard. 8. It is always safer and better to leave the determination of such questions of facts at the hands of the Authorities created under the Act upto the Appellate Forums, i.e. Income Tax Appellate Tribunal, which is the final fact-finding body under the provisions of the Income Tax Act, 1961. Cutting short of that procedure and process of assessment would amount to unnecessary interference with such proceedings, which prima facie, appear to have been validly initiated. Therefore, keeping it open for the petitioner-assessee to press the objections before the Assessing Authority and Appellate Authorities under the Act to decide these objections and adjudicate these questions of the assessee at their own level, the present petition is dismissed as premature and does not call for any interference by this Court. 7. In view of the aforesaid reasons, this Court is of the opinion that the petitioner-assessee should raise the objections before the concerned Authorities Date of Order -21-11-2017 W.P.No.45711/2017 Mphasis Australia Pty Ltd. vs. The Assistant Commissioner of Income Tax and Others. . 13/13 created under the Income Tax Act including the Appellate Forums and allow them to decide the objections raised by the petitioner-assessee at their own level, as several mixed questions of fact and law do arise in this case. Therefore, it would be premature for this Court to give any findings on the objections raised by the petitioner-assessee at this stage. 8. Therefore, this petition being premature is liable to be dismissed and is dismissed accordingly. No order as to costs. Copy of the order be sent to the Respondents forthwith. Sd/- JUDGE VGR "