MPHASIS CORPORATION V. THE ASSISTANT COMMISSIONER OF INCOME TAX

WP/45709/2017

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Mphasis Corporation challenged the reassessment proceedings initiated by the Income Tax Department under Section 148 of the Income Tax Act, 1961, concerning payments made to its foreign Associated Enterprises (AEs) without tax deduction at source. The petitioner argued that the approval for reassessment was obtained prematurely and that the notice was issued without proper jurisdiction as the company did not have a Permanent Establishment in India. The court, however, found these objections to be peripheral and not sufficient to quash the proceedings, emphasizing that the final determination of these issues should be left to the appropriate tax authorities and appellate forums.

• Counselvise Citation: [2017] 140 COUNSELVISE.COM (IT) 698133 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 21-11-2017
• Assessment Year: misc
• Other Referred Cases: M/S. STANDARD CHARTERED FINANCE LTD. v. COMMISSIONER OF INCOME TAX & ANR.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Assessee Lawyers: ANNAMALAI
• Keywords: Fees For Technical Services; Jurisdiction; Permanent establishment; Reassessment; Tax deduction at source
• Section: 147; 148; 9(1)(vii); 151(2)

Judgement Text

" 1/12 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.45709 OF 2017 (T-IT) BETWEEN: MPHASIS CORPORATION REP. BY ITS AUTHORISED REPRESENTATIVE SRI K.R.GIRISH SON OF SRI RATNA KRISHNA KALPATHI AGED ABOUT 59 YEARS 460, PARK AVENUE SOUTH SUITE 101, NEW YORK NY 1006 USA. …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 ROOM NO.441, 4TH FLOOR Date of Order -21-11-2017 W.P.No.45709/2017 Mphasis Corporation vs. The Assistant Commissioner of Income Tax and Others. 2/12 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 INCOME TAX ACT ISSUED BY THE R1 VIDE 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 M/s.Mphasis Corporation has filed this writ petition in this Court on 04.10.2017 challenging the proceedings under Section 148 of the Income Tax Act, 1961 (‘the Act’) for the Assessment Year 2008-2009. 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.45709/2017 Mphasis Corporation vs. The Assistant Commissioner of Income Tax and Others. 3/12 Circle 1(2), Koramangala Bengaluru 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. 1.5 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 ML subcontracts a certain part of the project to Date of Order -21-11-2017 W.P.No.45709/2017 Mphasis Corporation vs. The Assistant Commissioner of Income Tax and Others. 4/12 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 is also one of the AE of the Payer company and Date of Order -21-11-2017 W.P.No.45709/2017 Mphasis Corporation vs. The Assistant Commissioner of Income Tax and Others. 5/12 was in receipt of FTS during the previous year relevant to assessment year 2008-09. Such payments amounts to `2,23,64,32,041/-. 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. The contentions raised by Mr.Annamalai.S, learned counsel for the petitioner–assessee for assailing such reassessment proceedings, which are still pending before the Respondent–Assessing Authority and no final/reassessment order has yet been passed for the Assessment Year 2008 – 2009 are as follows:- (i) That the approval obtained by the Respondent-Assistant Commissioner from his higher Authority, i.e. Additional Commissioner of Income Tax, vide Annexure-E dated 13.3.2015 was even prior to the recording of Date of Order -21-11-2017 W.P.No.45709/2017 Mphasis Corporation vs. The Assistant Commissioner of Income Tax and Others. 6/12 the aforesaid reasons itself for re-opening the assessment on 16.3.2015 and therefore, there is a violation of Section 151(2) of the Act, which provides that in a case other than a case falling under Section 151(1) of the Act, no notice under Section 148 of the Act shall be issued by the Authority, who are below the rank of a ‘Joint Commissioner’, unless the ‘Commissioner’ is satisfied, on the reasons recorded by such Assessing Officer, that it is a fit case for the issue of such notice. He submitted that the approval obtained by the Assistant Commissioner even before recording the reasons is therefore fatal to these proceedings and the same deserves to be quashed; (ii) He also urged before the Court that in a formal notice issued under Section 148 of the Date of Order -21-11-2017 W.P.No.45709/2017 Mphasis Corporation vs. The Assistant Commissioner of Income Tax and Others. 7/12 Act, the words ‘assessment/reassessment’ both have been employed by the Assistant Commissioner and therefore, he submits that the said notice is bad in law and deserves to be quashed. For this purpose, the learned counsel relied on the order of the Hon’ble Supreme Court in the case of M/S. STANDARD CHARTERED FINANCE LTD. v. COMMISSIONER OF INCOME TAX & ANR. in S.L.P.(Civil) No.13512/2012, decided on 9.2.2016. (iii) He submitted that the Assessing Authority in Bengaluru had no jurisdiction to issue the impugned notice, as the petitioner does not have any Permanent Establishment (P.E.) in India and therefore, the impugned notice is without jurisdiction. Date of Order -21-11-2017 W.P.No.45709/2017 Mphasis Corporation vs. The Assistant Commissioner of Income Tax and Others. 8/12 (iv) Learned counsel for the petitioner submitted that all these objections have been raised before the Respondent-Assessing Authority and he has not yet decided the same and proceedings for the Assessment Year 2008-2009 are still pending, but since the very initiation of proceedings is bad in law and without jurisdiction, the same deserve to be quashed by this Court. 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 Date of Order -21-11-2017 W.P.No.45709/2017 Mphasis Corporation vs. The Assistant Commissioner of Income Tax and Others. 9/12 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 and reasonable reasons to initiate such proceedings, as certain payments were made to the Associate Date of Order -21-11-2017 W.P.No.45709/2017 Mphasis Corporation vs. The Assistant Commissioner of Income Tax and Others. 10/12 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 Date of Order -21-11-2017 W.P.No.45709/2017 Mphasis Corporation vs. The Assistant Commissioner of Income Tax and Others. 11/12 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 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 Date of Order -21-11-2017 W.P.No.45709/2017 Mphasis Corporation vs. The Assistant Commissioner of Income Tax and Others. 12/12 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. This petition is accordingly dismissed. No order as to costs. Copy of the order be sent to the Respondents forthwith. Sd/- JUDGE VGR "