2009 (12) TMI 593 - AT - Income Tax

Tribunal confirms parent seeds sale as business income, directs arm's length pricing. Appeals partly allowed.

The Tribunal upheld the reassessment proceedings under section 147 of the Income Tax Act, confirmed that income from the sale of parent seeds was business ... Reassessment - Income escaping assessment - Addition - Business income or Agricultural income - In the assessment order for A.Y. 1998-99, the AO has given a finding that the activity of doing research and production of parent seeds are same, and the assessee was engaged in the business of research and development of parent seeds - Therefore, this observation made by the AO in the reasons cannot said to be irrelevant for the purpose of forming an opinion or belief that income had escaped assessment within the meaning of section 147 of the Act, in as much as for the reasons given by the AO, the assessee's claim of agricultural income has not been accepted by the AO in the A.Y. 1998-99 - This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction, and it is not necessary that at the time of recording reason u/s. 148 of the Act, the AO should have finally ascertained the fact by legal evidence or conclusion. At the initial stage what is required is 'reason to believe' and not established fact of escapement of income - the reopening of the assessment u/s. 147 and issuance of notice u/s. 148 by the AO in year under consideration is justified and are valid In the assessment year 1998-99, the ten percent of total income from producing and sale of parent hybrid seeds is to be considered or recorded as agricultural income and the balance is to be assessed as business income liable to be taxed under the Act DTAA - e addition on account of apportionment of profit attributable to PE in India for use of research activity carried out in India by HO can be made in the present reassessment notwithstanding the fact that no specific reason relating to this issue were recorded by the AO while reopening the assessment u/s. 147 of the Act or at the time of issuance of notice u/s. 148 of the Act - Item 'e' of para (3) of Article 5 of Indo-US Treaty provides that the term 'permanent establishment' shall not include the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information for scientific research or for other activities which has a preparatory or auxiliary character, for the enterprise - the two activities are completely interlinked, interlaced and dependent on each other, and cannot be divorced or dissociated from each other the assessee's case is not covered by exclusionary provisions contained in Article 5(3)(e) of the Treaty between India and USA - the assessee's branch office in India do constitute a PE within the meaning of article 5 of DTAA between India and USA, and the income of the PE is, thus, to be taxed in India as per provisions of Article 7 of DTAA - In the result, all the assessee 's appeal as well as the revenue's appeal for all these assessment years i.e. A.Y. 1997-98, 1999-2000, 2000-01 and 2001-02 are partly allowed Issues Involved:1. Initiation of reassessment proceedings under section 147 of the Income Tax Act.2. Nature of income from sale of parent seeds-whether agricultural or business income.3. Attribution of Head Office (HO) income to the Indian Branch Office (PE) under the Indo-US DTAA.Detailed Analysis:1. Initiation of Reassessment Proceedings under Section 147:The primary issue was whether the reassessment proceedings initiated by the Assessing Officer (AO) under section 147 of the Income Tax Act were valid. The assessee argued that the reassessment was invalid as it was initiated without any fresh material or information and that all necessary facts had been fully disclosed. The AO had issued a notice under section 148 based on the belief that income had escaped assessment, particularly considering the AO's findings in the assessment year 1998-99, where the assessee's income from producing seeds was treated as business income rather than agricultural income.The CIT(A) upheld the AO's decision, stating that the reasons for reopening the assessment were properly recorded and communicated to the assessee. The Tribunal agreed with the CIT(A), citing the Supreme Court's decision in Asst. CIT vs. Rajesh Jhavery Stock Brokers Pvt. Ltd., which clarified that at the stage of issuing notice under section 148, the only requirement is a 'reason to believe' that income has escaped assessment, not the established fact of escapement. The Tribunal held that the AO had sufficient material to form a belief that income had escaped assessment, thereby validating the reassessment proceedings.2. Nature of Income from Sale of Parent Seeds:The second issue revolved around whether the income from the sale of parent seeds was agricultural income, exempt under section 10(1) of the Income Tax Act, or business income. The assessee claimed that the income was agricultural, while the AO treated it as business income. The CIT(A) and the Tribunal both held that the income from the sale of parent seeds was business income. The Tribunal noted that the activities of developing and producing breeder seeds and then producing parent seeds were interlinked and constituted a single integrated activity. Therefore, the income from these activities could not be considered agricultural income.3. Attribution of HO Income to the Indian Branch Office (PE):The third issue concerned the attribution of income from the HO to the Indian Branch Office (PE) under the Indo-US Double Tax Avoidance Agreement (DTAA). The AO had attributed a portion of the HO's income to the Indian PE, arguing that the research activities carried out in India contributed to the HO's income. The CIT(A) partially upheld the AO's decision but reduced the attributed income by 50%.The Tribunal agreed with the CIT(A) that the research activities in India were interlinked with the production and sale of seeds and contributed to the HO's income. However, the Tribunal held that the attribution of income should be based on the arm's length principle, as per Article 7(2) of the DTAA. The Tribunal directed the AO to determine the arm's length price of the services rendered by the Indian PE to the HO and to attribute income accordingly.Conclusion:The Tribunal upheld the reassessment proceedings under section 147, confirmed that the income from the sale of parent seeds was business income, and directed the AO to determine the arm's length price for attributing HO income to the Indian PE based on the principles laid down in the Indo-US DTAA. The appeals filed by both the assessee and the revenue were partly allowed, and the AO was directed to modify the assessments in accordance with the Tribunal's findings.