Reopening, permanent establishment and profit attribution upheld, with revised PE profit computation on depreciated asset values.

Reassessment under sections 147 and 148 was upheld because the reopening was supported by earlier assessment material, annual reports, and the assessees' recurring business model, giving prima facie reason to believe income had escaped assessment. The Tribunal also held that the Indian subsidiary's integrated functions, operational support, and treaty-based features created a business connection and a permanent establishment in India, so the income was taxable in India. Attribution of profits to the PE was sustained in principle, but the computation was directed to be revised on a depreciated asset basis after hearing the assessees. Interest under sections 234A and 234B was held leviable as mandatory.

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Issues: (i) Whether the reassessment proceedings were validly initiated under sections 147 and 148; (ii) Whether the assessees had a business connection and a permanent establishment in India so as to attract taxability in India; (iii) Whether the profits attributable to the alleged Indian permanent establishment were correctly computed; (iv) Whether interest under sections 234A and 234B was leviable.

Issue (i): Whether the reassessment proceedings were validly initiated under sections 147 and 148.

Analysis: The reopening was supported by material from the earlier assessment for assessment year 2003-04, the annual reports, and the recurring business model of the assessees. Since no returns had been filed for the years in question, the existence of similar operations in earlier years furnished prima facie material for a belief that income had escaped assessment. The recorded reasons were not invalid merely because exact escapement was not quantified at the stage of reopening, and service of notice on the authorised representative did not vitiate the proceedings in the facts found.

Conclusion: The reassessment proceedings were held to be valid.

Issue (ii): Whether the assessees had a business connection and a permanent establishment in India so as to attract taxability in India.

Analysis: On the facts found, the Indian subsidiary was not merely performing isolated back-office functions. The agreements, functional integration, use of Indian facilities, sales and marketing support, and the overall business arrangement showed continuity and a real and intimate connection with the income-earning operations of the non-resident group. The Tribunal also relied on the MAP resolution and on the nature of the Indian operations to hold that the Indian entity constituted a fixed place and service PE within the treaty framework.

Conclusion: The assessees were held to have a business connection and a permanent establishment in India.

Issue (iii): Whether the profits attributable to the alleged Indian permanent establishment were correctly computed.

Analysis: The Tribunal accepted that some income had to be attributed to the Indian PE, but found that the working adopted below required correction. It held that the computation should take the depreciated cost basis of assets, and directed a revised method for estimating attributable profits on a reasonable basis after giving the assessees an opportunity of hearing. The assessees' challenge to the computation therefore succeeded only to this limited extent, while the Revenue's objection to the asset basis was accepted.

Conclusion: The issue of attribution was decided partly in favour of the assessees and partly in favour of the Revenue.

Issue (iv): Whether interest under sections 234A and 234B was leviable.

Analysis: The Tribunal held that the assessees could not avoid interest merely on the plea of tax deduction at source, since the income was being assessed in their hands as non-resident PEs and the relevant tax liability had not been discharged. The statutory interest provisions were treated as mandatory.

Conclusion: Interest under sections 234A and 234B was upheld.

Final Conclusion: The reassessments and the finding of taxability in India were sustained, the computation of attributable profits was adjusted by directing adoption of depreciated asset values, and the levy of interest was confirmed.

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