2017 (12) TMI 571 - AT - Income Tax

Tribunal Invalidates Assessment Reopening; Emphasizes Need for Tangible Material

M/s. Sandvik System Development AB, C/o Sandvik Asia Pvt. Ltd. Versus The Dy. Director of Income Tax, (International Taxation) -II, Pune

The Tribunal allowed the appeal, finding the reopening of assessment proceedings invalid due to lack of tangible material to justify 'reason to believe' ... Reopening of assessment - reason to believe - Held that:- In the absence of any tangible material establishing escapement of income in the hands of assessee, there is no merit in the exercise of invoking of re-assessment proceedings under section 147 of the Act. The reason to believe escapement of income should have a live link. There is no merit in the stand of authorities below that in the present case, where the assessment order was passed under section 143(1) of the Act, then the Assessing Officer had no action to look at or to consider the same. Under the provisions of the Act, it is incumbent upon the Assessing Officer to come to finding on the basis of tangible material to establish his case of reason to believe of escapement of income; in the absence of which, re-assessment proceedings are invalid and bad in law. Accordingly, we hold so and cancel the same. The consequent order passed under section 143(3) r.w.s. 147 of the Act also does not stand. Thus, the ground of appeal No.1 raised by the assessee is allowed. Issues Involved:1. Reopening of assessment proceedings without 'reason to believe' as required by section 147 of the Income-tax Act.2. Taxation of receipts for IT support services as Fees for Technical Services (FTS) under Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and Sweden.3. Taxation of receipts for IT support services as Royalty under Article 12 of the DTAA between India and Sweden.Detailed Analysis:Issue 1: Reopening of Assessment Proceedings Without 'Reason to Believe'The primary jurisdictional issue raised by the assessee pertains to the reopening of assessment proceedings without any 'reason to believe' as required by section 147 of the Income-tax Act. The assessee argued that there was no tangible material to justify the reopening of the assessment. The return of income was initially filed declaring Nil income, and the notice under section 148 was issued on 28.03.2013. The assessee requested the reasons for reopening, which were communicated and objected to by the assessee on the grounds that similar reasons were recorded for the assessment year 2005-06. The Assessing Officer (AO) rejected the judicial pronouncements cited by the assessee and maintained that there was tangible material indicating escapement of income. The Dispute Resolution Panel (DRP) upheld the AO's action, relying on the Supreme Court's decision in ACIT Vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd., which validated the reopening of assessments.The Tribunal reviewed the case and concluded that the AO did not possess any new tangible material to justify the 'reason to believe' that income had escaped assessment. The Tribunal referenced the decision in DDIT (IT) Vs. Sandvik Information Technology AB, where it was held that the AO must have tangible material to form a belief of income escapement. The Tribunal also cited the Delhi High Court's judgment in Orient Craft Ltd. Vs. CIT, emphasizing that the expression 'reason to believe' should be interpreted consistently, irrespective of whether the initial assessment was under section 143(1) or section 143(3). Consequently, the Tribunal found that the reopening of the assessment was invalid and bad in law, leading to the cancellation of the reassessment proceedings and the consequent order under section 143(3) r.w.s. 147.Issue 2: Taxation of Receipts for IT Support Services as Fees for Technical Services (FTS)The second issue raised by the assessee was the DRP's decision to uphold the AO's action of taxing receipts for IT support services provided to Indian affiliates as Fees for Technical Services (FTS) under Article 12 of the DTAA between India and Sweden. The AO had concluded that the payments received for IT support services constituted FTS and were taxable under both the DTAA and sections 9(1)(vi) and 9(1)(vii) of the Income-tax Act. However, since the Tribunal found the reopening of the assessment itself to be invalid, this issue became academic and was not further adjudicated upon.Issue 3: Taxation of Receipts for IT Support Services as RoyaltyThe third issue was the DRP's decision to uphold the AO's action of taxing receipts for IT support services as Royalty under Article 12 of the DTAA between India and Sweden. Similar to the second issue, the AO had treated the payments as royalty based on the nature of the services provided. However, given the Tribunal's decision on the first issue, this issue also became academic and was not further addressed.Conclusion:The Tribunal allowed the appeal of the assessee, primarily on the grounds that the reopening of the assessment was invalid due to the absence of tangible material to justify the 'reason to believe' that income had escaped assessment. Consequently, the issues regarding the taxation of IT support service receipts as FTS or Royalty were rendered academic and were not further adjudicated. The Tribunal's decision emphasized the necessity of having tangible material to form a valid 'reason to believe' for reopening assessments under section 147 of the Income-tax Act.