2019 (5) TMI 846 - AT - Income Tax

Supreme Court invalidates reassessment under Income Tax Act, upholds arm's-length principle

The Supreme Court quashed reassessment proceedings under Section 147 of the Income Tax Act, ruling that the initiation did not meet statutory ... Reopening of assessment - Income accrued in India - reopening based on allegation as appellant has permanent establishment in India - fixed place PE in India - DTAA - interpretation of direction of Supreme Court - HELD THAT:- The reopening proceedings were challenged by the assessee before the honourable Supreme Court of India in HONDA MOTOR CO. LTD, JAPAN, THROUGH ITS AUTHORISED REPRESENTATIVE [2018 (5) TMI 265 - SUPREME COURT] along with batch of other appeals which were disposed of vide as held that in view of the judgment of the honourable Supreme Court in NEW DELHI VS E-FUNDS IT SOLUTIONS INCORPORATION, [2017 (10) TMI 1011 - SUPREME COURT] once arm’s-length principle has been satisfied, there can be no further profit attributable to a person, even if it has a permanent establishment in India. The honourable Supreme court was further pleased to hold that since the impugned notice is for the reassessment are based only on the allegation that the appellant has permanent establishment in India, notice cannot be sustained Once arm’s-length price procedure has been followed. The honourable Supreme court also noted that the counsel for the revenue stated that he does not have complete instructions. Therefore, the honourable court gave the liberty that if the revenue disputes the above factual position, it will be at the liberty to move this court. Even if, as per the revenue, the transaction are not at arm’s-length, it is required to approach the honourable Supreme Court only. In view of this, all these appeals against the orders of the reassessment becomes infructuous as reassessment notices have been quashed by the honourable Supreme Court as per above order. - Decided in favour of assessee. Issues Involved:1. Validity of reassessment proceedings under Section 147 of the Income Tax Act.2. Existence of a Permanent Establishment (PE) under Article 5 of the Double Tax Avoidance Agreement (DTAA).3. Taxation of offshore supplies and transfer pricing adjustments.4. Levy of interest under sections 234A, 234B, 234C, and 234D of the Income Tax Act.5. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.Detailed Analysis:1. Validity of Reassessment Proceedings under Section 147:The appellants challenged the reassessment proceedings initiated by the Assessing Officer (AO) under Section 147 of the Income Tax Act, arguing that the initiation did not satisfy the necessary requisites contained in Section 147 and there was no reason to believe that any income chargeable to tax had escaped assessment. The Supreme Court quashed the reassessment notices, rendering the reassessment orders void ab-initio and infructuous.2. Existence of a Permanent Establishment (PE) under Article 5 of the DTAA:The AO/Dispute Resolution Panel (DRP) concluded that the appellants had a PE in India based on the statements of expatriate employees of Honda Cars India Ltd. (HCIL). The appellants contended that the necessary requisites for creating a PE under Article 5 of the Indo-Japan DTAA were lacking and that the control of the holding company over the subsidiary does not in itself create a PE. The Supreme Court's judgment in ASSISTANT DIRECTOR OF INCOME TAX, NEW DELHI VS E-FUNDS IT SOLUTIONS INCORPORATION clarified that once the arm's-length principle is satisfied, no further profit is attributable even if a PE exists. Consequently, the reassessment notices based on the alleged PE were quashed.3. Taxation of Offshore Supplies and Transfer Pricing Adjustments:The AO/DRP erred in bringing to tax the offshore supplies made by the appellants to HCIL without appreciating that the title and risk of these goods were transferred outside India. The appellants argued that the international transactions relating to the purchase of raw materials from the appellants had been subjected to transfer pricing assessment and found to be at arm's length. The Supreme Court's ruling reinforced that once the arm's-length price procedure has been followed, no further income allocation is warranted, making the reassessment orders invalid.4. Levy of Interest under Sections 234A, 234B, 234C, and 234D:The AO/DRP levied interest under sections 234A, 234B, 234C, and 234D of the Income Tax Act. The appellants argued that as non-residents, tax was deductible from their income, and hence the interest levies were erroneous. Since the reassessment notices were quashed, the interest levies based on these reassessments were also invalidated.5. Initiation of Penalty Proceedings under Section 271(1)(c):The AO/DRP initiated penalty proceedings under section 271(1)(c) of the Income Tax Act, alleging that the appellants had concealed particulars of their taxable income and furnished inaccurate particulars. Given the Supreme Court's quashing of the reassessment notices, the basis for the penalty proceedings was nullified, rendering the penalty initiation invalid.Conclusion:The Supreme Court's order dated 14/03/2018 quashed the reassessment notices issued under Section 148 of the Income Tax Act, based on the principle that once the arm's-length price procedure is followed, no further profit is attributable even if a PE exists. Consequently, all the appeals against the reassessment orders were allowed, and the reassessment proceedings, interest levies, and penalty initiations were rendered void and infructuous. The tribunal pronounced the order in the open court on 10/05/2019, allowing all four appeals of the assessee.