2019 (3) TMI 2095 - HC - Income Tax

Finality of assessment under Section 263 bars Revenue from challenging assessment or raising Section 44BB subcontractor issue on appeal

HC held that the assessment order, not having been revised under Section 263, attained finality and the Revenue cannot challenge errors in that assessment ... Order passed by the AO to the CIT (Appeals) u/s 246 / 246A - Permanent Establishment under clauses (1), (2) & (3) of Article 5 of the DTAA - computation of presumptive income u/s 44BB - HELD THAT:- Admittedly, in the present case, neither the Principal Commissioner nor the Commissioner have exercised their power of revision under Section 263 (1) of the Income Tax Act. While the assessee had, no doubt, preferred an appeal to the Commission of Income Tax (Appeals), and had contended that Section 44BB of the Act itself was inapplicable, the question whether the deemed presumptive income u/s 44BB of the Act should be computed before or after deducting the amounts paid to sub-contractors etc. was not even in issue in the appeal preferred by the assessee to the Commissioner of Income Tax (Appeals). As noted hereinabove, the assessment order has not been subjected to revision under Section 263 of the Income Tax Act. As the appeal preferred by the Revenue to the Tribunal, is against the appellate order passed by the Commissioner of Income Tax (Appeals) it is evident that the Revenue has not put the aforesaid question in issue (nor could they have) in appeal before the Income Tax Appellate Tribunal. It is in this context that the judgment of the Supreme Court in Municipal Committee, Hoshiarpur vs. Punjab State Electricity Board & others, reliance on which is placed by Sri H.M. Bhatia, learned Senior Standing Counsel for Income tax, necessitates examination. The first condition referred to hereinabove does not apply, since the Assessing Officer has determined this issue. The second condition may apply, since it could be contended that the trial court had wrongly determined the issue regarding computation of presumptive tax under Section 44BB of the Act. As Section 103 of the Code of Civil Procedure is not an exception to Section 100 thereof, but is meant to serve the very same purpose, it is only if the question, which falls for determination, is a substantial question of law would the High Court be justified in exercising its jurisdiction under Section 100 CPC. As power has not been exercised by the Principal Commissioner/ Commissioner, to revise the assessment order under Section 263 of the Act, the order passed by the Assessing Officer has attained finality in so far as the Revenue is concerned, and they are disabled thereby to raise any contention, relating to any error in the assessment order, either before the Tribunal or before this Court. In any event, in the present case, the appeal to the Tribunal was preferred by the Revenue against the order passed by the CIT (A), and not by the assessee against any order passed in revision. What applied to the assessee, in M/S B.J. Services Company Middle East Limited [2015 (5) TMI 1036 - UTTARAKHAND HIGH COURT] would also apply to the Revenue in the present case, would enable the Revenue to have the assessment order set at naught, even without the power of revision under Section 263 (1) of the Income Tax Act having been exercised, and though the assessment order had attained finality. We are satisfied that such a course is impermissible. ISSUES PRESENTED AND CONSIDERED 1. Whether Article 5(3) of the Double Taxation Avoidance Agreement (DTAA) is a specific provision that overrides or is in addition to Article 5(1) and (2) for determining 'permanent establishment' (PE). 2. Whether the Mumbai/Bombay office qualifies as a 'permanent establishment' of the non-resident enterprise having regard to Article 5(1)-(4) of the DTAA, in particular Article 5(4)(e) (preparatory or auxiliary activities). 3. Whether the Revenue can, in an appeal under Section 260A of the Income Tax Act, raise for the first time a contention that presumptive income under Section 44BB should be computed on gross receipts (i.e., without deducting payments to sub-contractors) when that contention was not raised before the Tribunal or subjected to revision under Section 263. ISSUE-WISE DETAILED ANALYSIS - Article 5(3) vis-à-vis Articles 5(1)-(2) Legal framework: Article 5 defines 'permanent establishment': (1) fixed place of business; (2) includes specified places (place of management, branch, office etc.); (3) 'likewise encompasses' building sites, construction/installation projects continuing over nine months; (4) non-obstante clause excluding preparatory/auxiliary activities (inter alia sub-clause (e)). Precedent treatment: Tribunal had held Article 5(3) is a specific provision overriding Article 5(2); that Tribunal conclusion had been accepted in earlier years and not disturbed by the Division Bench in earlier proceedings. Interpretation and reasoning: The Court acknowledged the force of the Revenue's submission that the word 'likewise' in Article 5(3) may suggest addition rather than override; however, because Article 5(4) contains an express non-obstante clause deeming certain activities (including preparatory/auxiliary ones under 5(4)(e)) not to constitute PE 'notwithstanding the preceding provisions' (i.e., 5(1)-(3)), the question whether Article 5(3) overrides 5(1)-(2) is not necessary to resolve if 5(4)(e) excludes the office from PE. The Court therefore declined to decide the broader interpretative conflict because Article 5(4)(e) dispositively governed the facts. Ratio vs. Obiter: Ratio - where Article 5(4)(e) applies (non-obstante exclusion), it controls notwithstanding any potential interplay between 5(3) and 5(1)-(2); Obiter - no definitive pronouncement resolving whether 5(3) is strictly an exception or an additional category to 5(1)-(2), since not necessary for disposal. Conclusion: The Court did not answer the general question of overriding effect between Article 5(3) and Articles 5(1)-(2); it held that Article 5(4)(e)'s non-obstante exclusion, if applicable, renders the override issue unnecessary to decide in the appeal. ISSUE-WISE DETAILED ANALYSIS - Whether the Mumbai/Bombay office is a Permanent Establishment (Article 5(4)(e)) Legal framework: PE requires a fixed place of business through which business is wholly or partly carried on (Article 5(1)). Article 5(4)(e) excludes from PE a fixed place maintained solely for advertising, supply of information, scientific research or any other activity if preparatory or auxiliary in character. Precedent treatment: In the assessee's earlier assessment years the Tribunal held Article 5(3) to be specific and to prevail over Article 5(2); that finding was affirmed on earlier litigation and relied upon by the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) applied the earlier conclusions and found the Mumbai office preparatory/auxiliary. Interpretation and reasoning: The Commissioner of Income-tax (Appeals) found (a) the Mumbai office was project-specific, authorized by RBI to render coordination, not to conclude contracts or carry out main business operations; (b) contracts were between Indian clients and head office abroad; (c) invoices and correspondence showed work was carried out by the head office; (d) the basic ingredient of PE (fixed place through which business is carried on) was not established for the Mumbai office; (e) thus the Mumbai office was preparatory/auxiliary within the meaning of Article 5(4)(e) and hence excluded from PE 'notwithstanding the preceding provisions' of Article 5. Ratio vs. Obiter: Ratio - where factual findings (supported by documentary material and prior Tribunal findings) establish that an office performs only preparatory or auxiliary activities, Article 5(4)(e) excludes it from being a PE, regardless of the interplay between Articles 5(1)-(3). Obiter - none affecting this ratio; the Court declined to revisit prior Tribunal conclusions which were not challenged before the Tribunal. Conclusions: The Mumbai office is not a PE under Article 5 because it was found to be preparatory/auxiliary and excluded by Article 5(4)(e). Those factual findings were not challenged before the Tribunal and therefore could not be re-examined in the Section 260A appeal. ISSUE-WISE DETAILED ANALYSIS - Permissibility of raising for the first time in Section 260A appeal the challenge to computation under Section 44BB (gross v. net receipts) Legal framework: Section 44BB prescribes presumptive profits for certain non-resident operations. Remedies: assessee may appeal assessment to CIT(A) (Sections 246/246A) and Tribunal (Section 253); Revenue's remedy against an Assessing Officer's order is revision under Section 263; Section 260A permits High Court appeals from Tribunal orders on substantial questions of law and authorises the Court, in limited circumstances (Section 260A(6)), to determine issues not decided by the Tribunal, subject to the statute and applicable provisions of the Code of Civil Procedure (Sections 100/103 analogues). Precedent treatment: Authorities cited (Municipal Committee, Hoshiarpur; Scindia Steam Navigation; Karnataka precedents) limit second/260A appeals to substantial questions of law and preclude re-opening findings or issues not raised before the final fact-finding forum except in exceptional circumstances where findings are perverse and evidence suffices. Interpretation and reasoning: The Revenue sought at the High Court hearing to contend that deemed profit under Section 44BB should have been computed on gross receipts without deducting subcontractor payments. The Court noted: (a) this contention was not raised before the Tribunal and did not appear in grounds of appeal; (b) no revision under Section 263 was invoked, so the assessment order had attained finality as respects the Revenue; (c) Section 260A allows the High Court to decide issues not determined by the Tribunal only if they involve a substantial question of law and exceptional circumstances justify exercising the powers akin to Section 103 CPC; (d) the conditions for such interference (necessity for disposal, sufficiency of evidence, issue not determined by earlier courts or wrongly determined through a substantial question of law) were not met; (e) permitting the Revenue to raise the point would effectively undermine finality of assessment and allow by-pass of Section 263 safeguards. Ratio vs. Obiter: Ratio - the High Court will not entertain, under Section 260A, a new substantive contention affecting the assessment (here computation under Section 44BB) that was not raised before the Tribunal and not subjected to revision under Section 263, absent exceptional circumstances and a substantial question of law properly before the Court. Obiter - reference to analogous CPC principles reiterates high threshold for admissibility of new factual or mixed questions at the appellate stage. Conclusions: The Court refused to admit or decide the Revenue's fresh contention regarding deduction of sub-contractor payments for Section 44BB computation, holding it cannot be raised for the first time in a Section 260A appeal where it was not placed before the Tribunal and no revision under Section 263 was sought; no exceptional circumstance or substantial question of law justified consideration. OVERALL CONCLUSION The Tribunal's order was upheld: the income arising outside India was not attributable to the Bombay office because the office was factually found to be preparatory/auxiliary and thus excluded from PE by Article 5(4)(e) of the DTAA; the Revenue's late contention on computation under Section 44BB could not be entertained in a Section 260A appeal where it was not raised before the Tribunal nor subjected to revision under Section 263, and no exceptional circumstances or substantial question of law warranted the Court's reconsideration.