TaxTMI Updates e-Newsletter
Jan 13,2012

Reopening of assessment - change of opinion - jurisdictional pre-conditions under Section 147 - reassessment proceedings - deduction under Section 80HHC and 80IA

Reopening of assessment - change of opinion - jurisdictional pre-conditions under Section 147 - deduction under Section 80HHC and 80IA - Validity of reopening assessment under Sections 147/148 in respect of deductions claimed under Sections 80HHC and 80IA - HELD THAT: - The Court found that the questions on entitlement to deductions under Sections 80IA and 80HHC were specifically raised in the scrutiny questionnaire and the assessee furnished detailed replies and supporting documents which were considered during the original assessment; the assessment order accepted the returned income after such examination. Reopening on the basis recorded amounted to a change of opinion because the Assessing Officer had earlier examined and quantified the claims. An erroneous view taken in the original assessment, even if legally incorrect and prejudicial to Revenue, does not constitute valid reasons for reopening; the proper remedy would have been revision under the statute rather than initiating reassessment. The Court applied the precedent relied upon in the judgment (CIT v. Kelvinator of India and Kelvinator of India v. CIT ) to hold that jurisdictional pre-conditions for invoking Section 147 were not satisfied and the reassessment was accordingly impermissible. [Paras 7, 9, 10]

Reopening under Sections 147/148 quashed as a prohibited change of opinion; reassessment proceedings held invalid in respect of the challenged deductions.

Final Conclusion: The appeal is dismissed. The Tribunal's order quashing the reassessment for assessment year 2001-02 is upheld on the ground that the reassessment amounted to a change of opinion and the jurisdictional requirements for reopening under Section 147 were not satisfied.

Business profits under Article 7 of the DTAA - royalties and fees for technical services under Article 12 of the DTAA - permanent establishment - primacy of domestic law for deduction limitations under Article 7(3) - application of special gross-basis provision Section 44D to foreign companies - benefit/override principle under Section 90(2) of the Income Tax Act

Royalties and fees for technical services under Article 12 of the DTAA - permanent establishment - Article 12 of the Indo Australia DTAA is not applicable to the receipts in question. - HELD THAT: - Paragraph 4 of Article 12 excludes paragraphs 1 and 2 of that Article where the person beneficially entitled to the royalties carries on business in the State in which the royalties arise through a permanent establishment situated therein; in such a case Article 7 or 14 applies. The assessee had an admitted permanent establishment in India. For this reason Article 12 does not apply to the payments here, and the tribunal's conclusion that Article 12 was inapplicable is sustained though for a different legal rationale than the tribunal's composite activity finding. [Paras 11]

Article 12 is not applicable because the receipts are connected with a permanent establishment in India.

Business profits under Article 7 of the DTAA - primacy of domestic law for deduction limitations under Article 7(3) - benefit/override principle under Section 90(2) of the Income Tax Act - Article 7 of the DTAA applies to the assessee's income, but Article 7(3) preserves that deductions are to be allowed only in accordance with and subject to the limitations of the domestic tax law of the Contracting State where the PE is situated. - HELD THAT: - Once Article 12 is excluded by reason of the existence of a permanent establishment, Article 7 governs. Article 7(2) treats the PE as a distinct and separate enterprise whose profits may be taxed in India. Article 7(3) permits deduction of expenses "in accordance with and subject to the limitations of the law relating to tax in the Contracting State"; thus the availability and extent of deductions when computing business profits under Article 7 are governed by the Income Tax Act as applicable in India. The two parts of Article 7(3) (allowing deductions and permitting deduction of executive/administrative expenses incurred outside the Contracting State) must be read harmoniously; but any deduction is conditional on conformity with the Act's limitations. [Paras 11, 12, 13, 14]

Article 7 applies to the assessee's profits attributable to the PE, but deductions are allowable only to the extent permitted by the Income Tax Act under Article 7(3).

Application of special gross-basis provision Section 44D to foreign companies - royalties and fees for technical services under Article 12 of the DTAA - The receipts are taxable as fees for technical services and Section 44D of the Income Tax Act applies to the assessee (a foreign company) for the years in question. - HELD THAT: - Explanation 2 to section 9(1)(vii) defines "fees for technical services" to include consideration for managerial, technical or consultancy services and the provision of technical personnel. The payment in the present case was for furnishing an evaluation report and technical/managerial information; the tests, drilling and mapping were steps necessary to produce that information. The exclusion in Explanation 2 for consideration "for any construction, assembly, mining or like project undertaken by the recipient" requires a genuine construction/assembly/mining project undertaken by the recipient; no such finding exists. Therefore the receipts fall within the definition of fees for technical services and, being receipts of a foreign company, Section 44D applies so that the special gross basis regime governs taxation in the present years. [Paras 15, 18, 23, 24, 29]

The receipts are fee(s) for technical services within Explanation 2 to section 9(1)(vii) and Section 44D applies to the foreign company for the assessment years under challenge.

Final Conclusion: The High Court held that Article 12 of the Indo Australia DTAA does not apply (because the assessee had a permanent establishment in India), Article 7 applies to attribute profits to that PE but Article 7(3) requires that deductions be governed by the limitations of the Indian Income Tax Act, and on applying those principles the receipts were held to be fees for technical services so that Section 44D is attracted; the appeals are disposed of accordingly.

Penalty under Section 78 of the Finance Act, 1994 - requirement of opportunity of rebuttal before imposition of penalty - show cause notice and corrigendum as foundation for imposition of penalty - deletion of penalty under Section 76 of the Finance Act, 1994 - remand for fresh consideration of reasonable cause defence under Section 80

Penalty under Section 78 of the Finance Act, 1994 - requirement of opportunity of rebuttal before imposition of penalty - show cause notice and corrigendum as foundation for imposition of penalty - Deletion of penalty under Section 78 was set aside and matter remitted to the Tribunal for fresh decision on whether penalty was validly imposed in view of corrigendums and opportunity to rebut. - HELD THAT: - The Tribunal had deleted the penalty under Section 78 on the ground that the show cause notice did not provide an opportunity of rebuttal and did not posit a case for penalty. The High Court found that two corrigendums, calling upon the assessee to explain why penalty under Section 78 should not be imposed, were on the Tribunal record and had been referred to in an earlier Tribunal order. Therefore the Tribunal's stated reason for deleting the Section 78 penalty - absence of any proposition for penalty or opportunity of rebuttal in the show cause notice - was erroneous. The High Court distinguished the Punjab & Haryana decision relied upon by the assessee as addressing a factual dispute about issuance/service of a corrigendum, which is not the basis of the Tribunal's deletion in this case. The question whether the corrigendums were issued, served, issued after limitation, or otherwise ineffective remains open and is to be considered by the Tribunal. For these reasons the Court answered the question in favour of the Revenue, set aside the deletion of the Section 78 penalty and remitted the matter to the Tribunal for fresh adjudication on the merits, including any challenge to issuance or service of the corrigendums. [Paras 6, 9, 10, 11]

Tribunal's deletion of penalty under Section 78 cannot be sustained on the recorded grounds; matter remitted to Tribunal to decide afresh whether penalty was validly imposed having regard to the corrigendums and opportunity to rebut.

Deletion of penalty under Section 76 of the Finance Act, 1994 - remand for fresh consideration of reasonable cause defence under Section 80 - Deletion of penalties under Sections 76 and 78 was set aside and matter remitted so the Tribunal may examine the assessee's plea of reasonable cause under Section 80 and other factual aspects before deciding on imposition of penalties. - HELD THAT: - The Tribunal had deleted the penalty under Section 76 relying on precedent (Auto World) and had deleted the Section 78 penalty without examining the assessee's factual explanations or the defence under Section 80. The High Court held that the Tribunal did not advert to the assessee's contentions as to reasonable cause, period of default, and the overall factual matrix, and therefore its short reliance on precedent without recording findings on the assessee's stand was inadequate. Consequently, the High Court remitted the entire penalty issue to the Tribunal for fresh consideration of the factual aspects and the assessee's claim of reasonable cause; no opinion has been expressed by the Court on the merits of the reasonable cause defence. [Paras 6, 12]

Penalties deleted by the Tribunal are remitted for fresh decision so that the Tribunal may consider the assessee's plea of reasonable cause and other factual matters before determining liability for penalties under Sections 76 and 78.

Final Conclusion: The High Court set aside the Tribunal's deletions of penalties under Sections 76 and 78 insofar as those deletions rested on inadequate factual consideration; the Section 78 deletion was specifically found unsustainable on the Tribunal's stated ground and both penalty issues are remitted to the Tribunal for fresh adjudication, including consideration of corrigendums, service, limitation and the assessee's defence of reasonable cause.