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2021 (5) TMI 881
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....se are as follows:- 2.1.The petitioner-company, Watanmal Boolchand & Co. Ltd., is a body incorporated in Hong Kong under the Companies Ordinance 1932, that is, relevant Laws of Hong Kong. The petitioner-company was incorporated in the year 1948. The petitioner-company is engaged in the trading business and branded and unbranded products and general merchandise. The brands are owned by the petitioner-company either by way of Brand Registration or Assignments. It has no manufacturing facility of its own. The petitioner-company sources the goods mainly from China and shifts the goods directly to its customer at Africa and South America. The petitioner-company is continuing its business in Hong Kong since 1948. 2.2.One of the group companies of the writ petitioner-company, viz., Watanmal (India) Private Limited (hereinafter referred to as "Watanmal India") , is engaged in the business of providing trade, management and logistic support services to the petitioner-company in terms of the agreement between the parties. Watanmal India was incorporated in the year 2003. The petitioner-company entered into an Administration Agreement dated 01.04.2005 with Watanmal India for providin....
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.... assessment for Watanmal India for the assessment year 2006-07, determined the arm's length price between the petitioner-company and Watanmal India, both being "associated enterprises" in terms of Section 92C of the Act. Based on the information provided by Watanmal India and comparable price determined, the TPO adopted profit margin of 21.94% in place of claim of 7.63% by Watanmal India. As a consequence, an upward adjustment to the tune of Rs. 30,59,033/- was made to the sales/revenues of Watanmal India. In other words, arm's length price of the transaction between the petitioner-company and Watanmal India was determined and income in the hands of Watanmal India was increased. The order of the TPO as per the provisions of Section 92CA(3) of the Act is binding on the first respondent. 2.6.The Deputy Commissioner of Income Tax, International Taxation-2(2), Chennai, the second respondent herein, had issued show cause notice dated 05.03.2015 asking the petitioner-company to show cause as to why not the petitioner-company be declared to have business connection in India based on the reasons enumerated therein. In the reasons given in the notice, the second respondent has ch....
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.... late Shri.Lalchand Watanmal with the scope to have its business activity as a general merchandise trading company. In 1948, a company named Watanmal Boolchand & Company Ltd. (hereinafter referred to as "WBC"), the petitioner was incorporated in Hong Kong. Till the year 2004, the principal activity of the company remained import and export of general merchandise. Subsequently, WBC forayed into the branded food market segment, a move that has been profitable for the group. A lion's share of the company's revenue today comes from this category. The group owns the brand names Gino, Jago, Pomo, Palmo and Forte. The company's turnover has ranged from USD 239Mn to USD 450Mn since the foray into the branded segment. It was at this juncture in 2003, the Watanmal Group started a company in India incorporated as Watanmal India. Vide an Administration Agreement dated 01.04.2004, which is reproduced by the petitioner in its affidavit, Watanmal India was mandated to carry out certain operations as follows, which provided for certain restrictions as well:- "To correspond with the customers of the First Party (WBC) with regard to the prices, terms and conditions, delivery sch....
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.... in any form with any third party including taking shareholding in a company provide similar service to any other persons or companies trading in or selling products in corporation with the products to or in the African Market; and (b) This Agreement constitutes the whole and complete agreement between the Parties and supersedes all prior discussions and agreements if any between the Parties with respect to the subject matter of this agreement. 3.4.These functions were omitted to be mentioned by the petitioner in their affidavit. It is also to be noted that based on the above agreement, the petitioner-company preferred an application for Advance Ruling before Inland Revenue Department, Hong Kong pleading as under:- "WIP did in fact have the general authority to negotiate and conclude all sales and purchases contracts (and habitually did exercise that authority) of the branded food products on behalf of WBC. Kindly note that clause 2 of the Administrative Agreement (which states that WIP has no general authority to negotiate and conclude contracts on behalf of WBC) has been varied by conduct of the relevant parties. (i) A ll the terms of the purchase an....
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....g, the profits of which are classified as on shore and offered to Hong Kong profits tax." 3.7.On analysis of the above, the following inferences are brought to the notice of this Court:- (a) Shri N.L.Sakraney based in Hong Kong was responsible for unbranded products; (b) Shri K.L.Sakraney and Ganapathy Viswanathan, i.e., significant component of management, sitting in India were responsible for the branded products division; and (c) Inland Revenue Authority, Hong Kong while arriving at the conclusion as mentioned by the petitioner in Point No.6 of the affidavit, "as the trading profits arising from the sale of branded food products to customers overseas are offshore in nature and are not chargeable to Hong Kong profits tax", has been cognizance of following facts and based its ruling on the following assumption: "In making this ruling, the Commissioner assumes that effective from 1 April 2005, all contracts for sales and purchases of branded food products of WBC were and would be placed with or placed by, negotiated by and concluded by WIP, or the employees of WIPL, in India on behalf of WBC pursuant to the Trade Services Agreement dated 1 April 2005 i....
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.... the stand taken in the order dated 05.12.2017 and in the show cause notice dated 22.03.2017. The respondent has the jurisdiction by virtue of Section 9(1) of the IT Act, since the petitioner, a foreign company, has income accruing or arising in India as explained above. 4.THE ARGUMENTS ON BEHALF OF THE PETITIONER:- 4.1.The learned Senior Counsel appearing on behalf of the writ petitioner contended that it is a classic case where the respondents exercised their power without jurisdiction. The basic principles to be adhered to under the provisions of the IT Act had been violated. Admittedly, the petitionercompany is a non-resident and was not assessed any income under the territory of India. When there is no income derived within the territory of India, there is no question of filing any return of income, nor payment of tax would arise. The mixed questions of facts and law, necessarily to be considered by the respondents, are not considered in its right perspective and by adopting an erroneous interpretation of the provisions of the Act, impugned proceedings are initiated under Section 148 of the IT Act. 4.2.The learned Senior Counsel referred to Section 5 sub-Clause (2)....
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....cturing unit, not even a single product is sold within the territory of India by the petitioner-company. Thus, the company is only providing logistic support to the company at Hong Kong and goods are supplied in African Countries and South America and in other countries. Therefore, the question of invoking the provisions of the Act as applicable in India does not arise at all. Though the company is functioning from the year 1948, there is no business activity in India even now. Thus, the respondents cannot act based on some fictions which all are erroneous facts and circumstances and thus, the very initiation itself is in violation of the provisions of the Act and the provision would not be applicable as far as the petitioner-company is concerned. 4.6.It is contended that under Section 151 of the IT Act, sanction for issue of notice is to be obtained and the respondents have not produced any document to establish that the sanction was obtained from the competent authorities as contemplated under Section 151 of the Act. Reiterating the grounds raised, the learned Senior Counsel relied on the circular issued by the Central Board of Direct Taxes (CBDT) in its Circular No.1/2004 ....
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....lant went up in appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner rejected the appeal on the ground that the same was not maintainable. He took the view that an appeal lay only under Section 30(1A). But before such an appeal can be entertained the appellant must satisfy two conditions, namely, (1) he had deducted the tax due from the non-resident in accordance with the provisions of Sub-section 3(B) and (2) that he had paid the sum deducted to the Government. The appellant having not complied with those two conditions, the Appellate Assistant Commissioner held that the appeal was incompetent. The order of the Appellate Assistant Commissioner was confirmed by- the Tribunal. Thereafter the appellant moved the High Court under Article 226 of the Constitution. That application came up before a single Judge. The single Judge after going into the matter in detail came to the conclusion that M/s. Nathirmal and Sons is not a non-resident firm and that being so the appellant was not required to act under Section 18(3B). He accordingly, set aside the order impugned. The revenue went up in appeal against the order of the learned single Judg....
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....of assessment proceedings under Section 148 is in order and there is no infirmity as such. 5.2.Relying on Explanation 2(a) to Section 147, it is contended that, where no return of income has been filed by the assessee although his total income or the total income of any other person in respect of which he is assessable under the Act during the previous year exceeded the maximum amount, which is not chargeable to income tax is a ground for initiation of proceedings under Section 147. 5.3.In the present case, admittedly, the petitioner has not filed any return of income and there was no assessment order. The petitioner has not subjected for assessment. Thus, the case would fall under the above provision and on confiscation of material evidences, the authorities competent instituted action for assessment under Section 147 of the IT Act. 5.4.With reference to the contentions raised on behalf of the petitioner that in the absence of any assessment order, there is no question of reopening of assessment would arise under Section 147, the learned Senior Standing Counsel answered by stating that Section 147 unambiguously stipulates that "assess or reassess in respect of any income ....
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....7 proceedings is not conclusive and it is only pending and thus, the writ petition is premature and liable to be dismissed. 5.7.With reference to the grounds raised by the learned Senior Counsel on behalf of the petitioner that the sanction as required under Section 151 of the IT Act has not been obtained, the learned Senior Standing Counsel produced copy of the sanctioning letter issued by the competent authorities. It is contended that prior to 2015, the Joint Commissioner is competent to grant sanction, as far as the assessment under Section 147 is concerned. As far as the reassessment is concerned, it is to be given by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner. However, after the amendment in the year 2015, all such sanctions are to be given by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner. In the present case, for the relevant assessment year prior to 2015, i.e., 2006-07, the Joint Commissioner has granted sanction, which is in accordance with the provisions of Section 151 existing prior to the amendment made in the year 2015. With reference to the assessments after 201....
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....ed to open the sealed cover and issue the assessment order to the petitioner-company, who in turn, if aggrieved, may prefer appeal as contemplated under the provisions of the Act. ANALYSIS:- 6.Considering the pleadings and arguments, let us now consider Sections 5(2)(a) and 5(2)(b) of the Act. The said provision contemplates that subject to the provisions of the Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which - (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Finding arrived by the respondents/Department in their proceedings reveals that, the income accrues or deemed to accrue or arise in India. When such a finding is arrived based on certain materials collected from the premises of the petitioner company, then the respondents must be allowed to proceed with the assessment in the manner known to law. In other words, the disputed facts in this regard deserves to be adjudicated. 6.1.Section 6 contemplates "Residence in India" and Section 6(3)(ii) contempl....
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.... 6.4.Mindful reading of Section 147 would reveal that "If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned. 6.5.Numerous circumstances are enumerated under Section 147 in respect of "income escaping assessment". The very concept of Section 147 is to ensure that the income escaping assessment must be brought under the tax net worth on identification of informations or materials or evidence. The circumstances narrated in Section 147 of the Act are wider enough to cover various complex nature of facts and circumstances as contemplated so as to invoke the provisions of Section 147 and ensure that the tax applicable is paid or recovered in the manner prescribed. 6.6.The amended Section 147 which stipulates "has reason ....
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....the Act. 6.8.The first proviso to Section 147 would not be applicable with reference to the facts of the case on hand. The proviso to Section 147 would be applicable where an assessment under Section 143(3) or the Section has been made for the relevant assessment year. In the present case, admittedly, no return of income was filed by the petitioner and no assessment order has been passed by the competent authority. Thus, the said proviso clause would not be applicable at all. 6.9.However, Explanation 2 to Section 147(a) would be applicable with reference to the facts of the present case. Explanation 2 to Section 147(a) enumerates that "for the purposes of this Section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, viz., (a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax;" 6.10.In the backdrop of these provisions, this Court has to consider whether the initiation of proceedings under Section 147 of t....
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.....2013, the respondents have stated that Watanmal India, the Indian company, which is the associated enterprise of the petitioner-company, is working for the petitioner and on behalf of the petitioner and constitutes the petitioner's agency permanent establishment in India. The letter further states that the petitioner had been inappropriately advised about the provisions of the IT Act and its applicability and the principles of Cross Border Taxation. 10.In this context, the respondents relied upon Section 9(1) of the Act and arrived a conclusion that the petitioner is having business operations in India and further, the notice under Section 148 of the Act was issued after examining the facts in great detail and after due application of mind. Accordingly, the petitioner-company was obligated to file the return of income as requested in the notices issued. 11.Reference to the TPO under Section 92CA of the IT Act was issued in proceedings dated 06.08.2013, who in turn, requested the petitioner to send the copies of annual reports and also the computation of total income. 12.In proceedings dated 21.02.2014, reasons for reopening of assessment have been provided. The rea....
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....m the world markets and negotiate and concluding the agreements and contracts for the supply of the products for sale to the customers. As seen from the above, the Indian Company does major and critical functions and developed the supply chain management with reference to both the suppliers and customers. The Indian company - M/s.Watanmal India Pvt. Ltd., even negotiates the price by its highly skilled employees. The Indian Company provides Trade Services to the group companies which have to be compensated certainly by higher amount. During the course of survey, it is learnt that the AE, i.e., M/s.Watanmal Boolchand and Company Ltd., (WBC), Hong Kong is not having technical capacity and manpower to assist the assessee in this regard. The AE, i.e., M/s.Watanmal Boolchand and Company Ltd., (WBC), Hong Kong is making voluminous sales of Rs. 996,34,75,470/- (AY 2006-07) on account of trade services rendered by this Indian Company and the gross receipts shown by this Indian Company on this voluminous trade services rendered as high as of Rs. 996,34,75,470/- is very low at Rs. 2,30,00,497/-. This is apparently negligible on prudent commercial business lines to render su....
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....ourt cannot enter into such disputed controversies which all are to be adjudicated with reference to the documents and evidences in entirety. It may not be possible to express any opinion with reference to such factual controversies in a writ proceedings. Even in reply dated 02.02.2015, in response to the notice issued by the authorities under Section 143(2) read with Section 129 dated 05.12.2014, the petitioner has stated that WBC is not an assessable entity at all in India and the Department is not competent to initiate assessment proceedings against it under the Act. It is relevant to consider the show cause notice issued by the respondents in proceedings dated 05.03.2015. The show cause notice issued pursuant to the reopening of assessment and the notice under Section 148 reveal that in 2002, the group was reorganized and two holding companies were created in British Virgin Island, viz., Prime Target Development Inc and Portilio Holdings Corp. The shares of WBC were held by Prime Target Development Inc. In 2003, the Watanmal Group started a company in India in the name of Watanmal India with its shares held by Portilio Holdings Corp. Thus, WBC and Watanmal India became assoc....
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....es, India was the place of effective management of all business affairs of WBC, Honk Kong. 16.It is relevant to consider the detailed analysis of the crucial evidences found during the course of survey proceedings by the respondent/Department, which reads as follows:- "3.A detailed analysis of the crucial evidences found during the course of survey proceedings is as follows:- I. the administration agreement between WBC and WIPL dated 01.04.2004 (Annexure I) impounded vide ANN/GE/WIPL/LS/IMP-21 pg nos 1-8 provides for the following services to be rendered by WIPL viz. • to correspond with the customers of the FIRST PARTY (WBC) with regard to the prices, terms and conditions, delivery schedules, follow up for payment with the customers of the FIRST PARTY (WBC) in respect of the products dealt by the FIRST PARTY; • To maintain documents for export by the FIRST PARTY (WBC) to their customers (including invoices, Bill of Lading, Packing List, Certificate of Origin and inspection certificates); • To liaise with the inspection agencies for obtaining import licence and shipping lines for transport of the products; • T....
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....y relating to the trade on the products. III. With this agreement WBC approaches the Commissioner, Inland Revenue Department, Hong Kong on 22.09.2005 with an application for an advance ruling (ANNEXURE III), for not treating the trading profits on sale of branded food products so derived by the company as not chargeable to Hong Kong profits tax and the reasons for filing of application annexed to such application are as follows:- (i) All the terms of the purchase and sales contracts re branded food products were negotiated and concluded by WBC's related company, WIP, in India on behalf of WBC by email or fax. (ii) WBC was not involved in any of the purchase and sales activities re branded food products. The work done in Hong Kong was limited to providing banking facilities and maintaining bank accounts in Hongkong. (ii) WBC was not involved in any of the purchase and sales activities re-branded food products. The work done in Hong Kong was limited to providing banking facilities and maintaining bank accounts in Hong Kong; (iii) The relevant products were shipped directly from the suppliers in France, USA, Italy, Malaysia, Ghana, Peru....
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....egraphic transfer. There was no negotiation of L/C with the customers carried out in Hong Kong." 17.Based on the evidences collected and the detailed analysis made with reference to the crucial evidences, the Commissioner made an assumption stating that effective from 1st April, 2005, all contracts for sales and purchases of branded food products of WBC were and would be placed with or placed by, negotiated by and concluded by Watanmal India, or the employees of Watanmal India in India on behalf of WBC pursuant to the Trade Services Agreement dated 01.04.2005 in the manner as described in the agreement. The ruling relied on in this regard is that the trading profits arising from the sale of branded food products to customers overseas are offshore in nature and are not chargeable to Hong Kong profits tax. The period for which the ruling applies has also been considered by the authorities. 18.Pertinently, the modus operandi of WBC and Watanmal India are explained by Shri.Easwaran Sundaresan, the CEO of the Group. The said details were also considered by the authorities competent. 19.The analysis of the activities carried out by Watanmal India on behalf of WBC in India is det....
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....t. In both the cases, it is to be construed that the facts are to be adjudicated. However, if the petitioner is able to establish that the proceedings are initiated without jurisdiction or authority, then alone a writ can be entertained and even in such circumstances, the order passed without jurisdiction is to be quashed and the matter is to be remanded back for reconsideration by the competent authority. 24. The purpose and object of the statutes are to be protected. Any person falling within the ambit of the tax net, can never be allowed to escape from the clutches of Law. Thus, even in cases, where notice was issued by an incompetent authority having no jurisdiction, such erroneous orders are liable to be set aside and the matter is to be remanded back to the authority competent for reconsideration and to decide the matter afresh on merits and in accordance with law. In the eventuality of not providing an opportunity to the competent authority of the Income Tax Department to reconsider the issues, then the persons, who are liable to pay tax are allowed to escape from the clutches of the Statute and the same is impermissible. 25. Payment of tax is the law. Exoneration is a....
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....ontemplated under the Statutes and with reference to the grounds raised by the petitioner. Thus, this Court cannot entertain such disputed facts in the present writ proceedings. 29.The entire reading of the impugned show cause notice dated 05.03.2015 throws light on the issue and therefore, this Court has no hesitation in forming an opinion that there are prima facie materials and evidences enough to proceed against the petitioner under the provisions of the IT Act. However, the contentions in the impugned show cause notice alone cannot be a conclusive factor and all such facts, circumstances as well as the documents and evidences collected and recorded in the impugned show cause notice are to be adjudicated elaborately by the authorities competent by affording opportunity to the petitioner, Thus, the petitioner is bound to avail the opportunity in order to defend their case. The petitioner may not make an attempt to escape from the clutches of law based on unsustainable grounds, which all are not substantiated. 30.As far as the ground raised regarding the sanction under Section 151 is concerned, the respondent-Department able to establish that the sanction as contemplated un....