TaxTMI 
TaxTMI 
2023 (12) TMI 1135
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....y a product of change in opinion and accordingly is impermissible in law? 38 Whether the re-assessment notice under Section 147 r/w Section 148 amounts to borrowed satisfaction as it places reliance on findings recorded in the assessment proceedings recorded in the Assessment Year 2008-2009? 55 (iv) Whether the bar under third Proviso to Section 147 of the I.T. Act is a legal impediment insofar as the present re-assessment notice is concerned? 60 IV Implication of Circular No. 1/2013 80 The petitioner has filed three Writ Petitions before this Court i.e., W.P. /2013, 43236/2013, 43237/2013. The petitioner who is common in all these Writ Petitions has sought to challenge the re-assessment proceedings initiated pursuant to the notice issued under Section 148 read with Section 147 of the Income Tax Act, 1961 ('I.T. Act'). 2. W.P. No. 15061/2013 pertains to the Assessment Year 2005-2006; W.P. No. 43236/2013 pertains to the Assessment Year 2006-2007; W.P. No. 43237/2013 pertains to the Assessment Year 2007-2008. I. FACTS:- A. W.P. No. 15061/2013 3. The petitioner has sought for a declaration that the proceedings initiated by the....
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.... the fresh Assessment Order dated 24.12.2010. The said appeal came to be dismissed by its order dated 18.10.2011. It is further submitted that the petitioner has preferred an appeal against the order dated 18.10.2011 before the Appellate Tribunal, which is still pending adjudication. 9. During the consideration of such of the proceedings referred to above, the Additional Commissioner of Income Tax Range-11, Bangalore, took up the petitioner's assessment for the Assessment Year 2008-2009 and had disallowed the petitioner's claim for deduction under Section 10A of the I.T. Act substantially. It is the case made out by the petitioner that taking note of the assessment for the Assessment Year 2008-2009, the Assessing Officer issued a notice dated 29.03.2012 under Section 148 r/w Section 147 of the I.T. Act proposing to reassess the petitioner's income for the Assessment Year 2005-2006. 10. Insofar as the reassessment under Section 148 of the I.T. Act, the reasons recorded prior to issuance of notice was responded by filing of detailed objections by the petitioner invoking the provisions under Section 147 of the I.T. Act which came to be rejected by an order dated 13.03.2013. B....
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....king provisions under Section 147 of the I.T. Act which came to be rejected by an order dated 22.08.2013. C. W.P. No. 43237/2013 16. The petitioner has sought for a declaration that the proceedings initiated by the respondent No. 1- Assistant Commissioner of Income Tax under Section 147 read with Section 148 of the I.T. Act for the Assessment Year 2007-2008 as being barred by limitation and without jurisdiction. The petitioner has also challenged the notice dated 08.10.2012 (Annexure-'D') under Section 148 r/w Section 147 of the I.T. Act for the Assessment Year 2007-2008. Further, the petitioner has also sought for quashing of the order bearing F.No.DCIT-C-11-4/BGL/13-14 dated 26.08.2013 (Annexure-'J') which is the order passed by respondent No. 2 rejecting the objections filed by the petitioner to the notice issued under Section 148 of the I.T. Act for reopening of assessment in respect of Assessment Year 2007-2008. 17. Petitioner's regular assessment for the Assessment Year 2007-2008 was taken up under Section 143(3) of the I.T. Act. In due course of assessment with regard to certain international transaction and furnishing of Audit Reports under Section 92E reference wa....
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.... III. CONTENTIONS OF THE RESPONDENT/REVENUE:- 22. The Revenue has raised common contentions in these Writ Petitions, which are as follows:- (a) The reassessment proceedings are taken up by the Authority on the basis of valid reasons recorded which satisfies the conditions for invoking reassessment proceedings and such reason is based on the tangible material noticed in the assessment for of the year 2008- 2009. That the materials, such as, Master Service Agreements (MSA), Works Contracts/ Scope of Work (SCW), Invoices and other details related to claim of rebate under Section 10A of the I.T. Act establishes that the assessee has earned income from Deputation of Technical Manpower (DTM) and not from export of software. Such material was not part of the assessment proceedings for the Assessment Years in question. (b) The Tangible material that has come forth during the assessment proceedings for the Assessment Year 2008-2009 was not a part of the records during the earlier assessment proceedings and accordingly, on the basis of such material re-assessment is permissible. (c) That the aspect of deputation of technical manpower was not dealt with by the ....
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...., as the Assessment Year in question is 2005-2006 and notice at Annexure-'G' seeking to initiate proceedings was issued on 29.03.2012, in terms of the proviso to Section 147 of I.T. Act, any action taken after the expiry of four years from the end of relevant assessment year would require that the assessee has failed to disclose fully and truly all material facts necessary for assessment. 26. The relevant extract of Section 147 of I.T. Act prior to its substitution reads as follows:- "147. 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 (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under sub- section (3) of sectio....
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.... primary facts in his possession, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise-the assessing authority has to draw inferences as regards certain other facts; and ultimately, from the primary facts and the further facts inferred from them, the authority has to draw the proper legal inferences, and ascertain on a correct interpretation of the taxing enactment, the proper tax leviable. Thus, when a question arises whether certain income received by an assessee is capital receipt, or revenue receipt, the assessing authority has to find out what primary facts have been proved, what other facts can be inferred from them, and taking all these together, to decide what the legal inference should be. 9. There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee. To meet a possible contention that when some account books or other evidence has been produced, there is no duty on the assessee to disclose further facts, which on due diligence, the Income Tax Officer might have discovered, the legislature has put in the ....
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....o communicate an inference, which he might or might not have drawn? 12. It may be pointed out that the Explanation to the sub-section has nothing to do with "inferences" and deals only with the question whether primary material facts not disclosed could still be said to be constructively disclosed on the ground that with due diligence the Income Tax Officer could have discovered them from the facts actually disclosed. The Explanation has not the effect of enlarging the section, by casting a duty on the assessee to disclose "inferences" to draw the proper inferences being the duty imposed on the Income Tax Officer. 13. We have therefore come to the conclusion that while the duty of the assessee is to disclose fully and truly all primary relevant facts, it does not extend beyond this." 28. From the above, it can be stated as follows:- a) Assessee is to disclose the primary facts in his possession and the Assessing Authority on the basis of such recovery or facts discovered on the basis of facts disclosed or otherwise, could draw inferences regarding such other facts. b) The duty to disclose does not extend beyond full and truthful disclosure of ....
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....uch context that a finding is to be recorded as to whether the assessee has failed to "disclose fully and truly all material facts necessary for assessment". 31. In the present case, the assessee has filed his declaration in Form-56F in terms of Rule 16D of the Income Tax Rules, 1962 whereby, assessee who seeks to claim deduction under Section 10A of the I.T. Act has to make a declaration in Form-56F in the form of report of an accountant along with the return of income [Rule 16D has been omitted by IT(21st Amendment) Rules, 2021 w.e.f. 29.07.2021]. The omission of Rule 16D was only later and was in existence on the relevant date when the assessee has filed the return of Income. In terms of the declaration, the accountant has certified that the petitioner was engaged in export of computer software and the relevant details relating to deduction under Section 10A of the I.T. Act has been detailed in Annexure-'A'. The further declaration in Annexure-'1' annexed to Annexure-'A' which provides details relating to claim by the exporter for deduction under Section 10A of the I.T. Act contains a declaration as follows:- Name of the undertaking Software Technology Park Unit-I So....
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....ence Number of permission EC. BY. OPL363/2541 (1256)-92/93 EC. BY. OPL. 53/2541 (1793)-93/94 1,350,964,255 Reference Number of permission EC. BY. OPL363/2541 (1256)-92/93 EC. BY. OPL.53/2541 (1793)-93/94 32,231,736 Reference Number of permission EC. BY. OPL363/2541 (1256)-92/93 EC. BY. OPL. 53/2541 (1793)-93/94 32. The obligation of disclosure extends to disclosing fully and truly material facts necessary for assessment. Pursuant to the order passed by CIT, Bangalore-1 under Section 263 of the I.T. Act dated 22.12.2009 the assessment proceedings were directed to be re-done by recording a finding as to eligibility of deduction under Section 10A/80HHE of the I.T. Act. In the fresh assessment proceedings initiated culminating in passing of the Assessment Order by the order dated 24.12.2010 as regards the expenditure relating to providing technical services outside India, the material was placed before the Assessing Officer on such aspect as is revealed from the observations at paras-9 and 10 of the order, which are extracted hereinbelow: "9. When the above issues are raised before the AR of the assessee, AR of the assessee made a detailed submission. The gist of the ....
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....ing proceedings under Section 147 of the I.T. Act for re-opening the assessment was communicated, which reads as follows: "2. The said return had been taken up for scrutiny and an order u/s 143(3) dated 30.12.2008 had been passed arriving at a total income of Rs. 72,52,77,770/-. The various issues of additions and disallowances made in the assessment order are as below: 1. Recomputation of deduction u/s 10A a. Reduction of communication charges is restricted to export turn over only. b. Loss of one 10A unit was set off against the profits of other 10A units 2. Capitalization of Software Expenditure On account of additions and disallowances as above, the deduction of claim under Section 10A had been reduced to Rs. 114,87,47,042/-. Further order u/s 143 (3) rws 263 was passed on 24.12.2010 reducing the expenditure incurred in foreign currency for providing technical services from export turn over only and the deduction u/s 10A was revised to Rs. 74,25,62,786/- 3. During the course of scrutiny proceedings conducted for A.Y. 2008-09 various information including a large number of Master Service Agreements, Work Contracts/Scope of works....
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....n that failure on the part of assessee to disclose fully and truly all materials with regard to deduction u/s 10A has resulted in allowing excess deduction u/s 10A for AY 2005-06." 35. It is the contention of Sri Percy Pardiwalla, learned Senior Counsel appearing on behalf of Ms.Tanmayee Rajkumar for the petitioner/assessee, that the reasons for re-opening would indicate the stand of the Revenue that the deputation of technical man-power relating to software development activity conducted abroad had no link with the STP units in India. Further, that such activity was known as body shopping and eligible for deduction under Section 80HHE of the I.T. Act and was not an activity that was eligible for deduction as regards expenses under Section 10A of the I.T. Act. 36. It is submitted that this very aspect has been a subject matter of consideration by the Assessing Officer while passing a fresh Assessment Order on 24.12.2010 consequent to the directions made in the order under Section 263 of the I.T. Act dated 22.12.2009 vide F.No. 17/263/CIT-1/2009-10 (Annexure-'C'). It is submitted that in the Assessment Order passed, while computing deduction under Section 10A there was exclusi....
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....assessing officer has power to reopen, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reason to believe" but also inserted the word "opinion" in Section 147 of the Act. However, on receipt of representations from the companies against omission of the words "reason to believe", Parliament reintroduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the assessing officer. 8. We quote herein below the relevant portion of Circular No. 549 dated 31-10-1989, which reads as follows: "7.2. Amendment made by the Amending Act, 1989, to reintroduce the expression 'reason to believe' in Section 147.-A number of representations were received against the omission of the words 'reason to believe' from Section 147 and their substitution by the 'opinion' of the Assessing Officer. It was pointed out that the meaning o....
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....hnical services outside India are required to be reduced from the export turn over, while computing the deduction u/s 10A. The issue involved in the assessee's case which is one of the subject matters of the proposed action u/s 263 is whether the activity of rendering technical services outside India, was a business carried on by the assessee company distinct from the business of export of computer software and if so, the receipts on account of rendering technical services outside India are eligible for deduction u/s 80HHE and not Section 10A. The information as available in the records does not indicate that the Assessing Officer had examined the nature of receipts in detail having regard to the nature and extent of technical services rendered outside India during the relevant previous year ended 31.03.2005 irrespective of the nomenclature used for describing such services. In view of the failure of the Assessing Officer to examine this aspect of the matter, the assessment order is held to be erroneous and pre-judicial to the interest of the revenue. With reference to the submissions made by the assessee based on the assessments made for the earlier assessment year, it is necessar....
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....ara 10]. If that were to be so, revisiting the decision arrived at once again to further reduce the eligible deduction under Section 10A of the I.T. Act would amount to a review on the ground of change of opinion which is impermissible. 44. Though in Kelvinator (supra), the observation is that where there is tangible material to come to the conclusion that there is escapement of income from assessment, in the present case, the tangible material as asserted by the Revenue is itself not complete. 45. A perusal of Section 148 of I.T. Act, the notice along with the reasons for reopening make it clear that the tangible material relied upon are the MSA's, Works contracts/SCW's, Invoices and other details relating to the deduction claimed under Section 10A of the I.T. Act. All of which is stated to have come to the notice of the Department relating to the Assessment Year 2008-2009. However, even on a perusal of para-2.10 of the Assessment Order relating to the Assessment Year 2008- 2009, "... the assessee as has been asked on innumerable occasions to submit MSAs and SOWs that it had with its clients the assessee has only been able to provide some of the sample MSAs and SOWs...". Sim....
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....t activities onshore abroad had any link whatsoever with the STP Undertakings in India. It had been noticed that the assessee had claimed all revenue from Software developmental activities under STPs based in India only. No part of the income had ever been admitted as generated out of the company's activities abroad. During the course of investigation conducted, it had been detected on facts as per various contracts/SOW, work orders and invoices that a large body of work related to software development activity conducted onshore abroad had no link whatsoever with the STP units in India. The said revenue receipt from onshore activity was treated as not related to the undertaking eligible for deduction u/s 10A of the I.T.Act. Such onshore receipts were treated as companywide software receipts not related to the STP Undertakings in India. This had been computed and the deduction claimed u/s 10A of the I.T.Act had been drastically reduced. b. During the course of said fact finding it had also been detected that the assessee company is in the business of deputing technical manpower (DTM) of providing short duration technical manpower abroad. Such business activity commonly know....
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....roviso to Section 147 of the I.T. Act is a legal impediment insofar as the present re-assessment notice is concerned? 50. The third proviso to Section 147 of I.T. Act as it existed prior to amendment of Finance Act 2021 reads as follows: "Provided also that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment." 51. The details of the issuance of Section 148 notice as well as subsisting appeals as on the relevant dates is as follows:- W.P. No. & Year of Assessment Date of issuance of Section 148 Notice Pendency of Appeal/Revision/ Reference Date of institution of column(3) proceedings Remarks 1 2 3 4 5 15061/2013 A.Y. 2005-06 29.03.2012 Appeal No. IT(TP)A No. 162 (Bang )2012 (A.Y. 2005-06) Appeal filed against the order of CIT-(Appeals)-I dt. 18.10.2011. The CIT(Appeals)-I had rejected the appeal challenging the order passed giving effect to Order under Section 263 by the Assessing Officer. 30.01.2012 Appeal pending as on date of 148 notice. 432....
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....he assessee are that the activities regarding which the expenditure incurred in foreign exchange do not amount to providing of technical services outside India and regarding exclusion of communication expenses from both export turn over and total turn over, the same was claimed to be done on the basis of parity between export turn over and total turn over and also on the basis of definition of total turn over elsewhere in the provisions of the I.T. Act. 14. In the light of the above submissions, on verification of the details collected in respect of expenditure incurred in foreign exchange, it is clear that the Company's employees visit the clients' location and provide software development services to the clients which are group companies. Therefore all these services rendered by the Company are of the nature of technical services and therefore expenditure incurred in providing these services amounting to Rs. 294,66,48,857/- are required to be reduced from the export turn over as per the definition of export turn over contained in the provisions of Section 10A of the I.T. Act. 15. The AR of the assessee further argued that the Company does not recover any amounts....
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....outside India. 56. The notice under Section 148 of the I.T. Act dated 13.9.2012 which seeks to reassess income for the Assessment Year 2006-2007 leads subsequently to enumerating reasons for re-opening assessment. The relevant reasons detailed in "reasons for reopening assessment" are reproduced below:- "3. ... a. It is notified that the assessee company is rendering a large body of work on shore related to software developmental activities. However, it was detected that none of the said software development activities onshore abroad had any link whatsoever with the STP undertakings in India. It had been noticed that the assessee had claimed all revenue from software development activities under STPs based in India Only. No part of the income had ever been admitted as generated out of the Company's activities abroad. During the course of investigation conducted, it had been detected on facts as per various contracts/SOW, work orders and invoices that a large body of work related to software development activity conducted onshore abroad had no link whatsoever activity was treated as no related to the undertaking eligible for deduction u/s. 10A of the I.T. Act. S....
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....resulted in allowing excess deduction u/s. 10A for A.Y. 2006-07." 57. The question as to weather the Deputation of Technical Manpower [DTM] activity leading to generation of revenue and having a nexus with the STP undertaking is a legal requirement to claim deduction under Section 10A of the I.T. Act, whereas, in the absence of such nexus, income from DTM could be claimed as a deduction only under Section 80HHE of the I.T. Act. This precise aspect has been adverted to in the Assessment Order for the Assessment Year 2006-2007 as noticed above. The nexus between the technical services rendered and the STP which is necessary for an allowable deduction under Section 10A of the I.T. Act is a legal requirement and existence of such nexus is a conclusion to be arrived at by the Assessing Officer. Once the primary facts regarding providing of technical services outside India is made out, there would end the duty of the assessee and the question of nexus is a matter that the Assessing Officer ought to have clarified by further investigation. 58. Further, the reliance on documents that has come out as regards the proceedings for the Assessment Year 2008-2009 by way of MSAs, Work Contra....
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....issions, on verification of the details collected in respect of expenditure incurred in foreign exchange, it is clear that the Company's employees visit the clients' location and provide software development services to the clients which are group companies. Therefore, all these services rendered by the company are of the nature of technical services and therefore expenditure incurred in providing these services amounting to Rs. 336,14,67,945/- are required to be reduced from the export turn over as per the definition of export turn over contained in the provisions of Section 10A of the I.T. Act. 17. In view of the above discussion, exclusion of the abovementioned expenses, namely expenses incurred in foreign exchange in providing technical services outside India to the extent of Rs. 336,14,67,945/- and expenses incurred on communication expenses attributable to the delivery of software outside India to the extent of Rs. 9,77,74,451/-, has been restricted to export turn over only and accordingly deduction u/s 10A of the IT Act has been computed. 19. As discussed above, the deduction u/s 10A of the IT Act has been computed after excluding the expenses incurred in f....
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.... related to the STP undertakings in India. This had been concluded and the deduction claimed u/s.10A of the I.T. Act had been drastically reduced. b. During the course of said fact finding it had also been detected that the assessee company is in the business of deputing technical man power (DTM) of providing short duration technical man power abroad. Such business activity commonly known as Body Shopping was eligible for deduction u/s. 80HHE of the I.T. Act and was not included as an eligible activity u/s. 10A of the I.T. Act. It had been noticed from the contracts and invoices that the assessee Company had substantial revenue from such DTM activity and it claimed the revenue receipt from the same as software development activity. It had been detected that assessee had made similar claims for earlier Assessment Years also. 62. The reasons for reopening the assessment are identical in all respects to reasons for reopening made out as regards the Assessment Year 2006-2007 and the discussion made supra at paras-57 and 58 relating to the said Assessment Year 2006-07, is adopted to arrive at the conclusion that the assessing officer has not made out grounds for the for the ....
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....n power for such onsite "software development at the client's place". The clarification in this regard at para 2(i)(b) which is of relevance is extracted hereinbelow:- "(b) It has also been brought to notice that it is a common practice in the software industry to depute Technical Manpower abroad (at the client's place) for software development activities (like upgradation, testing, maintenance, modification, trouble-shooting etc.), which often require frequent interaction with the clients located outside India. Due to the peculiar nature of software development work, it has been suggested that such deputation of Technical Manpower abroad should not be considered detrimental to the benefits of the exemption under sections 10A, 10AA and 10B merely because such activities are rendered outside the eligible units/undertakings. The matter has been examined. Explanation 3 to sections 10A and 10B and Explanation 2 to section 10AA clearly declare that profits and gains derived from 'services for development of software' outside India would also be deemed as profits derived from export. It is therefore clarified that profits earned as a result of deployment of Technical Ma....
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....ct between the client and the eligible unit. To this extent, Circular No. 694 dated 23.11.1994 stands further clarified. 67. It is clear that the clarification stipulates that the benefits under Section 10A deductions can be availed of, if there exists a direct and intimate nexus or connection between the development of software abroad with the eligible units setup in India. Though the clarification is issued on 17.01.2013, whereas the said circular is only clarificatory and does not confer any new benefit and hence can be made use of to interpret the scope of deduction under Section 10A of the I.T. Act as regards development of software at the client's place abroad by deputation of technical man power. The circular clarifies as follows:- a) There has to be a nexus between development of software done abroad and the eligible units set up in India. b) Deputation of technical man power abroad cannot be considered detrimental to benefits of exemption under Section 10A of the I.T. Act merely on the ground that such activities are rendered outside the eligible units c) Tax benefits under Section 10A of the I.T. Act cannot be denied merely on the ground that....