|CORAM:||Adarsh Kumar Goel J, Navin Sinha J, Rohinton Fali Nariman J.|
|SECTION(S):||147, 148, 9|
|GENRE:||Domestic Tax, International Tax|
|CATCH WORDS:||Arms length price, Permanent Establishment, Reopening of assessment, Transfer Pricing|
|DATE:||March 14, 2018 (Date of pronouncement)|
|DATE:||March 24, 2018 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 148: The AO is not entitled to issue a reopening notice only on the basis that the foreign company has a permanent establishment (PE) in India if the transactions in respect of which it is alleged that there has been an escapement of income had already been disclosed by the Indian subsidiary and found by the Transfer Pricing Officer (TPO) to be at arm's length|
In LG Electronics Inc vs. ADIT and Honda Motor Co. Ltd vs. ADIT, the AO issued notices u/s 148 on the ground that the assessee has a permanent establishment and is carrying out its business activities through this permanent establishment for the purpose of supply of raw materials and finished products. It was also alleged that the permanent establishment was available to the employees of the petitioner, who were either permanently stationed or came to India for business purposes.
The assessee contended that the statements of the employees have been misconstrued to form an opinion that a permanent establishment (PE) of the petitioner was existing in India. It was contended that the transactions in respect of which it is alleged that there has been an escapement of income had already been disclosed by the Indian subsidiary, which has been considered by the Transfer Pricing Officer (TPO) and found to be at arm’s length basis.
The High Court upheld the reopening on the basis that:
“On a perusal of the reasons recorded by the Assessing Officer, it is evident that there is a rational and in a live nexus between the reasons recorded and the belief that income had escaped assessment. Once the Assessing Officer comes to a conclusion that the petitioner has a permanent establishment and is carrying out its business activities through this permanent establishment for the purpose of supply of raw materials and finished products and that the permanent establishment was available to the employees of the petitioner, who were either permanently stationed or came to India for business purposes, we are of the view that the Assessing Officer has given valid reasons to believe that income had escaped assessment. The Court finds that once a permanent establishment comes into existence, which presupposes that business operations are being carried out for the purpose of profit in which case the profits or the income needs to be attributed and taxed in India. Admittedly, no returns were filed by the petitioner.
The Assessing Officer had tangible material to form a belief that income had escaped assessment and, consequently, rightly issued the notice under Section 148 of the Act. The decision cited by the learned counsel for the petitioner in the case of G.S. Engineering and Construction Corporation Vs. Deputy Director of Income Tax (International Taxation) and others, 357 ITR 335 is not applicable in the facts of this case.”
On appeal by the assessee to the Supreme Court, HELD reversing the High Court:
In the judgment of this Court dated 24th October, 2017 in Assistant Director of Income Tax-I, New Delhi v. M/s. E-Funds IT Solution Inc., Civil Appeal NO.6082 of 2015 and connected matters, it has been held that 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.
Since the impugned notice for the reassessment is based only on the allegation that the appellant(s) has permanent establishment in India, the notice cannot be sustained once arm’s length price procedure has been followed.
Accordingly, the impugned order(s) is set aside and the appeals are allowed.
Learned counsel for the Revenue states that he does not have complete instructions. If the Revenue disputes the above factual position, it will be at liberty to move this Court.
GKN Driveshafts Vs. Income Tax Officer, 259 ITR 19
DIT (International Taxation) Vs. Morgan Stanley and Co. Inc., 292 ITR 416
Indra Prastha Chemicals Pvt. Ltd. and others Vs. Commissioner of Income Tax and another, 271 ITR 113,
S.Narayanappa v. CIT (1967) 63 ITR 219 (SC).
Kantamani Venkata Narayana and Sons v. Addl ITO (1967) 63 ITR 638 (SC),
Madhya Pradesh Industries Ltd. v. ITO (1970) 77 ITR 268 (SC),
Sowdagar Ahmed Khan v. ITO (1968) 70 ITR 79 (SC),
ITO v. Lakhmani Mewal Das, (1976) 103 ITR 437 (SC),
ITO v. Nawab Mir Barkat Ali Khan Bahadur, (1974) 97 ITR 239 (SC),
CST v. Bhagwan Industries (P) Ltd., (1973) 31 STC 293 (SC)
State of Punjab v. Balbir Singh (1994) 3 SCC 299.
Hindustan Lever Ltd. Vs. R.B. Wadkar, Assistant Commissioner of Income Tax and others, 268 ITR 332,
Jamna Lal Kabra Vs. Income Tax Officer, ‘B’ Ward, Bareilly and others, 69 ITR 461,
Commissioner of Sales Tax, U.P. Vs. Bhagwan Industries (P) Ltd., Lucknow, AIR 1973 SC 370
Assistant Commissioner of Income Tax Vs. Rajesh Jhaveri Stock Brokers P. Ltd., (2007) 291 ITR 500 (SC).
Raymond Woollen Mills Ltd. Vs. Income Tax Officer and others, 236 ITR 34.