2011 (1) TMI 1470 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and Belgium.
2. Validity of reopening the assessment u/s 147/148 of the IT Act, 1961.
3. Determination of Permanent Establishment (PE) in India.

Summary:

1. Applicability of Article 12 of the DTAA:
The petitioner, M/s Tractebel Industry, filed a return of income for the asst. yr. 2002-03 declaring total income of Rs. 2,53,01,260. The AO computed the total taxable income at Rs. 2,74,78,666, holding that Article 12 of the DTAA between India and Belgium was applicable. Payments received from "Indian operations" were taxable under "Fees for technical services" at 10% on a gross basis without allowing any deduction for reimbursement of expenses. Consequently, a deduction of Rs. 18,56,756 claimed on account of reimbursement of expenses was disallowed and added back to the income.

2. Validity of Reopening the Assessment u/s 147/148:
The IT Department issued a notice u/s 147/148 for reopening the assessment for the asst. yr. 2002-03. The petitioner filed objections, which were rejected by the impugned order dated 28th Sept., 2007. The AO recorded "reasons to believe" that the petitioner had a PE in India during the previous year 2001-02, making Article 12 of the DTAA inapplicable and the income chargeable to tax at 20% as per s. 9(1)(vii)/44D of the Act. The petitioner argued that the reasons recorded disclosed a mere change of opinion, as the issue of PE was already examined in the original assessment order dated 24th March, 2005.

3. Determination of Permanent Establishment (PE) in India:
The AO had specifically raised and examined the issue of whether the petitioner had a PE in India during the original assessment proceedings. The petitioner provided detailed responses, stating they did not have a PE in India. The AO concluded that the income earned from "Indian operations" was taxable as "fee from technical services" and not as "business income," implying that the petitioner did not have a PE in India. The court held that the decision of the AO, even if incorrect, could not be the subject matter of reopening the assessment u/s 147/148 on the basis of a mere change of opinion. The scope of s. 147/148 does not permit a review of an earlier order on second thoughts without new factual material.

Conclusion:
The court quashed the notice dated 26th March, 2007, and all subsequent proceedings, including the order dated 28th Sept., 2007, on the grounds that the reopening of the assessment was based on a mere change of opinion, which does not confer jurisdiction on the AO u/s 147/148. The petitioner succeeded, and a writ of certiorari was issued. No costs were awarded.