2010 (6) TMI 517 - AT - Income Tax

DTAA - Reassessment - Income escaping assessment - Addition - Short term capital gain - Tax evasion - There is no dispute that the assessee was liable to be taxed in India in the relevant assessment year, and there is also no dispute that an asset belonging to the Indian PE of the assessee company, on which depreciation was claimed in India, was also sold in the previous year relevant to this assessment year - The assessee was taxable in India in respect of its PE, and therefore, the assessee was under an obligation to share all the facts relevant to its Indian PE whether in respect of business profits or under any other head of income - On the facts of the present case, therefore, it cannot be said that the assessee had fully and truly disclosed all the material facts necessary for his assessment - Decided in the favour of the assessee Regarding taxability of gains - Held that under the domestic law as also under the applicable tax treaty, the assessee is liable to be taxed in respect of gains on sale of PE assets - It is thus clear that the movement of rig to the international waters was clearly connected with and consequent to sale of the rig, and necessary for fulfilling part of seller s obligations under the sale contract - That finding is, of course, without prejudice to our understanding, based on the reasoning discussed earlier in this order, that even deferral of sale or receipt of sale consideration, on sale of PE or PE assets, does not influence the tax liability in connection with sale of PE or its assets - Appeal is dismissed

Summary

Issues Involved:
1. Validity of reassessment proceedings.
2. Addition of Rs 111.16 crores on account of short-term capital gain on the sale of the rig.

Detailed Analysis:

1. Validity of Reassessment Proceedings:
The assessee challenged the reassessment proceedings initiated under section 147 of the Income Tax Act, 1961. The assessee, a company registered in Cyprus and later in Mauritius, claimed protection under the India-Mauritius Double Taxation Avoidance Agreement (DTAA). The original assessment was completed under section 143(3), estimating the income based on Rule 10 of the Income Tax Rules. However, the assessment was reopened by the Assessing Officer (AO) on 2nd June 2004, citing reasons that income chargeable to tax had escaped assessment.

The assessee objected, arguing that there was no obligation to inform Indian tax authorities about the sale of the rig, as the sale took place outside Indian territorial waters. The CIT(A) upheld the reassessment, noting that the assessee failed to disclose the sale of the rig in its income tax return, which constituted a lapse. The Tribunal agreed with the CIT(A), stating that the assessee was under an obligation to disclose all material facts necessary for assessment, and the failure to disclose the sale of the rig amounted to non-disclosure of material facts. Thus, the reassessment proceedings were justified.

2. Addition of Rs 111.16 Crores on Account of Short-Term Capital Gain:
The core issue was the taxability of gains from the sale of the rig. The assessee argued that the sale took place outside Indian territorial waters on 6th October 1997, and therefore, the gains were not taxable in India. The AO held that the gains were taxable in India as the rig was an asset of the permanent establishment (PE) in India, on which depreciation was claimed. The CIT(A) confirmed this, enhancing the addition to Rs 111.16 crores, noting that the sale agreement and the sale bill indicated that the sale was outright and definite while the rig was in India.

The Tribunal upheld the CIT(A)'s decision, stating that the rig was a PE asset, and the sale was part of the winding-up process of the PE. The Tribunal noted that the gains from the sale of PE assets are taxable in India under the Income Tax Act, 1961, as well as under Article 13(2) of the India-Mauritius tax treaty. The Tribunal rejected the assessee's contention that the sale took place outside Indian waters, emphasizing that the movement of the rig to international waters was a result of the sale, and the sale invoice dated 17th September 1997 was relevant.

Conclusion:
The Tribunal dismissed the appeal, upholding the validity of the reassessment proceedings and the addition of Rs 111.16 crores on account of short-term capital gain. The Tribunal emphasized the obligation of the assessee to disclose all material facts and the taxability of gains from the sale of PE assets in India.