2011 (12) TMI 336 - HC - Income Tax

Income escaping assessment - TDS - Purchase of raw material - disallowance - held that - the assessee contended that the provisions of Section 195 of the Act (for deduction of tax at source) are not applicable, when no part of payment made to non-resident is chargeable to tax in India - assessment is sought to be reopened within a period of 4 years from the end of relevant assessment year- the basic requirement for reopening the assessment that the Assessing Officer has to have reason to believe that the income chargeable to tax has escaped assessment, would continue to apply-both the petitions are allowed and Notices impugned are quashed.

Summary

Issues Involved:
1. Validity of reopening the assessment under Section 147 of the Income Tax Act, 1961.
2. Requirement to deduct TDS on payments made to foreign suppliers under Section 195 of the Income Tax Act, 1961.
3. Application of the Karnataka High Court judgment in the case of Commissioner of Income-Tax vs. Samsung Electronics Co. Ltd.

Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147 of the Income Tax Act, 1961:
The petitioner, a Private Limited Company, challenged the notice for reopening the assessment for the assessment year 2006-07 issued by the Assessing Officer (AO) on 4.3.2011. The AO had previously completed the scrutiny assessment under Section 143(3) of the Act on 18.6.2008. The AO sought to reopen the assessment on the grounds that the petitioner had made payments to a foreign supplier without deducting TDS, which should have been disallowed under Section 40a(i) of the Act. The petitioner contended that the reopening was invalid as the AO had no basis to believe that income chargeable to tax had escaped assessment, especially since the Supreme Court had reversed the Karnataka High Court's decision in the Samsung Electronics case.

2. Requirement to Deduct TDS on Payments Made to Foreign Suppliers under Section 195 of the Income Tax Act, 1961:
The AO's reason for reopening the assessment was based on the belief that the petitioner was required to deduct TDS on payments made to foreign suppliers for raw materials, as per the Karnataka High Court's judgment in the Samsung Electronics case. However, the petitioner argued that the Supreme Court's decision in GE India Technology Centre P. Ltd. vs. Commissioner of Income-Tax clarified that TDS is not required if the payment to the non-resident is not chargeable to tax in India. The petitioner maintained that the payments to the foreign supplier did not attract any income tax in India, and hence, there was no liability to deduct TDS.

3. Application of the Karnataka High Court Judgment in the Case of Commissioner of Income-Tax vs. Samsung Electronics Co. Ltd.:
The AO relied on the Karnataka High Court's judgment in the Samsung Electronics case to justify the reopening of the assessment. However, the petitioner pointed out that the Supreme Court had reversed this judgment in the GE India Technology Centre case. The Supreme Court held that TDS is required only if the payment to the non-resident is chargeable to tax in India. The AO's reliance on the Karnataka High Court's judgment, which had been stayed by the Supreme Court, was therefore misplaced.

Judgment:
The court observed that the AO had not examined the issue of TDS deduction in the original assessment, and thus, reopening the assessment did not amount to a change of opinion. However, the court emphasized that even after the amendment to Section 147, the AO must have a reason to believe that income chargeable to tax had escaped assessment. The court found that the AO's reasons for reopening the assessment did not reveal any basis to believe that the payments to the foreign supplier attracted tax in India. The court held that the AO's belief was based on the reversed Karnataka High Court judgment and lacked a live link to the reasons recorded.

The court concluded that the notice for reopening the assessment was invalid and amounted to a fishing enquiry. The court quashed the notices impugned in both petitions and made the rule absolute, allowing the petitions.