2013 (10) TMI 6 - HC - Income Tax

Revision u/s 263 appropriate or not method of determination of international income - ITAT has held that 10 per cent thereof assessed as taxable income will establish that the Revenue was not prejudiced in the instant case and, accordingly, exercise of power under Section 263 of the Act was inappropriate - Held that - the method referred to in paragraph 5 of Article 7 of the Treaty is a method known to the domestic law of the contracting State, in the instant case, India. The Assessing Officer and the Tribunal have failed to record anywhere that the method, that was adopted by the Assessing Officer to attribute profit of the assessee, is recognised by any law in India. This aspect of the matter goes to the root. There is no question, when the assessee has represented that it has maintained accounts, either in cash or in mercantile system, but has failed to establish that it has, in fact, maintained any such accounts, of applying best judgment method of assessment. In other words, if the assessee has maintained the accounts and has established that its expenses are more than its income or receipt, it is not liable to pay any tax in India. In the event, however, it fails to establish all or any of its expenses, the expenses shown to have been incurred, which could not be established, will be treated as the income of the assessee. - matter remanded to AO for reconsideration - Decided in favor of assessee.

Summary

Issues:
Assessment of tax liability for Permanent Establishment in India, application of Section 90 of the Income Tax Act, determination of taxable income for within India and outside India activities, exercise of power under Section 263 of the Act, interpretation of Treaty provisions regarding profit attribution, application of best judgment method for assessment.

Analysis:

1. Assessment of Tax Liability: The judgment concerns two assessment years where the assessee, having a Permanent Establishment in India, conducted business activities within and outside India. The assessee opted to be taxed as per the agreement between India and Korea under Section 90 of the Income Tax Act. The tax liability was previously determined based on a specific method involving 10% of gross receipts minus accepted expenses for within India activities, where payments were received in India. However, in the assessment years in question, the assessee claimed a loss for India operations and sought a refund of tax deducted at source.

2. Exercise of Power under Section 263: The Assessing Officer initially calculated the tax liability based on the previous method but later, under Section 263 of the Act, revised the assessment stating that the taxable income should be determined differently. The Tribunal found that there was no issue with the disclosures related to outside India activities and disagreed with the need to send back this aspect of the assessment to the Assessing Officer.

3. Application of Best Judgment Method: The Tribunal noted that while the Assessing Officer had assessed taxable income even when the assessee claimed no taxable income, the Revenue was not prejudiced. It was found that the assessee could only establish part of the claimed expenditure, and the Tribunal considered the unaccounted expenditure as income of the assessee, assessing it at 10%.

4. Interpretation of Treaty Provisions: The judgment delves into the interpretation of the Treaty provisions regarding profit attribution to the Permanent Establishment. It emphasizes that the method used for profit determination must align with the domestic law of the contracting State, in this case, India. The Tribunal and Assessing Officer failed to establish that the method applied was recognized by Indian law, leading to the decision to remit the matter back to the Assessing Officer for re-consideration.

5. Application of Best Judgment Method for Assessment: The judgment clarifies that if the assessee maintains accounts but fails to establish expenses, the unestablished expenses are treated as income. The Assessing Officer is directed to re-examine the assessment of profit arising from within India transactions, requiring the assessee to provide books of accounts and relevant documents for each expenditure entry within two months.

In conclusion, the judgment sets aside the Tribunal's decision on assessing profit from within India transactions and instructs a re-consideration by the Assessing Officer, emphasizing the importance of aligning the profit attribution method with domestic law provisions and the necessity for proper documentation to support expenditure claims.