2016 (2) TMI 713 - HC - Income Tax

Reopening of assessment - Taxation on royalty payment -taxable as business profits and not as royalty under Article 12 of DTAA - Held that - Insofar as the interest on royalty is concerned, the same was clearly disclosed by the Petitioner in the audit return (form 2 CEB). Further, the TPO has also recorded the same as a disclosed international transaction in his order dated 29th September, 2008. Thus, the contention that the Petitioner had failed to fully and truly disclose any material fact relevant for assessment of that income is plainly unsustainable. The question whether such income was to be taxed as interest income and not as royalty is again a matter of inference. The earlier decision of the AO to assess the same as royalty cannot be traced to any failure on the part of the Petitioner to disclose fully and truly any primary fact. It is apparent that whereas the AO while framing the assessment had not applied the rule of force of attraction , the present incumbent apparently feels that the rule of force of attraction ought to have been applied; he now infers that income by way of royalty can also be taxed under Section 44D of the Act as business income in terms of paragraph 1 of Article 7 of the Indo-US DTAA read with paragraph 6 of Article 12 of the Indo-US DTAA. Plainly, this is a change of opinion. It is now well settled that it is impermissible to re-open concluded assessments on the basis of such change of opinion This Court in a recent decision in Sun Pharmaceuticals Industries Ltd. v. Deputy Commissioner Of Income Tax & Anr. 2016 (1) TMI 788 - DELHI HIGH COURT had examined the CBDT Instruction No. 9 of 2006 and held that the same could not over-ride the statutory powers exercised by an AO in terms of Section 147 of the Act. The said CBDT instruction cannot be understood to compel the AO to re-open assessments that are inconsistent with his views. In the present case, the letter dated 1st September, 2009 clearly indicates that the AO had not accepted the view that the royalty paid to the Petitioner was liable to be taxed at the rate of 20% under Section 44D of the Act. He had expressly stated that no inference may be drawn that the royalty income has accrued to the petitioner from its PE in India . Mr. Syali is probably correct in assuming that the Petitioner s assessment for AY 2005-06 is being re-opened only on the basis of CBDT Instruction No. 9 of 2006. This, as held in Sun Pharmaceuticals Industries Ltd (supra), is impermissible. Even if, Mr Chaudhary s contention is accepted that the decision to re-open the assessment is not based on the audit objections but on independent reasons, it is apparent that the same is on account of a change in opinion. Whereas the AO by its letter dated 1st September, 2009 had reasoned to the contrary, he seems to have veered in favour of the opinion that was espoused by the audit party. As stated earlier, re-opening of assessment on account of change in opinion is also impermissible. - Decided in favour of assessee

Summary

Issues Involved:
1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Compliance with the conditions laid down under Section 147 for reopening the assessment.
3. Alleged failure to disclose fully and truly all material facts necessary for assessment.
4. Whether the reopening of assessment was due to a change in opinion.
5. Taxability of royalty payments and interest on delayed royalty under the Indo-US DTAA.

Detailed Analysis:

1. Validity of the notice issued under Section 148 of the Income Tax Act, 1961:
The Petitioner challenged the notice dated 28th March 2012 issued by the Assessing Officer (AO) under Section 148 of the Income Tax Act, 1961, which sought to reopen the assessment for the Assessment Year (AY) 2005-06. The Petitioner also contested the subsequent order dated 21st March 2013, which rejected the objections against the assumption of jurisdiction under Section 148.

2. Compliance with the conditions laid down under Section 147 for reopening the assessment:
The primary issue was whether the conditions under Section 147 for reopening the assessment were satisfied. The Petitioner argued that there was no failure on its part to disclose fully and truly all material facts necessary for assessment, as required by the proviso to Section 147. The Petitioner contended that the reopening was based on a change in opinion, which is impermissible.

3. Alleged failure to disclose fully and truly all material facts necessary for assessment:
The Petitioner had disclosed all relevant material, including the royalty payments and interest on delayed royalty, in its return of income. The AO had previously scrutinized these disclosures and accepted them in the original assessment. The AO's new stance that the royalty should be taxed at a higher rate was based on an inference rather than any new primary facts. The court noted that the question of whether the royalty was chargeable to tax at a higher rate depended on the AO's interpretation of the law, not on any failure by the Petitioner to disclose material facts.

4. Whether the reopening of assessment was due to a change in opinion:
The court observed that the AO's current position was a result of a change in opinion. The AO had initially concluded that the royalty was taxable at 15%, but the current AO believed it should be taxed at 20% under the principle of "force of attraction" in the Indo-US DTAA. The court cited the Supreme Court's decision in CIT v. Kelvinator of India Limited, which held that reassessment based on a change of opinion is impermissible.

5. Taxability of royalty payments and interest on delayed royalty under the Indo-US DTAA:
The AO sought to tax the royalty payments received by the Petitioner from its Indian subsidiary at a higher rate, arguing that the royalty was linked to the Petitioner's Permanent Establishment (PE) in India. The court examined Articles 7 and 12 of the Indo-US DTAA and concluded that the AO's new position was based on an interpretation of the law rather than any new facts. The court found that the Petitioner's disclosures were complete and that the AO's attempt to tax the royalty at a higher rate was an impermissible change of opinion.

Conclusion:
The court set aside the order dated 21st March 2013 and the notice dated 28th March 2012, allowing the Petition. The court held that the reopening of the assessment was based on a change of opinion and that the Petitioner had fully and truly disclosed all material facts necessary for assessment. The parties were left to bear their own costs.