2018 (6) TMI 1591 - AT - Income Tax

Reopening of assessment u/s 147 - taxability of receipts for Management Service Fee ( MSF ) - no Permanent Establishment (PE) in India - DTAA between India and Sweden - as per AO management service fees falls within the ambit of section 9(1)(vii) as well as India and Sweden Treaty and was taxable as fees for technical services - transaction were disclosed by the assessee company in its form No.3CEB and in the Notes to the return which was filed along with return of income HELD THAT - we hold that in the absence of live link between reason to believe of escapement of income with the tangible material and even in the present case where the assessment order was passed u/s 143(1), the requirement of section is for the AO to come to a finding on the basis of tangible material to establish his case of reason to believe of escapement of income and in the absence of the same, re-assessment proceedings initiated were both invalid and bad in law. Accordingly, we hold so. We cancel the re-assessment proceedings initiated against the assessee and consequent order passed under section 143(3) r.w.s. 147 does not stand. The second aspect of the issue is that while recording reasons for reopening the assessment, the AO had relied on earlier order of Assessing Officer / DRP relating to assessment years 2007-08, 2008-09 and 2004-05 and held that since the issue has been decided against the assessee in earlier years, reasons were being recorded for reopening assessment for the year under appeal also. Once the issue has been decided in favour of assessee in earlier year 2018 (2) TMI 249 - ITAT PUNE , on which reliance was placed by the Assessing Officer while reopening the assessment, then also reasons recorded for reopening of assessment do not stand. Hence, re-assessment proceedings initiated against the assessee are invalid and bad in law. Before parting, we may also refer to the appeal of assessee in 2017 (12) TMI 1684 - ITAT PUNE relating to assessment year 2010-11, wherein the Tribunal vide order dated 20.12.2017 considered not only the earlier decision of Tribunal in assessee s own case but also decided the alternate argument of the Revenue that receipts for Management Service Fees are treated in the nature of dividend and taxed under clause 10 of the Tax Treaty between India and Sweden as well as under section 9(1)(iv) of the Act. Following the same parity of reasoning, we decide the issue on alternate plea also in favour of assessee and allow the claim of assessee in entirety.

Summary

Issues Involved:
1. Validity of reopening of assessment under section 147 of the Income-tax Act.
2. Taxability of Management Service Fees received by the assessee.

Detailed Analysis:

1. Validity of Reopening of Assessment:
The primary issue raised by the Revenue was the validity of the reopening of the assessment under section 147 of the Income-tax Act. The Dispute Resolution Panel (DRP) had dismissed the reopening, terming it invalid as it was not in accordance with the provisions of the law. The grounds of appeal by the Revenue included arguments that the reopening was justified because the original return was processed under section 143(1) and no assessment was completed under section 143(3). The Revenue argued that the Assessing Officer had tangible material to believe that income had escaped assessment, based on form No.3CEB and agreements between the assessee and Sandvik Asia Pvt. Ltd.

The Tribunal analyzed the arguments and noted that the Assessing Officer must have "reason to believe" that income chargeable to tax had escaped assessment, which must be based on tangible material. The Tribunal referred to various precedents, including the Hon’ble Bombay High Court's decision in Khubchandani Healthparks (P.) Ltd. Vs. ITO, which emphasized that even in cases where the return was processed under section 143(1), the "reason to believe" must be based on tangible material.

The Tribunal found that the reasons recorded for reopening the assessment were based on the same material that was available at the time of the original return, and no new tangible material was brought on record. Consequently, the Tribunal held that the reopening of assessment was invalid and bad in law.

2. Taxability of Management Service Fees:
The second issue was the taxability of Management Service Fees received by the assessee. The assessee contended that the receipts were not taxable in India under the Double Taxation Avoidance Agreement (DTAA) between India and Sweden, as the services did not constitute fees for technical services and the assessee did not have a Permanent Establishment (PE) in India.

The Tribunal noted that the issue had been adjudicated in the assessee’s favor in earlier years, where it was held that the receipts for Management Service Fees were not taxable in India. The Tribunal referred to the principle of the Most Favoured Nation (MFN) clause in the DTAA, which provided that the fees for technical services would not be taxable unless the services "make available" technical knowledge, experience, skill, know-how, or processes. The Tribunal found that the services rendered by the assessee did not meet the "make available" criterion.

The Tribunal also addressed the alternative argument of the Revenue that the receipts should be treated as dividends and taxed under Article 10 of the DTAA. The Tribunal rejected this argument, citing earlier decisions where it was held that Management Service Fees could not be treated as dividends.

Conclusion:
The Tribunal dismissed the appeals of the Revenue and allowed the Cross Objections of the assessee, holding that the reopening of the assessment was invalid and the Management Service Fees received by the assessee were not taxable in India.