2018 (1) TMI 1540 - AT - Income Tax

Reopening of assessment u/s 147 - TDS u/s 195 - payment to foreign company without deducting tax - HELD THAT - In view of the specific agreement between the assessee and M/s. Canadian Crystalline Emirates Trading Company, UAE, it is obvious that M/s. Canadian Crystalline Emirates Trading Company, UAE has erected and commissioned the desalination equipment outside the country, therefore, it cannot be construed to be a technical service within the meaning of Section 9(1)(vii) - this Tribunal is of the considered opinion that the fee paid by the assessee to M/s. Canadian Crystalline Emirates Trading Company, UAE is not a fee for technical service. Hence, it does not require any deduction of tax under Section 195 of the Act. Therefore, no income has escaped from taxation. As the original assessment order u/s 143(3) of the Act was passed on 29.12.2011. Therefore, AO after scrutinizing the entire material available on record, allowed the claim of the assessee. In the case before High Court, it was only an intimation under Section 143(1)(a) but in this case it is an order passed by the Assessing Officer under Section 143(3) of the Act. The reassessment proceedings were initiated on the basis of the return and its enclosures. No tangible or new material came to the possession of the Assessing Officer subsequently. In the absence of any tangible material which came to the possession of the Assessing Officer, the proceeding cannot be reopened by issuing notice under Section 148 of the Act. Since the scrutiny proceeding under Section 143(3) of the Act was completed by an order dated 29.12.2011, in view of the judgment of Tanmac India 2017 (1) TMI 122 - MADRAS HIGH COURT AO cannot reopen the completed assessment in the absence of any new or tangible material. Therefore, even the reopening of assessment itself is invalid in law. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of ?5,25,00,000 paid to a foreign company without deducting tax under Section 195 of the Income-tax Act, 1961.
2. Validity of reopening the assessment under Section 147 of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Disallowance of ?5,25,00,000 paid to a foreign company without deducting tax under Section 195 of the Income-tax Act, 1961

The assessee contended that the payment of ?5,25,00,000 to Canadian Crystalline Emirates, UAE, was for erection and commissioning charges, not for technical services. The profit earned by the foreign company was not taxable in India, and thus, the assessee was not liable to deduct tax under Section 195 of the Act. The assessee argued that the design and machinery belonged to them, and the foreign company was merely erecting the machinery, which amounted to construction, not technical service.

On the contrary, the Departmental Representative argued that the payment to the non-resident company required deduction of tax at source as it was in the nature of fees for technical services. The non-resident company utilized its technical skill and expertise, making the profit taxable in India. The Department relied on the retrospective amendment to Section 9(1)(vii) of the Act, which deemed the income of the non-resident company to accrue in India.

The Tribunal examined the agreements and found that the machinery and equipment were purchased and supplied outside India, and the installation services were also rendered outside India. According to Explanation 2 to Section 9(1)(vii) of the Act, consideration for construction, assembly, or like projects is not deemed to be fees for technical services. The Tribunal concluded that the services rendered by the foreign company did not constitute technical services and, therefore, did not require tax deduction under Section 195. Consequently, no income had escaped taxation.

Issue 2: Validity of reopening the assessment under Section 147 of the Income-tax Act, 1961

The assessee challenged the reopening of the assessment, arguing that no fresh material came to the possession of the Assessing Officer, and the conditions for reopening under Section 147 were not met. The assessee relied on the judgment of the Madras High Court in Tanmac India v. Dy. CIT, where it was held that reopening of assessment was invalid in the absence of new or tangible material.

The Departmental Representative argued that the Assessing Officer had reason to believe that income chargeable to tax had escaped assessment, justifying the issuance of notice under Section 148. The payment made to the non-resident company without deducting tax at source led to the escapement of income from taxation.

The Tribunal referred to the Madras High Court judgment in Tanmac India, where it was held that reassessment proceedings based solely on the original return and enclosures, without new or tangible material, were invalid. In the present case, the original assessment under Section 143(3) was completed after scrutinizing the entire material, and no new material came to the possession of the Assessing Officer subsequently. Therefore, the Tribunal found the reopening of the assessment invalid in the absence of any new or tangible material.

Conclusion:

The Tribunal set aside the orders of the lower authorities, deleted the addition made by the Assessing Officer, and allowed the appeal filed by the assessee. The payment to the foreign company was not considered fees for technical services, and the reopening of the assessment was deemed invalid due to the absence of new or tangible material.