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2017 (11) TMI 132 - HC - Income TaxReopening of assessment - Income earned from the Scorpio agreement would be taxable in the hands of the Petitioner, as royalty under Section 9 (1) (vi) and also under DTAA - difference between Form 26 AS and assessed income - Held that - In respect of these very Assessee and for the same AY 2010-11, the earlier draft assessment order passed by the AO under Section 144C of the Act has already been set aside by its judgment dated 23rd March 2016. That judgment referred to the order of the DRP which had held that both the Assessees were not eligible Assessee under Section 144C (15) of the Act and that order of the DRP was binding on the AO. It was further held by this Court that the AO could not have disregarded the finding directions of the DRP and passed the final assessment order. This was an issue of jurisdiction of the AO to proceed under Section 144C of the Act against an entity which is a partnership firm incorporated outside India. The fact that is undeniable is that the AO continues to be bound by the order of the DRP which was by this Court by its decision dated 23rd March 2016 in respect of the same Assessees for the same AY 2010-11. Since the Revenue has not challenged that judgment, the AO had no option but follow the DRP s order. Further, the AO was aware that the earlier attempt at disobeying the DRP s order led to invalidation of the draft and the final assessment order. What is surprising is that while disposing of the objections to the reopening of the assessment, the AO again chose to only record that the DRP held that both the Assessees were not eligible Assessees. The AO did not refer to this Court s order dated 24th March 2016. This is despite the fact that the AO was disposing of the objections more than nine months after the judgment of this Court. This conduct of the AO is simply unacceptable. The passing of the draft assessment order pursuant to reopening of the assessment under Section 147/148 of the Act, in respect of both the Assessees and for the same AY 2010-11, is clearly in the teeth of the order of the DRP as well as judgment of this Court and is therefore, unsustainable in law. On this ground, both the draft assessment orders in respect of ESS Distribution and ESS Advertising for AY 2010-11 dated 19th December 2016 are liable to be set aside. Referring to reason for reopening that that the amount received by ESS Distribution from Scorpio, pursuant to the agreement entered into between them, was taxable under Section 9 (1) (i) of the Act read with the relevant provisions of the DTAA, the Court has been shown a computation of income and notes to computation filed by ESS Distribution in the original assessment proceeding. It is clearly mentioned therein that during the year in question ESS Distribution has not conducted any business with Scorpio and accordingly, there were no receipts from Scorpio. Therefore, the said reason recorded for reopening the assessment was apparently invalid. Even as regards the second reason viz., the difference between form 26 AS and the assessed income of the Assessee, all this forms part of the assessment proceeding. There was no new material for the AO to come into the conclusion that any other income arose during the AY in question that was left out from consideration. There was no nexus between the reasons to believe that income has escaped assessment and any new tangible material placed on record before the AO. As regards ESS Advertisement, there was only one reason for reopening of the assessment which is that 30% of the gross advertising revenue was assessed as an attributable income to Indian PE amounting to USD 418,939 had been left out for being considered - The determination of business income attributable to the India PE on an estimated percentage basis was deemed to have considered and taken into account all business income and expenses into its fold. There was no occasion for lifting any particular item reflected in the accounts for a specific treatment. Further the above aspect was already a part of the original assessment and there was no fresh tangible material available with the AO to form reasons to believe that any income of the Assessee escaped assessment. This order, therefore, is mere change of opinion. Existence of PE in India - Held that - When the Assessee had filed their respective returns for 2009-10 and intimation was sent under Section 143 (1) of the Act, it is difficult to believe that the Revenue was unaware of the Assessees having a PE in India particularly when in each of the other AYs the matter was contested and is pending at various levels of the hierarchy. All this goes to show that the Revenue was unable to point out any fresh tangible material which could form the basis for believing the argument on this aspect. Assessee appeal allowed.
Issues Involved:
1. Jurisdiction of the Assessing Officer (AO) under Section 144C of the Income Tax Act. 2. Validity of reopening assessments under Sections 147/148 of the Income Tax Act. 3. Difference between a partnership firm and a company for tax purposes. 4. Application of the India-Mauritius Double Taxation Avoidance Agreement (DTAA). 5. Requirement of fresh tangible material for reopening assessments. 6. Concept of "change of opinion" in reassessment proceedings. Issue-wise Detailed Analysis: 1. Jurisdiction of the AO under Section 144C of the Income Tax Act: The court noted that the Dispute Resolution Panel (DRP) had held that both ESS Distribution and ESS Advertising were not "eligible assessees" under Section 144C (15) of the Act. The AO, however, disregarded the DRP's binding directions and proceeded to pass final assessment orders. The court emphasized that the AO was bound by the DRP's order and could not unilaterally make adjustments to the income of ESS Distribution and ESS Advertising. The court held that the AO's actions were in violation of the jurisdictional limits imposed by the DRP's order and the court's previous judgment dated 23rd March 2016. 2. Validity of reopening assessments under Sections 147/148 of the Income Tax Act: The court examined the reasons for reopening the assessments for AY 2010-11 and AY 2008-09. For AY 2010-11, the court found that the reasons provided by the AO for reopening the assessment were invalid. Specifically, the AO's claim that the income from Scorpio had escaped assessment was unfounded as ESS Distribution had clearly stated that no business was conducted with Scorpio during the year in question. Additionally, the court found no fresh tangible material to support the AO's claim of a discrepancy between Form 26AS and the assessed income. For AY 2008-09, the court noted that the AO had issued a draft assessment order under Section 144C, which was impermissible in law, and there was no fresh tangible material to justify reopening the assessment. 3. Difference between a partnership firm and a company for tax purposes: ESS Distribution and ESS Advertising, both established under the laws of Mauritius, argued that they were partnership firms and not companies. The AO, however, questioned their status and treated them as foreign companies for tax purposes. The court highlighted that the DRP had accepted the distinction between a partnership firm and a company and had held that ESS Distribution and ESS Advertising were not eligible assessees under Section 144C (15) (b) of the Act. The AO's failure to adhere to this distinction was deemed "grossly illegal" by the court. 4. Application of the India-Mauritius Double Taxation Avoidance Agreement (DTAA): ESS Distribution and ESS Advertising claimed that their revenues from distribution and advertising were business profits not taxable in India under Article 7 (1) of the DTAA, as they did not have a Permanent Establishment (PE) in India as per Article 5 of the DTAA. The court acknowledged this claim and noted that the AO had not provided any valid reasons to counter this argument. The court held that the reopening of assessments based on the AO's interpretation of the DTAA was invalid. 5. Requirement of fresh tangible material for reopening assessments: The court reiterated the principle that reopening assessments under Section 147/148 of the Act requires fresh tangible material. In the case of ESS Distribution, the court found no new material to support the AO's reasons for reopening the assessment. Similarly, for ESS Advertising, the court noted that the AO's reasons were based on a mere change of opinion without any new material. The court cited the Supreme Court's decision in CIT v. Kelvinator of India Ltd., which emphasized that reassessment must be based on tangible material and not a mere change of opinion. 6. Concept of "change of opinion" in reassessment proceedings: The court emphasized that the concept of "change of opinion" cannot be a valid reason for reopening assessments. The court held that the AO's actions in reopening the assessments were based on a mere change of opinion, which is not permissible under the law. The court cited several judgments, including CIT v. Kelvinator of India Ltd. and Asian Paints Limited v. ACIT, to support this principle. Conclusion: The court quashed the notices issued to ESS Distribution and ESS Advertising under Sections 147/148 of the Act and all consequential proceedings, including the draft assessment orders passed on 19th December 2016 for AY 2010-11 and AY 2008-09. The court allowed the writ petitions filed by ESS Distribution and ESS Advertising, holding that the reopening of assessments was unsustainable in law. The court also emphasized the importance of adhering to the jurisdictional limits and the requirement of fresh tangible material for reopening assessments.
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