2024 (6) TMI 277 - HC - Income Tax

Validity of reassessment proceedings - Taxability of income without Permanent Establishment in India under India-Japan DTAA - income from sale/trade of the canned software - HELD THAT - We find ourselves unable to sustain the initiation of reassessment action bearing in mind the evident failure on the part of the respondent to deal with the fundamental challenge to reassessment as were raised by the petitioner. As would be evident from a perusal of the reply which was submitted to the Section 148A (b) notice, the petitioner had specifically alluded to the judgment rendered in Engineering Analysis Centre of Excellence (P.) Ltd 2021 (3) TMI 138 - SUPREME COURT to contend that the monies received from the sale/re-sale of shrink-wrapped software would not amount to royalty so as to be taxable. It had additionally also questioned the initiation of action based on its assertion of no PE existing in India. As is evident from order u/s 148A (d) those objections have been perfunctorily disposed of with the respondent observing that whether the revenue earned from the sale of software would amount to royalty would require further verification. Similarly, while dealing with the issue of PE it has chosen to observe that the same is a question of fact and law and hence need to be verified . The respondent has clearly failed to deal with objections which struck at the very root of assumption of jurisdiction. Findings on the aspect of royalty and PE could not have been deferred or made subject matter of further verification. This since at the stage of initiating action under Section 148, the respondent must be subjectively satisfied that income which was taxable has in fact escaped assessment. This aspect of criticality has clearly been ignored by the respondent while passing the impugned order. We allow the instant writ petition and quash the order passed u/s 148A (d) and notice u/s 148 - Decided in favour of assessee.

Summary

Issues:
Challenging reassessment under Section 148 of the Income Tax Act, 1961 based on alleged unexplained income and lack of Permanent Establishment (PE) in India.

Analysis:
1. The writ petitioner contested the reassessment initiated under Section 148 of the Income Tax Act, challenging the notice issued on 28 March 2024, referring to a previous notice under Section 148A (b) dated 24 February 2024, based on information from the Non-Filing Monitoring System for Assessment Year 2020-21.

2. The respondents alleged unexplained income of INR 6,52,46,913 due to payments made to the petitioner with tax deducted at source. The petitioner, an overseas entity engaged in software supply, argued that its income, even if viewed as business income, is not taxable without a PE in India, invoking the India-Japan Double Taxation Avoidance Agreement (DTAA).

3. The petitioner's reply emphasized its non-taxable income under the DTAA, citing judgments like Director of Income-tax vs. Organ Stanley & Co. and others, asserting that without a PE, business income from Indian customers is not taxable in India.

4. Despite the petitioner's contentions, the respondent observed a lack of evidence substantiating the nature of software sold, the taxability of royalty income, and the existence of a PE, stating that the income claimed as exempt needed verification through filing the Income Tax Return (ITR).

5. The High Court found the respondent's failure to address the fundamental challenges raised by the petitioner, notably regarding the taxability of income without a PE and the nature of software sales. The respondent's cursory dismissal of these objections without proper examination was deemed inadequate.

6. Consequently, the High Court allowed the writ petition, quashing the reassessment order and notice under Section 148, directing the matter to be reconsidered by the Assessing Officer from the stage of the petitioner's reply, keeping all rights and contentions open for both parties.