2024 (12) TMI 911 - HC - Income Tax

Validity of reopening of assessment - non deduction of TDS u/s 195 to foreign entities which do not have a permanent establishment ( PE ) in India - HELD THAT - As decided in order passed u/s 201(1) all transactions are done at arm's length, so assessee should not be treated as an assessee-in-default in respect of payment made by it to HMJ and its affiliates u/s 201 of the Act. Viewed in the aforesaid light, it is manifest that there would exist no justification for the continuation of the reassessment proceedings which stand impugned in the instant writ petitions. Decided in favour of assessee.

Issues Involved:
1. Legality of the reassessment proceedings initiated under Section 148 of the Income Tax Act, 1961.
2. Determination of Permanent Establishment (PE) status of foreign entities in India.
3. Applicability of tax deduction at source (TDS) obligations under Section 195 of the Income Tax Act.
4. Arm's Length Principle and its impact on tax liability.

Issue-wise Detailed Analysis:

1. Legality of the Reassessment Proceedings:
The reassessment proceedings were initiated based on notices dated 26 March 2013 and 29 March 2014 for Assessment Years 2006-07 and 2007-08, respectively. The core argument for reassessment was the alleged failure of the assessee to deduct tax at source under Section 195 of the Income Tax Act, due to payments made to foreign entities purportedly having a Permanent Establishment (PE) in India. However, subsequent legal developments, including findings from the Income Tax Appellate Tribunal (ITAT) and the Dispute Resolution Panel (DRP), indicated that the foreign entities did not have a PE in India. As a result, the court found no justification for the continuation of the reassessment proceedings and quashed the impugned notices and assessment orders.

2. Determination of Permanent Establishment (PE) Status:
The reassessment was predicated on the assertion that the foreign parent company and its affiliates had a PE in India, thereby necessitating tax deductions on payments made to them. However, both the DRP and the Supreme Court found that these entities did not have a PE in India. The absence of a PE was supported by the lack of physical presence or employees in India, as well as the findings that the activities conducted by expatriate employees were in the nature of reporting for the subsidiary and not for conducting business of the foreign entities in India.

3. Applicability of TDS Obligations under Section 195:
The court examined whether the assessee was liable to deduct tax at source on payments made to foreign entities under Section 195. The Supreme Court's ruling, which relied on the DRP's findings, established that since the foreign entities did not have a PE in India, there was no income chargeable to tax under the provisions of the Double Taxation Avoidance Agreement (DTAA). Consequently, the assessee was not obligated to deduct TDS on such payments, and the proceedings treating the assessee as an assessee-in-default under Section 201 were deemed unjustified.

4. Arm's Length Principle and Its Impact on Tax Liability:
The transactions between the assessee and its foreign affiliates were conducted at arm's length, as consistently determined by the Transfer Pricing Officer (TPO). The Supreme Court ruling in the case of Honda Motor Co. Ltd. further reinforced that once the arm's length principle is satisfied, no further profit can be attributed to a person even if it has a PE in India. This principle negated any additional tax liability for the assessee on account of these transactions, thereby invalidating the reassessment notices and proceedings.

Conclusion:
The court concluded that the reassessment proceedings lacked legal justification due to the absence of a PE for the foreign entities in India and the adherence to the arm's length principle in transactions. The impugned notices and assessment orders were quashed, and the writ petitions were allowed, effectively nullifying the reassessment actions initiated by the tax authorities.

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