2014 (4) TMI 976 - HC - Income Tax

Jurisdiction for re-opening of notice u/s 148 of the Act - Assessee in default u/s 201(1) of the Act Non-deduction of TDS u/s 195(2) of the Act - Whether any income arose or accrued to SEC through its PE in India in respect of the sales made in India Held that - The answer in our opinion should be in the negative, because even as per the revenue, as reflected in the order passed by the DRP in the reassessment proceedings of SEC, no income accrued to SEC in India - the DRP rejected the specific request made by that AO in his remand report that the assessee be treated as the PE of SEC and the income of SEC be computed on that basis - as regards attribution of income to the fixed place PE , a rough and ready basis would be to estimate 10% of the salary paid to the expat-employees of the assessee as the mark-up, as was done by the AO in the draft assessment order - The remuneration cost in respect of such employees seconded to the assessee amounted - this was taken as the base and a mark-up of 10% had been applied by the assessing officer and the income was taken - This was approved by the DRP in its order, the other claims made by the AO in the remand report were rejected. The basis of both the notices has been knocked out of existence by the DRP s order in the reassessment proceedings of SEC for the same assessment year- On the date on which notices were issued to the petitioner u/s 148 and 201(1)/(1A), there was an uncontested finding by the revenue authorities in the case of SEC that SEC cannot be taxed in respect of the sales made in India through the assessee on the footing that the assessee is its PE - If no income arose to SEC on account of sales in India since the petitioner cannot be held to be its PE in India, two consequences follows that the payments made by the petitioner to SEC for the goods are not tax deductible u/s 195(2) and they were rightly allowed as deduction in the original assessment of the petitioner and the assessee cannot be treated as one in default u/s 201(1) and no interest can be charged u/s 201(1A - the notice u/s 201 is a verbatim reproduction of the remand report of the assessing officer in SEC s case filed before the DRP thus, both the notices u/s 148 and section 201(1)/(1A) of the Act set aside Decided in favour of Assessee.

Summary

Issues Involved:
1. Jurisdiction to reopen the assessment under section 148 of the Income Tax Act, 1961.
2. Treatment of the petitioner as an "assessee in default" under section 201(1) for not deducting tax under section 195(2) and recovery of interest under section 201(1A).

Issue-wise Detailed Analysis:

1. Jurisdiction to Reopen the Assessment under Section 148:

The petitioner, a private limited company in India and a wholly-owned subsidiary of Samsung Electronics Ltd. (SEC) in South Korea, challenged the reopening of its assessment for the assessment year 2006-07. The original return was filed on 29-11-2006, and the assessment was completed without disallowing payments made to SEC under section 40(a)(i). A survey conducted on 24-6-2010 led to the reopening of SEC's assessment on 28-3-2011, based on the assertion that SEC had a "fixed place PE" and a "dependent agent PE" in India. This survey also triggered a notice to the petitioner on 25-4-2011, seeking details of payments made to SEC and other associated enterprises.

The court noted that the DRP, in its order dated 29-9-2012, had concluded that no income accrued to SEC from sales made in India through the petitioner. The DRP's order, which attained finality, rejected the claim that the petitioner was the permanent establishment (PE) of SEC. Consequently, the court held that the reopening of the petitioner's assessment under section 148 was without jurisdiction, as there was no fresh tangible material implicating the petitioner after the original assessment.

2. Treatment as an "Assessee in Default" under Section 201(1) and Recovery of Interest under Section 201(1A):

The petitioner contended that since the revenue had determined in SEC's reassessment proceedings that no income accrued to SEC from sales made by the petitioner, it was not liable to deduct tax under section 195(2). Therefore, it could not be treated as an "assessee in default" under section 201(1), and no interest was chargeable under section 201(1A).

The court agreed with the petitioner, noting that the DRP's order in SEC's reassessment proceedings had concluded that no income arose to SEC in India from sales made through the petitioner. As a result, the payments made by the petitioner to SEC were not tax deductible under section 195(2), and the petitioner could not be treated as an "assessee in default" under section 201(1). Consequently, the notice under section 201(1)/(1A) was also quashed.

Decision:

The court concluded that both the notices under section 148 and section 201(1)/(1A) were invalid. The basis for reopening the assessment and treating the petitioner as an "assessee in default" had been nullified by the DRP's order in the reassessment proceedings of SEC. Therefore, the writ petitions were allowed, and the notices were quashed. No order as to costs was made.