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2014 (8) TMI 210 - HC - Income TaxNotice for reopening of assessment u/s 148 Reason to believe Held that - Once the AO is satisfied that a permanent establishment of the petitioner exists in India and business is being conducted from this permanent establishment, the attribution of profits is a necessary consequence - The order of TPO will not come in the way for the reason that the TPO's order is in relation to the transactions between a subsidiary company and the petitioner - where the transfer pricing analysis does not take into account all the risk taking functions of the enterprise and it does not adequately reflect the function performed and the risk assumed by the petitioner, the situation would be different and there would be a need to attribute profits to the permanent establishment for those functions/risk that have not been considered. Relying upon Dit (International Taxation) Versus Morgan Stanley And Company Inc. 2007 (7) TMI 201 - SUPREME Court - the survey was made much after the order of the TPO, which survey and documents so impounded revealed the existence of a permanent establishment of the petitioner and its business operations in India through its permanent establishment without disclosing its taxable income - the order of the TPO is not binding at the stage of issuance of notice and, in any case, it would be open to the petitioner to take a stand that the transactions with the subsidiary company and/or with the permanent establishment, being the same, no further tax could be levied thus, there was no infirmity in the issuance of the notice u/s 148 of the Act Decided against Revenue.
Issues Involved:
1. Validity and legality of the notice issued under Section 148 of the Income Tax Act, 1961. 2. Whether there was a "reason to believe" that income chargeable to tax had escaped assessment. 3. The role and impact of the Transfer Pricing Officer's (TPO) order. 4. The existence and implications of a Permanent Establishment (PE) in India. 5. The applicability of the Double Taxation Avoidance Agreement (DTAA) between India and Korea. Issue-wise Detailed Analysis: 1. Validity and Legality of the Notice Issued Under Section 148 of the Income Tax Act, 1961: The petitioner challenged the notice issued under Section 148 of the Act, arguing that the basic ingredients for assuming jurisdiction under Section 147/148 were not satisfied. The court held that the notice was valid as the Assessing Officer had tangible material to form a belief that income had escaped assessment. The court emphasized that the reasons to believe must be based on relevant and material reasons and not be arbitrary or irrational. 2. Whether There Was a "Reason to Believe" That Income Chargeable to Tax Had Escaped Assessment: The court examined whether the Assessing Officer had a rational connection or relevant bearing to form the belief that income had escaped assessment. The court cited various precedents to underline that the belief must be held in good faith and should not be a mere pretence. The court found that the Assessing Officer had valid reasons to believe that income had escaped assessment, based on the survey conducted under Section 133A of the Act and the subsequent analysis of the material uncovered. 3. The Role and Impact of the Transfer Pricing Officer's (TPO) Order: The petitioner argued that the transactions between the petitioner and its subsidiary had already been examined by the TPO and found to be at arm's length, and thus, the Assessing Officer had no jurisdiction to issue the notice under Section 148. The court held that the TPO's order was not binding at the stage of issuance of notice and that the existence of a permanent establishment and its business operations in India were discovered after the TPO's order. The court noted that the TPO's order was in relation to the transactions between the subsidiary company and the petitioner, not the permanent establishment. 4. The Existence and Implications of a Permanent Establishment (PE) in India: The court analyzed the concept of a permanent establishment under Article 5 of the DTAA and Section 92F(iiia) of the Act. The court found that the petitioner had a fixed place of business in India through its subsidiary, which constituted a permanent establishment. The court noted that the subsidiary company was not functioning independently and was dependent on the petitioner for various business operations. The court concluded that the petitioner had a business connection in India and was liable to be taxed under Section 9(1)(i) of the Act and Article 7 of the DTAA. 5. The Applicability of the Double Taxation Avoidance Agreement (DTAA) Between India and Korea: The petitioner argued that the provisions of the DTAA between India and Korea were applicable, and the transactions had already been disclosed and accepted by the tax authorities. The court held that the DTAA provisions were considered, but the existence of a permanent establishment and the business operations conducted through it warranted the attribution of profits and taxation in India. The court noted that the transfer pricing analysis needed to reflect all risk-taking functions and that the permanent establishment's activities were not merely preparatory or auxiliary. Conclusion: The court dismissed the writ petitions, upholding the validity of the notice issued under Section 148 of the Act. The court found that the Assessing Officer had valid reasons to believe that income had escaped assessment and that the existence of a permanent establishment in India warranted the attribution of profits and taxation. The court emphasized that the TPO's order was not binding at the stage of issuance of notice and that the DTAA provisions were duly considered.
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