2015 (10) TMI 2380 - HC - Income Tax

Reopening of assessment - royalty payments received by the assessee from its Indian subsidiary (Oracle Indian Private Limited OIPL) - INDIA USA DTAA - allegation of AO that since the assessee has a Permanent Establishment (PE) in India and that the receipts by the assessee from licensing of the duplicate software has been treated as royalty the force of attraction rule would be attracted and that the income in the nature of royalty should also be attributed to the Permanent Establishment by virtue of the said rule - whether as per Section 44D no expenses would be allowable and the receipts are to be taxed as royalty under section 115A @20% in place of 15% as was done and accepted in the assessment order - Held that - In the present case, in the circumstances narrated above, it is evident that the when the Assessing Officer was examining the entire issue of royalty and its taxability the Assessing Officer must have examined Article 12 of the DTAA in its entirety, which also contained the exception mentioned in clause (6) thereof. When a regular assessment is completed in terms of Section 143(3), a presumption can be raised that such an order has been passed upon a proper application of mind. See CIT vs. Kelvinator of India Ltd 2002 (4) TMI 37 - DELHI High Court . Therefore, in our view, what the Assessing Officer is now seeking to do amounts to a clear change of opinion and that is not permissible. The escapement of income by itself is not sufficient for reopening the assessment in a case covered by the proviso to section 147 of the said Act, unless and until there was failure on the part of the assessee to disclose fully and truly all the material facts necessary for assessment. It was also made clear that unless and until the recorded reasons specifically indicated as to which material fact or facts was/were not disclosed by the petitioner in the course of the original assessment under section 143(3), there could not be any reopening of assessment. See Swarovski India Pvt. Ltd. Vs. Deputy Commissioner of Income Tax (2014 (9) TMI 4 - DELHI HIGH COURT) - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the notices under Section 148 of the Income Tax Act, 1961.
2. Allegation of change of opinion by the Assessing Officer.
3. Fulfillment of pre-conditions under the first proviso to Section 147 of the Income Tax Act, 1961.
4. Failure to disclose fully and truly all material facts necessary for assessment.

Issue-wise Detailed Analysis:

1. Validity of the notices under Section 148 of the Income Tax Act, 1961:
The writ petitions challenge the notices issued under Section 148 for the assessment years 2002-03 and 2003-04. The notices were issued on 10.12.2008 and 22.09.2008, respectively. The orders disposing of the objections were passed on 11.09.2009. The primary contention against these notices is that they are based on a change of opinion and that the pre-conditions under the first proviso to Section 147 have not been satisfied.

2. Allegation of change of opinion by the Assessing Officer:
The petitioner argues that the notices are based on a change of opinion. The original assessment under Section 143(3) was completed on 28.03.2005. The reasons recorded for reopening the assessment focus on the royalty payments received by the assessee from its Indian subsidiary. The Assessing Officer now contends that the royalty should be taxed at 20% instead of 15% due to the "force of attraction rule." The court notes that the original assessment had already examined the attribution of income to the Permanent Establishment (PE) and had taxed the royalties at 15% under Article 12 of the DTAA. The court concludes that the Assessing Officer's current stance amounts to a change of opinion, which is not permissible.

3. Fulfillment of pre-conditions under the first proviso to Section 147 of the Income Tax Act, 1961:
The court examines whether the pre-conditions for reopening the assessment under the first proviso to Section 147 have been met. The proviso requires that there must be a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. The recorded reasons for reopening do not specify any material fact that was not disclosed by the assessee. The court cites previous judgments, including CIT vs. Usha International Ltd. and CIT vs. Kelvinator of India Ltd., to support the view that a change of opinion does not justify the reopening of an assessment.

4. Failure to disclose fully and truly all material facts necessary for assessment:
The court finds that the Revenue has not pointed out any specific material fact that the assessee failed to disclose. The reasons recorded for reopening the assessment are based on the same facts that were before the Assessing Officer during the original assessment. The court refers to the decision in Swarovski India Pvt. Ltd. Vs. Deputy Commissioner of Income Tax, which states that the escapement of income alone is not sufficient for reopening an assessment unless there is a failure to disclose material facts fully and truly.

Conclusion:
The court concludes that both writ petitions must succeed on both counts. The impugned notices under Section 148 and all proceedings pursuant thereto, including the orders disposing of the objections, are quashed. There is no order as to costs.