2018 (2) TMI 249 - AT - Income Tax

Reopening of assessment u/s 147 - reasons to believe - Held that - In the absence of any tangible material establishing escapement of income in the hands of assessee, the AO has erred in exercise of jurisdiction under section 147 of the Act by reopening assessment after recording reasons. The reasons to believe of escapement of income should have a live link with the tangible material and even if the assessment order was passed u/s 143(1) the requirement is for the AO to come to a finding on the basis of tangible material to establish his case of reason to believe of escapement of income; in the absence of which, re-assessment proceedings are both invalid and bad in law. Accordingly, we hold so and cancel the re-assessment proceedings initiated in the case of assessee, the consequent order passed under section 143(3) r.w.s. 147 of the Act does not stand. Thus, the ground of appeal No.1 raised by the assessee is allowed.

Issues Involved:

1. Reopening of assessment under section 147 of the Income-tax Act, 1961.
2. Taxation of receipts for IT Support services as Royalty under Article 12 of the India-Sweden Double Taxation Avoidance Agreement (DTAA).
3. Taxation of receipts for IT Support services as Fees for Technical Services (FTS) under Article 12 of the India-Sweden DTAA.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 147 of the Act:

The primary issue was whether the reopening of assessment under section 147 was valid. The assessee contended that the reopening was invalid due to the absence of any tangible material. The Assessing Officer (AO) had reopened the assessment based on the information from Form No.3CEB of Sandvik Asia Ltd., which indicated that the assessee received ?8,072,286 as IT Support Services, not offered to tax.

The Tribunal noted that the AO had relied on the same reasons for reopening assessments for multiple years, all dated 26.07.2013. The Tribunal referred to its previous decisions, including in the case of Sandvik Systems Development AB and Sandvik Information Technology AB, where it was held that reopening based on the same information available during the original assessment was invalid. The Tribunal emphasized that for reopening to be valid, there must be new tangible material indicating escapement of income.

The Tribunal concluded that the AO had no new information or tangible material to justify the reopening of the assessment. The reasons recorded for reopening were based on information already disclosed by the assessee in the original return of income and Form No.3CEB. The Tribunal held that the reopening of the assessment was invalid and bad in law, as the AO did not have a valid reason to believe that income had escaped assessment.

2. Taxation of Receipts for IT Support Services as Royalty:

The second issue was whether the receipts for IT Support services provided to Indian affiliates should be taxed as Royalty under Article 12 of the India-Sweden DTAA. The AO had categorized these receipts as Royalty, but the assessee argued that the payments were for the use of a copyrighted article and did not constitute Royalty as per the DTAA.

The Tribunal did not delve into the merits of this issue because it had already concluded that the reopening of the assessment was invalid. Therefore, the addition made by the AO on this ground was rendered academic and was not adjudicated.

3. Taxation of Receipts for IT Support Services as Fees for Technical Services (FTS):

The third issue was whether the receipts for IT Support services should be taxed as Fees for Technical Services (FTS) under Article 12 of the India-Sweden DTAA. The AO had also categorized these receipts as FTS, but the assessee contended that the services provided did not fall within the definition of FTS under the DTAA.

Similar to the second issue, the Tribunal did not address the merits of this issue due to its conclusion that the reopening of the assessment was invalid. Consequently, the addition made by the AO on this ground was also rendered academic and was not adjudicated.

Conclusion:

The Tribunal allowed the appeals of the assessee, holding that the reopening of the assessments under section 147 was invalid due to the absence of new tangible material. As a result, the consequential orders passed under section 143(3) r.w.s. 147 were also invalid. The other grounds of appeal regarding the taxation of receipts as Royalty or FTS were rendered academic and were not adjudicated.

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