2024 (11) TMI 368 - HC - Income Tax

Revision u/s 263 - AO had not conducted the necessary inquiries and verified the facts for accepting the assessee s claim that its income was not chargeable to tax under the Act by virtue of the DTAA - HELD THAT - A plain reading of the SCN indicates that the CIT had called upon the petitioner to show cause why the proceedings u/s 263 of the Act not be taken in view of what was stated to be the failure on part of the AO to conduct the necessary enquiries. CIT had faulted the AO for not undertaking certain enquiries including verifying whether the assessee has a PE in India; whether in terms of Section 9(1)(vii) of the Act, the income is chargeable as fees for technical services (FTS); whether TDS at the rate of 10% on all the remittances made to the assessee were deducted; whether the condition as set out in Article 12 of the DTAA in regard to taxation of FTS were satisfied. In a similar vein, the learned CIT had also faulted the AO for not making enquiries regarding the commercial substance of the assessee in Singapore and whether it was a conduit company form for obtaining the tax benefits under the DTAA. The said observations were made only for the purposes of calling upon the assessee to show cause why the proceedings not be initiated u/s 263 of the Act. However, thereafter, the learned CIT had not put the issue regarding treaty shopping to the assessee. Undisputedly, the tentative opinion formed by the learned CIT that the assessee was a conduit company for the reasons as articulated in the order dated 25.03.2022, was not put to the assessee. Clearly in the circumstances, the assessee had not given any opportunity to satisfy the learned CIT regarding its view, which has found its way in the aforesaid order of the learned CIT s conclusion. We are unable to find any fault with the decision of ITAT in setting aside the order dated 25.03.2022 on the ground that the assessee was not afforded an opportunity to counter the allegation that it was a conduit company without any substance.

Summary

Issues:
1. Appeal against ITAT order under Section 260A of the Income Tax Act, 1961.
2. Interpretation of India-Singapore Double Taxation Avoidance Agreement (DTAA).
3. Allegations of tax avoidance and treaty shopping by the assessee.
4. Failure to afford the assessee an opportunity to rebut allegations.

Analysis:
1. The Revenue filed an appeal under Section 260A of the Income Tax Act against an ITAT order regarding the assessment year 2017-18. The appeal challenged the ITAT's decision in favor of the assessee, a Singapore-based company claiming benefits under the India-Singapore DTAA for income received from technical support and product sales in India.

2. The core issue revolved around the interpretation of the DTAA and whether the assessee was eligible for tax benefits under it. The CIT initiated proceedings under Section 263, alleging that the assessee structured its operations for tax avoidance and treaty shopping. The CIT contended that the assessee's arrangement was a conduit for tax avoidance, exploiting the DTAA to evade taxation in India and other jurisdictions.

3. The CIT's order highlighted the complex corporate structure involving entities in the USA, Jersey, Singapore, and India, aiming to minimize tax liabilities. The CIT concluded that the assessee's transactions were structured to avoid taxes by leveraging the DTAA and mischaracterizing income as business income to evade tax obligations in India and other jurisdictions.

4. The ITAT allowed the assessee's appeal, criticizing the CIT for not providing the assessee with an opportunity to counter the allegations of being a conduit company for tax avoidance. The High Court concurred with the ITAT's decision, emphasizing the importance of affording the assessee a fair chance to address the allegations before drawing conclusions.

5. Ultimately, the High Court dismissed the Revenue's appeal, finding no legal question warranting further examination. The judgment underscored the necessity of due process and fair opportunity for parties to respond to allegations in tax proceedings, ensuring procedural fairness and upholding principles of natural justice.