9911796707
TMI Blog2014 (8) TMI 210X X X X Extracts X X X X X X X X Extracts X X X X ..... nd has entered into several transactions relating to sale of raw materials finished goods and has received royalty income fees for technical services, etc. These transactions have been carried out between the two companies every year since its inception. For the assessment year 2004-05, the petitioner was in receipt of royalty income and fees for technical services of which the tax due was duly deducted and deposited. The petitioner, however did not file any return of income for the period under consideration since full tax as per the provision of Double Taxation Avoidance Agreement (DTAA) had been deducted by the Indian subsidiary on such payments. On 24th June, 2010 a survey was carried out by the income tax department on the premises of the Indian subsidiary under Section 133A of the Act. In this survey statements of expatriate employees of the Indian subsidiary were recorded by the survey team. On the basis of the statement recorded, the Assistant Director of Income Tax (International Taxation), Noida formed a belief that the petitioners income was chargeable to tax in India and had escaped assessment and, accordingly, issued a notice dated 30th March, 2011 under Section 148 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remise that certain income had escaped assessment which is based on certain transactions, which has already been accepted by the TPO as having met the arm's length price. The learned Senior Counsel submitted that the assumption of jurisdiction under Section 147 of the Act can be assumed when the Assessing Officer has reasons to believe that any income chargeable to tax had escaped assessment. The learned Senior Counsel submitted that in the facts of the given case, it is established that no income chargeable to tax had escaped assessment and that the respondents were unable to cross the very threshold for assuming such jurisdiction. It was submitted that there was no new material, which had come into possession of the respondents, which could reasonably led them to infer that income chargeable to tax had escaped assessment. The learned Senior Counsel submitted that the reasons recorded was only a suspicion on the basis of which reassessment proceedings could not be initiated and, consequently, there has been a complete non-application of mind. The learned Senior Counsel submitted that it is of crucial importance to note that the said transactions between the petitioner company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering Morgan Stanley's case (supra) had committed a manifest error in holding that the prices at which the PE's transactions took place were not at arm's length without considering the order of the TPO. The learned Senior Counsel submitted that the Assessing Officer bypassing the order of the Supreme Court in Morgan Stanley's case (supra) has made a desperate attempt to justify the notice under Section 148 of the Act, which was wholly illegal and without any authority of law and contrary to the order of the TPO. The learned Senior Counsel submitted that the petitioner had entered into various transactions with its Indian subsidiary with regard to the supply of raw materials, export of finished goods and capital goods, receipts of royalty income, receipts of fees on technical services, commissions, reimbursement, etc. These transactions have been noticed by the Assessing Officer from Form 3CEB filled by the Indian subsidiary disclosing related party transactions under the provisions of Chapter X of the Act. The Indian subsidiary has already deducted the tax at source and deposited the same with the government. Thus, there could not be any escapement of income. The r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the petitioner was having a business connection as per Section 9(1)(i) of the Act and has a fixed place of business as per Article 5(1) of the DTAA. It was further submitted that this survey was carried out subsequent to the order of the TPO and that the survey findings are not part of the order of the TPO. The learned counsel submitted that the petitioner has also not filed returns for the assessment year in question raising the possibility that income had escaped assessment under the Act . The notice issued under Section 148 of the Act has only been issued on the basis of fresh materials uncovered in the course of the survey and, consequently, the Assessing Officer was within its jurisdiction and had the authority of law to issue the notice. The learned counsel submitted that the transfer pricing order does not prohibit the Assessing Officer from initiating proceedings under Section 148 of the Act. The learned counsel submitted that once it is established that there exist a permanent establishment of the petitioner in India, then any income of a non-resident, namely, the petitioner, has to be determined and profits need to be attributed and taxed in India as per the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Constitution as held in Daulatram Rawatmal v. ITO (1960) 38 JTR 301 (Cal), Jamna Lal Kabra v. ITO (1968) 69 ITR 461 (All), Calcutta Discount Co. Ltd. v. ITO (1961) 41 ITR 191 (SC), CM. Rajgharia v. ITO (1975) 98 ITR 486 (Pat) and Madhya Pradesh Industries Ltd. v. ITO (1965) 57 ITR 637 (SC). The words "has reason to believe" are stronger than the words "is satisfied". The belief entertained by the Assessing Officer must not be arbitrary or irrational. It must be reasonable or, in other words, it must be based on reasons which are relevant and material as held by the apex Court in Ganga Saran and Sons (P) Ltd. v. ITO, (1981) 130 ITR 1. The expression "reason to. believe" in Section 147 does not mean purely subjective satisfaction on the part of the Assessing Officer. The belief must be held in good faith; it cannot be merely a pretence. It is open to the Court to examine whether the reasons for the belief have a rational connection or a relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Assessing Officer in starting proceedings under Section 147 is open to challenge in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further, this Court in proceedings under Article 226 of the Constitution of India can scrutinize the reasons recorded by the AO for initiating the proceedings under Sections 147/148 of the Act. The sufficiency of the material cannot be gone into but relevancy certainly be gone into." In Hindustan Lever Ltd. Vs. R.B. Wadkar, Assistant Commissioner of Income Tax and others, 268 ITR 332, the Bombay High Court held: ". The reasons recorded by the assessing officer nowhere state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of that assessment year. It is needless to mention that the reasons are required to be read as they were recorded by the assessing officer. No substitution or deletion is permissible. No additions can be made to those reasons. No inference can be allowed to be drawn based on reasons not recorded. It is for the assessing officer to disclose and open his mind through reasons recorded by him. He has to speak through his reasons. It is for the assessing officer to reach to the conclusion as to whether there was failure on the part of the assessee to disclose fully and truly all material fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the other default of the assessee specified in that clause. Sub-section (2) of section 148 requires the Income-tax Officer to record his reasons for issuing a notice under that section and it is necessarily envisaged that he will record all the reasons he has in mind. This consideration acquires importance when the question is raised as to what were the reasons on the basis of which the Income-tax Officer invoked the jurisdiction conferred under clause (a) of section 147. To justify action by reference to clause (a) of section 147 it is not open to the Income-tax Officer, in my opinion, to refer to reasons other than those recorded by him pursuant to sub-section (2) of section 148....................................... There is no quarrel with the aforesaid proposition. The reason to believe does not mean purely subjective satisfaction on the part of the Assessing Officer. It means that the belief must be held in good faith. Further, the formation of the opinion and belief is a condition precedent without which the Assessing Officer will not have jurisdiction to initiate proceedings for reassessment. The reasons for the formation of the belief must have a rational connection, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, escaped assessment to tax for some year. If such a basis exists, the assessing authority can proceed in the manner laid down in the section. To put it differently, if there are, in fact, some reasonable grounds for the assessing authority to believe that the whole or any part of the turnover of a dealer has escaped assessment, it can take action under the section. Reasonable grounds necessarily postulate that they must be germane to the formation of the belief regarding escaped assessment. If the grounds are of an extraneous character, the same would not warrant initiation of proceedings under the above section. If, however, the grounds are relevant and have a nexus with the formation of belief regarding escaped assessment, the assessing authority would be clothed with jurisdiction to take action under the section. Whether the grounds are adequate or not is not a matter which would be gone into by the High Court or this Court, for the sufficiency of the grounds which induced the assessing authority to act is not a justiciable issue. What can be challenged is the existence of the belief but not the sufficiency of reasons for the belief. At the same time, it is necessary to obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iates visit Korea and other countries very frequently for business purposes and implement decisions taken thereof. vi) The regional headquarters in Singapore monitors each and every function of the Indian company. It provides business consultancy and financial consultancy to the Indian company. vii) The regional director visits India regularly and monitors the progress of the Indian company. It also looks after the interest of the petitioner and other affiliates in the region including India. viii) The order of raw material and finished products is placed from India on a global portal provided by the petitioner which is accessed by the India company. This proves that there is a continuity of business and the office of LGIL is nothing but an extension of the petitioner company. ix) The petitioner company has a menu card of products manufactured and launched by it. The Indian company can only import and launch those products as an independent business enterprise and cannot import or sell brands of any other company. x) The Indian company does not own the brand. The brand promoted in India is LG brand which is owned by the petitioner. In India also the brand is registered by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resident. ii) The transaction of import is not an isolated transaction but a close business connection on a regular basis. iii) The non-resident is doing business in India through its employees who are heading various divisions in the Indian company and also through employees visiting India regularly. iv) There is a close business connection in terms of the dependence of the Indian company on the non-residents for all imports as it does not have the authority or choice to make imports from any other concerns other than LG affiliates. v) The whole transaction is so intermixed that supply of equipment cannot be segregated from the supply of technology and marketing of product. Each transaction is dependent on the other and has a close nexus with India. vi) The products supplied including raw material and finished products are customized for India e.g. the sound system in television is customized for India as per the local needs. The Indian company is nothing but an extension of the Korean company. If we analyse the functioning of LG India it works as a branch of LG Korea. vii) LG India and LG Korea work as partners in business. viii) The transaction between both the parties ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axation and the prevention of fiscal evasion with respect to taxes on income, have agreed as follows: Article 5 - Permanent establishment - 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" shall include especially - (a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; and (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources. 3. The term "permanent establishment" likewise encompasses a building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only where such site, project or activities continue for a period of more than nine months. 4. Notwithstanding the preceding provisions of this article, the term "permanent establishment" shall be deemed not to include - (a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; (b) the maintenance of a stock of goods or merchandise belonging to the enterp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the enterprise on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carried on business as aforesaid the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph (3), where an enterprise of a Contracting State carried on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. 3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment including executive and general administrative expenses so incurred whether in the State in which the permanent establishment is situated or elsewhere, which are allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Morgan Stanley's case (supra) held that the definition of permanent establishment in DTAA is exhaustive whereas the definition under the Act is inclusive. Section 9 of the Act spells out the extent to which the income of non-resident, namely, the petitioner would be liable to tax in India. In the light of the aforesaid and on a perusal of the reasons recorded by the Assessing Officer, it is evident that there is a rational and in a live nexus between the reasons recorded and the belief that income had escaped assessment. Once the Assessing Officer comes to a conclusion that the petitioner has a permanent establishment and is carrying out its business activities through this permanent establishment for the purpose of supply of raw materials and finished products and that the permanent establishment was available to the employees of the petitioner, who were either permanently stationed or came to India for business purposes, we are of the view that the Assessing Officer has given valid reasons to believe that income had escaped assessment. The Court finds that once a permanent establishment comes into existence, which presupposes that business operations are being carried out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India on so much of its business profit as is attributable to the P.E. in India. The quantum of taxable income is to be determined in accordance with the provisions of the Income-tax Act. All provisions of the Income-tax Act are applicable, including provisions relating to depreciation, investment losses, deductible expenses, carry forward and set off losses etc..................................................." Once the Assessing Officer 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. The situation becomes different when the subsidiary company also works as a permanent establishment of the petitioner. Once a permanent establishment is established, the petitioner becomes liable to be taxed in India on so much of its business profits as is attributable to the permanent establishment in India. The order of the TPO is in relation with the subsidiary company and not in re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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