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TMI Blog2019 (6) TMI 932X X X X Extracts X X X X X X X X Extracts X X X X ..... t an annulment of the assessment order. If by such an adjustment, the assessment order is annulled in its entirety, setting aside the tax levied on income, then the arguments of the petitioners can hold good prohibiting the authorities to invoke the penal proceedings irrespective of any explicit finding regarding the penal consequences in the order of MAP. However, in the present set of facts, such a situation would not arise in view of the adjustment made to certain extent in the order passed under Rule 44H(5), implementing the order of MAP reducing the transfer pricing adjustment to ₹ 91,80,00,000/- as against ₹ 240,11,91,692/-. The onus lies on the assessee to establish that the said addition now finally decided by MAP is not due to concealment of income or furnishing of inaccurate particulars and moreover, the computation was made under Section 92C in the manner prescribed under that Section, in good faith and with due diligence. At the same time, Explanation 7 would not empower the concerned authorities to levy penalty automatically for such transactions. A decision has to be taken by the authorities after application of mind. These aspects involving questions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refund. In W.P.No.56348/2015, the petitioner has challenged the notice dated 27.10.2015 issued under Section 274 read with Section 271 [1][c] of the Income Tax Act, 1961 relating to the assessment year 2005-06. 2. The facts relating to W.P.No.57865/2015 are as under: The petitioner is engaged in the business of manufacture and trade of passenger cars and multi-utility vehicles and is a subsidiary of Toyota Motor Corporation, Japan. For the assessment year 2006-07, the petitioner filed return of income on 22.11.2006. Pursuant to the same, notice was issued under Section 143[2] of the Income Tax Act, 1961, [ Act for short] as the transactions entered into by the petitioner included international transaction with the associated enterprises, the matter was referred to the Transfer Pricing Officer for the purpose of computation of Arms Length Price [ALP]. Respondent No.6 in exercise of power under Section 92[CA] of the Act was pleased to pass an order determining the shortfall for adjustment. The Assessing Authority passed a draft order of assessment and objections were filed by the petitioner to the same before the Dispute Resolution Panel contending that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 271[1][c] of the Act. 5. Aggrieved by the said imposition of penalty, the petitioner preferred an appeal before the Appellate Authority under Section 246A of the Act challenging the order on merits. In addition to the same, the petitioner has filed the present petition challenging the Constitutional validity of Section 271[1][c] along with Explanation 7 of the Act in so far as the same being applied to mutual agreement between sovereign Nations by virtue of conventions or avoidance of double taxations. The refund has been sought in as much as the recovery of ₹ 30,89,98,800/-towards penalty as the imposition of penalty is wholly illegal and also unconstitutional. 6. Learned Senior Counsel Sri.Naganand representing the learned counsel for the petitioner argued that basic initiation of penalty proceedings is wrong by virtue of the final, conclusive decision of the MAP order which was enforced, culminating in the assessment order in terms of Rule 44H[4] and [5] of the Income Tax Rules, 1962 [ Rules for short] on the basis of the negotiations and concessions made by two sovereign states. It was argued that in the absence of any pre-determined penalty in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income Tax; 2. [2013] 359 ITR 565 [Karn] Commissioner of Income-tax and Another V/s. Manjunatha Cotton and Ginning Factory and Others; 3. 1992 SCC OnLine Kar 400 Commissioner of Income-Tax V/s. R.M.Muthaiah; 4. [2004] 10 SCC 1 Union of India and Another V/s. Azadi Bachao Andolan and Another; 5. [2013] SCC OnLine Del 4694 Director of Income Tax V/s. Infrasoft Ltd.,; 6. [2011] 1 SCC 1 Brij Lal V/s. Commissioner of Income Tax, Jalandhar; 7. [2017] 5 SCC 517 National Securities Depository Limited V/s. Securities and Exchange Board of India; 9. Learned counsel Sri.K.V.Aravind appearing for the Revenue contended that Section 4 of the Act creates a charge on the total income of the previous years of every person. Section 5 of the Act deals with the total income of resident assessee and non-resident assessee. Section 9 of the Act deals with the deemed income in India in respect of non-residents. It was submitted that MAP is a mechanism for resolution of disputes to the extent provided under the terms and conditions of the treaty. The basic purpose of MAP is alleviation of economic doub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation not in accordance with the provisions of this Convention. Any agreement reached shall be implemented notwithstanding any time limits in the domestic laws of the Contracting States. 3. The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of this Convention. They may also consult together for the elimination of double taxation in cases not provided for in this Convention. 4. The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement in the sense of the preceding paragraphs of this article. 13. Resolution dated 06.05.2015 has been arrived at under the said Article 25 of the India-Japan Double Taxation Avoidance Convention read with Section 90 of the Act and the same is extracted hereunder: Resolution under Article 25 of the India- Japan Double Taxation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... territory, as the case may be, or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or (c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 90(a) of the Income-tax Act also refers to the granting of relief in respect of income on which Income-tax has been paid both under the said Act and under the Income-tax Act of the other country. Similarly, clause (b) also refers to the avoidance of double taxation. We are not concerned with the other clauses of section 90 in the instant case. In other words, the parties to an agreement to avoid double taxation is to grant relief to the assessee in case the law of two countries operates on the same income and the assessee may have to pay tax in both countries. The Revenue s contention in the instant case is entirely based on sections 4 and 5. But these provisions shall have to be read subject to the provisions of the agreement in question. The agreement in question, by necessary implication, takes away the power of the Indian Government to levy tax on the income in respect of certain categories as per articles 6, 7, 8, 9, 10, 11, etc., of the agreement. In case the income from a source is not covered by any of the provisions of the agreement, then the provisions of sections 4 and 5 of the Income-tax Act would operate on the said income and the tax certainly could be levied by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Finance Act, 1972 (Act 16 of 1972) modified section 90 and brought it into force with effect from 1.4.1972. The object and scope of the substitution was explained by a circular of the Central Board of Taxes (No.108 dated 20.3.1973) as to empower the Central Government to enter into agreements with foreign countries, not only for the purpose of avoidance of double taxation of income, but also for enabling the tax authorities to exchange information for the prevention of evasion or avoidance of taxes on income or for investigation of cases involving tax evasion or avoidance or for recovery of taxes in foreign countries on a reciprocal basis. In 1991, the existing section 90 was renumbered as sub-section(1) and subsection( 2) was inserted by Finance Act, 1991 with retrospective effect from April 1, 1972. CBDT Circular No. 621 dated 19.12.1991 explains its purpose as follows: 43. Taxation of foreign companies and other non- resident taxpayers Tax treaties generally contain a provision to the effect that the laws of the two contracting States will govern the taxation of income in the respective State except when express provision to the contrary is made in the trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision of the agreement can possibly fasten a tax liability where the liability is not imposed by this Act; (ii) if a tax liability is imposed by this Act, the agreement may be resorted to for negativing or reducing it; (iii) in case of difference between the provisions of the Act and of the agreement, the provisions of the agreement prevail over the provisions of this Act and can be enforced by the appellate authorities and the court. 27. In Arabian Express Line Ltd. of United Kingdom and Others v. Union of India [1995] 212 ITR 31 [Guj], the Gujarat High Court, interpreting section 90, in the light of circular No.333 dated April 2, 1982 issued by the CBDT, held that the procedure of assessing the income of a NRI because of his occasional activities in establishing business in India would not be applicable in a case where there is a convention between the Government of India and the foreign country as provided under Section 90 of the Income-tax Act, 1961. In case of such an agreement, section 90 would have an overriding effect. Interestingly, in this case a certificate issued by the H.M. Inspector of Taxes certifying that the company was a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 90 confers the power on the Central government to enter into any agreement with the government of another country for granting relief to an Assessee who has paid income tax under this Act and also income tax in that other country and also in respect of income tax which is chargeable under this Act and under the corresponding law of that country. This has been done with a view to promote mutual economic relations, trade and investment and for avoidance of double taxation of income under this Act as well as the act of the said contracting country. Section 90 (2) lays down that where the Central Government has entered into an agreement with the government of any other country for granting relief of tax or for avoidance of double taxation, then the provisions of this Act shall apply to the Assessee only to the extent that they are more beneficial to the said Assessee. In case the provisions of this Act are more onerous and burdensome then the provisions of this Act would not apply and the Assessee would be governed squarely by the provisions of the double taxation avoidance agreement. And further in para 40, it has held that: 40. Thus, where a Double Taxation Avoidance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eads as under: 60. The penalty proceedings are distinct from assessment proceedings, and independent therefrom. The assessment proceedings are taxing proceedings. The proceedings for imposition of penalty though emanating from proceedings of assessment are independent and separate aspects of the proceeding. Separate provision is made for the imposition of penalty and separate notices of demand are made for recovery of tax and amount of penalty. Also separate appeal is provided against order of imposition of penalty. Above all, normally, assessment proceedings must precede penalty proceedings. Assessee is entitled to submit fresh evidence in the course of penalty proceedings. It is because penalty proceedings are independent proceedings. The assessee cannot question the assessment jurisdiction in penalty proceedings. Jurisdiction under penalty proceedings can only be limited to the issue of penalty, so that validity of the assessment or reassessment in pursuance of which penalty is levied, cannot be the subject matter in penalty proceedings. It is not possible to give a finding that the re-assessment is invalid in such penalty proceedings. Clearly, there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessment Officer to initiate the proceedings because of the deeming provision contained in Section 1(B). h) The said deeming provisions are not applicable to the orders passed by the Commissioner of Appeals and the Commissioner. i) The imposition of penalty is not automatic. j) Imposition of penalty even if the tax liability is admitted is not automatic. k) Even if the assessee has not challenged the order of assessment levying tax and interest and has paid tax and interest that by itself would not be sufficient for the authorities either to initiate penalty proceedings or impose penalty, unless it is discernible from the assessment order that, it is on account of such unearthing or enquiry concluded by authorities it has resulted in payment of such tax or such tax liability came to be admitted and if not it would have escaped from tax net and as opined by the assessing officer in the assessment order. l) Only when no explanation is offered or the explanation offered is found to be false or when the assessee fails to prove that the explanation offered is not bonafide, an order imposing penalty could be passed. m) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed thus: 23. Descriptively, it can be stated that assessment in law is different from assessment by way of settlement. If one reads section 245D(6) with section 245I, it becomes clear that every order of settlement passed under section 245D(4) shall be final and conclusive as to the matters contained therein and that the same shall not be reopened except in the case of fraud and misrepresentation. Under section 245F(1), in addition to the powers conferred on the Settlement Commission under Chapter XIX-A, it shall also have all the powers which are vested in the income tax authority under the Act. In this connection, however, we need to keep in mind the difference between procedure for assessment under Chapter XIV and procedure for settlement under Chapter XIX-A (see section 245D). Under section 245F(4), it is clarified that nothing in Chapter XIX-A shall affect the operation of any other provision of the Act requiring the applicant to pay tax on the basis of self-assessment in relation to matters before the Settlement Commission. 26. It is thus held that the nature of the orders under Section 143 and 144 is different from the orders of the Settlement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthority has set aside the order levying penalty, the Tribunal correctly appreciated the facts in a proper perspective and was justified in not interfering with the order of the appellate authority in setting aside the penalty order. 29. Thus, it is clear that unless a specific provision is made in the Double Taxation Avoidance Agreement in as much as penalty is concerned, the provisions of Section 271[1][c] of the Act shall continue to apply or in other words, where a specific provision is made in the DTA Agreement, waiving of penalty, the same shall prevail over the penalty provisions of the Income Tax Act are concerned. Only in such circumstances, Section 271 [1] [c] of the Act cannot be invoked. Merely for the reason that Article 253 of the Constitution of India provides for enacting any law for implementing any agreement, treating or convention with foreign countries and Section 90 is engrafted to avoid Double Taxation it cannot be held that Section 271[[1][c] of the Act is ultravires the constitution as far as levy of penalty subsequent to passing of the order under Section 44(G) and (H) of the Rules. The competency of the legislature to levy penalty under Section 27 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . At the same time, Explanation 7 would not empower the concerned authorities to levy penalty automatically for such transactions. A decision has to be taken by the authorities after application of mind. These aspects involving questions of fact requires to be considered by the Authorities concerned and rightly the petitioner has preferred an appeal against the penalty proceedings in W.P.No.57865/2015. Since the notice issued under Section 271[1][c] of the Act being challenged in W.P.No.56348/2015, the petitioner is at liberty to file objections/reply to the notice impugned within a period of two weeks from the date of receipt of certified copy of the order. If such reply/objections are filed as aforesaid, the same shall be considered by the Assessing Officer in accordance with law in an expedite manner. Hence, the following. ORDER i) Section 271(1)(C) of the Income Tax Act, 1961 is held intra vires the constitution in so far as imposing of penalty on amounts determined pursuant to Convention for avoidance of Double Taxation between Union of India and other sovereign countries which is enforced in Indian territory by Section 90 of the Income Tax Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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