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TMI Blog2021 (5) TMI 881X X X X Extracts X X X X X X X X Extracts X X X X ..... it against the show cause notice may be entertained, however on certain limited grounds. A writ against the show cause notice is entertained only to ascertain whether the show cause notice has been issued by the competent authority or if there is any lack of jurisdiction. Even in other cases, where a mala fide intention is raised, then also a writ against the show cause notice may be entertained. Regarding the disputed facts, circumstances and evidences, no writ can be entertained against a show cause notice. The petitioner cannot be permitted to adjudicate the disputed facts and circumstances in a writ proceedings with reference to the documents and evidences. Such an exercise is to be done by the authorities competent by examining the evidences and the documents and by affording opportunity to the persons concerned. The law is settled regarding the entertainability of the writ petition against a show cause notice, so also the notice issued under Section 148 of the Act. In both the cases, it is to be construed that the facts are to be adjudicated. However, if the petitioner is able to establish that the proceedings are initiated without jurisdiction or authority, then alon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the impugned show cause notice throws light on the issue and therefore, this Court has no hesitation in forming an opinion that there are prima facie materials and evidences enough to proceed against the petitioner under the provisions of the IT Act. The contentions in the impugned show cause notice alone cannot be a conclusive factor and all such facts, circumstances as well as the documents and evidences collected and recorded in the impugned show cause notice are to be adjudicated elaborately by the authorities competent by affording opportunity to the petitioner, Thus, the petitioner is bound to avail the opportunity in order to defend their case. The petitioner may not make an attempt to escape from the clutches of law based on unsustainable grounds, which all are not substantiated. Sanction under Section 151 - Department able to establish that the sanction as contemplated under Section 151 has been granted by the competent authority and further regarding the plea that the petitioner has not been assessed in India, the said facts are controverted by the Department by placing evidences and materials and the details. All those materials and evidences were analysed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for quashing of the notices issued under Section 148 of the Income Tax Act, 1961 (hereinafter referred to as the Act ) for assessment. The consequential proceedings issued in continuation of Section 148 notices are also under challenge. 2.Since the facts are identical in all the writ petitions, W.P.No.8100 of 2015 is taken as the lead case and the facts of the case are as follows:- 2.1.The petitioner-company, Watanmal Boolchand Co. Ltd., is a body incorporated in Hong Kong under the Companies Ordinance 1932, that is, relevant Laws of Hong Kong. The petitioner-company was incorporated in the year 1948. The petitioner-company is engaged in the trading business and branded and unbranded products and general merchandise. The brands are owned by the petitioner-company either by way of Brand Registration or Assignments. It has no manufacturing facility of its own. The petitioner-company sources the goods mainly from China and shifts the goods directly to its customer at Africa and South America. The petitioner-company is continuing its business in Hong Kong since 1948. 2.2.One of the group companies of the writ petitioner-company, viz., Watanmal (India) Private ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, the business connection through Watanmal India constitutes the Agency Permanent Establishment for the petitionercompany in India and again asked the petitioner company to file a return of income for the assessment year 2006-07 under Section 148 of the Act. The jurisdictional TPO based on the reference made by the Assessing Officer, by order dated 07.05.2014 while making assessment for Watanmal India for the assessment year 2006-07, determined the arm's length price between the petitioner-company and Watanmal India, both being associated enterprises in terms of Section 92C of the Act. Based on the information provided by Watanmal India and comparable price determined, the TPO adopted profit margin of 21.94% in place of claim of 7.63% by Watanmal India. As a consequence, an upward adjustment to the tune of ₹ 30,59,033/- was made to the sales/revenues of Watanmal India. In other words, arm's length price of the transaction between the petitioner-company and Watanmal India was determined and income in the hands of Watanmal India was increased. The order of the TPO as per the provisions of Section 92CA(3) of the Act is binding on the first respondent. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Tax Act, 1961 in particular etc. These factual aspects and analysis ought not to be undertaken in a writ proceedings and hence, this Court may record the petitioner to statutory remedies available to them under the Act by dismissing the writ petition. 3.2.The counter affidavit further proceeds without prejudice to the above contentions stating that the Watanmal Group was established in 1908 by late Shri.Lalchand Watanmal with the scope to have its business activity as a general merchandise trading company. In 1948, a company named Watanmal Boolchand Company Ltd. (hereinafter referred to as WBC ), the petitioner was incorporated in Hong Kong. Till the year 2004, the principal activity of the company remained import and export of general merchandise. Subsequently, WBC forayed into the branded food market segment, a move that has been profitable for the group. A lion's share of the company's revenue today comes from this category. The group owns the brand names Gino, Jago, Pomo, Palmo and Forte. The company's turnover has ranged from USD 239Mn to USD 450Mn since the foray into the branded segment. It was at this juncture in 2003, the Watanmal Group started a com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; (iii) The other salient features of the revised Trade Service Agreement are as follows:- (a) The Second Party, i.e., WIPL undertakes to the First Party that during the duration of this Agreement and a further one year after expiration or termination of this Agreement, the Second Party shall not whether directly or indirectly through association or partnership or cooperation in any form with any third party including taking shareholding in a company provide similar service to any other persons or companies trading in or selling products in corporation with the products to or in the African Market; and (b) This Agreement constitutes the whole and complete agreement between the Parties and supersedes all prior discussions and agreements if any between the Parties with respect to the subject matter of this agreement. 3.4.These functions were omitted to be mentioned by the petitioner in their affidavit. It is also to be noted that based on the above agreement, the petitioner-company preferred an application for Advance Ruling before Inland Revenue Department, Hong Kong pleading as under:- WIP did in fact have the general authority to negotiate an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingapore) and Mr.Ganapathy Viswanathan (based in India). There are no staff in Hong Kong responsible for negotiation and conclusion of sales or purchases of branded food products (See para 4 below) there are no staff in Hong Kong. Kingly note that Mr.Sakraney N.L (based in Hong Kong) is only responsible for the negotiation and conclusion of sales or purchases of non-branded food products in Hong Kong, the profits of which are classified as on shore and offered to Hong Kong profits tax. 3.7.On analysis of the above, the following inferences are brought to the notice of this Court:- (a) Shri N.L.Sakraney based in Hong Kong was responsible for unbranded products; (b) Shri K.L.Sakraney and Ganapathy Viswanathan, i.e., significant component of management, sitting in India were responsible for the branded products division; and (c) Inland Revenue Authority, Hong Kong while arriving at the conclusion as mentioned by the petitioner in Point No.6 of the affidavit, as the trading profits arising from the sale of branded food products to customers overseas are offshore in nature and are not chargeable to Hong Kong profits tax , has been cognizance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above, they are overruled and rejected and the same are elaborately discussed and communicated to the petitioner vide office letter dated 05.12.2017. 3.10.The notice under Section 148 of the IT Act was issued to treat the petitioner as a taxable entity in India as per Explanation 2 of Section 9(1) of the Act, i.e., by virtue of the business connection in the form of Watanmal India, a dependent agent. The same had been the stand taken in the order dated 05.12.2017 and in the show cause notice dated 22.03.2017. The respondent has the jurisdiction by virtue of Section 9(1) of the IT Act, since the petitioner, a foreign company, has income accruing or arising in India as explained above. 4. THE ARGUMENTS ON BEHALF OF THE PETITIONER :- 4.1.The learned Senior Counsel appearing on behalf of the writ petitioner contended that it is a classic case where the respondents exercised their power without jurisdiction. The basic principles to be adhered to under the provisions of the IT Act had been violated. Admittedly, the petitionercompany is a non-resident and was not assessed any income under the territory of India. When there is no income derived within the territor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er was issued under Section 143(3), nor under Section 147 of the IT Act. In the absence of any such assessment order, opening of assessment or reassessment is impermissible under Section 147 of the Act. Thus, the notice issued under Section 148 of the IT Act is in violation of the ingredients stipulated under Section 147 of the IT Act. 4.5.It is further contended that absolutely there is no business activity in India, there is no manufacturing unit, not even a single product is sold within the territory of India by the petitioner-company. Thus, the company is only providing logistic support to the company at Hong Kong and goods are supplied in African Countries and South America and in other countries. Therefore, the question of invoking the provisions of the Act as applicable in India does not arise at all. Though the company is functioning from the year 1948, there is no business activity in India even now. Thus, the respondents cannot act based on some fictions which all are erroneous facts and circumstances and thus, the very initiation itself is in violation of the provisions of the Act and the provision would not be applicable as far as the petitioner-company i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the part of the respondents to look into the instructions given in the circular and accordingly, act with reference to the facts. 4.8.The learned Senior Counsel for the petitioner relied on the judgment of the four Judges Bench of the Hon'ble Supreme Court in the case of Raza Textiles Ltd. vs. Income Tax Officer, Rampur reported in (1973) 1 SCC 633. The relevant paragraph 3 is extracted hereunder:- 3. Aggrieved by that order the appellant went up in appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner rejected the appeal on the ground that the same was not maintainable. He took the view that an appeal lay only under Section 30(1A) . But before such an appeal can be entertained the appellant must satisfy two conditions, namely, (1) he had deducted the tax due from the non-resident in accordance with the provisions of Sub- section 3(B) and (2) that he had paid the sum deducted to the Government. The appellant having not complied with those two conditions, the Appellate Assistant Commissioner held that the appeal was incompetent. The order of the Appellate Assistant Commissioner was confirmed by- the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel strenuously objected the contentions raised on behalf of the petitioner by stating that the writ petitions are not maintainable. It is not as if the respondents have initiated proceedings without any basis under Section 147 of the Act and issued notice under Section 148 of the Act. There are abundant materials to establish that the entire business activities of the petitioner-company are happening in India and therefore, they are amenable to the provisions of the I.T. Act and thus, the initiation of assessment proceedings under Section 148 is in order and there is no infirmity as such. 5.2.Relying on Explanation 2(a) to Section 147, it is contended that, where no return of income has been filed by the assessee although his total income or the total income of any other person in respect of which he is assessable under the Act during the previous year exceeded the maximum amount, which is not chargeable to income tax is a ground for initiation of proceedings under Section 147. 5.3.In the present case, admittedly, the petitioner has not filed any return of income and there was no assessment order. The petitioner has not subjected for assessment. Thus, the case would fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments, and material evidences were collected by the Income Tax Authorities and when the authorities formed an opinion that there is a reason to believe that the income chargeable to tax has escaped assessment, then the petitioner has to submit their documents, evidences and objections including the reliance placed on by them with reference to the circular issued by the CBDT to the Assessing Officer, who in turn, should proceed with the enquiry by affording opportunity to the petitioner. Thus, the initiation of 147 proceedings is not conclusive and it is only pending and thus, the writ petition is premature and liable to be dismissed. 5.7.With reference to the grounds raised by the learned Senior Counsel on behalf of the petitioner that the sanction as required under Section 151 of the IT Act has not been obtained, the learned Senior Standing Counsel produced copy of the sanctioning letter issued by the competent authorities. It is contended that prior to 2015, the Joint Commissioner is competent to grant sanction, as far as the assessment under Section 147 is concerned. As far as the reassessment is concerned, it is to be given by the Principal Chief Commissioner or Chief Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is deriving income indirectly in India and buying and selling of product was facilitated by the Indian Company and therefore, the income accrued in India is taxable and they are falling within the ambit of the provisions of the Act and thus, the initiation of proceedings are in consonance with the provisions of law and further, the petitioner had already participated in the proceedings and the assessment orders are already passed by the competent authority and kept in a sealed cover and therefore, the respondents may be permitted to open the sealed cover and issue the assessment order to the petitioner-company, who in turn, if aggrieved, may prefer appeal as contemplated under the provisions of the Act. ANALYSIS :- 6.Considering the pleadings and arguments, let us now consider Sections 5(2)(a) and 5(2)(b) of the Act. The said provision contemplates that subject to the provisions of the Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which - (a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om any property in India, or through or from any asset or source of income in India or through the transfer of a capital asset situate in India. 6.3.The above ingredients of Section 9 would reflect that all income accruing or arising whether directly or indirectly through or any business connection in India or through or from any property in India is to be construed as income deemed to accrue or arise in India. Thus, even the income accrued directly or indirectly is also to be declared as deemed income for the purpose of the provisions of the Act. 6.4.Mindful reading of Section 147 would reveal that If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned. 6.5.Numerous circumstances are enumerated under Section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anguage employed in Section 147 of the Income Tax Act would provide not only wider meaning and power to the competent authority, but the provision adopts a holistic approach, so as to confer powers to the Assessing Officer to cull out the truth with reference to certain informations, documents, evidences, which were either provided by the assessee or not provided by the assessee or not considered during the original assessment. Various complex circumstances prevailing can be fit in with the provision, in view of the wider concept contemplated under Section 147 of the Act. 6.8.The first proviso to Section 147 would not be applicable with reference to the facts of the case on hand. The proviso to Section 147 would be applicable where an assessment under Section 143(3) or the Section has been made for the relevant assessment year. In the present case, admittedly, no return of income was filed by the petitioner and no assessment order has been passed by the competent authority. Thus, the said proviso clause would not be applicable at all. 6.9.However, Explanation 2 to Section 147(a) would be applicable with reference to the facts of the present case. Explanation 2 to Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laws of Hong Kong and they neither have any business operation at their own, nor any source of income taxable in India. Thus, the notices issued to the petitioner-company are beyond the jurisdiction and without any authority of law. In response to the assessee's reply to the notice issued under Section 148 of the IT Act, the respondents in proceedings dated 27.05.2013 provided reasons with reference to Section 9(1) of the IT Act holding that income deemed to accrue or arise in India is established in the case of the petitioner-company. In the said proceedings dated 27.05.2013, the respondents have stated that Watanmal India, the Indian company, which is the associated enterprise of the petitioner-company, is working for the petitioner and on behalf of the petitioner and constitutes the petitioner's agency permanent establishment in India . The letter further states that the petitioner had been inappropriately advised about the provisions of the IT Act and its applicability and the principles of Cross Border Taxation. 10.In this context, the respondents relied upon Section 9(1) of the Act and arrived a conclusion that the petitioner is having business operations in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cking lists, certificates of origin and inspection certificates and payment records. Liaisoning with and organise booking with shipping lines for shipment and inland transportation of the products. Providing written reports to WBC on transactions concluded and enquiries and complaints received and handled by WIPL including by not limited to sales, collections, goods returned by customers, expenses incurred by WIPL in the transactions or matters handled, shipment and movement of the products in different territories. Sourcing the products on most favourable terms from the world markets and negotiate and concluding the agreements and contracts for the supply of the products for sale to the customers. As seen from the above, the Indian Company does major and critical functions and developed the supply chain management with reference to both the suppliers and customers. The Indian company M/s.Watanmal India Pvt. Ltd., even negotiates the price by its highly skilled employees. The Indian Company provides Trade Services to the group companies which have to be compensated certainly by higher amount. During the course of survey, it is learnt that the AE, i.e., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceedings of the TPO and stated that Watanmal India provides assistance to Watanmal Group for the moment of goods from the suppliers in Malaysia, Singapore, USA, China to the AE end customers who are primarily located in Africa. Accordingly, Watanmal India does the following functions:- (i) Sourcing Assistance; (ii) Majestic Support; (iii) Sale Support for Oil Goods; and (iv) Accounting Support. 14.Relying on the said contentions, the petitioner contended that they have no business activities in India. However, the reasons stated for reopening of assessment provide various other components relatable to the business activities and therefore, this Court cannot enter into such disputed controversies which all are to be adjudicated with reference to the documents and evidences in entirety. It may not be possible to express any opinion with reference to such factual controversies in a writ proceedings. Even in reply dated 02.02.2015, in response to the notice issued by the authorities under Section 143(2) read with Section 129 dated 05.12.2014, the petitioner has stated that WBC is not an assessable entity at all in India and the Department is not competent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Group who were present in the premises of Watanmal India at the time of survey operation. The evidences gathered from the premises of Watanmal India along with the statements recorded clearly establish that all the business activities of WBC including negotiation and conclusion of contracts, fixation of price for purchase and sale, negotiation and conclusion of LCs, logistics maintenance and supervision, marketing strategies are being undertaken by the employees of Watanmal India on behalf of WBC. It establishes the presence of the foreign/non-resident company in India through the business connection with Watanmal India, which was in fact found to be its associated enterprises, India was the place of effective management of all business affairs of WBC, Honk Kong. 16.It is relevant to consider the detailed analysis of the crucial evidences found during the course of survey proceedings by the respondent/Department, which reads as follows:- 3.A detailed analysis of the crucial evidences found during the course of survey proceedings is as follows:- I. the administration agreement between WBC and WIPL dated 01.04.2004 (Annexure I) impounded vide ANN/GE/WIPL/LS/IMP-21 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the second party including by not limited to sales, collections, goods returned by customers, expenses incurred by the second party in the transactions or matters handled, shipment and movement of the products in different territories. Source the products on most favourable terms from the world markets in accordance with the requirements and directions of the First Party and negotiate and conclude the agreements and contracts for the supply of the products for sale to the customers; Provide such services and support as may be required from time to time by the first party relating to the trade on the products. III. With this agreement WBC approaches the Commissioner, Inland Revenue Department, Hong Kong on 22.09.2005 with an application for an advance ruling (ANNEXURE III), for not treating the trading profits on sale of branded food products so derived by the company as not chargeable to Hong Kong profits tax and the reasons for filing of application annexed to such application are as follows:- (i) All the terms of the purchase and sales contracts re branded food products were negotiated and concluded by WBC's related company, WIP, in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il or fax. Staff of WIP in India would also prepare sale contracts under letterhead of WBC. (f) Shipment of goods would not pass through Hong Kong. Inventory would not be maintained in Hong Kong to fulfil orders of branded food products. (g) WBC maintained banking facilities in Hong Kong and paid the suppliers by telegraphic transfer, letter of credit ( L/C ) document against acceptance ( D/A ) or document against payment ( D/P ). There was no negotiation of L/C with the suppliers carried out in Hong Kong. (h) Customers settled their accounts by D/P, D/A or telegraphic transfer. There was no negotiation of L/C with the customers carried out in Hong Kong. 17.Based on the evidences collected and the detailed analysis made with reference to the crucial evidences, the Commissioner made an assumption stating that effective from 1st April, 2005, all contracts for sales and purchases of branded food products of WBC were and would be placed with or placed by, negotiated by and concluded by Watanmal India, or the employees of Watanmal India in India on behalf of WBC pursuant to the Trade Services Agreement dated 01.04.2005 in the manner as described in the agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained. However, regarding the disputed facts, circumstances and evidences, no writ can be entertained against a show cause notice. The petitioner cannot be permitted to adjudicate the disputed facts and circumstances in a writ proceedings with reference to the documents and evidences. Such an exercise is to be done by the authorities competent by examining the evidences and the documents and by affording opportunity to the persons concerned. Therefore, the law is settled regarding the entertainability of the writ petition against a show cause notice, so also the notice issued under Section 148 of the Act. In both the cases, it is to be construed that the facts are to be adjudicated. However, if the petitioner is able to establish that the proceedings are initiated without jurisdiction or authority, then alone a writ can be entertained and even in such circumstances, the order passed without jurisdiction is to be quashed and the matter is to be remanded back for reconsideration by the competent authority. 24. The purpose and object of the statutes are to be protected. Any person falling within the ambit of the tax net, can never be allowed to escape from the clutches of Law. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are to be answered and to be adjudicated and a final decision is to be taken by the authority. In view of the fact that the requirements of Section 9(1) of the Income Tax Act are satisfied with reference to the reasons furnished in the show cause notice, and further, this Court considered the implications of Section 5(2)(a) and 5(2)(b) of the Income Tax Act and Section 6(3)(ii) of the Income Tax Act in earlier paragraphs of this order. Once the income deemed to accrue or availed in India is prima facie established by the respondents, then all further adjudications are to be done by following the procedures contemplated under the Statutes and with reference to the grounds raised by the petitioner. Thus, this Court cannot entertain such disputed facts in the present writ proceedings. 29.The entire reading of the impugned show cause notice dated 05.03.2015 throws light on the issue and therefore, this Court has no hesitation in forming an opinion that there are prima facie materials and evidences enough to proceed against the petitioner under the provisions of the IT Act. However, the contentions in the impugned show cause notice alone cannot be a conclusive factor and all such ..... X X X X Extracts X X X X X X X X Extracts X X X X
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