NYK LINE(INDIA ) LTD vs. DEPUTY COMMISSIONER OF INCOME TAX 1 (3)

ORAL JUDGMENT (Per Dr.D.Y.Chandrachud, J.): 1 Rule; with the consent of Counsel for the parties returnable forthwith. With the consent of Counsel and at their request the Petition is taken up for hearing and final disposal. 2 An   assessment   in   the   present   case   for   Assessment   Year 2006­07 is sought to be reopened by a notice dated 28 March 2011. The Assessee is before this Court in proceedings under Article 226 of the Constitution. 3 The Petitioner is a wholly owned subsidiary of a non resident shipping line. Under an agreement dated 1 April 1993, the Petitioner is under a contractual obligation to render services to its foreign principal including inter­alia in relation to vessel operations and towards collection and  remittance   of  freight.   The   Petitioner   collects   Container   Detention CNR No : HCBM020004602012 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:45:31

*2* wp.159.12.908.os.sxw Charges (CDCs) which are levied upon importers on behalf of the foreign principal.   Under   the   agreement,   the   Petitioner   was   entitled   to   a commission for services rendered to its foreign principal. The Reserve Bank   of   India   issued   a   circular   on   15   September   1993   under   which modalities were prescribed for considering applications for appropriation of Container Detention Charges. Under the circular, a sum of  US $ 1.5 for a container per day was to be retained to meet local expenses of the agent towards   administration   charges.   The   Petitioner   maintained   a   separate bank account for debiting and crediting receipts and payments on account of its principal. The Container Detention Charges were also credited to the account upto 31 March 2009. On 25 May 2009, the Petitioner entered into an   agreement   with   its   foreign   principal   by   which   the   Petitioner   was authorized to retain an amount of US $ 1.5 per day per container collected on behalf of the principal between 1993 to 2009. The Petitioner has offered the whole of the amount received as its own income during the period 1993 to 2009 for Assessment Year 2010­11. The total amount offered to tax is Rs.9.34 crores for Assessment Year 2010­11 including an amount of Rs.1.16 crores which is sought to be taxed in these proceedings. 4 For Assessment Year 2006­07, the Petitioner filed a return of income on 28 November 2006. In the notes forming part of accounts, the following disclosure was made:­ “The  Company collects  freight, detention and  terminal handling   charges   (THC)   on   behalf   of   its   Principal   in separate bank accounts held in the name of the Company. After effecting payments in connection with the Principal’s activity, the surplus funds of the Principal are held in these bank accounts, on behalf of the Principal. These bank balances are matched by a corresponding liability to the Principal. Vide   a   circular,   RBI   has   granted   permission   for retention of container detention charges @ U 1.5 per day,   per   twenty   feet   equivalent   units   (TEU)   as Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:45:31

*3* wp.159.12.908.os.sxw administrative charges for an agent’s local use. Since, the Company’s agreement with its Principal does not provide for such retention, it has credited an amount aggregating Rs.44,743,264/­ as at 31 March 2006 (previous year: Rs. 33,053,628/­)   to   the   Principal’s   account.   The management believes that if the Company is required to retain this amount in compliance with RBI regulations, its commission income on cargo or vessels handled will be revised to the extent of such retention amount. Hence the management believes that the aforesaid does not have an impact on the financial statements of the Company.” 5 In the report filed by the statutory auditors together with the return, the following note was placed on record:­ “4. We draw attention to Note 20 to the financial statements. As more fully explained in the note, the Company has not allocated for its local use, certain Container Detention Charges   as   per   the   RBI   circular.   The   Company’s management believes that this does not have an impact on the financial statements.” 6 The Assessing Officer passed an order of assessment on 23 December 2009 under Section 143(3). 7 During the course of assessment proceedings, the Petitioner had addressed a letter dated 18 November 2009 which was submitted, as stated therein, together with the details as requested by the Assessing Officer. The letter inter alia contained the following disclosure:­ “As the company is the shipping agent of Nippon Yusen Kaisha,   it   collects   freight,   detention   and   terminal handling charges on behalf of its principal. These are kept in a separate bank account matched by a corresponding liability  to  the principal.  Currently, credit  balances  in debtors account and unpaid brokerage account are only outstanding with the principal.

*4* wp.159.12.908.os.sxw principal.   Container   Detention   Charges   (CDC)   are charges levied on third party importers by the principal when the containers are not unloaded by the importers at the   port   of   destination   but   are   instead   moved/ transported by the importers to their respective factories and retained by the importers for a certain number of days. In view thereof, the potential freight income is lost as the containers are not available. The principal thus levies CDC on importers to recover the opportunity cost of earning the freight income and also to re­compensate the port charges that the principal has to bear. These charges are collected by the company as agent of the principal and are deposited in the separate bank account. These funds are then used to meet the expenses of the principal in India   or   could   be   remitted   back   to   the   principal   in accordance with the Foreign Exchange Regulations. Remittance of CDC by the shipping agents in India of the overseas Principal has been a subject matter of regulation under   the   Foreign   Exchange   Management   Act   and erstwhile   Foreign   Exchange   Regulation   Act.   Only   a permitted   part   of   the   CDC   is   allowed   to   be   remitted overseas and the balance can be retained by the shipping agent in India for meeting expenses of the Principal in India. Circular   No.EC   By.Pass.II.361/Misc­93/94   dated   15th September,   1993   issued   by   the   Exchange   Control Department of the Reserve Bank of India (RBI), a copy of which is enclosed at Annexure 3 prescribes guidelines for appropriation of CDC collected in India.” A reference was then made to the guidelines contained in a circular of the Reserve Bank of India including to the amount of US $ 1.5 which has to be retained by the agents in India. The letter concluded with the following statement:­ “The CDC belongs to the principal and is deposited by the company into a separate bank account of the principal which   is   matched   by   a   corresponding   liability   to   the principal. The company from time to time incurs expenses Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:45:31

*5* wp.159.12.908.os.sxw in India on behalf of the principal and remits the same to it in accordance with the prescribed ceiling limit by the Foreign Exchange Management Act. The   sums   collected   on   account   of   CDC   belong   to   the principal and is income of the principal. The company is the   shipping   agent   of   the   principal   whereby   its   main source of income is commission income. These amounts belong to the principal which is retained by company as an agent, and can under no circumstances be considered as income of the company. As the principal continues to retain the ownership of the income these sums cannot be treated as the income of the company. In view thereof, it is respectfully   submitted   that   no   addition   be   made   on account of the same.” 8 The order of assessement contained a specific discussion on items in respect of which the Assessing Officer made a disallowance. However,   as   regards   the   submission   of   the   Petitioner   on   an   amount representing US $ 1.5 of the container detention charges, the Assessing Officer did not make any specific observation. 9 The reasons which have been furnished to the Petitioner for reopening the assessement are as follows:­ “The assessee is a wholly owned subsidiary of a Japanese   company,   NYK   Ltd.   It   handles   with   freight booking and collection for the Principal. Apart from that, it also takes care of the management of the containers, collecting   container   rent,   paying   the   ports   and   other agents   for   container   on   behalf   of   the   Principal.   The assessee   company   doesn’t   charge   anything   for   these services and towards the expenses it incurs for rendering these services. The RBI to stop such practice has issued a directive/ circular No.EC By Pass II.361/Misc.93.94 dt. 15.09.03 issued by Exchange Control Department of RBI notifying   the   remission   of   container   rent   so   collected whereby   it   is   mandatory   for   the   agent   (like   assessee Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:45:31

*6* wp.159.12.908.os.sxw company) to retain 1.50 $ per TOU paid out of 12.50$ CDC collected towards its own administrative expenses. This amount cannot be remitted to the holding company abroad.   The   assessee   company   has   kept   this   amount which it could not remit to the holding company in a separate account and shows it as payable to the holding company whereas in reality is should have shown as part of the receipts of the assessee company. The amount for the year is Rs.1,16,89,636/­. This amount was added as income of the assessee company in the scrutiny assessment for   A.Y.   2007­08. The   facts   being   the   same,   similar treatment   has   to   be   given   for   this   amount   in   A.Y. 2006­07.” 10 On behalf of the Petitioner it has been submitted that though the reopening of the assessment has taken place within a period of four years, there is no tangible material on the basis of which the assessement is sought to be reopened. A full disclosure was  made by the Petitioner of the fact that the Reserve Bank of India had not permitted the Petitioner to remit an amount equivalent to US $ 1.5 per container per day. However, according to the Petitioner, this amount which was part of the Container Detention Charges belonged entirely to the principal and was income of the principal. The Petitioner had made a submission before the Assessing Officer that the amount did not represent its income. The assessment is sought to be reopened on the basis of an order of assessement for a subsequent Assessment Year, 2007­08. The learned counsel submitted that no   new   facts   have   been   brought   on   the   record   for   Assessment   Year 2007­08. Consequently, the reopening of the assessment for Assessment Year 2006­07 cannot be justified and would constitute a mere change of opinion,   which   is   impermissible.   The   reopening   would   amount   to permitting a review of the order. 11 On the other hand, the learned counsel appearing for the Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:45:31

*7* wp.159.12.908.os.sxw Revenue submitted that under Clause (c)(i) of Explanation 2 to Section 147, where an assessment has been made, but income chargeable to tax has been underassessed, this shall also be deemed to be a case where income chargeable to tax has escaped assessment. In the present case, it was urged that the reopening has taken place within a period of four years. The Assessing Officer had not discussed in the course of his order, whether, the amount representing US $ 1.5 per container represented the income of the Petitioner. Consequently, it was urged that the Assessing Officer is within his juri iction in seeking to reopen the assessment. 12 The reopening of the assessment in the present case has taken place within a period of four years of the end of the relevant assessment year. The power of the Assessing Officer to reopen an assessment within a period of four years of the relevant assessment year is undoubtedly wider than where a period of four years has elapsed. Once a period of four years has elapsed, the proviso to Section 147 stipulates that there must be a failure on the part of the Assessee to disclose fully and truly all material facts necessary for assessment as a result of which income chargeable to tax has escaped assessement. But, that is not to say that within a period of four years, the power of the Assessing Officer to reopen an assessment is untrammelled. Even within a period of four years, it is now a settled principle of law that an assessment cannot be reopened on the basis of a mere change of opinion. The Supreme Court has emphasized that the Assessing Officer has no power to review, but his power is a power to reassess.   If   a   mere   change   of   opinion   cannot   furnish   a   ground   for reopening   of   an   assessement,   then,   under   the   garb   of   reopening   an assessment, a review would not equally be permissible. Consequently, the test is that there should be tangible material to come to a conclusion that there is an escapement of income from assessment. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:45:31

*8* wp.159.12.908.os.sxw 13 These principles have been emphasized in the judgment of the Supreme Court in  Commissioner of Income Tax v/s Kelvinator of India Ltd.1 The Supreme Court has observed as follows:­ “6. ........... Therefore, post 1st April, 1989, power to reopen is much   wider.   However,   one   needs   to   give   a   schematic interpretation   to   the   words   “reason   to   believe”   failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of “mere change of opinion”, which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain preconditions and if the concept of “change of opinion” is removed, as contended on   behalf   of   the   Department,   then,   in   the   garb   of reopening the assessment, review would take place. One must treat the concept of “change of opinion” as an in­ built test to check abuse of power by the Assessing Officer. Hence, after  1st  April, 1989, the Assessing  Officer has power to reopen, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes   made   to   section   147   of   the   Act,   as   quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words “reason to believe” but also inserted the word “opinion” in section 147 of the Act. However, on receipt of representations from the companies against omission of the words “reason to believe”, Parliament reintroduced the said expression and deleted the word “opinion” on the ground that it would vest arbitrary powers in the Assessing Officer.  ......” 14 Now, undoubtedly an order of assessment which has been passed for a subsequent assessment year may furnish a foundation to 1 [2010] 320 ITR 561 (SC) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:45:31

*9* wp.159.12.908.os.sxw reopen an assessment for an earlier assessment year. However, there must be some new facts which come to light in the course of assessment for the subsequent assessment year which emerge in the order of assessment. Otherwise, a mere change of opinion on the part of the Assessing Officer in the course of assessment for a subsequent assessment year would not by itself legitimise the reopening of an assessment for an earlier year. 15 In  Raymond Woollen Mills Ltd. v/s Income Tax Officer2, the case of the Revenue was that the Assessee was charging to its profit and loss account, fiscal duties paid during the year as well as labour charges, power, fuel, wages, chemicals etc.. However, while valuing its closing   stock,   the   elements   of   fiscal   duty   and   the   other   direct manufacturing costs were not included by the Assessee. This resulted in undervaluation   of   inventories   and   understatement   of   profits.   This information,   as   the   Supreme  Court   emphasized,   was   obtained   by   the Revenue   in   the   assessment   proceedings   of   a   subsequent   year. Consequently, the reopening of the assessment was held to be valid. The point to be emphasized is, therefore, that where in the case of assessment proceedings   for   a   subsequent   year   certain   additional   information   is obtained by the Revenue which was not available to it in the course of an assessment for an earlier year, that may legitimately be utilized as a ground   for   reopening   an   assessment   of   the   earlier   year.   Where   the reopening has taken place within four years that may legitimately give rise to an inference of escapement of income. The new information which has come   to   the   knowledge   of   the   Revenue   would,   therefore,   constitute tangible material. 16 The   judgment   of   the   Division   Bench   of   this   Court   in Multiscreen Media (P) Ltd. v/s Union of India3 adverts to a decision of 2 [1999] 236 ITR 34 (SC) 3 [2010] 324 ITR 54 (BOM) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:45:31

*10* wp.159.12.908.os.sxw the   Supreme   Court   in  Ess   Ess   Kay   Engineering   Co.   (P)   Ltd.   v/s Commissioner of Income Tax4 as laying down the principle that merely because the case of the Assessee was accepted as correct in the original assessment for the assessment year in question that would not preclude the Assessing Officer to reopen an assessment of an earlier year on the basis of a finding of fact made on the basis of fresh material in the course of an assessment for a subsequent assessment year. This Court in its judgment in Multiscreen Media (supra) also adverted to a decision of the Division   Bench   in  Siemens   Information   System   Ltd.   v/s   Assistant Commissioner   of   Income   Tax5. The   Division   Bench   held   that   the judgment in Siemens Information System (supra) would not preclude the Assessing Officer to reopen an assessment for an earlier year on the basis of  fresh   material  which   has   come   in   the   course   of   assessment   for   a subsequent assessment year. 17 Now, in this background and considering these tests, the facts of the present case would have to be evaluated. The Assessee in the present case had made a disclosure in the notes forming part of the accounts of the nature of payments required to be made to the foreign principal on account of Container Detention Charges. A reference was made to the fact that as a result of a circular issued by the Reserve Bank of India,   the   Assessee   was   not   permitted   to   remit   a   certain   proportion equivalent to US $ 1.5 for each container. The statutory auditors had also included   a   note   in   the   report.   During   the   course   of   assessment proceedings,   the   Assessee   addressed   a   comprehensive   letter   dated   18 November   2009   making   a   full   disclosure   of   facts.   Now   it   is   in   this background that the order of assessment under Section 143(3) must be considered. The Assessing Officer specifically discussed in the course of 4 [2001] 247 ITR 818 (SC) 5 [2007] 295 ITR 333 (Bom) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:45:31

*11* wp.159.12.908.os.sxw the assessment order the matters in respect of which he has made a disallowance either fully or in part. Since the Assessing Officer did not find any justification to reject the claim of the Assessee in respect of the issue of container detention charges, there was no specific discussion in the course of order. In this regard the following observations of a Division Bench of this Court in Idea Cellular Ltd. v/s Deputy Commissioner of Income Tax6  have relevance:­ “9. It   was   also   sought   to   be   contended   that   since   the Assessing Officer had not expressed any opinion regarding this matter in his original assessment order, it could not be said that there was any change of opinion in this case. In our view, once all the material was before the Assessing Officer   and   he   chose   not   to   deal   with   the   several contentions   raised   by   the   petitioner   in   his   final assessment   order,   it   cannot   be   said   that   he   had   not applied his mind when all material was placed by the petitioner before him.” 18 Consequently and in this background the mere fact that the Assessing Officer for Assessment Year 2007­08 had come to a different

conclusion   would   not   justify   the   reopening   of   the   assessment   for Assessment Year 2006­07. In order to establish that the reopening of the assessment for Assessment Year 2006­07 is not a mere change of opinion, the Revenue must demonstrate before the Court that during the course of the assessment proceedings for the subsequent year i.e. Assessment Year 2007­08 some new information or material had been brought on record which   was   not   available   when   the   assessment   order   was   passed   for Assessment Year 2006­07. That indeed is not the case of the Revenue. All material which was relevant to the determination was available when the assessment was completed for Assessment Year 2006­07. Consequently, 6 [2008] 301 ITR 407 (Bom) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:45:31

*12* wp.159.12.908.os.sxw the   mere   formation   of   another   view   in   the   course   of   assessment proceedings for Assessment Year 2007­08 would not justify the Revenue in reopening   the   assessment   for   Assessment   Year   2006­07   though   the reopening of the assessment has taken place within a period of four years. The   power   to   reopen   assessments   is   structured   by   law.   The   guiding principles which have been laid down by the Supreme Court in Kelvinator (supra)   must   be   fulfilled.   In   the   present   case   there   was   no   tangible material, no new information and no fresh material which came before the Revenue in the course of assessment for Assessment Year 2007­08 which can justify the reopening of the assessment for Assessment Year 2006­07. 19 Moreover it must be noted that in pursuance of the agreement which was entered into by the Assessee with its foreign principal on 25 May 2009 allowing the Assessee to retain an amount of US $ 1.5 per container, the Assessee has offered to tax the entire amount collected between 1993 to 2009 in the immediately following Assessment Year, 2010­2011. The entire amount has consequently been offered to tax. 20 For   these   reasons,   we   allow   the   petition   by   making   Rule absolute by quashing and setting aside the impugned notice dated 28 March 2011. There shall be no order as to costs. (Dr.D.Y.Chandrachud, J.) (M.S.Sanklecha, J.) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 04:45:31 Powered by TCPDF (www.tcpdf.org)