DIRECTOR OF INCOME TAX vs. MC DONALDS CORPORATION

o A $-12 & 13 * IN THE TIIGH COURT OT' DELIII AT NEW DELHI + ITA 908/201 I + fTA 909120tt DIRECTOR OF INCOME TAX Through: Mr Rohrt Counsel versus MC DONALDS CORPORATION Respondenl Through Mr G C Shnvastava rvrth Mr Robrn Davrd. Mr Chitranshul Srnha and Mr Febrn Mathel. Advocates CORAM: MR. JUSTICB S. RAVINDRA BHA'[ MR. JUSTICE R.V. EASWAR S. RAVINDRA tsIIAT. J: (OPEN COTJRT) In these appeals the Revcnue rmpugns a common order of the Incomc Tax Appellate 'l'nbunal ('Tnbunal'. for short) dated l8.o2 20 l l made rn ITA No.l-133 & -143.1/Dell20l0. The common questron of larr'framed rs as lbllous. - "IYhe ther the Income Thx Appelltrte Trtbunal wcrs rrght m holdmg lhat lttrtsdtclrcnctl pre-cottclttton /br tsntoncc of' notrce under Scctrcn 117, 118 oJ the Incoma'l'ax Act. 196l arc not satts/iee{ m the present case and. accctrclmgl\', the re-ctsscsstnent proceedmgs ttre bad m lav,?" 2 The assessee entered inlo a master hccnsrng agreement ("MLA") on 0l 0l 1996 nrth McDonalds Indra Prrl'ate Lrmrted ("N,llPL'). In terms of that arrangement the MIPL uas granted non-exclusive right to use the McDonald's svstem at agreed localrons rn Indra The terms also requrred MIPL to par' the irsessee rnrtial franchrse fee of USD .15000 upon the operung of each restaurant and rovaltv on recorded monthlv sales of each restaurant durrng the perrod For the relevant assessment vears l e 2000-01 and 2001-02. scrulrny assessments uere completed after the relevanl documents and malerials u,ere consrdered On . . Appellant Madan- Sr. Standrng l'l A,)0tf/20I 1 & 9()91201I Page I of 6 2012:DHC:7968-DB

g.lo z r8c(l I l0Z/(106 ?? I I0Z1806 V-i.l tuai"od {r4tlt .{o aqu ary lD paxu aq ot s't 166[ ',{ts2/g ,,JE ato/aq apout ]uawaalBD uD Japun ulaJuoc LIDtpLq to luautu)anog tttot/'tttodaoo ufua.to1 o ,(q ytatraia.t aa! F)JtLtqJa.[. to '{llD,{otl 'tJY xD.L awoluJ aLll ./b VEf I uoucas Llltor pDar (Jff Ltotpas npLtn parfidrt aq plnolls '1961 'lrv ,I t ./b Cfn, uotlsas asDl qcns' ut anJatatg, '.tuaaaSououtlb aco1d o. salit'tlJLu tI puD Lto patilDi,Qltod to ,Q1oq,n sr astdntua tn./b ssawsnq aLil q)tq,ft qBnotql ssauts^t'IQ /b ocqcl pax(' o t^Ltoout,,ruautllsllqusa lttattout.rad,, lttaruaa.t8y nLtDpro^V uotttlxD,L alqno(J /b (dS pun (1)g alctllD nd sy ):rJnos./o Jlt)1.\ aqt /b suotsu,ottl ctlsawop ary LlltM aJuDpJox)tJ Ltt auto)ul ssautsnq s^D alQllx0l SI awoout qins 'alDls JaLilo aql ut PalnrulS lLtautLtstlqDlSa luauotatad n q\notql saJrA.taS IDJILIIJa,L nJ' saa.,1 to ,Q1tt'(oy /o a.tnlnu aLil Ltr auto)Lu Sutu.toa st aassas'sD uo ataqw lotll saptaotd yS.D pun nrpul /b tuawuhtoD uaa(waq luawaat,SV aiLtDprotry' uortDXD.J, a1qno61 ./o 7 aptitD t4tt,u poat (Q71 alrrttv DrpLtI Ltr ftfrtW) tuawqsrlqDlsa luauouuad at1t t13non1t s'sautsnq Swop tQnanp ^s/ ,fttodruo:t tuantd pLto VSI) uor1o.tod.to,'1 plouo(prV ./b ytaBn tuapuadap ,fi7n/. sn 7trt4to,n sr TrllW tDqt )Dap sr tt 'a.tofa.raq.y.. - .let{l pc}€ls racUJO Surssessy eql tuatussesw aql8uruedoer clrq\\ poproJar cq ol suoscar cql ul sessessP oql iq p3.\IoJcJ ol.uof,ul .i11cior (rer eues eql punu ur peq recUJO Sutssessy aql laql leo.\eJ plno.t\ s8urpaeco-rd luaserd aql 01 pel sel{ qolq.\\ -- uors?coo lcql uo poprocor suos"er oqJ 100(, E0 9Z uo ponssr lt'l uorlces Jopun ocrlou puoJes oql uo qse{e sSurpeecord e}urllur o1 lq8nos roouJO Surssessy eql z0-1002 puc I0-0002 e t s:eai tucrussossc otucs oql Jo lcedser ur urc8e 's8utpeecord luarussess€-ol Jo uorlaydruoc re13y E sree,( luerus sess€ 1uu.\olcl aqlJo lcadsa: ur -/0gZ't0'S6'€) puu -1019'tt'19'ZlJo sldrece: ,(11e.(or eql possosse puu pleq.{11uur8r,ro m %gl su.\\ elqccrlddu uorlexelJo oter eq} teql suorssruqns s.eessossc oql poldacau lecUJo Surssesse oql uor$?cro lcql uO pelaldruoc sB.\\ luotussossc pw runloJ su pelu 00sscssu eql 81 uorlces Jopun sSurpaecord eqt uedoer o1 Sursodord gf l uollce S Jcpun ponssr su.\\ e3rlou E00Z'T I EI ll 2012:DHC:7968-DB

Ic Hence, rolahv tncome recetved bv McDonald Corporatton ./rom Indm should have heen charged at the rata o./'thrh, percent m s t e crd o.f Ji./ieen pe r cen t (-onstdermg the above I hay'e reusotls to belrcve thal thorough opplrcatrcn o.f rnmel lhat mcome 'chargeable to tax hos escaltecl assessment " 'l The assessee filed its relum ln response to the notrce on2004 2007 and the reassessment proceedrngs \\'ere completed on 28 05 2007 Thrs trme the rncome rras held to be taxable rn terms of sectron I l5A read rrrth sectlon 44D irt 309. The assessee berng aggriered appealed to the CIT (Appeals) uho rras of the oplnlon that stnce the basrc facts relevant for the rovaltv lncome had been drsclosed bv the MLA and all the other materrals. the rnl'erence sought to be dra*n could hardh'be charactensed as "reasons 1o believe". On these grounds the cIT (Appeals) accepted the assessee's contention and set-asrde the re- assessments The Rer.enue thereafter unsuccessfullv appealed to the Tnbunal The Tnbunal after heanng the grounds and the contentrons. drsmrssed the appeals recordrng as belou' - "10 lle havc harcl hoth the pctrtrcs and gone through the mcttertql avqtluble on record I''rom the Jdcts stated abov,e, lhere rs no cltspule llutl the rnaternl rn lhe bast"- ol whrch 2"d reas.scs,strtcnl proceedmgs v'ere tnlrctted was avatlable on recorcl ancl w,as consrclercd bt, the A.O. whilc rnctkmg as,tessment uts l17, ll3(3) on 7.3.2005 1'here ts also no dtspute about the fuct that 2,,,1 reassessment procecdtng had been milmted on lha sqme rnolertal 'l'he A.O. tn the rcosotls recordecl has not recorc{ecl sctttsfactutn tlnl there w'as u .failure on rhe part of the assessee to thsclo,se .fitltlt anct truly all the mcttertal ./itcts necessarv for hn assessntent. In the obsence ctJ such reosot'ts. rhe assessment-Jiamec{.follmg ttncler rhe provtso lo Se clrcn I17 have to be declared bacl rn luw lrt the tn.\lenl case, ortgutal ctssessment v'cts macla u,s 117 113(3) on 7 3 2005 ctnd assessmant could be reopened undcr matn provtsnns ol Sectton 117 wthm thc perutd o.f' I 1,ears Jrom the encl o./' the Assessmcnt Ycar tn w,hrch lhc mcorne was .first a.ss'cssahle For the ils,sessment Year 20()0-0 l. the uss,e.tsment could havc bcen rcopcned uncler thc nuun prowstot'ts of Sec'tton l-17 bv,3l 03 2005 IlA e08/201 1 & 909/201 I I'agc 3 of 6 2012:DHC:7968-DB

g.lo I :)8c(l | 10T,1606 ? I I0Z/1106 V.l.l alll ot ,(1tto patcttlsat lou st aassassD ary lo ttnd ary L4O ,,Atn1\Ll,,, wtzt lLl.l. zillsolJSrp aut puD ry/ ayout ol tauottrlad-aassdssD aLu /o ttLtrl aql uo anqtn/ pLtD uotsstuto ou sDtA a.taql 'nltnhag Tooq )lnlDlt'aqt w pu sDtut Vf I uolJ)as 'Lunlar aql pa\l rDLl [aqJ uaLl'rr so nnf PID;^ a7l asolsstp o1 pannbat lou sD'rr ntrotlrlad aW lDql palrus pl4t) papDald st lJ ,,atnltpuadxat, pDaq dNlDlnwtlx ary tapun uotlcltpap o sD paltttDp a'ta,h LpIqM 'autoiLtt ldutaxa n aa'( xDl ol alqDlD/aJ sasuaclxa apuoruodottl o1 ptoSat qJtM sltDlap traarS Jou pnq aq lDql pallnupD pLtD paldacco stJtl r)uotttlad atp 'snq,1, 0l-. - .repun su Pelq8tgSlq ere,\\ .(1:ulncrgud (ofins) 'pt'l spry)otd -ta,^od pts DpuoH ul unoJ slqlJo suoll?\losqo oqJ lueulssessu pedecsa pcq qJIq.\\ Slslxo etuocul otuos luql JOJUI ol JaoUJo Surssesse oql eloJoq ol3 slseJ clscq sc 3uo1 os lue,\eloJ lou sI s8urpearord aql Jo otuoclno leurl oq]leql puE uorsnlcuoJ lo ocuapl\o p3e1 .(q lccJ oql pculsuacsB .(1pug e\sr.{ plnoqs locUJO Sutssessy l€ql 8ul(ldrul se pce; eq loulrec..e'\ollaq ol uoseer.. uorssardxa eq] teql pen8ru w.\\ 1l l\0zzo tl uo peplcep ,002/9€06'oN (J) d /\\',ll)e '^ ptl snnpot; n,rro({ pts DlluoH ur lucur8pnf eqt pw (CS) ooS xII I6Z (/OOZ) ' ITJ t^d st2\otg Yiots tn^Dq| qsafoy ^ J.IJV ur UnoJ euerdnS eql Jo uorsrJap aqt uodn perlaj enua.rer 4uu11edd3 oql JoJ Iosunoc peuJ€e'I I .. stoai zLlt t4toq nJ-Irautssasso aql StnlTacttrcc (ill1,l p7 aql ,(q pass'ttd srapJo aqt m ,(lrurtrlut ,furt pr'r1{ tou op aM '{lSutptoccV 'stueutt^s^\ssD aw palpcuD7 rt\ry7u sDLl (r).u:> p7 ',uoturdo palaptsuox Jno w 'atoJataq.l 'uotsnpuoi Ltloln? to Sumtun altq,^ O'Y aql {q pataprsuoc rQnp sD,rr puD luautssassDat Tntu8uo -/is aruu aql lD Alq\lID^D sD,4 ruawss'assL)at puz Jo./ s^ISDQ aIfl pauuof qsrLltt 'lDIJalDut ttaq'N s8tttTtaacotd tuawssassD puZ u, ttotttttlo 1it a\uotlt u st at;rLll su plaqdn aq PuutJJ apDw luawssassD aq,L ,rrDl Ltt pDq arry L00z zl 9z Lto apDut slLtaru^fs2'tj'l? aL'll'luarussassD uq to/' ,(tossaoau sprtf- TtnntDa ilD ,Qntl putt {1n/' asolcsrp oJ 22:rs2ssD aql ./'o ltod atp uo atnltof' sD,A lnlfi lttt1l Surptoca"r :sgicads rfuttlb nLtasqD aLll m 'anJa.taqJ apDut sD,^ lL4arussas'sDa.t lOutSuo Ltary,A aurt aql ]D alqqtD^to sDM arilrl rL[ s|Ltarussassn ./b Smuadoat nf 6 y ary nq ttodn patp.t uaaq sDLl LlctLl'rr V7W aW putt sDn/'aLU llD 'sn atof'aq zsm aW uJ luautssassD stLl to/ ,Oos'sa:tau stcD./' lDr.talDut llD 'Qn.t1 lttto Q7r!" asoTtslp ol aassassL) atlt /b ynd aqt utt atnlnf'sD,t\ a.tal\ /i t^tna'( 7./b pornd ary puo,t'aq Lf I Ltoucas ol osrtotd aW Japun pattadoat aq LtDc ]uawssassD 'n^a,^oH 9002 t0 tt rQ eo-f oOe il)atr tLlautssassv aqt n{ pun \\ 2012:DHC:7968-DB

/ \), \t2 tncome -lctx return and the colunms ofthe tncome-lax relurn or the Iax qudtr reporr T'ht.s ts the.lirst stage The sarc{ expre.ssrcn "fhthtre to /ully and trulv dtsclose material fitcrs" also re rate ro the srege ol the usscssmenr proceedtngs, the seconcl stage \'here crtn be omtsston ancl lhtlure on the part o/'the assessee to drsc,lose /ulh., and trull' muterml .facrs clurutg rhe course ol- rhe o,tsessment proc'eedmgs 'I-hts can happen when rhe assesse e does not tltsclose or ./urru';h to the As,se .t.smg OlJicer complete ancl correcl utformalnn and detcttls tt 6 requred and uncler an oblrgarnn to cltsclose Rurclen /.r on the assessee to rnctke /itil ancr true dtsclosure " 6 Thrs Court rs of the opmron that the assessment record rer.eals that the MLA had been placed on the record of the assesslng olficer rn the yel' first tnstance l'hen the assessmenl *'as completed under seclron 143(3) Thereafter the reassessment proceedrngs \\'ere rnitraled rn Nol'ember. 20()3 and completed rn March.2005. for those proceedrngs too u'hat drove the Revenue to rssue notrce and reopen the proceedlngs \\'as the master hcensrng agreement and the nature of 'ro1'altv lncome The assesstng olficer in that instance conscrously after gorng through the matenal concluded that the rale of laxatron u,as l5u% rn the reassessment proceedtngs The scope n'as the same as rn the orrginal proceedrng and tn the firsl reassessment proceedrngs i e the taxabrlrtr. of the royaltl, rncome under sectron 44D Having regard 1o these, thrs Court rs of the oprnion thal the declaralron of lan bv the Supreme court in calcutter l)t.vcount co v ITO. (1961) -tl ITR l9l apphes. squarelv to the facts rn this case rt n'as held b1,the Supreme Court that the duh of the assessee to make full disclosure extends to prrman' lacts Once that ts done. it rs thc Assessing Officer's dutr'1o dran'1he conclusion and tnference flou'tng from the drsclosure so made This aspect ivas hrghlighted rn the lbllonrng terms - "l)oes the dury,, how,ever, extend hetrtnd the .firll ancl trttthlul drsclo.sure o/ all prrntary fctcts') In our optnton, lhe ansv,er to rJlts questtotl must be m the negctttve. once all the prunary,facts ure be./bre tha a.\se.\.\rng outhorut\', he reqrtre s no /urtlter us.vstance by v'ay' of dtsclosure. It ts Jbr hnn to clecrcle wltcrl mferences ol ./itc'ts can be reasonablt, clruw,n ancl v,futt legal It'A e08/201 I & e09/201 I Page 5 of6 2012:DHC:7968-DB

g.lo 9 oSrr([ T l0Z/(106 if I l0Z18()6 VJ.l sq zr0z' lI uuflI l'JJg( t'uvA\svfl',\'u .,..-nl f .IVIIfl \'II(INIA\NI 'S { f'n'r I I pcssnustp oir? spedde oql,illuenbosuoJ prn scsus otll rlloq uI cnuo.\cll cw lsule8ll pu? acssassc oql Jo Jno.\uJ uI pele.\\sut? sI .\\BIJo uollsenb lcllul?lsqns cqJ \\cI ur pc]lnuJ oq louuur LV.LI puc (slueddy) II) eql ,iq u.$u:p suolsnlsuoc eq] lcrll uorul(lo at{} Jo sI UlloJ stql uolssncslp snol.\old eql 01 pJcAeJ 3ut.re11 L .. s'tLll pLloiaq plta$a loLt s'7op tI 'slJD/ luDAala) ,(ntutnl 1pt,Qntl puD (qru/ asopstp ol s't.zassassz 21il./o 'gn!) aryt |ltll,!\ lDL,lt Ltotsn/xLto? aLlt oJ awo:, 'a.to./araryL ',alDq alu 'taJil/b xl)l-zutoirtl aLil uo \'tas'odurt ,vnp dryl Sutaq sacuata.firr tadotd alll ,AD'tp ol ,,s'aJuaJ)/ut,, asolJstp ot )Asr^zssD aql uo {1rt1't vt Surlsttc ,(q 'uotlcas atp gu8tn1tta./b pa}Ja zLlt lou t^DLl uotlDuDldxll aq.1 pcsolJs'tp '(\1onlco sliDf aLil utot/ ru)qt pa.ta^orstp d^r)Ll plnoc nu//i1 xor-awocLq aLlt aruzStllf anp Lllt,^ tuLlt Tttmot8 zLll uo pasol:tt'rp [1aa'r1:sntlstroJ aq ot pttJS 2q //us pln0) p)s'\lrstp lou .y?D/ lDtJatDur ,fuDuutd tarypLl,rr uotlsartb atll qtt,rr,quo sloap pLtD ,,salLta.tafLtl,, tlllt op ol SnLllou sDq uotlJas -qns aql ot LtotluuDldxE atll tDLll tlto patttntl aq 'iuut l1 (,u'trDtp aADq 1ou 1t13tut xt tLTSrtu aLl Llxrr4,A ',atuanlut uD alDsturutnuoi ol a.tttlrnf qltt paii.ttnlp aLl ,,)ssrssD uD nno:, 'AoJ[ '1'lt'toLlln' Svrss,rssrl aqt ot lr patl)irunuuto) puD aJuanlm .nlnotltnd t(un umn.rp atntl pltnLls )lssass? ary JDLII ,ftts o1 alqtssod 2q pu plttol^ lI 'u,AD.t/'' aq pltlox auo LtDql salul'talm atout snnf' 'ilttutt.td uto.t/ ./1 slcD] ,(.towttcl at| tuot/.nwt[) pruo'^ 2q - ,^Dl "to s]cDJ'./'o 't)rytaq'A saxLtan|"Lil lDLl,A zsol?stp lsnw azssassD aLil lnLll puDuap ol st';tlBtttuoaw aq llt.^ tt 's1.1Dl ua^t8 utotl'u'ntt'tf aq runoqs sd"'uc'ta[ul 1r,qu s'ptoBat :'o .ta.//ip tra{o aldoad lDLlt palaqruawa't st lI uoll/rr 'paal)uJ 'Lt,ttDrp )q pryot4s ',ADI .to snnJ lo nLllaq,A 'satuatatut 1ot1,N ,(1rtot1nl) Su.sscssl aW llal ot aassassz ary ssal n/ )sla ,(poqauns rof lou sI ]J 'uturD"tp dq ol QarcutUfl a^nLl salua'ta./'ul al ( at/ 2012:DHC:7968-DB