DDIT (IT) 3(1), MUMBAI vs. GENERAL ELECTRIC COMPANY, MUMBAI

O R D E R Per Shri M. Balaganesh, A.M. : These cross appeals filed by the assessee and revenue are directed against the order dt.28.10.2010 of the learned Commissioner of Income Tax (Appeals)-10, Mumbai relating to Assessment Year 2001-02 .

2. The assessee has filed revised grounds of appeal which is taken on record. We deem it fit to address the preliminary ground raised by the assessee vide Revised Ground Nos.1 to 5 challenging the validity of reassessment under section147 of Income Tax Act, 1961 (in short ‘the Act’) framed in the hands of the assessee.

3. For the sake of convenience, the revised grounds 1 to 5 raised by the assessee in this regard are reproduced herein below :

1. On the facts and circumstances of the case CIT(A) erred in upholding the initiation of re-assessment proceedings under Section 148 of the Income-tax Act, 1961 (the "Act").

3 and 432/Mum/2011 2. On the facts and circumstances of the case CIT(A) erred in holding that the AO had reason to believe that income chargeable to tax had escaped assessment and was justified in re-opening of such assessment.

3. On the facts and circumstances of the case CIT(A) erred in not appreciating that the material on the basis of which re-assessment proceedings were initiated did not pertain to the Assessee and/or the assessment year in question.

4. On the facts and circumstances of the case CIT(A) erred in not appreciating that the re-assessment proceedings had been initiated on a change of opinion since the original assessment had been completed under Section 143(3) of the Act and no new material in respect of the Assessee in question had come to the knowledge of the AO warranting initiation of proceeding under Section 148 of the Act.

5. On the facts and circumstances of the case and in law, the CIT{A) has erred in assuming existence of business connection/PE for the relevant assessment year based on the material which pertains to subsequent years and pertains to GE Overseas entities in general without any specific mention of the Assessee.

4. General Electric Company is a company incorporated in the United States of America (USA). The assessee filed its return of income for the assessment year under consideration on 29 October 2001 declaring the total income of Rs.3,07,33,0901- as Royalty/Fee for technical services and income from other sources. During the year under consideration, the assessee made equipment! parts supplies on an off-shore basis to Indian customers in the Energy and Aviation Sector. The sales were made outside India and payments were also received outside India. As such, no income accrued or arose in India in 4 and 432/Mum/2011 respect of such off-shore supply of equipment parts which was liable to tax under section 5 of the Income Tax Act, 1961 (Act) or deemed to accrue or arise under section 9 of the Act. Further, the assessee being a resident of the USA, was eligible for the benefits of the Double Taxation Avoidance Agreement entered into between India and USA (Tax Treat). It did not have any presence in India so as to constitute a Permanent Establishment within the meaning of Article 5 of the Tax Treat and consequently, was not liable to tax in India in respect of the offshore supplies under the Tax Treaty. The assessment proceedings was completed vide order dated 29 January 2004 under section 143(3) of the Act wherein the returned income was accepted without making any additions / disallowances. A survey was conducted at General Electric International Operations Company Inc’s (GEIOC) premises located at AIFACS, 1, Rafi Marg, New Delhi-110001. Thereafter, notice dated 31 March 2008 under section 143 of the Act was issued to the assessee to file return of income by the office of the 5 and 432/Mum/2011 Assistant Director of Income-tax, International Taxation, Range (1) Mumbai (AO) In response to the same, the assessee vide letter dated 29 May 2008 requested the learned AO to treat the return already filed under section 139 of the Act as turn filed in compliance to the said notice. The assessee also made detailed submissions objecting to the reopening. We find that notice under section 148 of the Act was issued on the assessee on 31.3.2008. The assessee filed a reply on 29.5.2008 in response to the notice under section 148 of the Act by stating that the return already filed may be treated as a return filed in response to notice under section 148 of the Act. In the said letter, the assessee had duly sought for reasons recorded by the learned Assessing Officer for reopening the assessment. This letter is enclosed in pages 6 and 7 of Paper Book Vol.1 filed before us. On 20.11.2008, notice under section 142(1) of the Act was issued by the learned Assessing Officer calling for various details. In response to the notice, the assessee filed a reply vide letter dt.26.11.2008 seeking a short

6 and 432/Mum/2011 adjournment. In the said letter also the assessee once again reminded the learned Assessing Officer to furnish a copy of the reasons recorded for reopening the assessment. This letter is enclosed in page 43 of Paper Book Vol.I filed before us. Thereafter, the copy of reasons recorded were communicated to the assessee by the learned Assessing Officer on 17.12.2008. The reasons recorded are enclosed in pages 49 to 52 of the Paper Book Vol.1 filed before us. For the sake of convenience, the entire reasons recorded are reproduced herein below :-

“ REASONS RECORDED FOR ISSUE OF NOTICE U/S 148 OF THE INCOME TAX ACT, 1961 IN THE CASE OF GE COMPANY FOR AY 2001-02. The return of income for AY 2001-02 was fed on 29-10-2001 declaring total income at Rs 3,0733,000 The case was selected for scrutiny and the assessment was finalized u/s. 143(3) on a total income of Rs 3,07,35,000 on 20.01.2004.

2. A Survey u/s 133A of the Income Tax Act, 1961 (Ace) was carried out at the office premises of General Electric International Operation Company Inc India liaison office (GEIOC) located at AIFACS, Rafi Marg, New Delhi 110001 on 02.00 2007 The liaison offices (LO) of GEIOC USA was slanted in India from July 01, 1987. The office was set up to undertake the liaison activities. From the information available it is seen that GEIOC has employed various persons and is sending these employees on assignments to GE entries located worldwide. From this premises, other entities incorporated in India as well as non-resident entities of the GE group are also operating.

7 and 432/Mum/2011 3. During the course of survey, statement of Shri Rupak Shah, who is employed with GE Capital Services, India as Tax Manager but having extended responsibilities of tax matters relating to all companies of GE Group in India was recorded. Statement of Shri Chandan Jain, working with GEIOC who provides interface between GE USA and GE Business in India was also recorded.

5. GE has been in India since 1902. All of GE's global businesses have a presence in India and the company has become a significant participant in a wide range of key services, technology and manufacturing industries. Employment across India exceeds 12000. Over dollar 1 billion of exports from India support GE's global business operations around the world. It has sourced products, services and intellectual talent from India for its global businesses. It pioneered the concept of software sourcing from India and is one of the largest customers for the IT service industry of India.

6. With a diverse portfolio products and services ranging from aircraft engines, power generation, water processing and security technology to medical imaging, business and consumer financing, electrical and power protection and advanced materials, GE has presence in India. Various operating companies of the group in India are in the field of finance, industries, power systems and infrastructure.

8 and 432/Mum/2011 8. During the course of survey, it was found that various employees of GE overseas group companies are working in India. Some of these employees are on the payroll of GE International Inc. USA(assessed in this charge). These are  Dan Nalawade  Riccardo Procaco  William Biair  Ashfaq Nainar  Kenneth Pierson  SameerAggarwal  Prat Kumar 9. These persons are working for various direct businesses of the GE group in India, which are neither being conducted through a subsidiary or joint venture company. These persons are India Head of different businesses and they are being supported by a team of persons, who are employed by either GE India Industrial Pvt Ltd, or other group concern. From the information available during the survey or afterwards, it is clear that various employees of GE India Industrial Pvt. Lid, are working with the expats so as to constitute a team of the expats looking after the GE businesses.

10. General Electric International Operation Co Inc, India liaison office (GEIOC), has on its payroll more than 50 employees and the designation of such employees is CAs. The assessee has explained that employees are deputed to various GE companies and they work as their employees and such employees remain on the payroll of GEIOC till the same are transferred to other entities. As per the application made to RBI and permission obtained, the liaison office was to act as a communication channel between the head office and the customers in India. However, the company instead of undertaking the permitted activities is employing various persons and providing the services of such persons to the GE group entities worldwide. The company performs all the functions relating to such employees, including their employment, payroll administration, the activities relating to deputation etc. and such activities constitutes business activities being carried out in India. The expenses incurred by such office are reimbursed by the head office without any margin. Independent third parties providing such services will certainly earn profits on the activities. The activities indicate that the GEIOC is carrying out business in India through a Permanent

 A place of business is available at disposal of the GE group entities in India.  The place of business was fixed and the business was carried out through that place of business.

Some employees of the GE group Indian entities forming part of the sales team were also carrying out the business through other fixed place of business in the form of other offices of the GE group in India.

10 and 432/Mum/2011 In view of the above, it is clear that the various GE group entities, being tax residents of different countries had fixed place PE in India as per the provisions of respective tax treaties. The office as well as the premises used as a sales outlet or for receiving or soliciting orders also constitutes the PE as provided in paragraph 2 of Article 5 of respective tax treaties. The activities of the non resident GE group entities being conducted from the fixed place of business referred above are not of the preparatory or auxiliary character.

14. It is possible that in respect of various projects relating to rendering of services / supervisory services, such GE group entities will be considered to have the PE as per the other paragraphs of the Article relating to the PE of the respective tax treaties.

11 and 432/Mum/2011 16. Considering the fact that the sales are made to Indian customers on regular basis and such GE group entities are physically present in some form or the other in India and such physical presence has full role in these sales. Therefore, the income accrues or arises to such GE group companies in India. Such income accruing or arising is liable to be taxed in India as per the provisions of Section 5(2) of the Income Tax Act, 1961.

18. As per the information gathered during the course of the survey, it is seen that in the case of GE Company which is assessed in this charge, during the FY 2000-01 relevant to AY 2001-02, sales have been made on account of the following

1. Aviation business of the group GE co has made sales to the tune of Rs.47,679,646 USD on this account which amounts to Rs.221,37,67,963 during the year in question.

2. Energy business of the group

GE Co has made sales of equipment parts amounting to USD 8,989,460 which amounts to Rs.41,73,80,628. 19. In the assessment order for AY 2001-02, finalized u/s 143(3) the assessee company had shown only income on account of Fees for Tech Services of Rs 2.74 crores and interest income of Rs 32 lakhs. This was

20. The opinion of the AO to relevant AY 2001-02 for holding that GE Co. has no PE in India was based on the facts and information available with the AO during assessment for relevant AY 2001-02. But, due to finding of new facts and the Information, on the basis of survey conducted u/s 133A of the IT Act by the Team of Delhi International Taxation at the office premises of GEIOC, located at AIFACS, 1, Rafi, Marg, New Delhi 110 001 and report given by the ADIT(IT)-1(2) New Delhi. It is further apparent that the assessee has not disclosed the income on account of energy business and aviation business in the return of income for AY 2001-02. So, based on the new facts and information available, I am of the opinion that assessee has business connection as well as PE in India and income attributed to PE / business connection is taxable in India.

22. In this case, not more than 6 years have elapsed from the end of relevant assessment year (ie AY 2001-02) and income of more than Rs. 1 lakh has escaped assessment, therefore, the Notice u/s 148 rws 147 of the Income Tax Act, 1961 satisfies the time limit for issue of notice as provided in Section 149 of the Income Tax Act, 1961.

4. The assessee filed detailed objections to the reasons recorded vide letter dt.26.12.2008 making both factual and legal submissions before the learned Assessing

13 and 432/Mum/2011 Officer. This letter dt.26.12.2008 is enclosed in pages 58 to 102 of the Paper Book Vol.1 filed before us. The objections filed by the assessee were not admittedly disposed of by the learned Assessing Officer by way of a separate speaking order. The gist of various objections raised by the assessee challenging the validity of reopening vide letter dt.26.12.2008 are as under :- a) The learned Assessing Officer should have reason to believe that income of the assessee had escaped assessment based on some tangible information or material that has come to his knowledge subsequent to the framing of the assessment. The formation of belief that income of the assessee had escaped assessment is the condition precedent for assuming jurisdiction under section147 of the Act. b) The fulfillment of this condition is not a mere formality but it is mandatory and the failure to fulfill the condition would vitiate the entire reassessment proceedings.

14 and 432/Mum/2011 c) The reasons for formation of belief must have rational connection with or relevant bearing on formation of belief. Rational connection postulate that there must be a direct nexus or live link between the material that had come to the notice of the learned Assessing Officer and the formation of his or her belief that there has been escapement of income of the assessee for the relevant assessment year in the hands of the assessee warranting reopening of assessment.

4.1. In the reasons for issuance of notices under Section 148 provided to us, your goodself has alleged that GE overseas entities are taxable in India : a. Under the Act, as it has a BC in India; and b. Under the tax treaty, as it has a permanent establishment in India.

The following are the reasons for holding the above.

4. That there is also a possibility that in respect of various projects relating to rendering of services/ supervisory services, such GE group entities will be considered to have a PE under other provisions of the respective tax treaties.

5. That the sales are made to Indian customers on regular basis and such GE group entities are physically present in some form or the other in India, the income accrues or arises to GE overseas companies in India. Such income accruing or arising is liable to be taxed in India as per the provisions of Section 5(2) of the Income Tax Act, 1961.

4.2. In the instant case, there is no rational connection between the information in possession with yourself and the formation of belief that there has been escapement of income. It is submitted that the reasons recorded no where indicate as to what is the information on record which has enabled your Honour to form an opinion that income has escaped assessment. The reasons recorded are general in nature. The references to the business of GE Group in India and other entities have been made without any basis and are totally out of context. The same does not show as to how one can derive inference that income has escaped assessment. Furthermore, the evidence being sought to be used for initiating fresh enquiry against GEC does not pertain to GEC or for the year under consideration. The same is general in nature and the question of determining a PE in India being fact specific needs to be decided on the basis of specific facts. Therefore, the act of issuing notice under section 148 of the Act, without establishing a nexus between material on 4.3. In view of the above, the pre-requisites of section 147 remain unsatisfied as the belief entertained by your Honour is not only arbitrary, irrational and based on conjectures, but also assumes existence of the activities carried out by GEC when no material is on record.

4.4. Accordingly, it is submitted that the notices issued under section 148 of the Act to GEC are bad in law and without jurisdiction and hence the reassessment proceedings initiated against GEC may kindly be dropped.

18 and 432/Mum/2011 proceeded to extract the reasons recorded for the reopening of assessment in page 2 paragraph 4 of his order. These reasons extracted when correlated with the actual reasons recorded which are enclosed at pages 49 to 52 of the Paper Book Vol.1 filed before us, go to prove that only the first four paragraphs match with the actual reasons recorded. Thereafter, the learned Assessing Officer goes on to look into materials impounded during survey and used the same as if they were part of the reasons recorded. We find that the learned Assessing Officer had not disposed of the objections raised by the assessee for reopening the assessment even in the reassessment order framed on 31.12.2008.

a) There is a fixed place /agency Permanent Establishment (PE) in India with respect to all the group entities. b) The attribution of income to PE is decided @ 3.5% of sale. This percentage of attribution was later modified by the appellate forum.

The learned Departmental Representative also placed reliance on the co-ordinate Bench decision of Delhi Tribunal in the case of GE Energy Parts Inc. Vs. ADIT in dt. 27.01.2017 for the Assessment Year 2001-02 (group concern of the assessee company)

(i) Upheld the reopening of assessment under section147 of the Act in the group entities running from common address; (ii) Confirmed the finding of the learned Assessing Officer that there is a fixed place PE and dependent agency PE and hence taxable in India; (iii) As against the Assessing Officer applying 3.5% to the amount of sales made in India as attribution of income, confirmed to the extent of 2.6% of the total sales; and (iv) Deleted interest under section 234B of the Act charged by the Assessing Officer following the decision of Hon'ble Delhi High Court in assessee’s own group cases for the Assessment Year 2001-02 to 2006-07.

Accordingly the learned Departmental Representative vehemently pleaded that the decision of the Delhi Tribunal would be squarely applicable to the instant appeals filed

21 and 432/Mum/2011 before us. The learned Departmental Representative also drew the attention of the Bench that the Authorised Representative of the assessee on earlier occasion vide letter dt.17.09.2018 had requested for adjournment of these appeals before Mumbai Tribunal on the ground that against the Delhi Tribunal’s order, appeal is pending before Hon'ble Delhi High Court and that the said decision would have a bearing on the present appeals before us and requested for adjournment accordingly. Later the learned Department Representative also submitted that the Delhi Tribunal decision referred to supra was duly affirmed by the Hon'ble Delhi High Court vide its order dt.21.12.2018 which is reported in 101 Taxman.com 142.

22 and 432/Mum/2011 we find that the assessee has challenged the validity of reassessment on various counts. The Delhi Tribunal had upheld the validity of reassessment after observing that the objections filed by the assessee for reasons recorded were duly disposed off by the learned Assessing Officer by a separate speaking order dt.12.11.2008. This is mentioned in page 4 paragraph 3 of the order of Delhi Tribunal.

23 and 432/Mum/2011 declaring total income of Rs.3,07,33,066/- and that the assessment was completed under section 143(3) of the Act on 29.01.2004 accepting the Return of Income. Hence it can be safely concluded that reopening is made in the instant case by incorrect assumption of fact that the assessee had not filed the Return of Income. Consequentially the formation of belief based on incorrect assumption of fact also fails.

Similar matter came up for adjudication before the Hon'ble Jurisdictional High Court in the case of Hindustan Lever Ltd. Vs. R.B.Wadkar reported in 268 ITR 332 wherein it was held as under:-

25 and 432/Mum/2011 11. Moreover we find from the reasons recorded by the learned Assessing Officer which are reproduced herein above, the learned Assessing Officer had only resorted to make very doubtful and vague observations. The name of the assessee is not mentioned in the said reasons. It merely talks about the activities carried on by the GE group. Further as stated earlier, it is a fact on record that the learned Assessing Officer had not disposed of the objections filed by the assessee for the reasons recorded by way of a separate speaking order. The same is not done even in the assessment order framed on 31.12.2008. We find that the Hon'ble Supreme Court in the case of GKN Driveshafts Ltd reported in 259 ITR 19 had categorically mentioned that if an assessee files the return in response to notice under section 148 of the Act and seeks for furnishing of reasons recorded from the learned Assessing Officer, the learned Assessing Officer is bound to furnish the said reasons to the assessee (which has been complied with in the instant case by the learned Assessing Officer only on 17.12.2008) and thereafter, if the assessee desires

26 and 432/Mum/2011 to file objections to the said reasons, he may do so and in that event, the learned Assessing Officer is bound to dispose of those objections by a separate speaking order before proceeding with the reassessment proceedings. The learned Assessing Officer in the instant case had violated the directions given by the Hon'ble Supreme Court in the aforesaid decision. Now whether the reassessment framed without disposing off the objections for reasons recorded would become fatal to the reassessment was the subject matter of consideration by the Hon'ble Jurisdictional High Court in the case of KSS Petron Pvt. Ltd. Vs. ACIT in Income Tax Appeal No.224 of 2014 dt.3.10.2016. The question raised before the Hon'ble Jurisdictional High Court is as under :-

“Whether on the facts and circumstances of the case and in law, the Tribunal was justified in restoring the issue to the Assessing Officer after having quashed/ set aside the order dated 14th December, 2009 passed by the Assessing Officer without having disposed of the objections filed by the appellant to the reasons recorded in support of the reopening Notice dated 28th March,2008.?” “8 We note that once the impugned order finds the Assessment Order is without jurisdiction as the law laid down by the Apex Court in GKN Driveshafts (supra) has not been followed, then there is no reason to restore the issue to the Assessing Officer to pass a further/fresh order. If 27 and 432/Mum/2011 this is permitted, it would give a licence to the Assessing Officer to pass orders on reopening notice, without jurisdiction (without compliance of the law in accordance with the procedure), yet the only consequence, would be that in appeal, it would be restored to the Assessing Officer for fresh adjudication after following the due procedure. This would lead to unnecessary harassment of the Assessee by reviving stale/ old matters. 9 In fact, to ensure that reopening notices are disposed of, expeditiously the parliament itself has provided in Section 153(2) of the Act a period of limitation within which the Assessing Officer must pass an order on the notice of reopening i.e. within one year from the end of the financial year in which the notice was issued. In fact, Section 153 (2A) of the Act as in force at the relevant time itself provides that an order of fresh Assessment, consequent to the order of Tribunal under Section 254 of the Act, would have to be passed within one year from the end of the financial year in which the order under Section 254 of the Act, was passed by the Tribunal and received by the Commissioner of Income Tax. The Director of the appellant has filed an affidavit dated 19th September, 2006. In the affidavit, it is stated that consequent to the impugned order of the Tribunal dated 14th August, 2013, the Assessing Officer has not passed any order of reassessment. Time was granted on the last occasion to enable the Respondent to respond to the affidavit dated 19th September, 2006 of the Director of the AppellantCompany. The Respondent is unable to dispute the facts stated in the affidavit dated 19th Sept., 2016 filed by the Director of the AppellantCompany. The time to pass a order on the notice dated 28th March, 2008, even consequent to the impugned order of the Tribunal, has lapsed. 11 Therefore, on the above facts and law, the substantial question of law is answered in the negative i.e. in favour of the AppellantAssessee and again st the RespondentRevenue.”

12. In the instant case before us, the assessee had sought for the reasons recorded way back on 29.05.2008 and again on 26.11.2008. The learned Assessing Officer for reasons best known to him

28 and 432/Mum/2011 decided to provide the reasons recorded to the assessee only on 17.12.2008. The objections to the same were filed by the assessee immediately after the receipt of the said reasons recorded. If the learned Assessing Officer had consciously delayed the communication of the reasons recorded for reopening to the assessee, then he cannot cry over non-availability of time for disposing the objections filed by a separate speaking order. In the instant case as stated supra, the learned Assessing Officer had not even bothered to dispose of the objections even in the reassessment order framed on 31.12.2008. Hence it can be safely concluded that the objections filed by the assessee for reopening the assessment were never disposed of by the learned Assessing Officer in the instant case.

13. Similar matter also came up before the Hon'ble Jurisdictional High Court in the case of Bayer Material Sciences (P) Ltd Vs. DCIT reported in 382 ITR 333 wherein

11. In the present facts, we find that the draft Assessment order was passed on 30th March, 2015 without having disposed of the Petitioner's objections to the reasons recorded in support of the impugned notice. The reasons were supplied to the Petitioner only on 19th March, 2015 and the Petitioner had filed the objections to the same on 25th March, 2015. This passing of the draft Assessment order without having disposed of the objections is in defiance of the Supreme Court's decision in GKN Driveshafts (India) Ltd (supra). Thus, the draft Assessment order dated 30th March, 2015 is not sustainable being without jurisdiction. This for the reason that it has been passed without disposing of the objections filed by the Petitioner to the reasons recorded in support of their impugned notice. Accordingly, we set aside the draft Assessment order dated 30th March, 2015. We are not dealing the validity of the reasons in support of the impugned notice in the present facts as the time limit to pass the Assessment order as provided under 4th Proviso to sub-section(2) of Section 153 of the Act has already expired when the petition was filed.

20. In Bayer Material Sciences Pvt. Ltd……

21. Similarly in the case of KSS Petron Pvt. Ltd……

7……

15. The learned Departmental Representative on the hearing held on 7.12.2022 sought time to produce the assessment records and also stated that the learned Assessing Officer would be present on the next date of hearing. Accordingly, the case was adjourned to 15.12.2022 at the request of learned Departmental Representative. On 15.12.2022 the learned CIT DR who argued the case originally on 7.12.2022 was not present in the Court and the Assessing Officer also as promised by learned Department Representative was not present in the Court. The assessment folder as promised was also not submitted as promised by the learned Departmental Representative. Since it was the learned CIT DR who originally sought time to produce the assessment records and the same were never sought by the Bench, the Bench took this appeal as heard as no clarification was required

33 and 432/Mum/2011 for the Bench to dispose of the appeal. In any case, all the facts that are relevant for adjudication of the challenge to reopening the assessment, are already on record in the form of assessee’s Paper Book and detailed written submissions of the learned Departmental Representative which has already been considered hereinbove.

17. Since the reopening of assessment is quashed on the legal ground, the other grounds raised by the assessee

Order pronounced in the open court on 23rd Dec., 2022.