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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI S. JAYARAMAN
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
This appeal of the assessee is directed against the order of
the Commissioner of Income Tax (Appeals) – 15, Chennai, dated
21.08.2017 and pertains to assessment year 2009-10.
2 I.T.A. No.2347/Mds/17 2. Shri S. Sridhar, the Ld. counsel for the assessee, submitted that the first issue arises for consideration is with regard to disallowance of ₹5,25,00,000/- said to be paid to foreign company without deducting tax as required under Section 195 of the Income-tax Act, 1961 (in short "the Act"). The assessee has also challenged reopening of assessment under Section 147 of the Act.
The Ld. counsel for the assessee submitted that return of income was filed admitting a total income of ₹1,48,24,677/-. The return was processed under Sec. 143(1) of the Act on 30.11.2010. Subsequently, according to the Ld. counsel, the return was taken for scrutiny assessment and notice was issued under Section 143(2) of the Act on 19.08.2010. The Assessing Officer completed the assessment under Section 143(3) of the Act by an order dated 29.12.2011. The assessee, according to the Ld. counsel, furnished all the details with regard to payment made to foreign company. The Assessing Officer has not disallowed any payment under Section40(a)(ia) of the Act. Subsequently, according to the Ld. counsel, the Assessing Officer issued a notice under Section 148 of the Act on 30.03.2014. According to the Ld. counsel, no fresh material came to the possession of the Assessing Officer. Even though the notice under Section 148 of the Act was issued within a
3 I.T.A. No.2347/Mds/17 period of four years, unless the conditions were complied with for
reopening assessment under Section 147 of the Act, the Assessing Officer cannot reopen the assessment. Placing reliance on the judgement of Madras High Court in Tanmac India v. DCIT (2016) 97
CCH 189, the Ld. counsel submitted that on identical circumstances, the Madras High Court found in the case before it, the return was processed under Section 143(1)(a) of the Act and no
notice was issued under Section 143(2) of the Act and thereafter issued notice under Section 148 of the Act for processing the reassessment. Even in that case, according to the Ld. counsel, the
High Court found that reopening of assessment is invalid. According to the Ld. counsel, in view of the judgement of Madras High Court in Tanmac India (supra), the Assessing Officer is not justified in reopening the assessment under Section 147 of the Act.
Coming to the merit of the issue, the Ld.counsel for the assessee submitted that admittedly, the payment of ₹5,25,00,000/-
was made to Canadian Crystaline Emirates, UAE. This payment was made for erection and commissioning charges. It is not for technical service. Therefore, according to the Ld. counsel, the profit earned by Canadian Crystaline Emirates in respect of the payment
made by the assessee towards erection and commissioning
4 I.T.A. No.2347/Mds/17 charges is not taxable in India, hence, the assessee is not liable to
deduct tax at all under Section 195 of the Act. Referring to
Explanation 2 to Section 9(1)(vii) of the Act, the Ld. counsel
submitted that the consideration made for commissioning and
erection of the plant cannot be considered to be fee for technical
service. According to the Ld. counsel, the design and machinery
belong to assessee and the Canadian Crystaline Emirates has to
erect the machinery which amounts to construction. Therefore,
according to the Ld. counsel, the payment is not liable for TDS.
On the contrary, Smt. Ruby George, the Ld. Departmental
Representative, submitted that the assessee made a payment to
non-resident company M/s Canadian Crystalline Emirates Trading
Company, UAE towards erection and commission charges without
deducting the tax, therefore, the Assessing Officer reopened the
assessment. Referring to Section 147 of the Act, the Ld. D.R.
pointed out that when the Assessing Officer has a reason to believe
that income otherwise chargeable to tax has escaped assessment,
he can very well issue notice under Section 148 of the Act for
reopening of assessment. In this case, according to the Ld. D.R.,
the payment made to non-resident company requires deduction of
tax at source. Admittedly, the assessee has not deducted tax at
5 I.T.A. No.2347/Mds/17 source, therefore, such payment made by the assessee to a non-
resident company cannot be allowed as deduction while computing
the taxable income. To that extent, according to the Ld. D.R., there
was escapement of income from taxation, hence, the CIT(Appeals)
has rightly found that the Assessing Officer has rightly reopened the
assessment.
Now coming to the merit of the claim made by the assessee,
Smt. Ruby George, the Ld. Departmental Representative submitted
that the payment was already made to a non-resident company M/s
Canadian Crystalline Emirates Trading Company, UAE towards
erection and commission charges. According to the Ld. D.R., the
amount paid by the assessee towards erection and commission
charges is in the nature of fee for technical service, therefore, it
requires deduction of tax at source. According to the Ld. D.R., the
non-resident company M/s Canadian Crystalline Emirates Trading
Company, UAE utilised its technical skill and expertise for erection
and commission of unit. Therefore, according to the Ld. D.R., the
profit of the non-resident company is taxable in India, hence, the
assessee is liable to deduct tax. Referring to retrospective
amendment made by the Parliament in Section 9(1)(vii) of the Act
with effect from 01.06.1976, the Ld. D.R. pointed out that the
6 I.T.A. No.2347/Mds/17 income of the non-resident company is deemed to accrue in India
irrespective of the fact whether the non-resident company has a
place of business or business connection in India. Therefore,
according to the Ld. D.R., the CIT(Appeals) has rightly confirmed
the order of the Assessing Officer.
We have considered the rival submissions on either side and
perused the relevant material available on record. From the
material available on record it appears that the assessee purchased
equipments from M/s Alfatah International Navigation Company
Limited, Jeddah, Kingdom of Saudi Arabia. The contract of
purchase is available at page 1 of the paper-book. As per this
contract, the assessee has purchased the machinery and
equipments from Saudi Arabian company. The assessee has
entered into another agreement for installation and commissioning
of machinery, a copy of which is available at page 27 of the paper-
book. As per this agreement, M/s Canadian Crystalline Emirates
Trading Company, UAE is only a service provider for installation of
the machinery. The machinery was purchased outside India. It was
supplied outside India. The agreement to install the machinery is
also made outside India. Therefore, M/s Canadian Crystalline
Emirates Trading Company, UAE has no business connection or
7 I.T.A. No.2347/Mds/17
place of business in India. The entire services were rendered
outside India.
We have carefully gone through the provisions of Section
9(1)(vii) of the Act which reads as follows:-
9(1)(vii) income by way of fees for technical services payable by— (a) the Government ; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government. Explanation 1.— For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. Explanation 2.— For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like
8 I.T.A. No.2347/Mds/17
project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.
When a non-resident company rendered a technical service
and Indian company paid fees irrespective of the fact whether the
non-resident company has a place of residence or business or
business connection in India or the non-resident company rendered
service in India, the assessee is liable to deduct tax. In this case,
the question arises for consideration is whether the commissioning
and erection of the machinery by M/s Canadian Crystalline Emirates
Trading Company, UAE is a technical service or not? If the service
rendered by M/s Canadian Crystalline Emirates Trading Company,
UAE is a technical service, then the assessee is liable to deduct tax.
Therefore, we have to examine whether the service rendered by
M/s Canadian Crystalline Emirates Trading Company, UAE is a
technical service or not within the meaning of Section 9(1)(vii) of the
Act.
The Parliament by way of Explanation 2 to Section 9(1)(vii)
of the Act, has clarified that rendering of managerial, technical and
consultancy services would be considered as technical services but
consideration for any construction, assembly, mining or like project
9 I.T.A. No.2347/Mds/17 would not be construed as technical services. In view of this
Explanation 2 to Section 9(1)(vii) of the Act, we have to examine
whether the service rendered by M/s Canadian Crystalline Emirates
Trading Company, UAE would amount to technical service or not.
We have carefully gone through the agreement entered into
between the assessee and M/s Canadian Crystalline Emirates
Trading Company, UAE. It is obvious from the agreement that the
assessee has entered into the agreement for purchase of design,
machinery, etc. in respect of seawater desalination equipment of
capacity of 60,000M3 per day. M/s Canadian Crystalline Emirates
Trading Company, UAE agreed to install and commission the
desalination equipment outside the country. The equipment,
specifications, designing, drawing, etc. shall remain the property of
the assessee-company. In fact, the agreement reads as follows:-
“COPYRIGHTS AND TITLE:
The Contractor hereby irrevocably agree and warrant that any copyright and title information, drawings, photographs, calculations, specifications, equipment, developed or provided by the Principal to the Contractor and whether such was provided directly or indirectly to the Contractor shall be the property of the Principal and the Contractor shall not use the same for any other purpose other than performance of Services pursuant this agreement. The Contractor hereby vest all copyright, title, designs, patents and other proprietary rights whatsoever relating to this agreement and developed /
10 I.T.A. No.2347/Mds/17
acquired during the currency of the agreement from any third party to the Principal’s. The contractor shall execute all necessary documents, proof, statements if any required by the Principal proving such copyrights, title, design, patents and other proprietary rights of the Principal.” 12. In view of the above specific agreement between the
assessee and M/s Canadian Crystalline Emirates Trading Company, UAE, it is obvious that M/s Canadian Crystalline Emirates Trading Company, UAE has erected and commissioned
the desalination equipment outside the country, therefore, it cannot be construed to be a technical service within the meaning of Section 9(1)(vii) of the Act. Therefore, this Tribunal is of the considered
opinion that the fee paid by the assessee to M/s Canadian Crystalline Emirates Trading Company, UAE is not a fee for technical service. Hence, it does not require any deduction of tax under Section 195 of the Act. Therefore, no income has escaped
from taxation.
We have also carefully gone through the judgment of Madras
High Court in Tanmac India (supra). In the case before Madras High Court, the assessee-partnership firm paid ₹5,50,000/- to a retiring partner towards compensation. The firm claimed the above said payment of ₹5,50,000/- as deduction while computing the
taxable income. Initially, the return was processed under Section
11 I.T.A. No.2347/Mds/17 143(1)(a) of the Act. No notice was issued under Section 143(2) of
the Act. Subsequently, the Assessing Officer issued notice under Section 148 of the Act and initiated reassessment proceedings. The assessee claimed before the Assessing Officer that the payment of ₹5,50,000/- to the retiring partner is a non-compete fee, therefore, it is an allowable deduction. The Assessing Officer disallowed the claim of the assessee holding that it is a capital
expenditure. The CIT(Appeals) rejected the appeal of the assessee and confirmed the disallowance made by the Assessing Officer. This Tribunal also by an order dated 18.08.2006, confirmed the
order of the Assessing Officer as well as the CIT(Appeals). On further appeal by the assessee before the High Court, it was found that the Assessing Officer initiated reassessment proceedings solely on the basis of return of income and the enclosures thereto, being
the financials and the deed of partnership. The High Court found that the above said documents were part of record and on that basis, the intimation under Section 143(1)(a) of the Act was issued
on 01.12.1998. Subsequently, the High Court found that the Department cannot be permitted to avail the extended time limit in the absence of any new or tangible material, when the time limit for
scrutiny assessment has elapsed on 31.03.2001, prior to issue of
12 I.T.A. No.2347/Mds/17
notice under Section 148 of the Act. Thus, it was found that the
issue of notice for reassessment proceeding is an arbitrary exercise
of power and a review of proceedings is not permissible under the
scheme of the Income-tax Act. In fact, the High Court has observed
as follows:-
“7. The sine qua non for the initiation of proceedings in terms of section 147 of the Act is reason to believe on the part of the assessing officer that income chargeable to tax has escaped assessment. While the court cannot examine the sufficiency of reasons on the basis of which re-assessment is initiated, the existence or otherwise such reason to believe is certainly open to verification and would be evident from the reasons recorded prior to issue of notice under section148 as required in terms of section 148(2) of the Act. In order to examine this aspect of the matter, the records were called for and have been duly produced for our perusal by Mr..Narayanaswamy. The reasons recorded are as follows:
“The debit claimed towards lump sum payment made as a compensation for future profits forgone by the retiring partner Rs.5,50,000/- is not allowable for the following reasons: 1. The payment has not been authorised by partnership deed. 2. Serving of future profit is contingent one. Contingent expenditure cannot be allowed. 3. Future profits does not relate to the AY in question. And so, the expenditure cannot be allowed in this AY.”
A perusal of the Reasons would indicate that the assessing officer proceeds solely on the basis of the return of income and the enclosures thereto, being the financials and the deed of partnership, to initiate proceedings for re-assessment. The aforesaid documents however are part of record and the basis on which the intimation under section 143(1)(a) has been issued on 1.12.98. Let us bear in mind that the intimation dated 1.2.1998 has been manually issued, being prior to the electronic era which
13 I.T.A. No.2347/Mds/17
came into force on and with effect from 2003. The assessing officer has thus evidently applied his mind to the return and annexures even at that stage. 9. The scheme of assessment as set out in section 143 requires an assessing officer to process the return by issue of an intimation (which has been done in the present case) and thereafter issue a notice under sub-section (2) of section 143 to the assessee if the assessing officer considers it necessary or expedient to ensure that the assessee has not understated income, computed excessive loss or underpaid tax calling upon him to attend his office and require him on a date to be specified therein, to produce or cause to be produced any evidence on which the assessee may rely in support of such claim. Having done so, an assessment is to be completed in terms of section 153(1) of the Act within a period of two years from the end of the assessment year in which the income was first assessable, in this case, on or before 31.3.2001.
Let us now see the sequence of events that have transpired in this case. The assessee filed a return of income pursuant to which, an intimation dated 1.12.1998 under section 143(1) (a) of the Act was issued. The provisions of section 143(2) require that if the assessing officer considered it necessary or expedient to ensure that the assesse has not understated income, claimed excessive loss or underpaid tax in any manner, the assessment is to be subject to further scrutiny, a notice under section 143(2) is liable to be issued and the assessment completed on or before 31.3.2001. This was not done in the present case. Subsequently, a notice under section 148 has been issued on 9.12.2002 under section 148 of the Income Tax Act taking advantage of the now extended limitation of four years to re-assess income on the basis of the same materials that were available with the authority as part of the record.
The phrase reason to believe in section 147 relates to such other new or tangible material as may have come to the knowledge of the assessing officer pursuant to the original proceedings for assessment. The Supreme Court in CIT Vs. Kelvinator of India (320 ITR 561) states thus in the context of the beliefthat should form the basis for a re-assessment;
14 I.T.A. No.2347/Mds/17
“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 fulfillment of certain pre-conditions 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 materialto come to the conclusion that there is escapement of income from assessment. Reasons must have a link with the formation of the belief.”
If the assessing officer, after issuing intimation u/s section 143(1) does not to issue a notice u/s 143(2) of the Act to initiate proceedings for scrutiny of the return of income, the obvious conclusion is that he does not consider it necessary or expedient to do so, the inference being that the Return of Income filed in order. It is this opinion that cannot be arbitrarily changed by the assessing officer, to re-assess income on the basis of stale material, already on record. If we thus keep in the mind the above fundamental requirement of section 147, it would be apparent that the exercise undertaken by the Revenue in this case is not one of re-assessment, but of review. The reasons make it abundantly clear that the re-assessment is sought to be initiated on the basis of the return of income and the enclosures which were available with the assessing officer since 2.11.1998 and which ought to have prompted him to issue a notice under section 143(2) of the Act to conduct the proceedings under scrutiny. What is sought to be done by the re-assessment ought to have been achieved by scrutiny assessment proceedings. Having missed the bus earlier, the Department cannot be permitted to avail of the extended time limit in the absence of any new or tangible material, when the time for scrutiny assessment has elapsed on 31.3.2001, prior to issue of notice u/s 148. The notice under section 148 dated 9.12.2002 is thus an arbitrary exercise of power and a review of proceedings impermissible in law.”
15 I.T.A. No.2347/Mds/17 14. In the case before us, the original assessment order under
Section 143(3) of the Act was passed on 29.12.2011. Therefore,
the Assessing Officer, after scrutinizing the entire material available
on record, allowed the claim of the assessee. In the case before
High Court, it was only an intimation under Section 143(1)(a) of the
Act, but in this case it is an order passed by the Assessing Officer
under Section 143(3) of the Act. The reassessment proceedings
were initiated on the basis of the return and its enclosures. No
tangible or new material came to the possession of the Assessing
Officer subsequently.
In view of the above, in the absence of any tangible material
which came to the possession of the Assessing Officer, the
proceeding cannot be reopened by issuing notice under Section 148
of the Act. Since the scrutiny proceeding under Section 143(3) of
the Act was completed by an order dated 29.12.2011, in view of the
judgment of the Madras High Court in Tanmac India (supra), the
Assessing Officer cannot reopen the completed assessment in the
absence of any new or tangible material. Therefore, even the
reopening of assessment itself is invalid in law.
16 I.T.A. No.2347/Mds/17 16. In view of the above, we are unable to uphold the order of the lower authorities. Accordingly, orders of both the authorities below are set aside and the addition made by the Assessing Officer is deleted.
In the result, the appeal filed by the assessee stands allowed.
Order pronounced on 25th January, 2018 at Chennai.
sd/- sd/- (एस. जयरामन) (एन.आर.एस. गणेशन) (S. Jayaraman) (N.R.S. Ganesan) लेखा सद�य/Accountant Member �या�यक सद�य/Judicial Member
चे�नई/Chennai, �दनांक/Dated, the 25th January, 2018
Kri. आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त (अपील)/CIT(A)-15, Chennai 4. Principal CIT-6, Chennai 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.