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Income Tax Appellate Tribunal, “C” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM & Dr.Arjun Lal Saini, AM]
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : KOLKATA [Before Hon’ble Sri N.V.Vasudevan, JM & Dr.Arjun Lal Saini, AM] I.T.A No. 540/Kol/2015 Assessment Year : 2010-11
M/s Pricewaterhouse Coopers -vs- C.I.T. (IT & TP), LLP USA Kolkata [PAN : AAAAP 4377J] (Respondent) (Appellant) For the Appellant : Shri J.P.Khaitan, AR For the Respondent : Shri G.Mallikarjuna, CIT(DR) Date of Hearing : 06.02.2018. Date of Pronouncement : 14.02.2018
ORDER Per N.V.Vasudevan, JM
This is an appeal by the Assessee against the order dated 03.03.2015 of C.I.T- (International Taxation and Transfer Pricing) passed u/s 263 of the Income Tax Act, 1961 (Act) relating to A.Y.2010-11.
The Assessee is a limited liability partnership firm incorporated under the laws of United States of America (USA). It renders consultancy and technical services and derives income from rendering such services. For A.Y.2010-11 the assessee filed return of income electronically on 30.3.2012 declaring total income of Rs.5,33,36,592/-. The assessee also claimed that a sum of Rs.10,75,16,602/- which was received by the assessee for services rendered outside India is not chargeable to tax in India as per Article 15 of the Double Taxation Avoidance Agreement between India and USA (hereinafter referred to as DTAA). Since the return of income was filed electronically, it was not possible for the Assessee to file separate computation of income and notes on computation of income. The Assessee filed Notes on computation of Income dated
2 ITA No.540/Kol/2015 M/s Pricewater house Coopers LLP USA A.Yr.2010-11 21.6.2012 before the AO on 29.6.2012 along with Computation of total income, Tax Audit Report required to be filed u/s.44AB of the Act in Form 3CB dated 29.9.2010. The assessee explained as to how the service charges received for services rendered outside India are not chargeable to tax in the Notes on computation of income as follows : “The partnership firm being a resident of USA, had allocated its income sourced from India in two distinct categories, irrespective of the fact of how the recipient of such services had withheld the taxes. Brief notes on the two categories are given in the table below for your understanding :
Category Type of services Taxability Tax rate A Professional services with This service is in 30.90% on respect to US GAAP, continuation from the gross invoice restatement of financial accounts earlier years and some (including to US accounting standards, portion of the work has cess) assisting Indian companies in been rendered form listing ADR, GDR and other India, thereby creating securities, certification and a Service PE. Hence, compilation of relevant form in entire income from computation to the above. such projects in Indi has been offered for taxation. Further, no deduction for expense has been claimed and tax has been offered on gross income. B Services which are rendered Such invoices are NIL from USA and places outside towards professional India. Normally in the nature of services rendered tax compliance (corporate, completely outside employee returns as well as India and not connected transaction taxes like VAT, sales to any PE in India. tax) or reimbursement of Frees for professional travelling expenses. services are of the nature of independent personal services as per Article 15 of the India – US DTAA and do not constitute income in the 2
3 ITA No.540/Kol/2015 M/s Pricewater house Coopers LLP USA A.Yr.2010-11 hands of the foreign party. being a firm of individuals. With respect to reimbursements, based on the interpretation of the provision of section 4 of the Income-tax Act, 1961 and the decision of the Hon’ble Calcutta High Court in the case of CIT vs Dunlop Rubber Industries Limited reported in 142 ITR 493 that reimbursement of expenses does not constitute as income in the hands of the payee, the same has not been subjected to tax.
It may be noted that the limited liability partnership firm had taken reasonable steps to conduct a tax audit by a Chartered Accountant, who based on the invoices raised on Indian clients had certified the income earned during the financial year 2009-10. The tax audit report in this respect has been attached along with this letter.
During the computation of income for assessment year 2010-11, the partnership firm classified the income arising from rendering professional services outside India as ‘in dependent personal services' within the meaning of Article 15 of the India-USA Double Taxation Avoidance Agreement. This view is in line with the direction of the Ld.CIT(A)-VI in the partnership firm's case for an earlier year. The said clause provides that the income in the nature of professional services rendered by an individual or a firm of individuals would be taxable in India only if such individual or firm of individuals has a fixed place of business in India or stay in India exceeds go days. Hence the income earned from services rendered from India has been entirely offered for tax and income for services rendered entirely from outside India is not subjected to tax as it does not constitute as income in India.”
4 ITA No.540/Kol/2015 M/s Pricewater house Coopers LLP USA A.Yr.2010-11 3. Along with the notes on computation of income dated 21.06.2012 the assessee also gave Computation of total income, a copy of which is at Page-95 of the Assessee’s paper book. The Assessee also gave the details of invoices in respect of the income which was offered to tax in the return of income. The details of such invoices are at page 95 of the assessee’s paper book. In respect of receipts for the services rendered outside India the assessee gave details like invoice no., date of invoice, nature of payment. These details are at pages 96 to 108 of the assessee’s paper book. The audit report u/s 44AB of the Act was also filed along with the return of income which is placed at pages 109 to 161 of the assessee’s paper book. The assessee claims that it had also filed details of international transaction which the assessee had with the associated enterprises (AE) in Form 3CEB as is required in terms of Rule 10E of the I.T.Rules 1962(Rules) r.w.sec.92 & 92C of the Act. These details in Form 3CEB along with the report of an accountant are at pages 162 to 168 of the assessee’s paper book.
The AO issued a notice u/s 143(2) of the Act dated 07.09.2012. Another notice u/s 142(1) of the Act dated 16.10.2012 was issued by the AO. In the said notice the AO called upon the assessee to produce the following documents : “1.Brief note on the nature of business 2.Details of ownership structure 3.Details of key management personnel and effective place of management 4.Details of branch offices/liaison offices in INDIA 5.Tax Residency Certificate if any 6.Hard copy of return and any explanatory notes in support of the return, 7.Audited Accounts & Balance Sheet as on 31.03.2010 8.Report of Audit u/s 44AB of the Income Tax Act, 1961 9.Details of International Transaction if any and Form No.3CEB 10.Copy of contract/agreements, if any 11.Any other details considered necessary.”
The assessee filed submissions dated 06.03.2013 giving a reconciliation between TDS claimed in the return and Form 26AS. Thereafter the case was discussed in the hearings on 05.03.2013, 12.03.2013 and 15.03.2013. On 19.03.2013 the AO passed an 4
5 ITA No.540/Kol/2015 M/s Pricewater house Coopers LLP USA A.Yr.2010-11 order of assessment u/s 143(3) of the Act. In para-2 of the order of assessment the AO has recorded the fact that details of income received and TDS that were produced by the AR to claim credit for TDS. Written and oral arguments were put forth which were considered. The case was heard and discussed with them. Thereafter in para-3 and 4 of the order the AO has recorded the fact that the assessee was tax resident of USA for the purpose of application of DTAA. In para-4 of the order of assessment the AO has accepted the claim of the assessee that professional services rendered outside India fall within the ambit of independent personal services as laid down in Article 15 of DTAA and is therefore not taxable in India. The AO has accepted that income earned in India from services rendered in India have been offered to tax entirely by the assessee. Thereafter the AO has accepted the total income of the assessee as declared in the return of income.
The CIT(International Taxation and Transfer Pricing), Kolkata was of the view that the aforesaid order of the AO was erroneous and prejudicial to the interest of the revenue for the following reasons :- “i)that during assessment proceedings, the AO accepted without any verification, the claim of the assessee that payment of Rs. 10,75,16,602/-was not taxable in India, though the amount was aggregate of various receipts from Indian clients, majority of them received after deduction of tax at source.
ii)that the AO also did not verify the claim of the assessee that the payments shown as non taxable was indeed related to services rendered outside India and not connected to any P.E.in India.
iii)that the A.O also did not collect any evidence to test assessee's claim for relief under Article- 15 of the Indo –US DTAA.
iv)And that although the AO had asked for details of International Transaction and Form No.3CEB vide notice u/s.142(1) dated 16.10.2012,but the assessee did not give any reply in this regard, nor did the AO pursue the matter further.
6 ITA No.540/Kol/2015 M/s Pricewater house Coopers LLP USA A.Yr.2010-11 The CIT was of the view that there was complete lack of enquiry/verification by the AO during scrutiny proceedings and therefore the order passed u/s. 143(3) of the I.T.Act vide order dated 19.03.2013 was considered erroneous in so far as it is prejudicial to the interests of revenue. The CIT accordingly issued show cause notice dated 22.1.2015 u/s.263 of the Act on the above lines and called for reply from the Assessee.
The assessee submitted a reply in response to the aforesaid notice and brought to the notice of the CIT the various documents that were filed in the course of assessment proceedings before the AO. The assessee pointed out that a sum of Rs.10,75,16,602/- was not connected to any Permanent Establishment (PE) of the Assessee in India. The assessee pointed out that all invoices in connection with the receipt of the aforesaid sum was filed before the AO. The assessee also pointed out that the services for which the assessee received a sum of Rs.10,75,16,6002/- was not rendered in India. The assessee submitted that under Article 15 of DTAA, services rendered by the assessee had to be regarded as independent personal services which are taxable only in USA. The assessee pointed out that it has no fixed place regularly available in India and the aforesaid receipts is not attributable to any such fixed place in India. The assessee also pointed out that for rendering the aforesaid services no person stayed in India exceeding 90 days during the relevant previous year. The assessee also pointed out that Form 3CD was filed along with the return of income. The assessee also pointed out that similar services rendered outside India were considered as falling within the Article of the DTAA by the CIT(A) in assessee’s own case for A.Y.2000-01. The assessee also pointed out that since the relevant enquiries were made by the AO before completing the assessment, jurisdiction u/s 263 of the Act should not be exercised on the ground that there was lack of enquiry on the part of the AO before completing the order of Assessment which renders his order erroneous and prejudicial to the interest of the revenue. The assessee made reference to the decision of the Hon’ble Supreme Court in the case of Malabar Industries Ltd. Vs CIT 243 ITR 83 (SC), the decision of the 6
7 ITA No.540/Kol/2015 M/s Pricewater house Coopers LLP USA A.Yr.2010-11 Hon’ble Bombay High Court in the case of Gabriel India Ltd. 203 ITR 108 (Bomb) and the Hon’ble Delhi High Court in the case of Naba Investments vs Union of India 246 ITR 41 (Delhi).
The CIT after considering the aforesaid reply of the assessee was of the view that the AO has merely accepted the claim of the assessee without any verification whatsoever. He held that the records of assessment did not show that any enquiry was conducted by the AO. The CIT also observed that in respect of receipts which were claimed to be falling with the ambit of Article 15 of DTAA, the persons who paid fees to the assessee were persons resident in India and they had deducted tax at source(TDS) on the payments made to the Assessee. The CIT also held that in the return of income filed the assessee had claimed credit of such TDS and refund of TDS. According to CIT therefore it was the duty of the AO to have verified whether the sum in question was taxable in India. He was of the view that the AO ought to have examined the contract between the assessee and the persons resident in India to find out the nature of services rendered and persons who rendered the services and the place at which the services were rendered. Since the AO did not do any such verification, the CIT was of the view that the order of AO was erroneous and prejudicial to the interest of the revenue..
Though in the show cause notice issued u/s.263 of the Act, the CIT did not cite non furnishing of Audit Report of International transactions between the Assessee and its Associated Enterprises in Form 3CEB as one instance of lack of proper enquiry by the AO, the CIT cited the non availability of Form 3CEB in the assessment records and drew a presumption that such report had not been filed by the Assessee. Thereafter the CIT discussed the legal position with regard to exercise of jurisdiction u/s 263 of the Act. The main conclusion of the CIT is based on the decision of the Hon’ble Delhi High Court in the case of Gee Vee Enterprises 99 ITR 375 (Delhi) wherein it was held that failure to make enquiry which the AO ought to have made in the given facts and 7
8 ITA No.540/Kol/2015 M/s Pricewater house Coopers LLP USA A.Yr.2010-11 circumstances of a case, before completing the assessment, renders his order erroneous and prejudicial to the interest of the revenue. Thereafter the CIT concluded by setting aside the order of AO for lack of proper enquiry and directed the AO to examine certain points. The following were the relevant observations of the CIT : “6. In view of the above discussions and considering the complete lack of enquiry in the assessment proceedings, I am of the considered view that the assessment order dated 19.03.2013 is erroneous in so far as it is prejudicial to the interests of revenue. The assessment order is accordingly set aside with the direction to the AO to complete the assessment de novo after giving due opportunity of being heard to the assessee. While completing the assessment, the AO shall, apart from any other thing that the AO considers necessary to examine, look into the following points and collect the necessary details as given below:
i) In case of services rendered outside India: copy of contract, the parties for whom services were rendered; amount of contractual receipts party wise; whether the payments were made by related parties - whether such related parties were associated enterprises; whether there was assistance to related parties in India to carry out their work; etc. and determine the nature of services and which Article of the DTAA is applicable. In case of reimbursements, their nature, project to which linked, employees to which related, who bore them.
ii) In case of services rendered in India: copy of contracts; the parties for whom services were rendered; amount of contractual receipts party wise; whether there was any elements of reimbursement involved; whether premises of some other entity (related or otherwise) were used; whether employees were seconded to India; whether employees or related parties provided the service, whether the services were sub-contractual; against which contracts employees visited India etc.
iii)In the Form 3CEB filed before me, only one associated enterprise - one M/s. Price Water House Coopers Service Delivery centre (Bangalore) Pvt. Ltd. is mentioned as its AE. The assessee did not file this form either with the return or during the scrutiny proceeding. However, it is also seen from the TDS reconciliation statement submitted during assessment proceedings vide letter dated 06.032013 that some of the deductors are named as M/s. Price Water House, M/s. Pricewaterhouse Coopers Pvt. Ltd., M/s. Price Waterhouse and Co., M/s. Price Waterhouse etc. The AO should also examine these payments, their relation with the assessee and the nature of services rendered by the assessee to these enterprises.”
9 ITA No.540/Kol/2015 M/s Pricewater house Coopers LLP USA A.Yr.2010-11 10. Aggrieved by the order of CIT the assessee has filed the present appeal before the Tribunal.
The ld. Counsel for the assessee brought to our notice the enquiries made by the AO before completing the Assessment to demonstrate that the AO did make adequate and necessary enquiry before completing the Assessment. Our attention was drawn to notice u/s 143(2) of the Act dated 07.09.2012 and another notice u/s142(1) dated 16.10.2012 issued by the AO. He pointed out that in reply to the aforesaid notices filed all the details before the AO. In particular the ld. Counsel brought to our notice a letter dated 06.09.2013 filed by the assessee before the AO in which the assessee explained the difference between TDS claimed in the return of income and Form 26AS. The ld. Counsel also brought to our notice the fact that the details in respect of invoices in respect of income which arose in India were filed. Similar invoices along with the nature of services and their details were furnished in respect of services rendered in USA which were not taxable in India. We have already referred to these details while narrating the sequence of events that occurred from the filing of return of income till the conclusion of the assessment by the AO u/s 143(3) of the Act dated 19.03.2013. The ld. Counsel also brought to our notice that in the notice u/s 142(1) of the Act the AO specifically called for details of international transaction and Form 3CEB. Our attention was drawn to the order of assessment wherein the AO has made a reference to the notice u/s 142(1) of the Act dated 16.10.2012 and the fact that in response to the said notice the reply filed by the assessee. He drew our attention to the paragraph 4 of which reads as follows :- “4. The activity of the assessee is stated to provide consultancy and technical Services. For the computation of income' for A Y 2010-11, the assessee classified the income arising from rendering professional services outside India as ‘independent personal services' within the meaning of article 15 of Indo-US DTAA. Thus the income earned from services rendered from India has been entirely offered to tax whereas the income arising from services rendered entirely
10 ITA No.540/Kol/2015 M/s Pricewater house Coopers LLP USA A.Yr.2010-11 from outside India has not been offered to tax as it does not constitute as income in India. In the light of above discussions, total income of the non-resident foreign firm is accepted as per return. The calculation sheet as per the system is attached herewith.
Issue copy of order to the assessee.”
According to him the AO has duly applied his mind the taxability of a sum of Rs.10,75,16,602/- which were receipts of the assessee in respect of services rendered outside India which were taxable only in USA as per Article 15 of DTAA. The ld. Counsel pointed out that in the impugned order the CIT has observed that the assessee had not produced form 3CEB viz., particulars in respect of the international transaction between the assessee and its associated enterprises. He drew our attention to the fact that in the notice dated 16.10.2012 u/s 142(1) of the Act the AO specifically called for Form 3CEB and the assessee duly furnished the same. If the Form 3CEB filed by the assessee is not in the record of assessment, the assessee cannot be held responsible for the same. He also brought to our notice that a copy of Form 3CEB was also filed before CIT in the proceedings u/s 263 of the Act and he did not find any necessity to make any reference to the Transfer Pricing Officer (TPO) u/s 92C of the Act except to record purely on a surmise that there could be more than one Associated Enterprise of the Assessee and it cannot be believed that there was only one AE of the Assesssee in India. According to him there was no impact on income due to the international transaction with the associated enterprises.
The ld. Counsel drew our attention to the decision of the Hon’ble Delhi High Court in the case of Gee Vee Enterprises vs ACIT 99 ITR 375(Delhi). He brought to our notice that this decision is the basis on which the CIT passed the order u/s 263 of the Act. In the aforesaid order the Hon’ble Delhi High Court took the view that failure to make enquiry which the AO in the given facts and circumstances of a case ought to have made renders the order of the AO erroneous and prejudicial to the interest of the 10
11 ITA No.540/Kol/2015 M/s Pricewater house Coopers LLP USA A.Yr.2010-11 revenue. He drew our attention to the following passage of the order of the Hon’ble Delhi High Court : “The reason is obvious. The position and function of the Income-tax Officer is very different from that of a civil court. The statements made in a pleading proved by the minimum amount of evidence may be accepted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. The meaning to be given to the word "erroneous" in section 263 emerges out of this context. It is because it is incumbent on the Income-tax Officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word "erroneous" in section 263 includes the failure to make such an inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.”
He submitted that in the present case, the AO did not remain passive in the face of the return. He made due enquiry as was necessary to ascertain the truth of the facts stated in the return. There was no circumstances of the case which provoked or called for any further enquiry and therefore jurisdiction u/s 263 ought not to have been exercised by the CIT. It was also submitted by him that even in the impugned order the CIT has opined that since the parties who paid fees to the Assessee were persons who are residents in India, the AO ought to have verified as to the place were services were rendered and the nature of services as per the contract between the parties to come to a conclusion that services were or could not have been rendered in India. Thus the CIT has expressed the manner in which he would have made the enquiry had he been the AO. It was submitted by him that jurisdiction u/s.263 of the Act cannot be exercised to substitute the manner in which the enquiry should be made. The approach of AO and that of the CIT could be different. If AO has conducted enquiries which in his view were warranted under the circumstances of a given case, the CIT cannot say that that
12 ITA No.540/Kol/2015 M/s Pricewater house Coopers LLP USA A.Yr.2010-11 was not the proper approach. The AO exercises his individual judgment on how to proceed to make an Assessment, what enquiries he has to make and how to frame the order of Assessment. On a mere disagreement on such individual judgment, the CIT is not entitled to exercise jurisdiction u/s.263 of the Act.
The ld. Counsel drew our attention to the decision of the Hon’ble Calcutta High Court in the case of CIT vs J.L.Morrison India Ltd. 366 ITR 593 (Cal). It was a case where order of the tribunal quashing the order u/s 263 was challenged before the Hon’ble Calcutta High Court. Order u/s 263 of the Act was passed on the ground that the AO did not make due enquiry before completing the assessment. The Hon’ble High Court made a reference to section 114 (e) of the Evidence Act, 1872 which lays down that there shall be a presumption that judicial and official acts have been regularly performed. The Hon’ble court held that this presumption is applicable to an order of assessment,. The Court observed as follows : “The Assessing Officer was required to examine the return filed by the assessee in order to ascertain his income and to levy appropriate tax on that basis. When the Assessing Officer was satisfied that the return filed by the assessee was in accordance with law, he was under no obligation to justify as to why was he satisfied. On the top of that the Assessing Officer by his order dated March 28, 2008, did not adversely affect any right of the assessee nor was any civil right of the assessee prejudiced. He was as such under no obligation in law to give reasons.
The fact, that all requisite papers were summoned and thereafter the matter was heard from time to time coupled with the fact that the view taken by him is not shown by the Revenue to be erroneous and was also considered both by the Tribunal as also by us to be a possible view, strengthens the presumption under clause (e) of section 114 of the Evidence Act. A prima facie evidence, on the basis of the aforesaid presumption, is thus converted into a conclusive proof of the fact that the order was passed by the Assessing Officer after due application of mind.”
13 ITA No.540/Kol/2015 M/s Pricewater house Coopers LLP USA A.Yr.2010-11 16. Our attention was also drawn to the observation of the Hon’ble Court in the aforesaid judgment with regard to the manner in which the AO is expected to write his order, if he is satisfied with the contention of the assessee “Unless the aforesaid recital is factually incorrect or the computation is legally wrong, it is not possible to hold that the assessment order was passed without application of mind. On the top of that when the Assessing Officer accepted the contention of the assessee there was no occasion for him to make any discussion in his order. If the Assessing Officer cannot be shown to have violated any form prescribed for writing an assessment order, it would not be correct to hold that he acted illegally or without applying his mind. The third question is, for the reasons discussed above, answered in the negative.”
Attention was also drawn to the decision of the Hon’ble Calcutta High Court in the case of CIT vs Mulchand Bagri (1993) 68 Taxman 215 (Cal). The Hon’ble court in the aforesaid decision took the view that if the AO had made some enquiry then the order cannot be termed as erroneous and prejudicial to the interest of the revenue for lack of enquiry having been made before completing the assessment.
The ld. Counsel drew our attention to the decision of the Hon’ble Bombay High Court in the case of Gabriel India 203 ITR 108(Bom) wherein the Hon’ble Bombay High Court held that the CIT cannot make an order u/s 263 of the Act unless the twin conditions viz. order being erroneous and prejudicial to the interest of the revenue exists. The Court further held that an order cannot be termed as erroneous unless it is not in accordance with law. The following observations were brought to our notice: “If an Income-tax Officer acting in accordance with law makes certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualize a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order, unless the decision is held to be erroneous. Cases may be visualized where the Income- tax Officer while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making 13
14 ITA No.540/Kol/2015 M/s Pricewater house Coopers LLP USA A.Yr.2010-11 some estimates himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a higher figure than the one determined by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. This is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of tile Commissioner the order in question is prejudicial to the interests of the Revenue. But that by itself would not be enough to vest the Commissioner with the power of suo moto revision because the first requirement, namely that the order is erroneous, is absent. Similarly if an order is erroneous but not prejudicial to the interests of the Revenue, then the power of suo moto revision cannot be exercised. Any and every erroneous order cannot be the subject-matter of revision because the second requirement must be fufilled. There must be, some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute, on an incorrect or incomplete interpretation, a lesser tax than what was just has been imposed. When exercise of statutory power is dependent upon the existence of certain objective facts, the authority before exercising such power must have materials on record to satisfy it in that regard. If the action of the authority is challenged before the court it would be open to the courts to examine whether the relevant objective factors were available from the records called for and examined by such authority.”
According to him the aforesaid observations of the decision are clearly applicable to the facts of the present case. Further reliance was also placed on the decision of the Hon’ble Calcutta High Court in the case of Russel Properties (P) Ltd. vs ACIT 109 ITR 229 (Cal) wherein the Hon’ble Calcutta High Court was concerned with the case where the AO followed the decision of the higher authorities in an earlier assessment year while making an assessment and the Commissioner revised such order u/s 263 of the Act. The Hon’ble Calcutta High Court in a writ petition against the order u/s 263 of the Act observed as follows :- “The Income-tax Officer has merely followed the decision of the Tribunal. No error has been pointed out in the said decision of the Income-tax Officer. It has not 14
15 ITA No.540/Kol/2015 M/s Pricewater house Coopers LLP USA A.Yr.2010-11 been pointed out that there were materials for the Income-tax Officer not to follow the decision of the Tribunal. As a matter of fact whenever there is a decision of the higher appellate authority, the subordinate authorities are bound to follow the said decision if judicial discipline is to be maintained. Reliance may be placed in this connection on the observations of the Supreme Court in. the case of East India Commercial Co. Ltd. v. Collector of Customs AIR 1962 SC 1893 at page 1905 of the report. In the aforesaid view of the matter I must hold that the conditions for exercise of the power under section 263 of the Act, namely, that there must be material for the Commissioner to consider that the order passed by the Income-tax Officer was erroneous in so far as it is prejudicial to the interests of the revenue were not fulfilled in the instant case.”
The above submission was made in the context of the existence of the order of CIT(A) in assesee’s case in A.Y.2000-01 on the taxability of fees received by the assesse for services rendered in USA under Article 15 of DTAA. Reference was also made to the decision of the Hon’ble Supreme Court in the case of CIT vs Max India Ltd 295 ITR 282 (SC) with regard to the conditions to be satisfied for exercise of jurisdiction u/s 263 of the Act.
The ld. DR, on the other hand, relied on the order of CIT. He submitted that there was no Form 3CEB (report of international transaction with Associated Enterprise) filed by the assessee and that was sufficient to justify the proceedings u/s 263 of the Act. He also placed reliance on the decision of the Hon’ble Delhi High Court in the case Gee Vee .Enterprises (supra). According to him the AO remained passive while passing the order of assessment and did no enquiry on the applicability of Article 15 of DTAA. He pointed out that the assessee’s return was take up for scrutiny assessment for the reason that there was high claim of refund of TDS. Therefore it was the duty of the AO to verify whether the corresponding receipts which were claimed to be not taxable were in fact not taxable. It was also submitted that none of the decisions relied upon by the ld. Counsel for the assessee are applicable to the facts of the present case. He also submitted that order of the CIT was not binding on the AO on the question of applicability of Article 15 of DTAA. He pointed out to para 3.6 of the order 15
16 ITA No.540/Kol/2015 M/s Pricewater house Coopers LLP USA A.Yr.2010-11 of CIT and submitted that the enquiries as suggested by the CIT in the impugned order ought to have been made by the AO.
We have given a very careful consideration to the rival submissions. The jurisdiction u/s 263 of the Act has been exercised by the CIT on the ground that the AO failed to make proper enquiries with regard to the claim of the assessee that a sum of Rs.10,75,16,602/- which was claimed to be receipts of the assessee in respect of services rendered outside India are not taxable in view of Article 15 of DTAA. In this regard we find that along with the computation of total income, as annexure to the computation/statement of income the assessee has given the details of nature of payment, invoice no., invoice date, gross fees and tax both in US$ and Indian rupee. In all there were 93 payments. These details are available at pages 96 to 108 of the assessee’s paper book. These documents had been filed by the assessee along with the computation of total income. It is not in dispute that these documents was available before the AO when he completed the assessment. The AO in the notice u/s 142(1) of the Act dated 16.10.2012 has also called for Audited accounts and balance sheet as on 31.10.2010, report of audit u/s 44AB of the Act. As we have already observed in a letter dated 21.06.2012 the assessee has clearly taken a stand regarding non taxability of fees received for services rendered outside India. We have also made a reference to the stand of the Assessee in this regard in the earlier part of this order. The AO in the order of assessment dated 19.03.2013 has duly taken cognizance of all the details and has come to a conclusion that the income earned from services rendered in India has been offered to tax whereas income arising from services rendered outside India has not been offered to tax. Thus it is clear that the AO has made due enquiries with regard to non taxability of receipts by the assessee for services rendered outside India and applicability of Article 15 of DTAA. The CIT in the impugned order was of the view that the AO ought to have called for the copy of the contract between the assessee and the person to whom the assessee rendered services from USA and also to verify where payments were made 16
17 ITA No.540/Kol/2015 M/s Pricewater house Coopers LLP USA A.Yr.2010-11 to the related parties and also examine the nature of services. In our view this is nothing but a fishing and roving enquiry which is not permitted in exercise of jurisdiction u/s 263 of the Act. The decision of the Hon’ble Bombay High Court in the case of Gabriel India (supra) which we have extracted in the earlier part of this order clearly lays down that u/s 263 of the Act, there cannot be any substitution of the AO’s judgment by judgment of CIT. The other decisions cited by the learned DR also supports the plea of the Assessee that the order of the AO cannot be termed as erroneous and prejudicial to the interest of the revenue for lack of proper enquiry. In our view therefore the AO has made due enquiries with regard to the receipts of the assesse from services rendered outside India which receipts are not taxable in India under Article 15 of DTAA. The exercise of jurisdiction u/s 263 of the Act in this regard is therefore held to be not sustainable and is hereby quashed. The directions given by the CIT in paragraph 3.6(i) of his order are therefore held to be unsustainable.
With regard to the services rendered in India, it is not disputed that this was offered to tax by the assessee and brought to tax by the AO. Therefore there cannot be any loss of revenue in this regard. We therefore hold that the exercise of jurisdiction in respect of receipts for services rendered in India and the direction of CIT as given in Paragraph 3.6(ii) of his order to examine the contract of the parties is not sustainable and is hereby quashed.
With regard to the international transaction between the assessee and the associated enterprises, the CIT has not cited non filing of Form No.3CEB report as a reason for initiating proceedings in the show cause notice issued u/s.263 of the Act. He has however confronted the Assessee in the course of the proceedings u/s.263 of the Act regarding to the non filing of such report. Though it has been claimed by the Assessee such report was called for by the AO in the notice issued u/s.142(1) of the Act and the same was duly furnished by the Assessee, there is not material on record to 17
18 ITA No.540/Kol/2015 M/s Pricewater house Coopers LLP USA A.Yr.2010-11 suggest that the Assessee had filed the said report. The finding of the CIT in this regard that such report was not filed by the Assessee before the AO is therefore correct. The said report was filed before the CIT in the proceedings u/s.263 of the Act. In the order passed u/s.263 of the Act, the CIT has not prima facie found any impact on income of the Assessee by reason of international transaction with AE in terms of Sec.92 of the Act. He however found on a perusal of TDS reconciliation statement that there were payees reflected in the TDS certificate by name M/s Price Water House, M/s Pricewaterhouse Coopers Pvt. Ltd.,. M/s. Price Waterhouse.and Co., M/s Price Waterhouse etc. The CIT therefore surmised that there could be some more international transactions with AE and the report disclosing only one international transaction may not be correct. In our view the CIT on perusal of Form 3CEB has not drawn any adverse inference. He however directed the AO to examine certain other payments to parties having similar name as that of the assessee. We fail to see as to how such vague reasons jurisdiction u/s 263 of the Act could be exercised. The jurisdiction u/s 263 can be exercised only on a definite finding that the order of the AO was erroneous and prejudicial to the interest of the revenue. Such a finding with regard to Form 3CEB in respect international transaction with associated enterprises has not been spelt out. Moreover the conclusions of the CIT in paragraph 3.6 (iii) of his order regarding international transactions with AE are based purely on surmises and suspicion. Therefore exercise of jurisdiction u/s.263 of the Act on the ground of non filing of Form No.3CEB and the further direction of the CIT in the impugned order is also held to be unsustainable.
In conclusion we hold that the AO before concluding the assessment has made enquiries and has take cognizance of material on record. The CIT was of the view that the course adopted by the AO was not proper. The CIT seeks to substitute his view with that of the AO without a finding that the order of the AO was erroneous and prejudicial to the interest of the revenue. On the facts of the present case we are satisfied that the 18
19 ITA No.540/Kol/2015 M/s Pricewater house Coopers LLP USA A.Yr.2010-11 AO made due enquiries before completing the assessment and order of the AO cannot be termed as erroneous for lack of proper enquiry before concluding the assessment. For the reasons stated above we quash the order u/s 263 of the Act and allow the appeal of the assessee.
In the result the appeal of the assessee is allowed.
Order pronounced in the Court on 14.02.2018
Sd/- Sd/- [Dr.A.L.Saini] [ N.V.Vasudevan ] Accountant Member Judicial Member
Dated : 14.02.2018 [RG Sr.PS]
Copy of the order forwarded to:
M/s Price waterhouse Coopers LLP USA, C/o Pricewaterhousecoopers Private Ltd., Plot Y-14, Sector EP & GP, Sector-V, Salt Lake, Kolkata-700091, west Bengal. 2C.I.T. (IT & TP), Kolkata. 3.CIT(DR), Kolkata Benches, Kolkata.