FL SMIDTH PRIVATE LIMITED,CHENNAI vs. DCIT, CHENNAI

आदेश /O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

The assessee filed this appeal against the order of the

Commissioner of Income Tax (Appeals)-II, Chennai in ITA No. 458/2013-14

dated 24.10.2013 for assessment years 2003-04.

Limited) is a company, engaged in the business of design and supply of

automation systems to cement and other industries. For the assessment year

2003-04, the Assessing Officer completed the assessment u/s. 143(3) on

08.02.2006. Subsequently, the assessment was reopened on 18.03.2008 ,

primarily for the reason that the assessee obtained certain engineering

drawings from FLS Automation A/S, Denmark and claimed it as revenue

expenditure. Engineering drawings normally forms intangible assets and

accordingly becomes capital expenditure, but the assessee by mistake has

claimed the same as revenue expenditure. In the re-assessment order, the

AO concluded that the engineering drawings obtained from FLS Automation

A/S,Denmark was ultimately supplied to the customers and hence treated the

expenditure as revenue in the hands of assessee. However, he found that on

the payment for the drawings, TDS should have been deducted, but the

assessee did not do so and hence disallowed the expenditure u/s. 40(a)(i).

Aggrieved, the assesse filed an appeal, inter alia, challenging the validity of

re-opening the assessment u/s. 147 and the disallowance made u/s. 40(a)(i).

The CIT(A) has dismissed the appeal. Aggrieved, the assessee filed this

appeal, inter alia, with the following grounds:

I. GENERAL

(i) The order of the Commissioner of Income-tax (Appeals) dated 24.10.2013

is bad in law and on facts and is liable to be quashed ab-initio.

II Assessment Barred by Limitation

(i) The Commissioner of Income-tax (Appeals) erred in not noting that the

re-opening of assessment was barred by limitation in so far as it has been

effected beyond the period of four years from the end of the relevant

Assessment Year by invocation of the proviso to sec. 147 of the Income-tax

Act. In so far as the statutory conditions set out in sec. 147 have not been

satisfied, the proceedings for re-assessment are wholly bad in law.

(ii) The Commissioner of Income-tax (Appeals) erred in upholding the re-

opening u/s 147 notwithstanding the non-satisfaction of the conditions set

out in the proviso thereto. He ought to have noted that the Assessee had

disclosed fully and truly all the material facts necessary for the assessment at

the time of regular assessment u/s 143 (3) itself.

(iii) The Commissioner of Income-tax (Appeals) as well as the Assessing

Authority erred in re-opening the assessment notwithstanding that admittedly

no new or tangible material was found to warrant the re-opening of

assessment. In fact the reasons for re-opening rely only upon the Return of

Income filed by the Appellant and the annexures thereto, making it apparent

that no material has been found by the Assessing Authority and further that

there has been no non- disclosure of materials by the Assessee warranting

the invocation of the proviso to Sec. 147.

(iv) The lower authorities err in relying upon Explanation 1 to Sec. 147 of

the Act which is wholly inapplicable in the present case. In any event, the

provisions of the Explanation would not override the provisions of the Proviso

and the satisfaction of the statutory conditions set out therein. The Appellant

relies on various judicial pronouncements in this regard. The re-opening is

thus wholly bad in law, barred by limitation and liable to be quashed in full.

(v) The lower authorities further err in relying upon the judgment of the

Supreme Court in the case of Rajesh Javeri Stock Brokers which has been

rendered in the context of an intimation u/s 143(1) and is wholly inapplicable

in the present legal context where the original assessment has been

completed u/s 143 (3) of the Act. Further, the judgments relied on by the

Commissioner of Income-tax (Appeals) in upholding the assumption of

jurisdiction, are distinguishable and not applicable in the present

circumstances.

(vi) The Commissioner of Income-tax (Appeals) err in not noting that a

detailed enquiry had been called for by the Assessing Authority on the very

issue for which proceedings for re-assessment had been initiated at the time

of original assessment and the Appellant had, vide response dated 19.1.2006,

submitted all relevant particulars in this regard. The conclusion that there had

been no enquiry at the time of original assessment is thus wholly bad in law.

III. NON-COMPLIANCE WITH STATUTORY CONDITIONS UNDER THE

PROVISO TO SEC. 147 OF THE ACT

(i) The Commissioner of Income-tax (Appeals) errs in not noting that the

reasons for re-opening did not contain even an allegation to the effect that

there had been non-disclosure of relevant materials fully and truly by the

Assessee, justifying the invocation of extended period of limitation of six

years. In the absence of such allegation, the statutory conditions set out

under the Proviso to Sec. 147 do not stand complied with.

(ii) The Appellant relies on various judgments of the High Courts and

Tribunals to the effect that a specific allegation is required to be made in the

reasons for re-opening with regard to the failure to make a full and true

disclosure as well as setting out the new and tangible material found by the

Assessing Authority, warranting the invocation of the proviso to Sec. 147. In

the absence of such finding, Courts have confirmed the position that the

proceedings for re-assessment are liable to fail.

IV. MERITS

Disallowance u/s 195 and 40(a)(i) of the Act - Rs.31 ,34,000/-

(i) In any event and without prejudice to the above ground challenging

the assumption of jurisdiction u/s 147 of the Act, the impugned order of the

Commissioner of Income-tax (Appeals) dated 24.10.2013 is erroneous and

contrary to statutory provisions.

(ii) The Commissioner of Income-tax (Appeals) errs in upholding the

disallowance u/s 40 (a) (i) r.w.s. 195 of the Act of an amount of

Rs.31,34,000/- being payment to M/s. FLS Automation NS, Denmark towards

the purchase of engineering drawings.

(iii) The Commissioner of Income-tax (Appeals) ought to have noted that

the remittance of an amount of Rs.31,34,000/- represents an amount not

chargeable to tax in India, consequent upon which there is no requirement to

deduct tax at source u/s 195 of the Act. The provisions of Sec. 40 (a) (i) of

the Act are thus not attracted in the present case.

(iv) The Commissioner of Income-tax (Appeals) ought to have noted that

the remittances were made with regard to engineering and scientific drawings

that constitute Plant and Equipment and are thus not classifiable as 'fees for

technical services' u/s 9 (1) (vii) of the Act. The expenditure is thus not liable

for deduction of tax at source.

(v) The lower authorities err in stating that the required documentation,

not produced. In fact, all documents required for adjudication upon the issue

have been produced before the lower authorities.

(vi) The lower authorities erred in relying upon Explanation to Sec. 9 of the

Act which is wholly inapplicable in the present case, in so far as the said

Explanation would apply only in the context of interest, royalty or fees for

technical services and not in the present circumstances.

(vii) The Commissioner of Income-tax (Appeals) ought to have appreciated

the position that the remittance of Rs.31,34,000/- while representing

allowable expenditure, being part of the project cost, did not represent

income in the hands of the non-resident. The consideration related to the

purchase of technical drawings from M/s. FLS Automation AlS, Denmark that

constituted 'business income' in the hands of the entity at Denmark. The

payments were thus not liable to tax in India.

(viii) The lower authorities ought to have noted that the consideration

related to an outright purchase of offshore supply of goods and thus there

was no taxability in this regard in India. The goods had been prepared

offshore, title transferred offshore and remittances received outside India. In

so far as no part of the transaction had been occasioned in India, no income

arose or accrued in India for chargeability. The various judgments relied on

by the lower authorities are wholly distinguishable and relate to a different

factual matrix.

Omission to grant relief

The Commissioner of Income Tax (Appeals) erred in not considering the

specific ground raised by the Appellant herein pertaining to the computation

of taxable income in Ground NO.6 of the Appeal Memorandum. The Appellant

had contended that the relief granted by the Assessing Authority by order

dated 6.11.2006 ought to be given effect to which has been omitted to be

considered in the present impugned order of the Commissioner of Income

Tax (Appeals).

change of opinion. He invited our attention to the following portion of the

original assessment order:

“ A notice u/s. 142(1) of the IT Act was issued requesting the assessee

to furnish the sales tax order, bills for addition to fixed assets, details of

sundry debtors, loans and advances, current liabilities, rent paid, engineering

drawings, repairs and maintenance, professional charges, lease rentals,

provision for warranty and miscellaneous expenses. In response to the

hearing notice, the assessee’s representative Shri V.P. Manikandan, CA,

appeared and filed power. He had also furnished the details. The assessee’s

representative has also furnished the proof for TDS on foreign exchange,

details of hiring charges and other details. After discussing the case with the

assessee’s representative the assessment is completed.”

and submitted that based on the original turn of income, the AO had called

for various details and the assessee had fully and truly disclosed all material

facts including the details of engineering drawings. The AO has applied his

mind while allowing the claim of engineering drawing expenses which has

been mentioned in the above extracted portion.Thus, there was no failure on

the part of the assessee to disclose fully and truly the material facts necessary

for the assessment. The initiation of re-assessment without any fresh

evidence amounts to change of opinion and hence the re-assessment is bad in

law. In this regard, the AR invited our attention to the ratios reported in 320

ITR 361, 340 ITR 299, 378 ITR 547& 369 ITR 209. He further submitted that

the reassessment made on the ground different from reasons recorded in

notice is not valid. In this regard, he invited our attention to para 11 of the

reassessment order and relied on the ratios reported in 331 ITR 236, 349 ITR

482 and 372 ITR 762. He has also relied on the Board Circular No 3/2015

dated 12.02.2015 reported in 371 ITR 359 (ST) to say that the disallowance

made by the AO u/s. 40(a)(i) is without jurisdiction. Per contra, the DR

supported the order of the AO and the order of the CIT(A).

material. The relevant portion of the reason recorded for reopening the

assessment as recorded from the reassessment is extracted as under:

“ 2. Subsequently, reassessment proceedings u/s 147 of the Act was initiated as there was a prima facie belief that the assessee has failed to disclose all material facts relevant for the assessment. The issue involved is briefly given as under. 3. From the P&L account – Sch.11 – ‘Operating Expenses’ an amount of Rs.31,34,788 has been debited towards ‘Engineering Drawings’. In annexure- III to Form 3CEB – clause 9 (particulars relating to international transaction), it is mentioned that Engineering Drawings constitute intangible property and classified them accordingly in the certificate in Form 3CEB.

expenditure. In view of the above, the then Assessing Officer had reasons to believe that the assessee has failed to disclose fully and truly all material facts relevant for the assessment and income chargeable to tax has escaped assessment within the meaning of Sec. 147 of the Income Tax Act, 1961. Accordingly,the assessment was re-opened u/s.147 of the Act after obtaining administrative approval of the Commissioner of Income Tax -1, Chennai.”

The Assessing Officer’s observations in the original assessment order

with regard to the issues examined by him are extracted, supra, in Para 3

above. From the above , it is clear that the issues on which initiation of the

reassessment proceedings was made were clearly considered by the

Assessing Officer at the time of original assessment itself. Further, the

reasons recorded above do not indicate availability of any fresh material.

The AO’s observation in the reassessment order is extracted as under :

“11.It was explained to the assessee’s representative that if the copy of the master agreement with FLS Automation A/S, Denmark is not furnished, the nature of the said drawings and it usage, i.e., whether the drawings are intellectual properties of FLS Automation A/S Denmark that are used for multiple customers or whether separate drawings are prepared for each customer, could not be ascertained. Further, a question arises as to whether the drawings were sold to the assessee company by FLS Automation A/S, Denmark and had become its property and the assessee company in turn utilizes these designs for various projects of customers. There is no sanctity that one drawing used for one project cannot be reused for another project. While questioned, the assessee could not furnish any concrete proof that there is no re-usage of drawings. In the absence of master agreement between the assessee company and FLS Automation A/S Denmark, the exact

nature of the drawings and the ownership could not be ascertained. However, for the year under consideration, since the drawings were ultimately supplied to the customers, the expenditure is treated as revenue, in the hands of the assessee company.”

4.2 From the above it is clear that the AO in the reassessment proceedings

had also arrived to the same conclusion as was made by the AO in the

original assessment order. This fact further evidences that the reassessment

proceedings is nothing but mere change of opinion. Thereafter, the AO

travelled to an issue ie the issue u/s 40 (a) (i) on which he has not initiated

the reassessment proceedings. The Bombay High Court in 349 ITR

482(Bom) held as under in the head note:

“The sine qua non for issue of a notice for reopening of assessments even within a period of less than four years from the end of the assessment year, is reason to believe that income has escaped assessment and this belief should be on the basis of tangible material, otherwise the exercise of power to reopen would be a review of the assessment order. The mere fact than an assessment order does not deal with a particular claim cannot lead to the conclusion that while allowing the-claim the Assessing Officer had not applied his mind.

Held, dismissing the appeal, that the reasons provided a conclusion and gave no material particulars of information obtained during the course of assessment proceedings for the assessment year 1998-99. Therefore, the reasons recorded did not indicate any tangible material which had led to a reasonable belief that income had escaped assessment. Further, while passing the order of reassessment, the Assessing Officer had taken a ground different from the grounds in the reasons recorded [or reopening the

assessment under section 148 of the Act.The reasons furnished for reopening the assessment alleged that the non-fund income had been shown in the fund based income so as to avail of a higher deduction. However, the basis of the order dated March 26, 2002, was that 20.1 per cent. out of the gross expenses attributed to the non-fund income was excessive and ought to’ be restricted to only 10 per cent. Thus, the basis of the order was completely different from the reasons recorded for reopening the assessment. The reopening of assessment by notice under section 148 was not sustainable in law.”

Following the above decision, the reassessment made is held

as not valid on both grounds ie no fresh material and hence it is

mere change of opinion and the basis of the order being completely

different from the reasons recorded for reopening the assessment.

The assessee’s appeal is allowed.

Order pronounced on 18th August, 2017 at Chennai.

Sd/- Sd/- (एन एन एन.आर एन आर आर.एस आर एस एस . . . .गणेशन एस गणेशन गणेशन) गणेशन (एसजयरामन एसजयरामन एसजयरामन) एसजयरामन (N.R.S. GANESAN) (S. JAYARAMAN) �याियकसद�य �याियकसद�य/Judicial Member �याियकसद�य �याियकसद�य लेखासद�य लेखासद�य/Accountant Member लेखासद�य लेखासद�य

चे�ई/Chennai, �दनांक/Dated: 18th August, 2017 JPV आदेशक��ितिलिपअ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकरआयु� (अपील)/CIT(A) 4. आयकरआयु�/CIT 5. िवभागीय�ितिनिध/DR 6. गाड#फाईल/GF