DDIT (E), NEW DELHI vs. M/S. AMERICAN ASIA PACIFIC LLC, NEW DELHI

per the provisions of Article 5(4) of India US DTAA. Consequently, income

was assessed at Rs. 7,05,24,639/- taxable under Article 12 of the India-USA

DTAA as being royalties. On the aspect of income attributable to PE, it was

held that income would be such on which tax would come to be 15% of gross

receipts. Hence, the total income was subject to tax on a gross basis at the rate

of 15%. The assessee preferred an appeal against this assessment order before

the Ld. CIT(A).

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3.4. Subsequently, a notice dated 31.03.2010 U/S 148 of the Act was issued

by the Ld. AO for the purported reason of taxing the royalty income at a higher

rate of tax of 20% as being attributable to the PE of the assessee in India. The

reasons to belief are reproduced below:

"The assessee is a company incorporated under the laws of United States of America and is engaged in the business of operating satellites and related communication equipments. The Assessee provides transmission services through satellite under contract entered into with various parties around the world. During the relevant year, the assessee has entered into contracts with Antrix Corporation limited and Bharti BT limited for provision of data transmission services through the use of satellite and received payments from various parties. In the notes to the return of income, the assessee has claimed that the above payments received by it are neither in the nature of 'Royalty' under Article 12(3) of DTAA nor in the nature of 'Fees for Included services' as defined under Article 12(4) of the DTAA. The subject payments received by it are therefore in the nature of normal business income, which are not taxable in India in terms of Article 7 of the DTAA since the assessee does not have a PE in India. On this basis the return of Income was filed at NIL income. The assessment order in this case was passed on 19.12.2008 under section 143(3) read with section 263 of the IT Act, 1961 wherein the Assessing Officer has held that the payment received by the assessee is covered by the provision of Royalty income as defined both under the Act and the DTAA. The assessee has a fixed place permanent establishment in India and income of the assessee would also be taxed as business income under Article 7(2) of the DTAA. And in the absence of the figure attributable to the PE a tax @ 15% on the gross receipts was levied. It is perused from the record that while deciding the tax rate the date of execution of the agreement with the PE was not taken into account which resulted into an underassessment of the income of the assessee for the AY 2003-04. This also satisfies the pre-requisite condition stated under explanation 2 to section I47. Relevant portion of section 147 of the Act reads as below: "Explanation 2.-For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:- (a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income- tax;

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(b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return ; (c) Where an assessment has been made, but- (i) Income chargeable to tax has been under assessed; or (ii) Such income has been assessed at too low a rate; or (iii) Such income has been made the subject of excessive relief under this Act; or (iv) Excessive loss or depreciation allowance or any other allowance under this Act has been computed" In view of the above, I have reason to believe that the income of the assessee for the AY 2003-04 chargeable to tax has escaped assessment. In this case, not more than 6 years have elapsed from the end of the relevant Asstt. Year (i.e. AY 2003-04) and income of more than 1 Lakh has escaped assessment, therefore, the notice under section 148 read with section 147 of the IT Act, 1961 satisfies the time limit for issue of notice as provided in section 149 of the Act. “

3.5. In response to the above reasons recorded, the assessee filed its

objections vide letter dated 19.12.2011 which were disposed off vide an order

dated 23.12.2011. Subsequently, a draft assessment order was passed retaining

the conclusions regarding the characterization of receipts in the hands of the

assessee as 'royalties' and that the assessee has PE in India as held vide order u/s

263 r.w.s. 143(3) dated 19.12.2008. However, it was held that since the

agreement between the assessee and Antrix Corporation was entered on

21.08.2001, therefore, as per the provisions of section 44D r.w.s. 115A of the

Act, such assessed income is chargeable to tax at 20% on a gross basis.

Subsequently, the said draft assessment order was finalized on 27.02.2012.

6 ITA No.6355/del/2013 4. Aggrieved, the assessee preferred an appeal before the ld.CIT (A) who

was pleased to quash the reopening u/s 147/148 and subsequent reassessment.

establishment in India and while deciding the tax rate the date of execution of

the agreement with the PE was not taken into account which resulted into an

under assessment of the income of the assessee for the relevant AY 2003-04, so

the AO has rightly issued the notice u/s 147/148, which is legally valid and so

the quashing of reassessment is bad in law and need to be set aside.

submitted that the very same AO had issued similar notice u/s 147/148 to

reopen a number of reassessments which has been quashed by the Hon’ble High

Court of Delhi and cited the case of Alcatel-Lucent France dated 15.05.2012 in

WP (C) 8739/2011. The ld. AR pointed out that in the present case, scrutiny

assessment was done u/s 143(3) and u/s 263 by the CIT and the reopening notice was issued after four years after end of the relevant assessment year and, therefore, the twin condition as envisaged as per the 1st Proviso to section 147

need to be satisfied before issuance of the notice u/s 147/148 of the Act, which

is absent in this case, so the ld. CIT (A) has rightly quashed the reassessment

proceedings being one initiated by the AO without satisfying the jurisdictional

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requirement before initiating the reassessment itself. So he does not want us to

interfere in the impugned order of the ld. CIT (A).

no dispute as to the fact that notice for reopening was issued four years after end of the relevant assessment year, so 1st Proviso to section 147 needs to be satisfied before issuance of notice u/s 147/148. For ready reference, 1st Proviso

to section 147 is reproduced below :-

"Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return u/s 139 or in response to a notice issued under sub- section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary (or his assessment, (or that assessment year"

From the perusal of the aforesaid section it can be seen that, in order to assume

jurisdiction u/s 147, in a case where assessment has already been made u/s

143(3) of the Act, two conditions are required to be satisfied, viz.:

(i) The AO must have reason to believe that income chargeable to tax has escaped assessment; and (ii) He must also have a reason to believe that such escapement occurred by reason of failure on the part of the assessee either: (a) to make a return of income U/S 139 or in response to notice issued under sub-section (1) of section 142 or section. 148; or (b) to disclose fully and truly all material facts necessary for his assessment for that purpose.

8 ITA No.6355/del/2013 Thus, the ld. CIT (A) has rightly interpreted the law that in cases where

assessment has been made u/s 143(3) of the Act and action u/s 147 is sought to

be taken after the expiry of four years from the end of the relevant assessment

year, it is necessary that conditions no.(i) and either of conditions no.(ii)(a) or

(ii)(b) must co-exist. In case, any of the said two conditions is not satisfied, the

very initiation of proceedings u/s 147 of the Act shall be wholly without

jurisdiction. There are a plethora of judgments on this issue.

8.1 We concur with the ld. CIT (A) that there is no whisper / allegation that

there was any failure on the part of the assessee to disclose truly and fully all

material facts necessary for assessment. The AO himself admits that while

perusing the records of the relevant assessment year, he came across the date of

execution of agreement with the PE and that he has not taken into consideration

that fact while deciding the original assessment u/s 143(3) r.w.s. 263 of the Act,

that means assessee had disclosed everything during the original assessment

proceedings. Thus, there was no failure on the part of the assessee not to

disclose fully and truly all material facts necessary for the original assessment.

We take note of the fact that while passing the order u/s 263 r.w.s. 143(3) of the

Act, the clauses of the agreement with the customer was examined in detail to

hold that the revenues earned under the said agreement falls within the taxable

ambit of royalty as defined under section 9(1)(vi) of the Act as well as Article

12 of the India USA DTAA. Therefore, such royalty income was subject to tax

@ 15% and even though PE was also alleged and Article 7 read with section

9 ITA No.6355/del/2013 44D was not invoked. This fact in itself makes it clear that it was well within the knowledge of the Ld. AO that the said agreement has been entered before 31.03.2003 for invoking section 44D of the Act. For this reason alone,

initiation of reopening of assessment U/S 147 of the Act for this assessment year beyond four years is not found to be sustainable both in facts and law as the case falls within the first proviso to section 147 of the Act. The conclusion is

also supported by the decision relied on by the assessee of the jurisdictional High Court in Alcatel - Lucent France & Another Vs. ADIT, Circle 1(1) (2012) [W.P.(C) 8739/2011] where, on similar facts, their lordships have quashed notice u/s 148 of the Act. We also concur with the view of CIT (A) that in this

case, the AO n the same records before him had a change of opinion which cannot give jurisdiction to him to reopen the assessment. Therefore, we do not find any infirmity in the order of the CIT (A), so we uphold the same and

dismiss the revenue’s appeal.

Sd/- sd/- (J.S. REDDY) (A.T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated the 4th day of March, 2016 TS

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