Brief of the Case
Delhi High Court held In the case of Oracle Systems Corporation vs. DIT that it is a settled law that reopening based on change in opinion is not permitted. In the current case, revenue does not discovered another concealed permanent establishment but wanted to link the royalty received by the Petitioner by applying the principle of force of attraction to business income of PE in India. The reasons for forming a belief that income has escaped assessment also does not indicate that the royalty in question was earned by the Petitioner through a PE, it only alleges that it is observed that such royalty is linked to the Petitioner PE. Clearly, there was no other primary fact which was material to the assessment and not disclosed by the Petitioner. Further it is apparent that whereas the AO while framing the assessment had not applied the rule of force of attraction, he now infers that income by way of royalty can also be taxed under Section 44D as business income in terms of Article 7 of the Indo US DTAA. Clearly, this is a change of opinion. Hence, reopening of assessment on account of change in opinion is not permitted.
Facts of the Case
The Assessee is engaged in the manufacture and production of business support software. The Assessee has a wholly owned subsidiary in India, namely, Oracle India Private Limited (OIPL). The Assessee filed its return of income for AY 2005-2006 on 30th November, 2006 declaring an income of Rs.1,79,27,09,864/-. The Assessee has entered into a Software Duplication and Distribution License Agreement with OIPL pursuant to which OIPL sublicenses software products to various customers in India. The Assessee offered the royalty received under the Software Duplication and Distribution License agreement to tax in its return of income. After due scrutiny of the return and all explanations furnished by the Assessee, the AO concluded that the software development centres of OIPL located at Hyderabad and Bangalore constituted the Assessee‘s Permanent Establishment (PE) in India. Accordingly, the AO taxed the income of the Petitioner in respect of business of development of software as profits of the Assessee attributable to its PE in India. The AO also assessed income of the Petitioner from what he termed as Global Deals, as chargeable to tax under the Act. After culmination of the proceedings, an assessment order was passed on 21st November, 2008.
Later The Assessee received a notice dated 28th March, 2012 issued under Section 148 of the Act, inter alia, stating that the AO had reason to believe that income chargeable to tax for the AY 2005-06 had escaped assessment within the meaning of Section 147 of the Act and consequently, he proposed to re-assess the Assessee‘s income for the said year. The main controversy in the present petition is whether the conditions as laid down under Section 147 of the Act for re-opening the assessment for the AY 2005-06 were satisfied.
Contention of Appellant
The ld counsel of the appellant questions the assumption of jurisdiction to reopen the assessment principally on the ground that there has been no failure on the part of the Petitioner to fully and truly disclose all material facts necessary for its assessment. The Petitioner also disputes the claim of the Revenue that any of its income chargeable to tax under the Act has escaped assessment but for the purposes of the present petition, the learned counsel for the Petitioner has, without prejudice to other contentions, restricted his arguments to (a) the applicability of the first proviso to Section 147 of the Act, that is, the Petitioner has not failed to disclose fully and truly all material facts necessary for its assessment; and (b) that the re-opening of assessment has been occasioned by change in opinion, which is impermissible.
Contention of the Revenue
The ld counsel of the revenue submitted that the royalty payable to the Petitioner is taxable as business profits in terms of Article 7 of the Double Tax Avoidance Agreement between India and USA and not as royalty in terms of Article 12 of the Indo-US DTAA. He submitted that the royalty payable to the Petitioner by OIPL is linked to its PE in India and by applying the principle of force of attraction; the said royalty would also be taxable as business profits and not as royalty.
Held by High Court
High Court held that it is not in dispute that the Assessee has produced all relevant material that was required. The AO had further examined the transactions in question and had accepted that the royalty payable to the Petitioner was chargeable to tax at the rate of 15%. The AO had concluded that the software development centres in Hyderabad and Bangalore constituted the Petitioner‘s PE in India insofar as the Petitioner‘s income from software development is concerned. However, the AO accepted that the ordinary course of business of OIPL is replication and licensing of software‖ Accordingly, the Petitioner‘s income from royalty was taxed in accordance with Article 12 of the Indo – US DTAA. The AO now wants to tax this royalty as income from business by applying the principle of force of attraction to the Petitioners alleged PE in India. The principle of force of attraction of the Permanent Establishment – as explained by Klaus Vogel on Double Taxation Conventions – is a principle where the state in which a permanent establishment of a non-resident is allowed to “tax all income derived by the enterprise from sources in that State irrespective of whether or not such income is economically connected with the permanent establishment.” In other words, the Revenue is not seeking to tax such royalty as it has discovered another concealed permanent establishment but is seeking to link the royalty received to the Petitioner‘s alleged extant PE by applying the principle of force of attraction to that PE. The reasons for forming a belief that income of the Petitioner has escaped assessment also does not indicate that the AO had discovered that the royalty in question was earned by the Petitioner through a PE, it only alleges that it is observed that such royalty is linked to the Petitioner PE. Clearly, there was no other primary fact which was material to the assessment and not disclosed by the Petitioner.
Further it is apparent that whereas the AO while framing the assessment had not applied the rule of force of attraction, the present incumbent apparently feels that the rule of force of attraction ought to have been applied; he now infers that income by way of royalty can also be taxed under Section 44D of the Act as business income in terms of paragraph 1 of Article 7 of the Indo US DTAA read with paragraph 6 of Article 12 of the Indo-US DTAA. Plainly, this is a change of opinion. It is now well settled that it is impermissible to re-open concluded assessments on the basis of such change of opinion.
In Oracle Systems Corporation v. Assistant Director of Income-tax, Circle 2(1), International Taxation, New Delhi  235 Taxman 337 (Delhi), a Co-ordinate Bench of this Court considered the Petitioner‘s challenge to re-opening of assessment for the AY 2002-03 and 2003-04. The reasons recorded for re-opening the assessments for those years were more or less similar to the reasons as recorded in the present case. In that case, the Court observed that in the present case, having examined all the relevant facts and circumstances, it is clear that the aspect of attribution was too obvious and apparent for the Assessing Officer to have been ignored in the first round/original proceedings” and following the decision of the Full Bench in CIT v. Usha International Ltd. 2012 348 ITR 485 held that what the Assessing Officer is now seeking to do amounts to a clear change of opinion and that is not permissible.” Further the Supreme Court in the case of CIT v. Kelvinator of India Limited: 320 ITR 561 (SC) had held that the expression ―reason to believe as used in Section 147 must be given an schematic interpretation. The Court held that an assessing officer had no power to review but only to re-assess an Assessee‘s income that had escaped assessment on fulfilment of certain conditions. Thus, re-assessment on the basis of change of opinion must be excluded from the scope of Section 147.
Accordingly, appeal of the assessee allowed.