ITAT Quashes Reassessment as Reopening Was Based on Mere Change of Opinion

Van Oord Dredging and Marine Contractors BV Vs ADIT(IT)-2(2) (ITAT Mumbai)

Summary:  The assessee, a company incorporated in the Netherlands and engaged in international dredging activities, filed appeals before the ITAT Mumbai for Assessment Years 2005-06 and 2007-08 challenging the reopening of assessments, the validity of the assessment orders, and the taxation of management service fees as royalty.

The assessee had received management service fees from its Indian associated concern, Van Oord India Private Limited (VOIPL). It did not offer these receipts to tax, contending that the services rendered did not make available any knowledge, experience, skill, know-how, or processes to VOIPL and therefore were not taxable under Article 12 of the India–Netherlands Double Taxation Avoidance Agreement (DTAA) as fees for technical services. During the original assessments completed under Section 143(3), the Assessing Officer (AO) accepted the assessee’s position and made no addition in respect of the management service fees.

Subsequently, while completing the assessment for AY 2009-10, the AO treated similar management service fees as royalty and brought them to tax. Relying on that assessment order, the AO reopened the assessments for AYs 2005-06 and 2007-08 by issuing notices under Section 148 on 30.03.2012. In the reassessment proceedings, the AO taxed the management service fees as royalty. The CIT(A) upheld both the reopening and the additions, leading to the present appeals before the Tribunal.

The assessee contended that during the original assessment proceedings, the AO had specifically examined the taxability of management service fees and had raised detailed queries, which were answered through written submissions. After considering those explanations, the AO had accepted the assessee’s position. Therefore, reopening the assessments solely because a different view was taken in AY 2009-10 amounted to a mere change of opinion, which was impermissible in law. The assessee relied on judicial precedents, including the Supreme Court decision in CIT v. Kelvinator of India Ltd..

For AY 2005-06, the assessee further argued that the reopening was based on incorrect facts. The AO had stated in the recorded reasons that certain agreements had not been submitted during the original assessment proceedings. However, the assessee demonstrated that the relevant agreements had already been furnished, while one agreement referred to by the AO did not exist. It was therefore contended that the reopening rested on a factually incorrect premise. The assessee also argued that the reopening for AY 2005-06 had been made after four years from the end of the relevant assessment year despite there being no failure to disclose fully and truly all material facts during the original assessment proceedings.

The Tribunal observed that the assessments had been reopened only because the AO had adopted a different view regarding the taxability of management service fees in AY 2009-10. It noted that the AO’s references to agreements not being considered properly did not legally justify the reopening. The Tribunal accepted the assessee’s contention that the reassessments were initiated merely on account of a change of opinion. Referring to the Supreme Court decision in Kelvinator of India Ltd., the Tribunal held that reopening on the basis of a change of opinion was not permissible.

The Tribunal further held that for AY 2005-06, the reopening was based on incorrect facts and that the AO had failed to establish any failure on the part of the assessee to make full and true disclosure of material facts. Accordingly, the reopening of AY 2005-06 was also liable to be quashed on those grounds.

Additionally, the Tribunal found that the AO had not issued mandatory notices under Section 143(2) after the filing of returns in response to the reopening notices. The notices under Section 143(2) had instead been issued simultaneously with the notices under Section 148. The Tribunal held that the assessment orders were liable to be quashed on this ground as well.

On the merits of the additions, the Tribunal noted that the management service fees had been assessed as royalty by the AO based on the view adopted in AY 2009-10. However, the Tribunal had already held in the assessee’s own case for AY 2009-10 that management service fees could not be assessed as royalty under Article 12(4) of the India–Netherlands DTAA. That decision had also been followed in subsequent assessment years. Therefore, even on merits, the addition treating management service fees as royalty was liable to be deleted.

Accordingly, the Tribunal held that the reopening of assessments for both years was not in accordance with law, quashed the reassessment orders, and allowed both appeals of the assessee.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The assessee has filed these appeals challenging the orders passed by the learned CIT(A)-56, Mumbai and they relate to A.Ys. 2005-06 & 2007-08. Since the issues urged in these appeals are identical in nature, they were heard together and are being disposed of by this common order, for the sake of convenience.

2. The assessee has challenged the reopening of the assessment, validity of assessment order passed and also the correctness of assessment of management service fees as ‘royalty’.

3. The assessee is incorporated in Netherlands and is an international dredging contractor. The original assessment for A.Y. 2005-06 was completed u/s. 143(3) of the Act on 31.3.2008 and the original assessment for A.Y. 2007­08 was completed u/s. 143(3) of the Act on 4.1.2011. The assessee is having an associated concern by name M/s. Van Oord India Private Limited (VOIPL) in India (This Indian company was earlier known as “Ballast Hum Dredging India Private Ltd). The assessee has received management service fees from VOIPL in both the years under consideration. The assessee did not offer the same to tax on the reasoning that services rendered by the assessee do not make available any knowledge, experience, skill, knowhow or processes to VOIPL and therefore it is not taxable as per Article 12 of DTAA entered between India and Netherlands as fee for technical services. In the original assessment proceedings, the Assessing Officer accepted the view of the assessee and did not assess the management service fees received by it from VOIPL in both the years under consideration.

4. Subsequently, the Assessing Officer completed the assessment of A.Y. 2009-10 wherein, he brought management service fees to taxation treating the same as “royalty”. By following the order passed for AY 2009-10, the Assessing Officer reopened the assessment of both the years under consideration by issuing notices u/s 148 of the Act. The notices for both the assessment years were issued on 30-03-2012 and served on 03-04-2012. In the reopened assessments, the AO brought the management services fees to taxation by treating the same as ‘royalty’.

4. Before the learned CIT(A), the assessee challenged the validity of reopening as well as assessment of management service fees received by it as ‘royalty’. The contentions of the assessee did not find favour with the learned CIT(A) and accordingly he confirmed the reopening of assessments of both the years and also confirmed the addition made in both the years. Aggrieved, the assessee has filed these appeals before us.

5. The Learned AR challenged the validity of reopening of assessment in both the years on various grounds. The Ld A.R submitted that the Ld CIT(A) has upheld the reopening by observing that Explanation-1 to sec. 147 shall apply to the facts of the present case. The Explanation-1 to sec. 147 states that mere production of account books and other evidence from which material evidence could with due diligence have been discovered by the AO does not necessarily amount to a disclosure within the meaning of first proviso to sec. 147. The Learned AR submitted that the Assessing Officer had raised a specific query during the course of original assessment proceeding, in both the years under consideration, regarding taxability of management service fees and the assessee has filed its submissions dated 15.12.2008 for A.Y. 2005-06 and submissions dated 21.12.2010 for A.Y. 2007-08 explaining as to why the amount received in connection with rendering of management service fees is not taxable. The AO has accepted the same and hence did not make any addition in the original assessment proceedings. The Learned AR submitted that when a specific query has been raised during the course of original assessment proceedings in respect of an issue, then the provisions of Explanation-1 to section 147 of the Act does not apply to the said issue. In support this proposition, the learned AR placed reliance on the decision rendered in the case of Idea Cellular Ltd. Vs. DCIT (301 ITR 407). In view of the facts narrated above, the Ld A.R submitted that the learned CIT(A) was not justified in placing reliance on Explanation-1 to Section 147. The Learned AR submitted that the Assessing Officer, after having examined the issue in detailed manner in the original assessment proceedings, have reopened the assessment only for the reason that he has taken a different view on the very same issue in AY 2009-10, which is nothing but a mere change of opinion. He submitted that the Assessing Officer did not have any material or reason to believe that there was escapement of income, except stating that the relevant agreement has not been examined properly in the original assessment proceedings. Accordingly he contended that the reopening of assessment is liable to quashed in both the years, as the AO has reopened the assessments merely on account of change of opinion. In this regard learned AR placed reliance on the decision rendered by Hon’ble Supreme Court in the case of CIT Vs. Kelvinator of India (320 ITR 561).

6. The Learned AR also submitted that the assessment orders of both the years are required to be quashed as the Assessing Officer did not issue mandatory notice u/s 143(2) of the Act after filing return of income. Instead he has issued notice u/s. 143(2) in both the years along with notice issued u/s. 148 of the Act, which cannot be considered as proper issue of mandatory notice.

7. The Learned AR submitted that the Assessing Officer has reopened the assessment for A.Y. 2005-06 on the basis of incorrect facts. Submissions of learned AR in this regard are extracted below:-

3.1.1. Incorrect facts in reasons for re-opening:

The AO in his reasons recorded (Page 27 of the Paperbook) had stated as follows:

“But on going the records, it has been observed that the service agreement submitted by the assesses along -with its submission dated 11.12.2008 was not updated agreement which dated back to 1st April, 1998 (the assessee during the course of the assessment proceedings for AY 2009-10 has submitted the agreement entered into as of 1st April, 2004). The assessee company had also entered into service agreement on 01.04.2001 which was also not submitted by them.”

He further observes that in AY 2009-10, the Assessing Officer has after going through the 1 April 2004 agreement held the income earned by the Appellant as Management Fees to be Royalty and taxable in India.

In this connection we wish to submit as under:

Agreement dated 1 April 1998 – This agreement was submitted to the AO during assessment proceedings vide letter dated 8 December 2008 (filed on 11 December 2008) (refer Page 8-9 of the Paperbook). Further, pursuant to the said agreement, VOIPL renders services to VODMC i.e. an expense in the hands of VODMC and has no connection with the amount received for rendering management services (refer Page 19-23 of the Paperbook).

Agreement dated 1 April 2001 – There is no such agreement entered into by the Appellant (refer Page 5 of the assessment order).

Agreement dated 1 April 2004 – This agreement was submitted also to the AO during assessment proceedings vide letter dated 15 December 2008 (refer Page 12 of the Paperbook)

Hence, the reopening is based on factually incorrect premise viz. that it is factually incorrect for the AO to say that the agreements dated 1st April 1998 and 1^st April 2004 were not submitted the reasons recorded by the AO. It is submitted that factually incorrect reasons cannot be the basis of reopening under section 147 of the Act. In this regard, the Appellant relies on the decision of High Court fHC³) of Delhi in the case of Oriental Insurance Co. vs Commissioner of Income-tax (378 ITR 421) (Para 11 and 12).

He submitted that the re-opening of assessment of the AY 2005-06 is liable to be quashed on the above said reason also.

8. The Learned AR submitted that the assessment for A.Y. 2005-06 has been reopened after expiry of four years. He submitted that the assessee has furnished all details during the course of original assessment proceedings and there was on failure on the part of the assessee to disclose fully and truly all material facts on record. Accordingly he submitted that the first proviso to sec. 147 would disable the AO to reopen the assessment. In this regard, he placed reliance on the decision of Hon’ble Bombay High Court rendered in the case of Hindustan Lever Limited Vs. ACIT (268 ITR 332).

9. We heard Ld D.R and perused the record. We notice that the assessing officer has reopened the assessments of the impugned assessment years only for the reason that he has taken a different view with regard to the taxability of the management services fees received by the assessee in AY 2009-10. We have noticed that the assessing officer has mentioned in the reasons for reopening that certain agreements have not been considered or not considered properly. But the Ld A.R has demonstrated that the agreement dated 01st April, 1998 (referred to in AY 2005-06) relates to the agreement under which the assessee has availed services from VOIPL and paid money to it. Hence the agreement dated 01st April, 1998 is not relevant for the issue under consideration, i.e., receipt of management service fee from VOIPL. In AY 2007- 08, the assessing officer has stated that the agreement was not been explored by the AO in the original assessment proceedings, which is nothing but taking a different view on the same matter. Though the assessing officer has attempted to give a reasoning to support his reasons for re-opening, we are of the view that the same would not be legally supporting the view of the AO. Hence, we are of the view that there is merit in the contentions of the assessee that the assessing officer has reopened the assessments of both the years only on account of change of opinion. There is also merit in the contentions of the assessee that the assessing officer has changed his opinion on the basis of view taken by him while completing the assessment of the assessment year 2009-10. In the case of Kelvinator India Ltd (supra), the Hon’ble Supreme Court has held that the reopening of assessment on account of change of opinion is not permissible. In AY 2005-06, the AO has reopened the assessment on incorrect facts and further the assessing officer has failed to demonstrate that there was failure on the part of the assessee to disclose fully and truly all material facts during the course of original assessment proceedings. Hence the reopening of assessment of AY 2005-06 is liable to be quashed on these two grounds also. Accordingly we set aside the order passed by Ld CIT(A) on this issue and hold that the reopening of assessments of both the years are not in accordance with the law and accordingly quash the assessment orders passed for both the years under consideration.

10. Since the assessing officer has not issued notices u/s 143(2) of the Act after filing of returns in both the assessment years, the assessment orders are liable to be quashed on this ground also.

11. We have noticed that the assessing officer has assessed the management service fees received by the assessee as “Royalty” in AY 2009-10. The AO has reopened the assessments of both the years under consideration after passing of order for AY 2009-10 and accordingly assessed the management service fee received in both the years under consideration as Royalty. The assessment order passed for AY 2009-10 has been challenged by the assessee and when it reached ITAT, the Tribunal, vide its order 07-10-2016 passed in ITA No.7589/Mum/2012 has held that the management service fees cannot be assessed as Royalty in terms of Article 12(4) of India Netherlands Treaty. The order so passed by the Tribunal in AY 2009-10 has been followed in AY 2013­14 and 2014-15 in ITA Nos. 6140 & 6141/Mum/2017 dated 10-11-2017. Accordingly, on merits of the issue also, the addition made by the AO by assessing the management service fee as Royalty is liable to be deleted.

12. In the result, both the appeals of the assessee are allowed.

Order has been pronounced in the Court on 28.02.2018.