HIGH COURT OF DELHI
Deputy Director of Income-tax
W.P. (C) NO. 13983 OF 2009
MAY 1, 2012
Sanjiv Khanna, J
Mitsubishi Corporation has filed the present writ petition impugning initiation of re-assessment proceedings under Section 147 of the Income Tax Act, 1961 (‘Act’, for short) vide notice issued under Section 148 of the Act dated 31.3.2009. The petitioner thereafter had in terms of the decision of the Supreme Court in GKN Driveshafts (India) Ltd. v. ITO  259 ITR 19/ 125 Taxman 963 filed objections to the initiation of re-assessment proceedings which stand dismissed by the impugned order dated 26.11.2009.
2. The assessment year in question is 2002-03 and it is undisputed that the original assessment proceedings were concluded vide assessment order dated 24.3.2006 passed under Section 143(3) of the Act.
3. Ld. counsel for the petitioner before us has raised 6 contentions namely,
(1) It is the case of change of opinion as the Assessing Officer in the original assessment proceedings had examined and gone into the question of the income earned by the project office from sales made to Delhi Metro Rail Corporation (hereinafter referred to as DMRC).
(2) That the assessee had made full and true disclosure of material facts and the bar stipulated in the proviso to Section 147 of the Act applies.
(3) The reasons recorded do not specifically record and mention that the assessee had failed to disclose full and true material particulars.
(4) There is no escapement of income.
(5) Approval granted under Section 151 of Act by the Director of Income Tax (International Taxation) is back dated and was not taken on or before 31st March, 2009.
(6) The original assessment order under Section 143(3) of the Act is an agreed assessment and accordingly, the petitioner was taxed at GP rate of 2.75% on the total turnover as mentioned in Annexure P2 of the writ petition.
4. As far as the contention No.5 is concerned, we notice that a Division Bench of this Court vide orders dated 25.11.2010, 28.1.2011 and by our order dated 9.8.2011, we had directed that affidavits of the concerned officer who had put the file for approval and the authority who had granted the approval should be filed. The said affidavit has not been filed by the approving authority i.e. Director of Income Tax (International Taxation). However, two affidavits of the then assessing officer, Neehar Ranjan Pandey have been filed. In the second affidavit filed on 21.10.2011, he has stated that the approval/satisfaction was granted by the Director of Income Tax (International Taxation) on 31.3.2009. Annexure 2 to the said affidavit has not been filed with the affidavit but has been produced before us during the course of hearing. The said original shows that the Director of Income Tax (International Taxation) had granted sanction/approval on 31.3.2009. In view of the above, the 5th contention of the petitioner does not appear to be correct and has to be rejected. We may only record here that we are not impressed by the contentions No.4 and 6 raised by the petitioner with regard to the escapement of income and an agreed assessment cannot be reopened. Re-assessment can be initiated if the conditions mentioned in Section 147 are satisfied, even if the first/original assessment was on agreed assessment. Regarding under assessment or escapement of tax, a wrong or incorrect assessment can result in the same. At the stage of issue of notice only a prima facie or tentative view is to be taken.
5. Having heard counsel for the parties, we are of the view that the petitioner is entitled to succeed in view of the contention Nos.1 and 2. Contention No.3 as we perceive is a part of contention No.2. Our reasons are elucidated in paragraphs below.
6. The reasons recorded for reopening go into about 49 typed pages. However, except for first two pages and the last page, the said reasons are mere reproduction of the assessment order passed by the said Assessing Officer for the assessment year 2005-06. The first two pages portion of the reasons which are germane and discuss the factual matrix pertaining to the assessment year 2002-03 and the last portion of the same reasons read as under :
“The assessee is operating in India through liaison office and also through project office. The assessee alongwith Rotem Co., a company incorporated in South Korea and Mitsui Electrical Corporation, a company incorporated in Japan , formed a consortium. The said consortium has been awarded a contract by Delhi Metro Rail Corporation (DMRC) for design, manufacture, supply, testing and commissioning of passengers. It was agreed between parties that the obligations and rights under the Contract are separate for each party and no party will be responsible for the acts of other parties. The consideration for the entire work to be carried out by the consortium is a fixed lump sum price of INR 3,110,439,836 and USD 260,997,269 which is apportioned amongst various cost centres (A to J), and further apportioned amongst various milestones.
Under the terms of conditions of the said contract, it has been agreed that 15 trains will be supplied to DMRC from overseas entirely manufactured outside of India and remaining 45 trains will be supplied/assembled/manufactured in India in a phased manner as regard upon between the parties. The assessee was appointed as the leader of the consortium and has set up a Project Office (PO) in India for executing the said contract.
The Liaison Office (LO) of the assessee is engaged in various activities, details of which has been furnished by the assessee in the course of the assessment proceedings.
The assessee filed original return of income showing a loss of Rs. 21,345,145/-. In notes to the accounts the assessee has stated that “no income has accrued to the Project Office during the period ended March 31, 2002 from the contract mentioned in paragraph 3 above”. This return was subsequently revised on 31.03.2004 showing a income of Rs. 19,21,063/- on account of ‘prior period income’. During the course of the assessment proceedings, the assessee furnished details of the turnover of the LO in India at Rs. 34989 Million. The assessee, during the assessment proceedings agreed to be taxed at the G.P. rate of 2.75% of total turnover of the L.O. This turnover, however, did not include the sales to DMRC effected through the Project Office amounting to Rs.187,14,40,158/-. This amount represents ‘milestones payments’ received overseas in foreign currency. The said amount was also not offered for tax in the income of P.O.
During the course of assessment proceedings, for A.Y 2005-06 it was found that the assessee has shown total ‘milestones payments’ of Rs. 2,348,868,060/- received from DMRC under the contract RS1 which is relevant for A.Y 2002-03 also. The assessee included these sales in the turnover of the LO and applied the GP rate of 2.75% for arriving at the gross income, 50% of such income was attributed to the LO in India . The taxable income was computed after claiming of deduction u/s 44C of the Act.
In the course of the assessment proceedings, it was found that the sales made to DMRC are not attributable to the LO rather they are attributable to the Project Office opened in India for the purpose of executing the project of DMRC. In the assessment order for the A.Y.2005-06, the issue was discussed in detail, the relevant extracts of which are reproduced below :
In view of the above finding in the assessment year 2005-06 and as the facts for the A.Y. 2002-03 are exactly the same. I have reasons to believe that an income exceeding Rs.100,000/- has escaped assessment.
Put up for kind approval of the D.I.T. (International Taxation-I), New Delhi to issue notice u/s 148 of the Act in terms of proviso to section 151(1) of the Act.” (Emphasis supplied)
7. For the sake of completeness we may record that the extracts of the assessment order for the assessment year 2005-06, contain a reference to “business connection” and interpretation of the said term, whether the assessee had a permanent establishment in India in respect of sales made to the DMRC, terms of contract entered into between DMRC and the consortium of which the petitioner-assessee was one of the members, terms on which payment was made from time to time referred to as “milestones” etc.
8. A reading of the reasons recorded which specifically refer to the factual matrix as far as assessment year 2002-03 is concerned shows that the Assessing Officer has recorded that the petitioner was a member of the consortium which was awarded a contract by DMRC for design, manufacture, supply, testing and commissioning of passenger trains. In consideration thereof, the said consortium was entitled to the fixed lumpsum payment of INR 3,110,439,836/- and USD 260,997,269 which was apportioned amongst various cost centres and further amongst milestones. The reasons to believe further record that the assessee had both liaison office and project office in India . It is recorded that the assessee had furnished details of various activities carried on by the liaison office during the course of original assessment proceedings. It is further recorded that the assessee had filed a return disclosing loss of Rs. 2,13,45,145/- in which it was also declared that no income had accrued to the project office for the period ending 31.3.2002. Subsequently, the return was revised to include income of Rs. 19,21,063/- on account of prior period income.
9. Thereafter, the most relevant part of the reasons to believe begins. For the sake of convenience we have underlined the same in already extracted the portion quoted above. It is mentioned that the petitioner in the original assessment proceedings had furnished details of turnover of the liaison office in India and the same was agreed to be taxed at the gross profit rate of 2.75%. It is alleged that the assessee did not include the sales to the DMRC effected through the project office amounting to Rs. 187,14,40,158/-. (This figure in fact should be Rs. 17,36,387,775/- as accepted and admitted by ld. counsel for the Revenue in view of the draft re-assessment order.) It is alleged that this amount represents milestone payments received abroad in foreign currency but the same was not offered to tax in India as income of the project office. In the next para of the reasons to believe, it is mentioned that in the assessment proceedings for the assessment year 2005-06, the same position was reiterated and the assessee had included sales made to DMRC through the liaison office and had applied gross profit rate of 2.75% for arriving at the gross income. The reason thereafter aver that in the original assessment order, 50% of the income was attributed to the liaison office and the income was computed after making deduction under Section 44C of the Act.
10. We notice a contradiction in the two paragraphs and the observations recorded by the Assessing Officer therein. In the later paragraph the Assessing Officer has mentioned that the sales turnover/income paid in foreign currency by DMRC was included in the income of the “liaison office” and gross profit rate of 2.75% was applied after attributing 50% of the total receipts as attributable to the liaison office, but in the earlier paragraph, the Assessing Officer has stated that sales be made to DMRC by the “project office” had not been offered to taxation. Thus in the later paragraph of the reasons it is stated that payment made by DMRC in foreign currency was taxed in the original order after attributing 50% of the total receipts as taxable in India and GP rate of 2.75% was applied. The question of “liaison office/project office” is examined below.
11. Ld. counsel for the petitioner has rightly drawn our attention to the original assessment order under Section 143(3) dated 24.3.2006. The said assessment order is fairly detailed and goes into several aspects including the question of business connection, permanent establishment etc. We are not reproducing lengthy extracts of the said assessment order, but we would like to refer to the discussion in the original assessment order under the heading ‘project office DMRC’. The said portion of the assessment order mentions that the assessee consortium was awarded the RS1 contract. It refers to the payment from DMRC to consortium, establishment of project office for smooth execution of contract and administrative matters. It further records that once the contract with DMRC was signed, the liaison office ceased to function and the project office started functioning. It is stated that the project office coordinated with DMRC as well as contractors. The net income of the project office in the original assessment order was to be undertaken separately on actual basis.
12. Thereafter, the Assessing Officer has referred to the sales made by the Mitsubishi Corporation, Japan to DMRC. One Mr. Ichiro Suzuki had appeared before the Assessing Officer and discussed the case including the issue of profitability and profit margin from India . The assessee had filed profit and loss account of Mitsubishi Corporation, Japan (English version along with other particulars and details). The details with regard to the gross profit margins of the said corporation of Japan was furnished. Ichiro Suzuki had filed letter dated 10.3.2006 which has been reproduced in the assessment order. The relevant portion of the assessment order reads as under :
“Mr. Ichiro Suzuki also filed subsequently (on the same day of hearing) on the letter head of the assessee, the no objection pf the assessee to applying the gross profit rate of 2.75% for computing the profit in respect of the Indian transactions of MC Japan. The said letter dated 10.03.06 is reproduced below:-
“We refer to the ongoing assessment proceedings of MC Japan for the subject assessment year and our hearing with you on March 14, 2006 in connection with the same.
As desired, notwithstanding any other basis, we wish to confirm our no – objection to applying the gross profit rate of 2.75% for computing the profitability in respect of the Indian transactions of the MC, Japan for purposes of the above assessment proceedings provided you do not initiate any penalty and/or prosecution proceedings in connection with or as an outcome of the assessment proceedings.”
13. The original assessment order thereafter notices that the assessee had furnished details of turnover and ledger of transactions with Indian clients. The Indian turnover shows that the figure was submitted separately for the purpose of taxation in India . It also refers to submissions filed by the assessee dated 2.3.2006 where the petitioner had furnished several details. The Assessing Officer records that the petitioner had accepted that it earns profits from the Indian transactions of the Mitsubishi Corporation, Japan at G P rate of 2.75% of the turnover attributable to India . The Assessing Officer computed the taxable income of the assessee as Rs. 23,17,75,386/-.
14. Ld. counsel for the revenue has relied on certain observations made in the original assessment order. We deem it appropriate to reproduce the last portion of the order :
“The above submission of the assessee with regard to the turnover and determination of profit is considered. The assessee has furnished its ledger of transaction with Indian clients. The assessee also filed the complete ledger of all the trading done by the assessee company in its individual capacity and culled out the figures pertaining to transactions with Indian customers. The completed ledger filed emanated from its audited accounts in respect of its trading activities. The Indian turnover shown there matched up with the ledger submitted separately for the purpose of taxation in India . There is no material available on record from which any adverse reference can be drawn with regard to the turnover for the assessee in India . In view of the above, the turnover shown by the assessee from India is accepted. As regards the profitability of the assessee from the operations carried out in India, the assessee has submitted a very detailed analysis of its global accounts and operations, which can be seen in the submission of the assessee reproduced above. I have considered the above submission of the assessee and looking into the nature of trading business, I tend to agree to the same. Further in the final submission dated 14.03.06, the assessee has accepted that its gross profit from Indian transaction may be taken at 2.75% of the turnover from India.
As far as the revenue from DMRC is concerned, Honble AAR has observed as follows:
“It is also important to point out that the entire payment to the leader of the consortium is on account of its managerial services by way of coordinating the entire programe for execution of the contract.”
In view of the above, income of the assessee is recomputed as under:-
|In Million INR|
|Total turnover of the assessee from IndiaG.P. Rate = 2.75%
(as proposed by the assessee)
|Gross Profit (applying the G.P. rate of 2.75%)||962|
|Expenses(L.O. and the total Salary of expats)||450|
|Income attributable to Indian operation @ 50% And allowing Head office expense u/s 44C||231|
|(as discussed and accepted by assessee)|
|Net Taxable Income (in Rs.)||23,17,75,386|
|Total Taxable Income||Rs. 23,17,75,386|
Income from Project Office is taken as retuned. The taxable income calculated above is in addition to the income declared in the return of income.
Total Taxable Income (including PO) Rs. 23,36,96,446/-“
15. Ld. counsel for the Revenue has heavily relied upon the observations in the original assessment order dated 24.3.2006 that the income from project office was taken as returned. We are afraid, the counsel is reading the said observations in isolation without taking into consideration and without reading the earlier portion of the assessment order. The cumulative effect of the assessment order is that the Assessing Officer had treated the project office and income from sales made to DMRC as clearly taxable in India. It was held that the project office constitutes permanent establishment in India. The question, what portion of the payment made by the DMRC in foreign exchange aboard should be attributed to income earned in India by the project office/permanent establishment was examined. The Assessing Officer held that gross profit rate of 2.75% should be treated as the profit earned and out of this expenses were allowed. These expenses related to the liaison office and payment of salaries. The Assessing Officer attributed income to Indian operations at 50% and accordingly after allowing head office expenses under Section 44C an amount of Rs. 23,17,75,386/- was held to be taxable in India . This becomes very clear if we refer to the annexure to the assessment order (annexure P2 for the writ petition) which for the sake of convenience is reproduced below:
|Total Turnover of Assessee (including DMRC sales)||A||JPY||87,356,000,000|
|Average Exchange Rate used to convert JPY into INR||B||1 INR = 2.62701 JPY|
|Total Turnover of Assessee||C=A/B||INR||33,253,013,882|
|Amount of DMRC Sales again added by the AO (as voluntarily disclosed by the assessee in Income Tax Return)||D||INR||1,736,387,775|
16. A reading of the said annexure would show that the assessee’s total turnover in Japanese Currency Yen (JPY). The Assessing officer converted the Japanese currency to Indian rupees by applying the conversion rate and came to the figure of Rs. 33,253,013,882. Then he included the sales made to the DMRC of Rs. 1,736,387,775/-. After adding these two figures, the Assessing Officer has computed the figure of Rs. 34,989,401,658/-. (We may note here that it is the contention of the petitioner that the figure of sales made to DMRC of Rs. 1,736,387,775/- has been included twice but we are not concerned with this in the present petition. Petitioner states that he has filed an application under Section 154 of the Act but we express no opinion in this regard). The figure of Rs. 1,736,387,775/- is the correct figure of the sale consideration paid abroad to Mitsubishi Corporation, Japan. This is clear when we examine the draft reassessment order, which has been placed on record along with the counter affidavit. As per the computation made on the last page, the figure mentioned as to the sales made to DMRC through the project office is Rs. 1,736,387,775/-.
17. We note here that the Assessing Officer in the re-assessment proceedings had taken 10% of the total turnover/sales as profit attributable to the project office.
18. A careful reading of the reasons to believe as well as draft re-assessment order for the assessment year 2002-03 shows that the Assessing Officer in the reason to believe did not agree that the gross-profit rate of 2.75% should be applied and has applied GP rate of 10%. Further, the Assessing Officer has not agreed and observed that it was not correct to attribute only 50% of the turnover as taxable in India but has held that the entire turnover is taxable in India .
19. It is apparent and clear from the factual narration mentioned above that the Assessing officer during the course of the original assessment proceedings had gone into all aspects now mentioned in the reasons to believe for initiation of re-assessment proceedings. On the basis of his understanding and appreciation of law, assessment was framed on a figure of Rs. 22,36,96,446/-. The Assessing Officer during the course of the original assessment proceedings felt that GP rate of 2.75% was justified and should be accepted. He also felt that the entire turnover should not be taken for computing the profit attributed to India and 50% of the turnover should be attributed to the Indian permanent establishment in form of the project office.
20. This is the basic difference between the original assessment orders for the assessment year 2002-03 and 2005-06 which forms the foundation for the reasons to believe for reopening for the Assessment Year 2002-03.
21. It is well settled that Assessing Officer cannot reopen concluded assessment under Sections 147 and 148 of the Act in a case of change of opinion. The Supreme Court in CIT v. Kelvinator of India Ltd.  320 ITR 561/187 Taxman 312, has held as under:
“On going through the changes, quoted above, made to section 147 of the Act, we find that, prior to the Direct Tax Laws (Amendment) Act, 1987 reopening could be done under the above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act (with effect from 1st April, 1989), they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post-1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words “reason to believe” failing which, we are afraid, section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of “mere change of opinion”, which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfillment of certain pre-conditions and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of “change of opinion” as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1st April, 1989, the Assessing Officer has power to reopen, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words “reason to believe” but also inserted the word “opinion” in section 147 of the Act. However, on receipt of representations from the companies against omission of the words “reason to believe”, Parliament reintroduced the said expression and deleted the word “opinion” on the ground that it would vest arbitrary powers in the Assessing Officer. We quote hereinbelow the relevant portion of Circular No. 549 dated October 31, 1989 ( 182 ITR (St.) 1, 29), which reads as follows:
“7.2 Amendment made by the Amending Act, 1989, to reintroduce the expression ‘reason to believe’ in section 147.-A number of representations were received against the omission of the words ‘reason to believe’ from section 147 and their substitution by the ‘opinion’ of the Assessing Officer. It was pointed out that the meaning of the expression, ‘reason to believe’ had been explained in number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression ‘has reason to believe’ in place of the words ‘for reason to be recorded by him in writing, is of the opinion’. Other provisions of the new section 147, however, remain the same.”
For the aforesaid reasons, we see no merit in these civil appeals filed by the Department; hence, dismissed with no order as to costs.”
22. We may also notice that the proviso to Section 147 of the Act is fully applicable as the assessee had disclosed all the materials facts at the time of original assessment. Even if the materials/evidence was not enclosed with the return, full and true details/material was disclosed during the course of the original proceedings. The turnover or sales made to DMRC has not been disputed. The expenses of the project office is not disputed. It is also not disputed that the project office was a permanent establishment. The only issue is what should be the GP rate and whether or not only 50% of the turnover/sales made to DMRC should be attributed to the Indian operations as held by the Assessing Officer in the original assessment proceedings. This is a matter of conclusion to be drawn from the material facts and not a matter relating to furnishing material details and particulars i.e. the primary facts. The conclusion drawn by the Assessing Officer cannot be attributed to the failure of the petitioner to disclose fully and truly all the material facts. No new material fact or particulars have come to the notice/knowledge of the Assessing Officer. Therefore the petitioner had disclosed full and true material facts at the time of original assessment.
23. In view of our findings, the present writ petition is allowed and the impugned notice dated 31.3.2009 is quashed. The order dated 26.11.2009 and the draft re-assessment order is also quashed.
24. We clarify that we have not expressed any opinion on merits; whether GP rate of 2.75% or 10% is appropriate or any other rate should be applied. We have not expressed any opinion whether 50% of the income or more or less should be attributed to the Indian office. These questions are left open. The only issue examined by us relates to the jurisdictional pre-condition for initiation of the re-assessment proceeding. The writ petition is allowed in the above terms, with no order as to costs.