Delhi High Court held In the case of Oracle Systems Corporation vs. ADIT that it is clear that when a regular assessment is completed in terms of Section 143(3), a presumption can be raised that such an order has been passed upon a proper application of mind. Therefore, in our view, what the Assessing Officer is now seeking to do amounts to a clear change of opinion and that is not permissible. Also it is well settled that unless and until the recorded reasons specifically indicated as to which material facts were not disclosed by the petitioner in the course of the original assessment under section 143(3), there could not be any reopening of assessment.
Facts of the Case
The assessee is a company incorporated in USA and into the business of supplying and replication of software. The assessment order u/s 143(3) of the Act was passed for the AY 2002-03 on March 28, 2005 wherein it was established that the assessee has PE in India under Article 5 of the DTAA as well as business connection u/s 9(1)(i) of the Act. The receipts from software were treated as royalty and have been taxed at gross basis as per the DTAA at the rate of 15%. Subsequently a notice under Section 148 was issued on 10.12.2008 after the 4 years from the end of relevant AY. Pursuant to the reasons having been furnished, the assessee submitted its objections to the reopening of assessment on 31.08.2009 which was rejected by AO.
The reason of reopening of the assessment was given that in view of the fact that the assessee has PE in India and that receipts from software were treated as „royalty‟ the „force of attraction rule‟ would be involved and the income in the nature of royalty should be attributed to the PE by virtue of this rule. Then as per section 44D of the Act no expenses are allowable and the receipts are to be taxed as royalty u/s 115A of the Act at the rate of 20% in place of 15% as done in the assessment order. The case is covered under deemed escapement of income under Explanation 2 to section 147.
Contention of the Assessee
The ld counsel of the assessee submitted that the impugned notices and the orders rejecting the objections are liable to be set aside, primarily on two grounds. First of all, it is contended that there has been a change of opinion and, secondly, it has been contended that the pre-conditions as stipulated in the first proviso under Section 147 have not been satisfied. Particularly, there is no failure on the part of the assessee to disclose fully and truly all the material facts for assessment.
Further they contended that reopening of account based on these reasons would amount to a change of opinion. This is so because in the first instance when the original assessment was being framed, the Assessing Officer examined the attribution of income to the Permanent Establishment and while doing so attributed only that part of the income of the assessee which falls within Article 7. According to the learned counsel for the assessee, apart from the fact that on merits also the tax on royalties could only be taxed under Article 12 and not under Article 7, this aspect of attribution has been examined and noticed by the Assessing Officer during the original assessment.
Contention of the Revenue
The ld counsel of the revenue submitted that the Assessing Officer has not examined the aspect of distribution of income at all and, had he done so, the “force of attraction rule” would have been applied.
Held by High Court
With regard to the reason for reopening of assessment that the escapement of income had occurred by reason of the “failure on the part of assessee to disclose fully and truly all material facts necessary for assessment for that year”. It would be pertinent to point out that no so-called material fact has been specified which, according to the Assessing Officer had not been fully and truly disclosed. There is only a general statement that there has been failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment.
On a reading of Article 7 (1) of the DTAA between India and USA , it becomes clear that profits of the assessee, which is a US company, would be taxable only in USA until and unless and the assessee carries on business in India through a Permanent Establishment situated here. It is further clear that if the assessee carries on business as aforesaid, the profits of the assessee may be taxed in India but only so much of them as are attributable to; (a) that permanent establishment; (b) sales in USA of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in USA of the same or similar kind as those effected through that permanent establishment. This is what is commonly known as the “force of attraction rule” .
Further Article 12 (1) clearly indicates that Royalty and Fees for included services arising in India and paid to a resident of United States may be taxed in USA. However, by virtue of the provisions of Article 12(2) such royalty and fees for included service could also be taxed in India. But there is a cap on the tax. The cap (as is applicable in the present case) is to the extent of 15% of the gross amount of royalty and fees for included services. It is necessary to clarify that the assessee has paid 15% tax in terms of Article 12 (2) (a) (ii) of the DTAA and this has been accepted by the Assessing Officer at the time of original assessment under 143(3).
We are unable to agree with the submissions made by the learned counsel for the Revenue that the AO has not gone through aspect of distribution of income; for the simple reason that clause (6) of Article 12 itself carves out an exception. When the Assessing Officer has accepted the assessee‟s contentions that the royalty was to be taxed under Article 12 (2) (a) (ii) at the rate of 15%. It has to be presumed that the Assessing Officer‟s attention was attracted to the entire Article 12 of the DTAA. As stated above, that Article itself carves out an exception under clause (6) thereof.
In the case of CIT vs. Usha International Ltd: (2012) 348 ITR 485 (Delhi) a full bench of this Court clearly observed that there may be cases where the Assessing Officer does not and may not raise any written query but still the Assessing Officer in the first round/original proceedings may have examined the subject matter, claim, etc., because the aspect or question may be too apparent and obvious. The court also observed that in such cases it would be contrary and opposed to normal human conduct to hold that the Assessing Officer in the first round did not examine the question or subject-matter and form an opinion.
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. In Usha International Ltd. it is also noted that sometimes application of mind and formation of opinion can be ascertained and gathered even when no specific question or query in writing had been raised by the Assessing Officer. It is also observed that the aspects and questions examined during the course of assessment proceedings itself may indicate that the Assessing Officer must have applied his mind on the entry, claim or deduction, etc.
Also In the present case, in the circumstances narrated above, it is evident that the when the Assessing Officer was examining the entire issue of royalty and its taxability the Assessing Officer must have examined Article 12 of the DTAA in its entirety, which also contained the exception mentioned in clause (6) thereof. Same views were expressed in CIT vs. Kelvinator of India Ltd:  256 ITR 1.
Also it was noted that even the reasons do not specify or indicate as to which material fact had not been disclosed fully or truly by the assessee. In Swarovski India Pvt. Ltd. Vs. Deputy Commissioner of Income Tax 368 ITR 601 (Delhi), a division bench of this court observed that “the escapement of income by itself is not sufficient for reopening the assessment in a case covered by the proviso to section 147 of the said Act, unless and until there was failure on the part of the assessee to disclose fully and truly all the material facts necessary for assessment. It was also made clear that unless and until the recorded reasons specifically indicated as to which material fact or facts was/were not disclosed by the petitioner in the course of the original assessment under section 143(3), there could not be any reopening of assessment.” This decision has been followed in several other decisions including the decision in the case of Global Signal Cables (India) Pvt. Ltd. V. Deputy Commissioner of Income-Tax (2014) 368 ITR 609 (Delhi).
Accordingly, appeal of the assessee allowed.