CASE LAW
Can a notice under section 148 of the Income-tax Act, 1961(‘the Act’), calling upon a taxpayer to file a return of income, be valid if issued after the end of the relevant assessment year??????
In this petition presented under Article 226 of the Constitution, the petitioner assails the jurisdiction of the respondent to continue reassessment proceedings initiated by notices issued by the Dy. Director (International Taxation), Noida under Section 148 of the Income Tax Act, 1961. (Adobe Systems Software Ireland (Petitioner) vs Assistant Director of Income Tax on DOI 28 March, 2014)
FACTS OF THE CASE
· The petitioner is a non-resident company, incorporated in Ireland. It functions in India from Gurgaon, Haryana. It is engaged in the business of Adobe Products – shrink-wrapped/ off-the-shelf computer software.
· Petitioner for first time filed a return of income for the assessment year 2008-09 with the respondent declaring “nil” taxable income.
· A notice under Section 143(2) was served on the petitioner in respect of the return. A draft assessment order under Section 144C was proposed by the respondent and the proceedings were referred to the Disputes Resolution Panel (DRP). In the meantime i.e. after the issue of notice under section 143(2) by the respondent and before the preparation of the draft assessment order, a notice under Section 142(1) was issued by the Deputy Director of Income Tax, International Taxation, Noida (Noida officer) calling for a return for the income for the assessment year 2009-10
· The petitioner pointed out that the jurisdiction to assess a non-resident company is determined either on the basis of the location of the “permanent establishment” (PE) of the non-resident company or the location of a source of income accruing to the company in India and that the petitioner did not have any source of income in Noida (India) as none of its clients in India were located there, nor did the petitioner have a PE in India. It was accordingly submitted that the notice issued by the Noida officer was without jurisdiction. It would appear that there was no reply to this notice.
· Noida officer issued notices under Section 148 of the Act seeking to reopen the petitioner’s assessment for the assessment years 2004-05, 2005-06 and 2006-07. These notices were received by the petitioner and the petitioner wrote to the Noida officer informing him that the petitioner was already assessed in India by the respondent (Delhi officer) and, therefore, he had no jurisdiction to issue the notices.
· No reply appears to have been received for a period of 4 months from the Noida officer. However, on 26.09.2011 the Noida officer wrote a letter to the petitioner enclosing the reasons recorded for reopening the assessments for all the three years. The reasons are identical and they are as follows:
Reasons
· The assessee is a company incorporated in Ireland. NO return of income has been filed by the assessee for the A.Y. 2006-07
· During the year the assessee has received Rs.301731289 for marketing support services from Adobe India which is AE of the assessee.
· Indian company is a dependent agent for non-resident company as it works wholly and exclusively for non-resident and completed contracts of non-residents with the distributors in India. Without prejudice to the above, the assessee’s income is chargeable to tax in India as royalty received by him for licensing software to various customers in India. Predictably, the petitioner’s response was;
(a) the notices under Section 148 were issued without any jurisdiction by the Noida officer and at the time
(b) notice issued under Section 142(1) for the assessment year 2004-05 was barred by limitation since it was issued beyond the period of six years from the end of the relevant assessment year;
(c) even assuming that the notices under Section 148 were validly issued by the Noida officer, the time limit to complete the reassessments under Section 153 of the Act would expire.
· The respondent wrote to the petitioner pointing out that no returns had been filed in response to the notices issued under Section 148 and also pointing out that despite issue of notices under Section 142(1) on 14.11.2011 “to enforce compliance to the requirement of filing the return in response to notice u/s 148”, the petitioner did not file any return and calling upon the petitioner to show- cause “as to why the assessment in your case may not be completed u/s. 144 read with Section 147 of the Act”.
JUDGEMENT
After examining the facts of the case High court held that the jurisdiction of Directors of Income Tax (International Taxation) over a foreign company lay with the assessing officer in whose area the foreign company has a PE or a business connection. Examination of records reveals that the petitioner had a “dependent agent PE” in Noida in the form of Adobe India, which was also the petitioner’s associated enterprise. Therefore, the Noida officer had valid jurisdiction over the petitioner and was entitled to issue the notices under Section 148.
(a) For the aforesaid reasons the court concluded that the objections raised by the petitioner were without merit and dismissed them, it seems clear that the validity of the proceedings which were continued by the respondent depends upon the validity of the initiation of the proceedings for reassessment by notices issues by the Noida officer.
(b) The question whether the initiation of reassessment proceedings by the Noida officer was valid or not would depend upon whether the petitioner had a PE within the jurisdiction of the Noida officer. If the petitioner is found to have a PE at Noida as alleged by the revenue, and if the revenue is able to establish that fact, the petitioner not having filed any returns of income for the assessment years 2004-05 to 2006-07, there was escapement of income which the revenue is entitled, subject to the provisions of the Act, to bring to assessment. There can be no vested right that escaped income cannot be taxed, provided all the jurisdictional conditions and the procedural requirements of the Act are satisfied.
(c) It is also noticed that the petitioner did not file any returns of income in response to the notices issued under Section 148. We are inclined to agree with the view taken by the respondent that the petitioner would get the reasons recorded for reopening the assessment only upon filing the return of income pursuant to the notice issued under Section 148. The conduct of the petitioner has been one of defiance; it did not file returns in response to the notices issued under Section 148. The mere filing of the return can never amount to submitting to the jurisdiction. The filing of the return in response to the notice under Section 148 defines the stand taken by the assessee. Section 148 says that the return called for by the notice issued under that section shall be treated as if such a return were a return required to be furnished under Section 139 of the Act.
(d) The petitioner, not having made the Noida officer aware that no income chargeable to tax had escaped assessment and having merely told him that he has no jurisdiction to issue reassessment notices, was not acting strictly in accordance with law. The writ remedy being a discretionary remedy, the discretion can be exercised in favour of the writ petitioner only if his conduct has been in conformity with law. If it is not, the Court may refuse to exercise the discretion in favour of the writ petitioner. For the aforesaid reasons the writ petitions with all connected applications are dismissed with no order as to costs.
Conclusion
In India taxation of Non Residents has always been fraught with uncertainty. The existence of a business connection and also that of a PE (Permanent Establishment) has been a subject matter of frequent debate decision of the High Court in the present case dealt with a number of significant issues relating to the taxation of nonresidents.
The observations of the High Court should serve as a useful reference for non-residents desiring to carry on business in India. Chartered Accountants practicing Income-tax and Tax Counsel should also find this decision stimulating and a useful tool for guiding non-resident taxpayers in optimizing their Indian income-tax liability. We need to understand that a return of income conveys the position taken by the assessee to the assessing authority – whether he has taxable income or not. A return is not a mere scrap of paper. There is a sanctity attached to the return. If the assessing authority calls upon the assessee to file a return of income, the same shall be complied with by the assessee and it is no answer to the notice to say that since in his (assessee’s) opinion there is no taxable income, he is under no obligation to file the return.
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