The Income Tax Appellate Tribunal ( ITAT ), Delhi Bench, has recently, while deciding the appeals filed before it, held that when there is no material to form ‘reason to believe’, re-assessment cannot be made by the income tax department.
The aforesaid observation was made by the Income Tax Appellate Tribunal (ITAT), when appeals were preferred before it by the appellant, Oracle Systems Corporation, against the order dated 20.01.2009 of the Commissioner of Income Tax (Appeals), New Delhi, pertaining to assessment years 1997- 98 to 2000-01.
The facts of the case were that the assesse was a non-resident corporate entity incorporated in the Unites States of America (USA) and who was stated to be one of the largest independent software company in the world.
The assessee had a wholly owned subsidiary in India known as Oracle India Pvt. Ltd. (OIPL), which was incorporated in India in the year 1993 and started its operation by setting up a facility at Bangalore. As stated, the Indian subsidiary carries on business in two segments, i.e., software development support services and software duplication and distribution segment.
For the assessment year 1997-98, the assessee had filed its return of income on 24.04.1997 declaring income of Rs.17,30,01,448/-. The return of income filed by the assessee was processed under section 143(1) of the Income Tax Act and there was no scrutiny assessment under section 143(3) of the Income Tax Act.
Subsequently, in the course of assessment proceeding for the assessment year 2001-02, the Assessing Officer observed that while completing the assessment under section 143(3) of the Income Tax Act for assessment years 1998-99, 1999-2000 and 2000-01, the issue of royalty on software sales was discussed only on the stand-point of rate of tax applicable to the income from royalty, i.e, whether it is to be taxed at 30% as per section 115A or at 15% as claimed by the assessee, and that no other issue was taken up for consideration.
Thus, he opined that since the taxability of royalty of all software sales made by the assessee in India and attribution of such income to the Permanent Establishment (PE) has not been examined, the assessments have to be reopened. And based on such reasoning recorded in assessment years 2000-01 and 2001-02, the Assessing Officer reopened the assessment for the impugned assessment year.
According to the Assessing Officer, the assessee had a PE in India through its Indian subsidiary OIPL having office at Hyderabad, and secondly, the royalty income from the global deals relating to sale of software by the assessee or its affiliates involving Indian customers have to be taxed in India. And based such reasoning, the Assessing Officer reopened the assessment under section 147 of the Income Tax Act by issuing a notice under section 148 of the Income Tax Act.
In course of the assessment proceeding, though the assessee objected to the reopening of assessment as invalid, his objection was rejected by the Assessing Officer, who ultimately completed the assessment under section 143(3) read with section 148 of the Income Tax Act vide order dated 23.03.2006 determining the total income at Rs.13,14,60,723/.
Against the assessment order so passed, the assessee preferred an appeal before the Commissioner (Appeals), inter alia, challenging the validity of reopening of assessment under section 147 of the Income Tax Act. However, the Commissioner (Appeals) did not find merit in the submissions of the assessee, and hence, dismissed the assessee’s appeal. And it is against the same that the assesse has preferred the instant appeal before the Income Tax Appellate Tribunal (ITAT).
The grounds raised by the assessee in all these appeals, inter alia, being the validity of reopening assessment under section 147 of the Income-tax Act, 1961 and the assessment orders passed pursuant thereto, it was submitted by Sh G.C. Srivastava, Advocate, sh Mayank Patawari, CA and Sh. Kalrav Mehrotra, Advocate , all representing the assesse that the Assessing Officer had initiated the reassessment proceeding without independent application of mind, by simply adopting his reasoning in the assessment order passed for assessment years 2000-01 and 2001, and further that the allegation of the Assessing Officer that OIPL carried on core revenue generating activity on behalf of the assessee is misconceived as while recording such observation, the Assessing Officer has not correctly reproduced the facts mentioned in Form 10K.
However, with Ms. Sapna Bhatia, CIT (DR) though opposing the assessee’s contentions but failing to controvert assessee’s allegation that no notice under section 143(2) of the Act was ever issued to the assesse, the ITAT Bench consisting of Dr. B.R.R. Kumar, the Accountant Member and Saktijit Dey, the Judicial Member, observed as follows :
“It is necessary to examine, whether the reopening of assessment under section 147 of the Act meets legal requirement. while examining the return of income filed by the assessee for assessment year 2001-02, the Assessing Officer was of the view that whether the issue of consideration received from sale of software is in the nature of royalty was not examined by the Assessing Officer in scrutiny assessment for assessment years 1998-99 and 1999-2000. Further, he found that similar issue was also involved in assessment year 2000-01, where the return filed by the assessee was processed under section 143(1) and the time limit prescribed for issuing of notice under section 143(2) of the Act has lapsed”.
“In the reasons recorded for reopening of assessment for the impugned assessment year, the Assessing Officer himself admitted that based on the facts involved in assessment years 2000-01 and 2001-02, the assessments for the impugned assessment year was reopened. A careful perusal of the reasons recorded would reveal that the formation of belief regarding the escapement of income is on account of profit from royalty received from sale of software, which allegedly is attributable to the PE of the assessee, being the Hyderabad unit of OIPL.”
“Thus, it is quite clear, the reasons recorded for reopening of assessment is without independent application of mind but simply based on conclusions drawn in the subsequent assessment years without having any tangible material. It is further evident, the reasons recorded do not have any live link with material/information in possession of the Assessing Officer which could have establish escapement of income for the impugned assessment year”, the ITAT Bench added.
Thus, subsequently allowing the assessee’s appeal the Income Tax Appellate Authority (ITAT) held:
“Accordingly, we quash the assessment order for the impugned assessment year. The impugned order of learned Commissioner (Appeals) having no leg to stand, is hereby set aside.”
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