Madras High Court
Watanmal Boolchand & Co. vs The Assistant Director Of Income ... on 28 April, 2021
W.P.Nos.8100 of 2015 etc., batch
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 28.04.2021
CORAM
THE HONOURABLE MR.JUSTICE S.M. SUBRAMANIAM
W.P.Nos.8100 & 26641 of 2015, 20254 & 20255 of 2016,
32866 & 32867 of 2017 & 33706 of 2018
and
M.P.Nos.1, 2 of 2015, W.M.P.Nos.17420 & 17421 of 2016,
880 & 881 of 2016, 36224 to 36227 & 39113,
39115 of 2018 & 24527 & 24529 of 2020
W.P.No.8100 of 2015 :-
Watanmal Boolchand & Co., Ltd.,
(a body corporate established under the
laws of Hong Kong, having its office at
15-17, Wyndham Street, Man Cheung Building
10/Floor, Hong Kong),
Rep., by its Authorised Representative,
M/s.C.Ramaswamy & B.Srinivasan,
Chartered Accountants,
Mr.N.S.Sriram,
No.37, Alagiri Nagar, 2nd Street,
Vadapalani, Chennai-600 026. .. Petitioner
-vs-
1.The Assistant Director of Income Tax,
International Taxation-II,
121, Nungambakkam, High Road, Chennai.
2.The Deputy Commissioner of Income Tax,
International Taxation – 2(2),
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W.P.Nos.8100 of 2015 etc., batch
121, Nungambakkam High Road, Chennai. .. Respondents
Petition filed under Article 226 of the Constitution of India praying
for issuance of Writ of Certiorari to call for the records of the first
respondent in PAN No.AABCW3559Q in impugned notice under Section
148 of the Act dated 28.03.2013 and the consequent proceedings issued by
the second respondent dated 05.03.2015 and quash the same.
W.P.No.26641 of 2015 :-
Watanmal Boolchand & Co., Ltd.,
(a body corporate established under the
laws of Hong Kong, having its office at
15-17, Wyndham Street, Man Cheung Building
10/Floor, Hong Kong),
Rep., by its Authorised Representative,
M/s.C.Ramaswamy & B.Srinivasan,
Chartered Accountants,
Mr.N.Vijay Kumar
No.37, Alagiri Nagar, 2nd Street,
Vadapalani, Chennai-600 026. .. Petitioner
-vs-
1.The Deputy Director of Income Tax,
International Taxation-II(1),
121, Nungambakkam, High Road,
Chennai-600 034.
2.The Deputy Commissioner of Income Tax,
International Taxation – II(2),
121, Nungambakkam High Road,
Chennai-600 034. .. Respondents
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W.P.Nos.8100 of 2015 etc., batch
Petition filed under Article 226 of the Constitution of India praying
for issuance of Writ of Certiorari to call for the records of the first
respondent in PAN No.AABCW3559Q and quash the impugned notice
under Section 148 of the Act dated 28.03.2014 passed by the first
respondent and the consequent proceedings dated 16.12.2014.
W.P.Nos.20254 & 20255 of 2016 :-
Watanmal Boolchand & Co., Ltd.,
(a body corporate established under the
laws of Hong Kong, having its office at
15-17, Wyndham Street, Man Cheung Building
10/Floor, Hong Kong),
Rep., by its Authorised Representative,
M/s.C.Ramaswamy & B.Srinivasan,
Chartered Accountants,
Mr.N.Vijay Kumar
No.37, Alagiri Nagar, 2nd Street,
Vadapalani, Chennai-600 026. .. Petitioner
-vs-
The Deputy Commissioner of Income Tax,
International Taxation – II(2),
121, Nungambakkam High Road,
Chennai-600 034. .. Respondent
Petitions filed under Article 226 of the Constitution of India praying
for issuance of Writ of Certiorari to call for the records of the respondent in
PAN No.AABCW3559Q and quash the impugned notices under Section
148 of the Act dated 03.03.2016 and 30.03.2015 respectively passed by the
respondent and the consequent proceedings dated 24.05.2016 issued by the
respondent.
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W.P.Nos.8100 of 2015 etc., batch
W.P.Nos.32866 & 32867 of 2017 :-
Watanmal Boolchand & Co., Ltd.,
(a body corporate established under the
laws of Hong Kong, having its office at
15-17, Wyndham Street, Man Cheung Building
10/Floor, Hong Kong),
Rep., by its Authorised Signatory,
Mr.Gulab M.Assomal .. Petitioner
-vs-
The Deputy Commissioner of Income Tax,
International Taxation – II(2),
Room No.409, 4th Floor, 16, BSNL Building,
Tower-I, Greams Road, Chennai-600 006. .. Respondent
Petition filed under Article 226 of the Constitution of India praying
for issuance of Writ of Certiorari to call for the records of the respondent in
PAN No.AABCW3559Q and quash the impugned notices under Section
148 of the Act dated 22.03.2017 passed by the respondent and the
consequential speaking order dated 05.12.2017 passed by the respondent.
W.P.No.33706 of 2018 :-
Watanmal Boolchand & Co., Ltd.,
(a body corporate established under the
laws of Hong Kong, having its office at
15-17, Wyndham Street, Man Cheung Building
10/Floor, Hong Kong),
Rep., by its Authorised Signatory,
M/s.C.Ramaswamy & B.Srinivasan,
Chartered Accountants,
Mr.N.Vijay Kumar, Partner,
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W.P.Nos.8100 of 2015 etc., batch
No.37, Alagiri Nagar, 2nd Street,
Vadapalani, Chennai-600 026. .. Petitioner
-vs-
1.The Assistant Commissioner of Income Tax,
International Taxation – II(2),
Room No.410, 4th Floor, BSNL Building (Tower-1),
No.16, Greams Road, Chennai-600 006.
2.The Deputy Commissioner of Income Tax,
International Taxation – II(2),
Room No.410, 4th Floor, BSNL Building (Tower-1),
No.16, Greams Road, Chennai-600 006. .. Respondents
Petition filed under Article 226 of the Constitution of India praying
for issuance of Writ of Certiorari to call for the records of the first
respondent in notice No. ITBA/AST/S/148/2017-18/1009542513(1), the
impugned notice under Section 148 of the act dated 29.03.2018 passed by
the first respondent and the consequential speaking order dated 10.12.2018
passed by the second respondent and quash the same.
For Petitioner : Mr.Arvind P. Datar,
(In all W.Ps.) Senior Counsel
For Mr.R.Sivaraman
For Respondents : Ms.Hema Muralikrishnan,
(In all W.Ps.) Senior Standing Counsel
******
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W.P.Nos.8100 of 2015 etc., batch
COMMON ORDER
The lis on hand is instituted for quashing of the notices issued under
Section 148 of the Income Tax Act, 1961 (hereinafter referred to as “the
Act”) for assessment. The consequential proceedings issued in continuation
of Section 148 notices are also under challenge.
2.Since the facts are identical in all the writ petitions, W.P.No.8100
of 2015 is taken as the lead case and the facts of the case are as follows:-
2.1.The petitioner-company, Watanmal Boolchand & Co. Ltd., is a
body incorporated in Hong Kong under the Companies Ordinance 1932,
that is, relevant Laws of Hong Kong. The petitioner-company was
incorporated in the year 1948. The petitioner-company is engaged in the
trading business and branded and unbranded products and general
merchandise. The brands are owned by the petitioner-company either by
way of Brand Registration or Assignments. It has no manufacturing facility
of its own. The petitioner-company sources the goods mainly from China
and shifts the goods directly to its customer at Africa and South America.
The petitioner-company is continuing its business in Hong Kong since
1948.
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2.2.One of the group companies of the writ petitioner-company, viz.,
Watanmal (India) Private Limited (hereinafter referred to as “Watanmal
India”) , is engaged in the business of providing trade, management and
logistic support services to the petitioner-company in terms of the
agreement between the parties. Watanmal India was incorporated in the
year 2003. The petitioner-company entered into an Administration
Agreement dated 01.04.2005 with Watanmal India for providing non-
exclusive back office services such as correspondence with the customers,
maintenance of documents for exports, liaising with the inspection agency
for obtaining import license, liaising with the shipping companies and
reporting back to the petitioner-company. Under this Agreement, Watanmal
India provided services to the petitioner-company in sourcing and supplying
goods to its customers in Africa and South America. Under the Agreement,
Watanmal India is paid on cost plus basis. It is relevant to note that the
goods are neither purchased, sources, supplied, nor dealt with in India by
the parties. The Transfer Pricing Officer (TP) of Watanmal India has passed
an order dated 07.05.2014 and determined arm's length price of transaction
between the two entities.
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2.3.On 14.03.2013, the International Taxation Unit of the Income Tax
Department carried out survey proceedings under Section 133A of the Act
at the premises of Watanmal India and collected various documents and
records including the Agreement for the relevant period. Relying on the
documents found during the survey, the Assistant Director of Income Tax,
International Taxation-II, Chennai, the first respondent herein, issued a
notice under Section 148 of the Act dated 28.03.2013, the order impugned,
initiating assessment proceedings under Section 147 of the Act for the
assessment year 2006-07.
2.4.In reply to the said impugned notice, the petitioner-company filed
a response dated 05.04.2014 stating that the petitioner has neither any
business operations, nor any source of income taxable in India. Therefore,
the impugned notice issued is beyond the jurisdiction under the Act and
without authority of law.
2.5.The first respondent again issued a letter dated 27.05.2013 stating
that the petitioner-company has a “business connection” in terms of Section
9 of the Act and Watanmal India is a permanent establishment in India
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which carried on the core/primary business activities and function for the
petitioner-company. Therefore, the business connection through Watanmal
India constitutes the “Agency Permanent Establishment” for the petitioner-
company in India and again asked the petitioner company to file a return of
income for the assessment year 2006-07 under Section 148 of the Act. The
jurisdictional TPO based on the reference made by the Assessing Officer, by
order dated 07.05.2014 while making assessment for Watanmal India for the
assessment year 2006-07, determined the arm's length price between the
petitioner-company and Watanmal India, both being “associated
enterprises” in terms of Section 92C of the Act. Based on the information
provided by Watanmal India and comparable price determined, the TPO
adopted profit margin of 21.94% in place of claim of 7.63% by Watanmal
India. As a consequence, an upward adjustment to the tune of
Rs.30,59,033/- was made to the sales/revenues of Watanmal India. In other
words, arm's length price of the transaction between the petitioner-company
and Watanmal India was determined and income in the hands of Watanmal
India was increased. The order of the TPO as per the provisions of Section
92CA(3) of the Act is binding on the first respondent.
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2.6.The Deputy Commissioner of Income Tax, International
Taxation-2(2), Chennai, the second respondent herein, had issued show
cause notice dated 05.03.2015 asking the petitioner-company to show cause
as to why not the petitioner-company be declared to have business
connection in India based on the reasons enumerated therein. In the reasons
given in the notice, the second respondent has changed the reasons to assess
the petitioner-company after four years, i.e., the petitioner-company having
“Agency Permanent Establishment” (as taken in the notice issued under
Section 147 of the Act) “Business Connection” in India under Section 9 of
the Act. The petitioner-company has no other remedy other than to file a
writ petition before this Court, as the second respondent will pass their re-
assessment order any day and leading to heavy pecuniary demand on the
petitioner-company. The actions initiated by the respondents under Section
148 of the IT Act provided cause for the petitioner to file the present writ
petition.
3.COUNTER AFFIDAVIT FILED BY THE SECOND
RESPONDENT:-
3.1.The second respondent filed a counter affidavit stating that the
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proceedings under Section 148 of the Act cannot be termed as a
“reassessment”, but only an assessment, inasmuch as the petitioner has not
filed any return of income under the Act for the assessment year 2010-11
and the activities being carried on by the petitioner-company came to light
pursuant to the survey conducted in the premises of Watanmal India under
Section 133A of the Act on 14.03.2013. This is the first assessment being
undertaken against the petitioner for the assessment year 2010-11 and
therefore, the basic parameters for testing the proceedings under Section
148 of the IT Act, viz., whether the proceedings under Section 148 amount
to change of opinion, whether there has been a failure on the part of the
assessee to make a true and full disclosure of all material facts etc., do not
apply to the present case. The issues in proceedings against the petitioner
involve a deep analysis of the facts as emanating from various agreements
entered between the petitioner and Watanmal India, the statements put forth
by the petitioner in its application for Advance Ruling before Inland
Revenue Department, Hong Kong, the decision given by the said authority
and bearing the same has in the context of Indian Laws and the Income Tax
Act, 1961 in particular etc. These factual aspects and analysis ought not to
be undertaken in a writ proceedings and hence, this Court may record the
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petitioner to statutory remedies available to them under the Act by
dismissing the writ petition.
3.2.The counter affidavit further proceeds without prejudice to the
above contentions stating that the Watanmal Group was established in 1908
by late Shri.Lalchand Watanmal with the scope to have its business activity
as a general merchandise trading company. In 1948, a company named
Watanmal Boolchand & Company Ltd. (hereinafter referred to as “WBC”),
the petitioner was incorporated in Hong Kong. Till the year 2004, the
principal activity of the company remained import and export of general
merchandise. Subsequently, WBC forayed into the branded food market
segment, a move that has been profitable for the group. A lion's share of the
company's revenue today comes from this category. The group owns the
brand names Gino, Jago, Pomo, Palmo and Forte. The company's turnover
has ranged from USD 239Mn to USD 450Mn since the foray into the
branded segment. It was at this juncture in 2003, the Watanmal Group
started a company in India incorporated as Watanmal India. Vide an
Administration Agreement dated 01.04.2004, which is reproduced by the
petitioner in its affidavit, Watanmal India was mandated to carry out certain
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operations as follows, which provided for certain restrictions as well:-
“To correspond with the customers of the First
Party (WBC) with regard to the prices, terms and
conditions, delivery schedules, follow up for payment
with the customers of the First Party (WBC) in respect of
the products dealt by the First Party;
To maintain documents for export by the First
Party (WBC) to their customers (including invoices, Bill
of Lading, Packing List, Certificate of Origin and
inspection certificates);
To liaise with the inspection agencies for
obtaining import licence and shipping lines for transport
of the products;
To furnish necessary feedback to the First Party
(WBC) regarding purchases, sales, collection, goods
returned by customers, expenses incurred in relation to
purchase and sale of the products, movement/off-take of
the products of the First Party (WBC) in different
territories on a fortnightly basis;
It is expressly understood between the parties that
the Second Party, i.e., WIPL (or its employees) shall not
represent itself as an agent/representative of the First
Party; and
It is also expressly understood between the parties
that the Second Party (or its employees) shall not on
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behalf of the First Party have any authority to
conclude/alter any terms of any contract, receive
payments, give guarantee or warranties, or by any act or
deed pledge the credit or impose or attempt to impose
any contractual or other obligations of the First Party.”
3.3.The said initial Administration Agreement was subsequently
revised/altered vide a Trade Services Agreement dated 01.04.2005 to
include the following functions that were restricted in the Administration
Agreement, viz.,
(i) Negotiate on behalf of the First Party (WBC) with the customers
on their orders for the products and conclude and sign the contracts and
agreements as authorized agent for the First Party;
(ii) Source the products on most favourable terms from the world
markets in accordance with the requirements and directions of the First
Party and negotiate and conclude the agreements and contracts for the
supply of the products for sale to the customers;
(iii) The other salient features of the revised Trade Service Agreement
are as follows:-
(a) The Second Party, i.e., WIPL undertakes to the First Party
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that during the duration of this Agreement and a further one
year after expiration or termination of this Agreement, the
Second Party shall not whether directly or indirectly through
association or partnership or cooperation in any form with any
third party including taking shareholding in a company
provide similar service to any other persons or companies
trading in or selling products in corporation with the products
to or in the African Market; and
(b) This Agreement constitutes the whole and complete
agreement between the Parties and supersedes all prior
discussions and agreements if any between the Parties with
respect to the subject matter of this agreement.
3.4.These functions were omitted to be mentioned by the petitioner in
their affidavit. It is also to be noted that based on the above agreement, the
petitioner-company preferred an application for Advance Ruling before
Inland Revenue Department, Hong Kong pleading as under:-
“WIP did in fact have the general authority to negotiate
and conclude all sales and purchases contracts (and
habitually did exercise that authority) of the branded
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food products on behalf of WBC. Kindly note that
clause 2 of the Administrative Agreement (which states
that WIP has no general authority to negotiate and
conclude contracts on behalf of WBC) has been varied
by conduct of the relevant parties.
(i) A ll the terms of the purchase and sales contracts re-
branded food products were negotiated and concluded
by WBC's related company, WIP, in India on behalf of
WBC by email or fax;
(ii) WBC was not involved in any of the purchase and
sales activities re-branded food products. The work
done in Hong Kong was limited to providing banking
facilities and maintaining bank accounts in Hong Kong;
(iii) The relevant products were shipped directly from
the suppliers in France, USA, Italy, Malaysia, Ghana,
Peru, China and Singapore directly to customers in West
Africa, Central Africa and other parts of the world
outside Hong Kong. No shipment of goods passed
through Hong Kong; and
(iv) As all the sales and purchases were effected outside
Hong Kong, we therefore opine that the relevant sales
should be treated as offshore and the profits so derived
should not be chargeable to Hong Kong profits tax.
3.5.WBC did not send its own staff overseas to negotiate and
conclude sales and purchases. However, it is to be noted that there were
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two Directors of WBC viz., Mr.Sakraney, K.L. and Mr.Ganapathy
Viswanathan stationed in the India Office of Watanmal India. Staff of
Watanmal India in India were involved in the negotiation and conclusion of
sales and purchases on behalf of WBC, i.e., the petitioner with the overseas
customers and suppliers. They acted under the authority of clause 3.1.3. and
clause 3.1.8 of the Trade Services Agreement between WBC and Watanmal
India under which Watanmal India was appointed as the fully accredited
agent of WBC, the petitioner in the negotiation and conclusion of sales and
purchase for WBC.
3.6.The petitioner's own submissions before the Inland Revenue
Authority, Hong Kong state as under:-
“Please note that all except one of the directors of
the company are stationed overseas. Kindly note that
Mr.Sakraney N.L. (based in Hong Kong). This include
Mr.K.L.Sarkraney (based in India), Mr.Sakraney P.K
(based in USA), Mr.Sarkraney H.L (based in Singapore)
and Mr.Ganapathy Viswanathan (based in India). There
are no staff in Hong Kong responsible for negotiation
and conclusion of sales or purchases of branded food
products (See para 4 below) there are no staff in Hong
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Kong.
Kingly note that Mr.Sakraney N.L (based in Hong
Kong) is only responsible for the negotiation and
conclusion of sales or purchases of non-branded food
products in Hong Kong, the profits of which are
classified as on shore and offered to Hong Kong profits
tax.”
3.7.On analysis of the above, the following inferences are brought to
the notice of this Court:-
(a) Shri N.L.Sakraney based in Hong Kong was
responsible for unbranded products;
(b) Shri K.L.Sakraney and Ganapathy Viswanathan, i.e.,
significant component of management, sitting in India
were responsible for the branded products division; and
(c) Inland Revenue Authority, Hong Kong while arriving
at the conclusion as mentioned by the petitioner in Point
No.6 of the affidavit, “as the trading profits arising from
the sale of branded food products to customers overseas
are offshore in nature and are not chargeable to Hong
Kong profits tax”, has been cognizance of following
facts and based its ruling on the following assumption:
“In making this ruling, the Commissioner assumes that
effective from 1 April 2005, all contracts for sales and
purchases of branded food products of WBC were and
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would be placed with or placed by, negotiated by and
concluded by WIP, or the employees of WIPL, in India
on behalf of WBC pursuant to the Trade Services
Agreement dated 1 April 2005 in the manner as
described in the Agreement”.
3.8.During the course of survey operations, various evidences were
collected which went on to prove that the sites of management and control
of the petitioner is in India at Unit-4, 7th Floor, Crest Building, Ascendas IT
Park, CSIR Road, Taramani, Chennai-600 113, i.e., the premise of
Watanmal India, in association with all the functions related to the business
activity of the petitioner, which are being carried out there and there exists a
business connection as per Explanation 2(a) of Section 9(1) of the IT Act.
3.9.The petitioner vide objections filed in letter dated 24.11.2017,
questioned the reopening of the assessment under Section 147 of the Act
both legally and factually. Based on material evidences collected during the
survey and sworn statement recorded, it is established that the sites of the
management and control of the petitioner is in India, i.e., at the office of
WIPL located at WIPL Unit-4, 7th Floor, Crest Building, Ascendas IT Park,
CSIR Road, Taramani, Chennai-600 113 and all the functions relating to the
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business activity of the petitioner being carried out in India, in association
with Watanmal India. Thus, there exists a business connection of the
petitioner in India, as per Explanation 2 of Section 9(1) of the Act. Based
on these aspects, reasons were formed and recorded and after obtaining
approval of the Commissioner of Income Tax (International Taxation),
notice under Section 148 was issued to the petitioner on 22.03.2017. The
officer, who recorded reasons forming opinion of income escaping
assessment, had issued the notice under Section 148 of the Act, after getting
due approval from the appropriate authority. In response to the said notice,
the petitioner filed its return of income. Subsequently, due to change of
incumbency, notice under Section 143(2) read with Section 129 was issued
on 01.09.2017. As the objections raised are contrary to the evidences as
stated above, they are overruled and rejected and the same are elaborately
discussed and communicated to the petitioner vide office letter dated
05.12.2017.
3.10.The notice under Section 148 of the IT Act was issued to treat
the petitioner as a taxable entity in India as per Explanation 2 of Section
9(1) of the Act, i.e., by virtue of the business connection in the form of
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Watanmal India, a dependent agent. The same had been the stand taken in
the order dated 05.12.2017 and in the show cause notice dated 22.03.2017.
The respondent has the jurisdiction by virtue of Section 9(1) of the IT Act,
since the petitioner, a foreign company, has income accruing or arising in
India as explained above.
4.THE ARGUMENTS ON BEHALF OF THE PETITIONER:-
4.1.The learned Senior Counsel appearing on behalf of the writ
petitioner contended that it is a classic case where the respondents exercised
their power without jurisdiction. The basic principles to be adhered to under
the provisions of the IT Act had been violated. Admittedly, the petitioner-
company is a non-resident and was not assessed any income under the
territory of India. When there is no income derived within the territory of
India, there is no question of filing any return of income, nor payment of tax
would arise. The mixed questions of facts and law, necessarily to be
considered by the respondents, are not considered in its right perspective
and by adopting an erroneous interpretation of the provisions of the Act,
impugned proceedings are initiated under Section 148 of the IT Act.
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4.2.The learned Senior Counsel referred to Section 5 sub-Clause (2)
of the Act and submitted that there is no income derived in India by the
petitioner-company and therefore, the question of applicability of the Act
would not arise at all. As far as Section 6(3)(ii) is concerned, the learned
Senior Counsel contended that the said clause was incorporated by the
Finance Act, 2016 with effect from 01.04.2017 and therefore, the said
clause, that is, “it is place of effective management, in that year, is in India”
would not be applicable for the purpose of instituting assessment
proceedings under Section 148 of the IT Act. Retrospective application of
the said clause would be bad in law and therefore, the impugned
proceedings are liable to be set aside. Reiterating the same, it is contended
that when there is no income accrued or derived in India, the question of
assessment would not arise at all. Thus, the petitioner cannot be construed
as a person liable to pay tax under the Act and thus, the initiation of
proceedings are misconceived and based on the erroneous interpretation of
the provisions of the Act.
4.3.The learned Senior Counsel further referring to Section 9 of the
Act contended that when it is established that the petitioner has not accrued
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any income within the territory of India, then the “income deemed to accrue
or arise in India” cannot be applied as far as the petitioner-company is
concerned.
4.4.The learned Senior Counsel solicited the attention of this Court
with reference to the ingredients under Section 147 of the Act by
contending that the Assessing Officer must have 'reason to believe' that any
income chargeable to tax has escaped assessment. In the present case, when
there is no income, there is no escapement; and when there is no return,
there is no assessment. Thus, the basis on which the proceedings are
initiated under Section 147 of the Act by the respondents are absolutely
untenable and beyond the scope of the provisions of the Act. No
assessment order was issued under Section 143(3), nor under Section 147 of
the IT Act. In the absence of any such assessment order, opening of
assessment or reassessment is impermissible under Section 147 of the Act.
Thus, the notice issued under Section 148 of the IT Act is in violation of the
ingredients stipulated under Section 147 of the IT Act.
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4.5.It is further contended that absolutely there is no business activity
in India, there is no manufacturing unit, not even a single product is sold
within the territory of India by the petitioner-company. Thus, the company
is only providing logistic support to the company at Hong Kong and goods
are supplied in African Countries and South America and in other countries.
Therefore, the question of invoking the provisions of the Act as applicable
in India does not arise at all. Though the company is functioning from the
year 1948, there is no business activity in India even now. Thus, the
respondents cannot act based on some fictions which all are erroneous facts
and circumstances and thus, the very initiation itself is in violation of the
provisions of the Act and the provision would not be applicable as far as the
petitioner-company is concerned.
4.6.It is contended that under Section 151 of the IT Act, sanction for
issue of notice is to be obtained and the respondents have not produced any
document to establish that the sanction was obtained from the competent
authorities as contemplated under Section 151 of the Act. Reiterating the
grounds raised, the learned Senior Counsel relied on the circular issued by
the Central Board of Direct Taxes (CBDT) in its Circular No.1/2004 dated
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02.01.2004. Relying on the said circular, it is contended that "in some cases
the entire or major portion of the Revenue generating activities of the non-
resident enterprise is performed by the BPO (Business Process Outstanding)
unit in India. The extent to which global profits of a non-resident enterprise
is to be attributed to the activities of the BPO unit in India in these various
circumstances, has been under consideration in the Board. The manner and
extent of such attribution of profits will evidently depend on the facts of
each case and the nature of services rendered by the BPO unit and the same
has to be determined in accordance with the provisions of the treaty
applicable and the domestic law. The Board is, however, of the view that in
a case where the non-resident, carrying on manufacture and sale of goods or
merchandise or provision of services outside India, outsources some of its
incidental activities, viz., conclusion of contracts and procurement of orders
(which enable the core activities to be carried on aboard) to an I.T-enabled
entity in India, which constitutes a permanent establishment of the non-
resident, then the insignificant profit which is difficult to determine and
attributable to the conclusion of such contracts or procurement of such
orders can be considered to be embedded in the income of the permanent
establishment taxable in India, if the price charged in respect of the above
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services by the permanent establishment is an arm's length/fair market price.
In such a situation, therefore, no income shall separately accrue or arise or
be deemed to accrue or arise to the non-resident principal in India.
4.7.Relying on the above circular issued by the CBDT, the learned
Senior Counsel contended that the said circular by the Board is binding all
the authorities and the circular is to be followed by all the authorities under
Section 119 of the IT Act. Thus, it is mandatory on the part of the
respondents to look into the instructions given in the circular and
accordingly, act with reference to the facts.
4.8.The learned Senior Counsel for the petitioner relied on the
judgment of the four Judges Bench of the Hon'ble Supreme Court in the
case of Raza Textiles Ltd. vs. Income Tax Officer, Rampur reported in
(1973) 1 SCC 633. The relevant paragraph 3 is extracted hereunder:-
“3. Aggrieved by that order the appellant went up
in appeal to the Appellate Assistant Commissioner. The
Appellate Assistant Commissioner rejected the appeal
on the ground that the same was not maintainable. He
took the view that an appeal lay only under Section
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30(1A). But before such an appeal can be entertained
the appellant must satisfy two conditions, namely, (1) he
had deducted the tax due from the non-resident in
accordance with the provisions of Sub-section 3(B) and
(2) that he had paid the sum deducted to the
Government. The appellant having not complied with
those two conditions, the Appellate Assistant
Commissioner held that the appeal was incompetent.
The order of the Appellate Assistant Commissioner was
confirmed by- the Tribunal. Thereafter the appellant
moved the High Court under Article 226 of the
Constitution. That application came up before a single
Judge. The single Judge after going into the matter in
detail came to the conclusion that M/s. Nathirmal and
Sons is not a non-resident firm and that being so the
appellant was not required to act under Section 18(3B).
He accordingly, set aside the order impugned. The
revenue went up in appeal against the order of the
learned single Judge to the Appellate Bench. That Bench
allowed the appeal with the observations, "In the present
case the question before the Income-tax Officer,
Rampur, was whether the firm Nathirmal and Sons was
non-resident or not. There was material before him on
this question. He had jurisdiction to decide the question
either way. It cannot be said that the officer assumed
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jurisdiction by wrong decision on this question of
residence". The Appellate Bench appears to have been
under the impression that the Income-tax Officer was the
sole judge of the fact whether the firm in question was
resident or non-resident. This conclusion, in our
opinion, is wholly wrong. No authority, much less a
quasi-judicial authority, can confer jurisdiction on itself
by deciding a jurisdictional fact wrongly The question
whether the jurisdictional fact has been rightly decided
or not is a question that is open for examination by the
High Court in an application for a writ of certiorari. If
the High Court comes to the conclusion, as the learned
single Judge has done in this case, that the Income-tax
Officer had clutched at the jurisdiction by deciding a
jurisdictional fact erroneously, then the assesses was
entitled for the writ of certiorari prayed for by him. It is
incomprehensible to think that a quasi-judicial authority
like the Income-tax Officer can erroneously decide a
jurisdictional fact and thereafter proceed to impose a
levy on a citizen. In our opinion the Appellate Bench is
wholly wrong in opining that the Income-tax Officer can
"decide either way".”
4.9. Further, the learned Senior Counsel is of an opinion that in the
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event of not considering these factors, it would affect the NRI companies
working in India and the repercussion would be wider. Thus, the writ
petition is to be allowed.
5. THE ARGUMENTS ADVANCED ON BEHALF OF THE
RESPONDENTS:-
5.1.The learned Senior Standing Counsel strenuously objected the
contentions raised on behalf of the petitioner by stating that the writ
petitions are not maintainable. It is not as if the respondents have initiated
proceedings without any basis under Section 147 of the Act and issued
notice under Section 148 of the Act. There are abundant materials to
establish that the entire business activities of the petitioner-company are
happening in India and therefore, they are amenable to the provisions of the
I.T. Act and thus, the initiation of assessment proceedings under Section
148 is in order and there is no infirmity as such.
5.2.Relying on Explanation 2(a) to Section 147, it is contended that,
where no return of income has been filed by the assessee although his total
income or the total income of any other person in respect of which he is
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assessable under the Act during the previous year exceeded the maximum
amount, which is not chargeable to income tax is a ground for initiation of
proceedings under Section 147.
5.3.In the present case, admittedly, the petitioner has not filed any
return of income and there was no assessment order. The petitioner has not
subjected for assessment. Thus, the case would fall under the above
provision and on confiscation of material evidences, the authorities
competent instituted action for assessment under Section 147 of the IT Act.
5.4.With reference to the contentions raised on behalf of the
petitioner that in the absence of any assessment order, there is no question
of reopening of assessment would arise under Section 147, the learned
Senior Standing Counsel answered by stating that Section 147
unambiguously stipulates that “assess or reassess in respect of any income
chargeable to tax has escaped assessment for any assessment year”. Thus, a
fresh assessment in the absence of the assessee submitting return of income
is possible. Thus, the powers conferred is exercised in the present case for
assessment in view of the fact that there is a reason to believe that the
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income chargeable to tax has escaped assessment on collection of materials
from the petitioner-company.
5.5.With reference to the arguments advanced by the petitioner
regarding Section 5(2), Section 6(3)(ii) and Section 9, the learned Senior
Standing Counsel replied by stating that Section 9 would be the answer for
all such arguments. Section 9(1)(i) enumerates that “all income accruing or
arising, whether directly or indirectly, through or from any business
connection in India, or through or from any property India, or through or
from any asset or source of income in India or through the transfer of a
capital asset situate in India”. The petitioner-company squarely falls under
the categories stipulated in Section 9(1)(i) and thus, there is no impediment
for the Income Tax Authorities for initiating action under Section 147 and
issuing notice under Section 148. When Section 9 provides income deemed
to accrue or arise in India directly or indirectly and when the respondents
have obtained materials from the petitioner-company, which constitute a
reason to believe that the income chargeable to tax has escaped assessment,
then the authorities competent had rightly invoked the provisions of Section
147 and issued notice under Section 148 enabling the petitioner to submit
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their returns and further objections, if any, for proceeding with the matter.
5.6.The learned Senior Standing Counsel raised the question of
maintainability of the writ petition on the ground that the employees and the
management officials of the writ petitioner-company have given statements,
and material evidences were collected by the Income Tax Authorities and
when the authorities formed an opinion that there is a reason to believe that
the income chargeable to tax has escaped assessment, then the petitioner has
to submit their documents, evidences and objections including the reliance
placed on by them with reference to the circular issued by the CBDT to the
Assessing Officer, who in turn, should proceed with the enquiry by
affording opportunity to the petitioner. Thus, the initiation of 147
proceedings is not conclusive and it is only pending and thus, the writ
petition is premature and liable to be dismissed.
5.7.With reference to the grounds raised by the learned Senior
Counsel on behalf of the petitioner that the sanction as required under
Section 151 of the IT Act has not been obtained, the learned Senior
Standing Counsel produced copy of the sanctioning letter issued by the
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competent authorities. It is contended that prior to 2015, the Joint
Commissioner is competent to grant sanction, as far as the assessment under
Section 147 is concerned. As far as the reassessment is concerned, it is to
be given by the Principal Chief Commissioner or Chief Commissioner or
Principal Commissioner or Commissioner. However, after the amendment
in the year 2015, all such sanctions are to be given by the Principal Chief
Commissioner or Chief Commissioner or Principal Commissioner or
Commissioner. In the present case, for the relevant assessment year prior to
2015, i.e., 2006-07, the Joint Commissioner has granted sanction, which is
in accordance with the provisions of Section 151 existing prior to the
amendment made in the year 2015. With reference to the assessments after
2015, the Principal Commissioner has granted sanction and therefore, the
requirement of Section 151 has been fully complied with.
5.8.The learned Senior Standing Counsel made a submission that this
Court passed an interim order dated 18.12.2017, directing the petitioner to
participate in the proceedings and the respondent was directed to proceed
with the matter and before the writ petitions are heard for disposal, if the
Authorities are able to complete the proceedings, then an order shall be
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passed and kept in a sealed cover till the disposal of the writ petitions. The
Court, further, ordered that it is needless to state that the petitioner should
cooperate with the respondent to complete the proceedings with regard to
the impugned notice. Pursuant to the interim orders passed, the respondents
proceeded with the assessment and assessment orders are passed and as
directed by the High Court, the orders are kept in a sealed cover.
5.9.With reference to the judgment of the Hon'ble Supreme Court in
Raza Textiles Ltd., (supra), the learned Senior standing Counsel submitted
that the said judgment is not applicable with reference to the facts and
circumstances of the case. In the present writ petition, admittedly, the
petitioner-company has not filed any return of income, nor an assessment
order is passed by the competent authority. However, in the case before the
Hon'ble Supreme Court, it is an appellate order and the appeal filed by the
assessee was rejected by the Appellate Assistant Commissioner on the
ground that the same was not maintainable. Thus, the facts are not
comparable at all. Thus, the ratio laid down in the case of Raza Textiles
Ltd., (supra) would not be applicable with reference to the present writ
petition.
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5.10.The learned Senior Standing Counsel reiterated that as per
Section 9(1)(i), the petitioner-company is deriving income indirectly in
India and buying and selling of product was facilitated by the Indian
Company and therefore, the income accrued in India is taxable and they are
falling within the ambit of the provisions of the Act and thus, the initiation
of proceedings are in consonance with the provisions of law and further, the
petitioner had already participated in the proceedings and the assessment
orders are already passed by the competent authority and kept in a sealed
cover and therefore, the respondents may be permitted to open the sealed
cover and issue the assessment order to the petitioner-company, who in turn,
if aggrieved, may prefer appeal as contemplated under the provisions of the
Act.
ANALYSIS:-
6.Considering the pleadings and arguments, let us now consider
Sections 5(2)(a) and 5(2)(b) of the Act. The said provision contemplates
that subject to the provisions of the Act, the total income of any previous
year of a person who is a non-resident includes all income from whatever
source derived which - (a) is received or is deemed to be received in India in
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such year by or on behalf of such person; or (b) accrues or arises or is
deemed to accrue or arise to him in India during such year. Finding arrived
by the respondents/Department in their proceedings reveals that, the income
accrues or deemed to accrue or arise in India. When such a finding is
arrived based on certain materials collected from the premises of the
petitioner company, then the respondents must be allowed to proceed with
the assessment in the manner known to law. In other words, the disputed
facts in this regard deserves to be adjudicated.
6.1.Section 6 contemplates “Residence in India” and Section 6(3)(ii)
contemplates “its place of effective management, in that year, is in India”.
However, the said clause was substituted by the Finance Act 2016 with
effect from 01.04.2017. Prior to the said amendment, the clause existed was
that “during that year, the control and management of its affairs is situated
wholly in India”. The contention of the petitioner is that, prior to
01.04.2017, the control and management of its affairs is situated wholly in
India was not applicable, as far as the petitioner-company is concerned and
after 01.04.2017 alone, the petitioner would come under the provisions of
Section 6(3). Thus, the action initiated prior to 01.04.2017 by
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retrospectively applying the amended clause would be bad in law and
untenable. However, the respondents contended the evidences collected
reveals that the petitioner company falls within the meaning of Section 6,
even prior to the amendment on 01.04.2017. With reference to the findings
of the respondents in their proceedings, certain incriminating materials were
collected and statements were obtained from the officials of the petitioner
company and thereafter, the respondents formed an opinion that the income
accrues or arises or is deemed to accrue or arise in India. Thus, further
enquiry and scrutiny is inevitable even with reference to the pre-amendment
provision of Section 6(3)(ii) that “during that year, the control and
Management of its affairs situated wholly in India” and has stated it is
mixed question of fact and law, which all are to be considered during the
assessment by the competent authority.
6.2.Section 9 denotes income deemed to accrue or arise in India and
Section 9(1)(i) reads as follows:-
“Section 9(1)(i)
“(i) all income accruing or arising, whether
directly or indirectly, through or from any business
connection in India, or through or from any property in
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India, or through or from any asset or source of income
in India or through the transfer of a capital asset situate
in India.”
6.3.The above ingredients of Section 9 would reflect that all income
accruing or arising whether directly or indirectly through or any business
connection in India or through or from any property in India is to be
construed as income deemed to accrue or arise in India. Thus, even the
income accrued directly or indirectly is also to be declared as deemed
income for the purpose of the provisions of the Act.
6.4.Mindful reading of Section 147 would reveal that “If the
Assessing Officer has reason to believe that any income chargeable to tax
has escaped assessment for any assessment year, he may, subject to the
provisions of Sections 148 to 153, assess or reassess such income and also
any other income chargeable to tax which has escaped assessment and
which comes to his notice subsequently in the course of the proceedings
under this section, or recompute the loss or the depreciation allowance or
any other allowance, as the case may be, for the assessment year concerned.
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6.5.Numerous circumstances are enumerated under Section 147 in
respect of “income escaping assessment”. The very concept of Section 147
is to ensure that the income escaping assessment must be brought under the
tax net worth on identification of informations or materials or evidence.
The circumstances narrated in Section 147 of the Act are wider enough to
cover various complex nature of facts and circumstances as contemplated so
as to invoke the provisions of Section 147 and ensure that the tax applicable
is paid or recovered in the manner prescribed.
6.6.The amended Section 147 which stipulates “has reason to
believe” is also wider enough to cover the materials or informations made
available to the Assessing Officer for assessment or for reassessment. Thus,
it is the subjective satisfaction of the Assessing Officer and such subjective
satisfaction must be based on certain acceptable reasons. The very
legislative intention of the provision is to ensure that the competent
authorities did not exceed their jurisdiction. However, the tax liable for
assessment is also not escaped and in order to have a balancing approach,
the provision confers power to the Assessing Officer to assess or reassess
the income escaped assessment and for invoking the provision, such
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Assessing Officer is bound to assign reasons.
6.7 Section 147 contemplates that the Assessing Officer may assess
or reassess. Thus, Section 147 provides the scope for assessment and for
reassessment. Assessment would arise in cases, where no return of income
is filed. Reassessment would arise, if the assessment order is passed under
the provisions of the Income Tax Act. Even in such cases, the Assessing
Officer is empowered to invoke Section 147, if any other income chargeable
to tax, which has escaped assessment. Thus, even after initiation of
proceedings under Section 147 of the Act, if the Assessing Officer
identified that any other income chargeable to tax has escaped assessment,
and such informations, comes to his notice, subsequently during the course
of the proceedings, then also, the authority is empowered to exercise the
powers. Thus, the provision contemplates that during the course of the
proceedings, if any other information is identified regarding the tax, which
has escaped assessment, then also, he can recompute the loss or the
depreciation allowance or any other allowance, as the case may be, for the
assessment year concerned. The language employed in Section 147 of the
Income Tax Act would provide not only wider meaning and power to the
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competent authority, but the provision adopts a holistic approach, so as to
confer powers to the Assessing Officer to cull out the truth with reference to
certain informations, documents, evidences, which were either provided by
the assessee or not provided by the assessee or not considered during the
original assessment. Various complex circumstances prevailing can be fit in
with the provision, in view of the wider concept contemplated under Section
147 of the Act.
6.8.The first proviso to Section 147 would not be applicable with
reference to the facts of the case on hand. The proviso to Section 147
would be applicable where an assessment under Section 143(3) or the
Section has been made for the relevant assessment year. In the present case,
admittedly, no return of income was filed by the petitioner and no
assessment order has been passed by the competent authority. Thus, the
said proviso clause would not be applicable at all.
6.9.However, Explanation 2 to Section 147(a) would be applicable
with reference to the facts of the present case. Explanation 2 to Section
147(a) enumerates that “for the purposes of this Section, the following shall
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also be deemed to be cases where income chargeable to tax has escaped
assessment, viz.,
(a) where no return of income has been furnished by the assessee
although his total income or the total income of any other person in respect
of which he is assessable under this Act during the previous year exceeded
the maximum amount which is not chargeable to income-tax;”
6.10.In the backdrop of these provisions, this Court has to consider
whether the initiation of proceedings under Section 147 of the Act and the
consequential notice issued under Section 148 are in consonance with the
provisions of the Act or not.
7.The facts and circumstances are required to be considered for the
purpose of arriving a decision, whether any income can be construed as
deemed to accrue or arise in India. Only, if it is established by the
Department that the income deemed to accrue or arise in India, they are
empowered to invoke the provisions of Section 147 for assessment. In the
event of establishing that income deemed to accrue or arise in India with
reference to the facts, then such a person is the resident of India, as there
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was an income deemed to accrue or arise in India. Therefore, Section 9 is to
be considered at the first instance to form an opinion, whether there is any
income deemed to accrue or arise in India, as far as the petitioner-company
is concerned.
8.Let us consider the actions initiated as well as the reasons furnished
for initiation of action under Section 147 of the Act. Notice under Section
148 was issued in proceedings dated 28.03.2013 stating that the authority
has reasons to believe that the income chargeable to tax for the assessment
year 2006-07 has escaped assessment within the meaning of Section 147 of
the Act. It is established by the respondents that necessary administrative
sanctions were granted by the competent authorities as contemplated under
Section 151 of the Act. Thus, the contentions raised by the petitioner that
there was no sanctioning by the competent authority is incorrect. The
respondents produced documents to establish that necessary sanction was
accorded by the competent authority of the Income Tax Department.
9.The petitioner-company vide their reply dated 05.04.2013, has
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stated that the petitioner-company incorporated outside India under the laws
of Hong Kong and they neither have any business operation at their own,
nor any source of income taxable in India. Thus, the notices issued to the
petitioner-company are beyond the jurisdiction and without any authority of
law. In response to the assessee's reply to the notice issued under Section
148 of the IT Act, the respondents in proceedings dated 27.05.2013
provided reasons with reference to Section 9(1) of the IT Act holding that
income deemed to accrue or arise in India is established in the case of the
petitioner-company. In the said proceedings dated 27.05.2013, the
respondents have stated that Watanmal India, the Indian company, which
is the associated enterprise of the petitioner-company, is working for the
petitioner and on behalf of the petitioner and constitutes the petitioner's
agency permanent establishment in India. The letter further states that the
petitioner had been inappropriately advised about the provisions of the IT
Act and its applicability and the principles of Cross Border Taxation.
10.In this context, the respondents relied upon Section 9(1) of the Act
and arrived a conclusion that the petitioner is having business operations in
India and further, the notice under Section 148 of the Act was issued after
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examining the facts in great detail and after due application of mind.
Accordingly, the petitioner-company was obligated to file the return of
income as requested in the notices issued.
11.Reference to the TPO under Section 92CA of the IT Act was
issued in proceedings dated 06.08.2013, who in turn, requested the
petitioner to send the copies of annual reports and also the computation of
total income.
12.In proceedings dated 21.02.2014, reasons for reopening of
assessment have been provided. The reasons for reopening of assessment
provided by the respondent-Department read as under:-
“(i) It is noticed that depreciation claimed @ 15%
in respect of 'improvement to lease hold property'. The
allowable depreciation for improvement of lease hold
property is only 10%. Hence the excess depreciation
claimed under improvement to lease hold property for
Rs.1,08,825/- need to be disallowed and added with the
total income;
(ii) As per Form 3CD filed along with the return
of income, it is seen that as per Column 27(a), it has
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been clearly mentioned that the assessee has not
complied with the provisions of Chapter XVII B
regarding deduction of TDS and also observed that tax
has not been deducted on advertisement for Rs.60,000/-
which needs to be disallowed u/s.40(1)(ia) of the
Income-tax Act;
(iii) Further, a survey under Section 133A was
conducted on 14.03.2013 so as to verify the transactions
with reference to its Associate Enterprise,
M/s.Watanmal Boolchand and Company Ltd. (WBC),
Hong Kong. M/s.WBC and its international transaction
and other issues like TPO adjustments, if any. Survey
revealed that existence of various trade service
agreements between M/s.WIPL and M/s.WBC depicting
the following kinds of services:
Handling enquiries from the customers from time
to time received for the products.
Corresponding with the customers with regard to
the prices, terms and conditions, delivery schedules and
follow up for payment.
Negotiating on behalf of WBC with the customers
on their orders for the products and conclude and sign
the contracts and agreements as authorised agent of
WBC.
Keeping records of the transactions handled by
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WIPL for WBC including filing and keeping invoices,
bills of lading, packing lists, certificates of origin and
inspection certificates and payment records.
Liaisoning with and organise booking with
shipping lines for shipment and inland transportation of
the products.
Providing written reports to WBC on transactions
concluded and enquiries and complaints received and
handled by WIPL including by not limited to sales,
collections, goods returned by customers, expenses
incurred by WIPL in the transactions or matters
handled, shipment and movement of the products in
different territories.
Sourcing the products on most favourable terms
from the world markets and negotiate and concluding
the agreements and contracts for the supply of the
products for sale to the customers.
As seen from the above, the Indian Company does
major and critical functions and developed the supply
chain management with reference to both the suppliers
and customers. The Indian company – M/s.Watanmal
India Pvt. Ltd., even negotiates the price by its highly
skilled employees. The Indian Company provides Trade
Services to the group companies which have to be
compensated certainly by higher amount. During the
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course of survey, it is learnt that the AE, i.e.,
M/s.Watanmal Boolchand and Company Ltd., (WBC),
Hong Kong is not having technical capacity and
manpower to assist the assessee in this regard.
The AE, i.e., M/s.Watanmal Boolchand and
Company Ltd., (WBC), Hong Kong is making
voluminous sales of Rs.996,34,75,470/- (AY 2006-07) on
account of trade services rendered by this Indian
Company and the gross receipts shown by this Indian
Company on this voluminous trade services rendered as
high as of Rs.996,34,75,470/- is very low at
Rs.2,30,00,497/-. This is apparently negligible on
prudent commercial business lines to render such high
services.
This clearly clearly shows that the assessee
company is receiving only very meagre amount, i.e.,
Rs.2,30,00,497/-
Rs.996,34,75,470/- = 0.2%
as fees for its trade services. This is very minimal and
difficult to carry on the business for any prudent
business concern. From this, it appears that
M/s.Watanmal India Pvt. Ltd., has understood the
income by not disclosing the true/real income for
A.Y.2006-07 on its trade services with its AE, i.e.,
M/s.Watanmal Boolchand and Company Ltd., (WBC),
Hong Kong.
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In fact, the service income of Rs.2,30,00,497/-
earned for A.Y.2006-07 does not commensurate with the
functions and the level of human resources employed.
The mark up must be on the basis of sales turnover of
AE, i.e., Watanmal Boolchand and Company Ltd.,
(WBC), Hong Kong. In the case of Li Fund India vs.
ACIT, (ITA No.5156/Del/2010), the ITAT, Delhi, had
told that for the sourcing/purchasing/critical services
rendered by the Indian Company, the cost plus 5% mark
up is definitely not on the arms length. In that case, the
Hon'ble ITAT had also held that the Indian Company
should be compensated by mark up on the FOB value of
the goods sources through the assessee.
Even if 3% of the sales turnover is attributed to
the Indian Company (i.e., if the Watanmal Boolchand
and Company Ltd., (WBC), Hong Kong, has
compensated the Indian Company on 3% of its sales),
the Indian assessee company should have earned an
income of Rs.29,89,04,264/-. However, it has
compensated by only Rs.2,30,00,497/- and accordingly
income has escaped to the minimum extent of
Rs.27,59,03,767/-.”
13.The petitioner-company has relied on the proceedings of the TPO
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and stated that Watanmal India provides assistance to Watanmal Group for
the moment of goods from the suppliers in Malaysia, Singapore, USA,
China to the AE end customers who are primarily located in Africa.
Accordingly, Watanmal India does the following functions:-
(i) Sourcing Assistance;
(ii) Majestic Support;
(iii) Sale Support for Oil Goods; and
(iv) Accounting Support.
14.Relying on the said contentions, the petitioner contended that they
have no business activities in India. However, the reasons stated for
reopening of assessment provide various other components relatable to the
business activities and therefore, this Court cannot enter into such disputed
controversies which all are to be adjudicated with reference to the
documents and evidences in entirety. It may not be possible to express any
opinion with reference to such factual controversies in a writ proceedings.
Even in reply dated 02.02.2015, in response to the notice issued by the
authorities under Section 143(2) read with Section 129 dated 05.12.2014,
the petitioner has stated that WBC is not an assessable entity at all in India
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and the Department is not competent to initiate assessment proceedings
against it under the Act. It is relevant to consider the show cause notice
issued by the respondents in proceedings dated 05.03.2015. The show
cause notice issued pursuant to the reopening of assessment and the notice
under Section 148 reveal that in 2002, the group was reorganized and two
holding companies were created in British Virgin Island, viz., Prime Target
Development Inc and Portilio Holdings Corp. The shares of WBC were
held by Prime Target Development Inc. In 2003, the Watanmal Group
started a company in India in the name of Watanmal India with its shares
held by Portilio Holdings Corp. Thus, WBC and Watanmal India became
associated enterprises. The show cause notice contemplates that the integral
functions like board meetings, managing the sales and marketing team,
managing the procurement team, administering the logistics of food
products to various countries, appointment of employees, determination of
salary, etc., were being carried out on behalf of Watanmal Group in India
from the business premises of Watanmal India. In other words, India was
the place of effective management of all the business affairs of WBC,
Hongkong.
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15.It is further contended that in order to confirm these findings and
to check the veracity of accounts and volume of business activity conducted
in India by WBC, a survey under Section 133A of the Act was conducted on
14.03.2013 at the business premises of Watanmal India situated at Unit IV,
7th Floor, Crest Building, Ascend IT Park, Taramani, Chennai where the
business activities of WBC are being undertaken. The operation resulted in
the discovery of books of accounts and other documents from the business
premises of Watanmal India, which have been impounded as per Annexure
ANN/GE/WIPL/LS/IMP with impounding order dated 15.03.2013 and hard
disks of the servers, computers and laptop of key personnel and executives
responsible for conduct of business of Watanmal Group, which have been
impounded as per Annexure ANN/GE/WIPL/Hard Disk/IMP with
impounding order dated 16.03.2013, which confirmed the allegations that
the business activities of the foreign/non-resident company WBC was being
carried on from the premises of Watanmal India at Chennai. Statements on
oath under Section 133A(3) of the Act were recorded from various
executives/persons responsible for conduct of business of Watanmal Group
who were present in the premises of Watanmal India at the time of survey
operation. The evidences gathered from the premises of Watanmal India
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along with the statements recorded clearly establish that all the business
activities of WBC including negotiation and conclusion of contracts,
fixation of price for purchase and sale, negotiation and conclusion of LCs,
logistics maintenance and supervision, marketing strategies are being
undertaken by the employees of Watanmal India on behalf of WBC. It
establishes the presence of the foreign/non-resident company in India
through the business connection with Watanmal India, which was in fact
found to be its associated enterprises, India was the place of effective
management of all business affairs of WBC, Honk Kong.
16.It is relevant to consider the detailed analysis of the crucial
evidences found during the course of survey proceedings by the
respondent/Department, which reads as follows:-
“3.A detailed analysis of the crucial evidences
found during the course of survey proceedings is as
follows:-
I. the administration agreement between WBC
and WIPL dated 01.04.2004 (Annexure I) impounded
vide ANN/GE/WIPL/LS/IMP-21 pg nos 1-8 provides
for the following services to be rendered by WIPL viz.
to correspond with the customers of the FIRST
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PARTY (WBC) with regard to the prices, terms
and conditions, delivery schedules, follow up for
payment with the customers of the FIRST PARTY
(WBC) in respect of the products dealt by the
FIRST PARTY;
To maintain documents for export by the FIRST
PARTY (WBC) to their customers (including
invoices, Bill of Lading, Packing List, Certificate
of Origin and inspection certificates);
To liaise with the inspection agencies for
obtaining import licence and shipping lines for
transport of the products;
To furnish necessary feedback to the First Party
(WBC) regarding purchases, sales, collection,
goods returned by customers, expenses incurred
in relation to purchase and sale of the products,
movement/off-take of the products of the First
Party (WBC) in different territories on a
fortnightly basis;
II. Subsequently a Trade Service Agreement
between WBC and WIPL dated 01.04.2005
(ANNEXURE II) impounded vide
ANN/GE/WIPL/LS/IMP-11 pg nos 14-22 was signed,
which provides for an elaborate range of services to be
performed by WIPL as follows:
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The second party shall provide the following
services to the First Party from India;
Handle enquiries from the customers from time
to time received for the products;
correspond with the customers with regard to
the prices, terms and conditions delivery
schedules and follow up for payment;
Negotiate on behalf of the First Party with the
customers on their orders for the products
and conclude and sign the contracts and
agreements as authorized agent for the First
Party;
Keeping records of the transactions handled by
the second party for the first party including
filing and keeping invoices, bills of lading,
packing lists, certificates of origin and
inspection certificates and payment records.
Liaise with inspection agencies and obtain
import licences and where applicable and
necessary, handle customs clearance matters
for the shipment and delivery of the products in
different customers.
Liaise with and organise booking with
shipping lines for shipment and inland
transportation of the products.
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Provide written reports to the first party on
transactions concluded and enquiries and
complaints received and handled by the second
party including by not limited to sales,
collections, goods returned by customers,
expenses incurred by the second party in the
transactions or matters handled, shipment and
movement of the products in different
territories.
Source the products on most favourable terms
from the world markets in accordance with the
requirements and directions of the First Party
and negotiate and conclude the agreements
and contracts for the supply of the products for
sale to the customers;
Provide such services and support as may be
required from time to time by the first party
relating to the trade on the products.
III. With this agreement WBC approaches the
Commissioner, Inland Revenue Department, Hong
Kong on 22.09.2005 with an application for an
advance ruling (ANNEXURE III), for not treating the
trading profits on sale of branded food products so
derived by the company as not chargeable to Hong
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Kong profits tax and the reasons for filing of
application annexed to such application are as
follows:-
(i) All the terms of the purchase and sales
contracts re branded food products were negotiated and
concluded by WBC's related company, WIP, in India on
behalf of WBC by email or fax.
(ii) WBC was not involved in any of the purchase
and sales activities re branded food products. The work
done in Hong Kong was limited to providing banking
facilities and maintaining bank accounts in Hongkong.
(ii) WBC was not involved in any of the purchase
and sales activities re-branded food products. The work
done in Hong Kong was limited to providing banking
facilities and maintaining bank accounts in Hong Kong;
(iii) The relevant products were shipped directly
from the suppliers in France, USA, Italy, Malaysia,
Ghana, Peru, China and Singapore directly to customers
in West Africa, Central Africa and other parts of the
world outside Hong Kong. No shipment of goods passed
through Hong Kong; and
(iv) As all the sales and purchases were effected
outside Hong Kong, we therefore opine that the relevant
sales should be treated as offshore and the profits so
derived should not be chargeable to Hong Kong profits
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tax.
IV.WBC receives a ruling u/s 88A of the Inland
Revenue Ordinance, Hongkong from Inland revenue
Department on 05.06.2006 (Annexure to Sworn
statement of Shri Easwaran Sundaresan, CEO of the
Group) (ANNEXURE IV) as follows:
(a) WBC is a company incorporated in Hong
Kong. Its principal activities are the import and export
of general merchandise.
(b) Watanmal (India) Private Limited (“WIP”) is
a company incorporated in India. WBC and WIP have
common shareholders.
(c) By a Trade Service Agreement dated on 1
April 2005, WBC engaged WIP as authorized agent to
negotiate and conclude all the purchase and sale
contracts of branded food products on behalf of WBC.
(d) When WIP received an order from overseas
customers, addressed either to WBC or to the Watanmal
Group, staff of WIP in India would negotiate and
conclude the purchase price with the suppliers by email
or fax. WIP in India would then place a purchase order
on behalf of WBC with the suppliers by email or fax.
Formal purchase contract was prepared for every order
in India by staff of WIP who would then send the same to
suppliers by email or fax.
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(3) Overseas customers would place with staff of
WIP in India by e-mail or fax their purchase orders to
WBC. Staff of WIP would then negotiate and conclude
the prices and quantities of branded food products with
WBC's customers by email or fax. Staff of WIP in India
would also prepare sale contracts under letterhead of
WBC.
(f) Shipment of goods would not pass through
Hong Kong. Inventory would not be maintained in
Hong Kong to fulfil orders of branded food products.
(g) WBC maintained banking facilities in Hong
Kong and paid the suppliers by telegraphic transfer,
letter of credit (“L/C”) document against acceptance
(“D/A”) or document against payment (“D/P”). There
was no negotiation of L/C with the suppliers carried out
in Hong Kong.
(h) Customers settled their accounts by D/P, D/A
or telegraphic transfer. There was no negotiation of L/C
with the customers carried out in Hong Kong.”
17.Based on the evidences collected and the detailed analysis made
with reference to the crucial evidences, the Commissioner made an
assumption stating that effective from 1st April, 2005, all contracts for sales
and purchases of branded food products of WBC were and would be placed
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with or placed by, negotiated by and concluded by Watanmal India, or the
employees of Watanmal India in India on behalf of WBC pursuant to the
Trade Services Agreement dated 01.04.2005 in the manner as described in
the agreement. The ruling relied on in this regard is that the trading profits
arising from the sale of branded food products to customers overseas are
offshore in nature and are not chargeable to Hong Kong profits tax. The
period for which the ruling applies has also been considered by the
authorities.
18.Pertinently, the modus operandi of WBC and Watanmal India are
explained by Shri.Easwaran Sundaresan, the CEO of the Group. The said
details were also considered by the authorities competent.
19.The analysis of the activities carried out by Watanmal India on
behalf of WBC in India is detailed as under in a chart:-
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20.Based on the modus operandi, the authorities made a finding that
for all purposes under Section 9 of the Act, the income shall be deemed to
accrue or arise in India. Once the income accrued or arose in India, then
they became amenable to the provisions of the Act and therefore, the
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respondents are empowered to invoke the provisions of Section 147 to
assess the income, as the petitioner had not submitted any return of income.
21.Citing all the facts, circumstances as well as the modus operandi
of the petitioner along with the other company, show cause notices were
issued. The petitioner instead of replying to the said show cause notice
contending the details in its entirety, filed the writ petition to quash the
notice issued under Section 148 as well as the notice dated 05.03.2015.
22.This Court is of the considered opinion that the show cause notice
impugned dated 05.03.2015, cannot be assailed in view of the fact that
many informations and evidences as well as the modus operandi of the
petitioner-company are elaborated with reference to certain informations,
statements and evidences collected by the respondents. All such details,
informations and evidences are to be answered by the petitioner-company in
order to cull out the truth and to form an opinion with reference to the
grounds raised by the petitioner.
23.Undoubtedly, a writ against the show cause notice may be
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entertained, however on certain limited grounds. A writ against the show
cause notice is entertained only to ascertain whether the show cause notice
has been issued by the competent authority or if there is any lack of
jurisdiction. Even in other cases, where a mala fide intention is raised, then
also a writ against the show cause notice may be entertained. However,
regarding the disputed facts, circumstances and evidences, no writ can be
entertained against a show cause notice. The petitioner cannot be permitted
to adjudicate the disputed facts and circumstances in a writ proceedings
with reference to the documents and evidences. Such an exercise is to be
done by the authorities competent by examining the evidences and the
documents and by affording opportunity to the persons concerned.
Therefore, the law is settled regarding the entertainability of the writ
petition against a show cause notice, so also the notice issued under Section
148 of the Act. In both the cases, it is to be construed that the facts are to be
adjudicated. However, if the petitioner is able to establish that the
proceedings are initiated without jurisdiction or authority, then alone a writ
can be entertained and even in such circumstances, the order passed without
jurisdiction is to be quashed and the matter is to be remanded back for re-
consideration by the competent authority.
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24. The purpose and object of the statutes are to be protected. Any
person falling within the ambit of the tax net, can never be allowed to
escape from the clutches of Law. Thus, even in cases, where notice was
issued by an incompetent authority having no jurisdiction, such erroneous
orders are liable to be set aside and the matter is to be remanded back to the
authority competent for reconsideration and to decide the matter afresh on
merits and in accordance with law. In the eventuality of not providing an
opportunity to the competent authority of the Income Tax Department to
reconsider the issues, then the persons, who are liable to pay tax are allowed
to escape from the clutches of the Statute and the same is impermissible.
25. Payment of tax is the law. Exoneration is an exception.
Exceptions are to be granted only on exceptional circumstances, where law
permits. Thus, strict interpretation of tax law is of paramount importance
and a holistic approach is imminent in the interest of Revenue. With these
principles, this Court has to consider the contends in the Show Cause Notice
issued by the respondent Department in proceedings dated 05.03.2015.
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26.Looking into the spirit of Section 9(1)(i) of the Act, in the context
of the contents made in the show cause notice dated 05.03.2015, it is
sufficient to form an opinion that the matter requires effective and elaborate
adjudication in order to cull out the truth with reference to the pleadings and
grounds raised by the petitioner.
27.The petitioner has approached this Court at initial stage only on
the ground that the respondents have no authority to invoke Section 147 of
the Act. However, perusal of the reasoning given in the show cause notice,
it is suffice to arrive a conclusion that there are materials and evidences
enough to allow the Department to proceed with the issues and adjudicate
the same based on the materials and evidences available and by affording
opportunity to the petitioner.
28.As far as the contentions of the petitioner are concerned, this
Court is of the considered opinion that the case of the petitioner squarely
falls under Section 9(1)(i) of the IT Act, which contemplates income
deemed to accrue or arise in India and to satisfy the provisions of Section
9(1), the respondent-Department elaborated the details and made an analysis
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on the modus operandi of the petitioner and thus, the details are
unambiguously recorded in the impugned show cause notice issued in
proceedings dated 05.03.2015. Thus, all such analysis as well as evidences
collected are to be answered and to be adjudicated and a final decision is to
be taken by the authority. In view of the fact that the requirements of
Section 9(1) of the Income Tax Act are satisfied with reference to the
reasons furnished in the show cause notice, and further, this Court
considered the implications of Section 5(2)(a) and 5(2)(b) of the Income
Tax Act and Section 6(3)(ii) of the Income Tax Act in earlier paragraphs of
this order. Once the income deemed to accrue or availed in India is prima
facie established by the respondents, then all further adjudications are to be
done by following the procedures contemplated under the Statutes and with
reference to the grounds raised by the petitioner. Thus, this Court cannot
entertain such disputed facts in the present writ proceedings.
29.The entire reading of the impugned show cause notice dated
05.03.2015 throws light on the issue and therefore, this Court has no
hesitation in forming an opinion that there are prima facie materials and
evidences enough to proceed against the petitioner under the provisions of
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the IT Act. However, the contentions in the impugned show cause notice
alone cannot be a conclusive factor and all such facts, circumstances as well
as the documents and evidences collected and recorded in the impugned
show cause notice are to be adjudicated elaborately by the authorities
competent by affording opportunity to the petitioner, Thus, the petitioner is
bound to avail the opportunity in order to defend their case. The petitioner
may not make an attempt to escape from the clutches of law based on
unsustainable grounds, which all are not substantiated.
30.As far as the ground raised regarding the sanction under Section
151 is concerned, the respondent-Department able to establish that the
sanction as contemplated under Section 151 has been granted by the
competent authority and further regarding the plea that the petitioner has not
been assessed in India, the said facts are controverted by the Department by
placing evidences and materials and the details. All those materials and
evidences were analysed by the competent authority and the findings made
during the analysis were also made available in the impugned show cause
notice dated 05.03.2015. The show cause notice dated 05.03.2015 is self-
sufficient to form an opinion that the matter requires an elaborate
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adjudication in depth in order to cull out the truth behind the pleadings
made by the petitioner.
31.The business transactions, which all are complex in nature and
made by the traders, many times in a calculated manner are to be
adjudicated with expertise in the field and such an exercise must be allowed
to be done by the competent authorities of the Income Tax Department and
in the event of interference at the earliest stage and in the absence of any
ground regarding the jurisdiction, the Court must in all fairness allow the
authorities to proceed with the adjudication and pass an order of assessment
enabling the petitioner to prefer an appeal even thereafter if any grievance
exists.
CONCLUSION:
32.In view of the fact that the petitioner could not able to establish
any acceptable ground for the purpose of interference at the stage of
issuance of a notice under Section 148 and the issuance of show cause
notice and contrarily the respondents could able to establish that sufficient
materials are available on record, which were considered and scrutinised
and a finding on such analysis is also recorded in the impugned show cause
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notice, there is no reason whatsoever to interfere with the actions of the
respondent and thus, all the writ petitions fail and stand dismissed. In view
of the fact that the respondents had already completed the assessment
process and passed an assessment order and kept the same in a sealed cover,
the respondents are permitted to open the sealed cover and communicate the
assessment orders to the petitioner without any further delay enabling the
petitioner to proceed further, if any grievance exist. Accordingly, all the writ
petitions in W.P.Nos.8100 of 2015, 26641 of 2015, 20254 & 20255 of 2016,
32866 & 32867 of 2017 & 33706 of 2018 stand dismissed. No costs.
Consequently, connected miscellaneous petitions are closed.
28.04.2021
Index : Yes/No
Speaking/Non-Speaking Order
abr
S.M.SUBRAMANIAM, J.
(abr)
To
1.The Assistant Director of Income Tax,
International Taxation-II,
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121, Nungambakkam, High Road, Chennai.
2.The Deputy Commissioner of Income Tax,
International Taxation – 2(2),
121, Nungambakkam High Road, Chennai.
3.The Deputy Director of Income Tax,
International Taxation-II(1),
121, Nungambakkam, High Road,
Chennai-600 034.
4.The Assistant Commissioner of Income Tax,
International Taxation – II(2),
Room No.410, 4th Floor, BSNL Building (Tower-1),
No.16, Greams Road, Chennai-600 006.
W.P.Nos.8100 & 26641 of 2015,
20254 & 20255 of 2016, 32866
& 32867 of 2017 & 33706 of 2018
28.04.2021
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