Category: Direct Taxes

10.  Co-operative Society – Deduction u/s. 80P –
If the income of a society is falling within any one head of exemption, it has
to be exempted from tax notwithstanding that the condition of other heads of
exemption are not satisfied – A deduction would however not be admissible to a
co-operative bank – Also, where the activities of the society are in violation
of the Co-operative Societies Act, deduction cannot be allowed.

The Citizen
Co-operative Society Limited vs. ACIT (2017) 397 ITR 1 (SC)

The Assessee as
Co-operative Society had filed return of income for the Assessment Year
2009-10, for the year ending March 31, 2009 on September 30, 2009 declaring NIL
income. In the return filed, the Assessee claimed a sum of Rs. 4,26,37,081/- as
deduction u/s. 80P of the Act.

The Assessing
Officer held that deduction in respect of income of co-operative societies u/s.
80P of the Act was not admissible to the Appellant as the benefit of deduction,
as contemplated under the said provision was, inter alia, admissible to
those co-operative societies which carried on business of banking or providing
credit facilities to its members. On the contrary, the Appellant society was
carrying on the banking business for public at large and for all practical
purposes, it was acting like a co-operative bank governed by the Banking
Regulation Act, 1949, and its operation was not confined to its members but
outsiders as well.

Insofar as
disallowance of deduction claimed u/s. 80P of the Act was concerned, the CIT
(A) rejected the claim for deduction thereby upheld the order of the Assessing
Officer. While doing so, the CIT (A) followed the order of the Income Tax
Appellate Tribunal (ITAT) in the case of the Appellant itself in respect of
Assessment Years 2007-08 and 2008-09.

Further, appeal
to the ITAT met the same fate as ITAT also referred to its aforesaid order and
dismissed the appeal of the Appellant.

Undeterred, the
Appellant approached the High Court in the form of appeal u/s. 260A of the Act.
This appeal was dismissed by the High Court with the observations that there
was no illegality or infirmity in the order passed by the ITAT.

The Supreme
Court noted that section 80P of the Act provides for certain deduction in
respect of incomes of the co-operative societies. A co-operative society is
defined by section 2(19) of the Act. Where the gross total income of such
co-operative societies includes any income referred to in sub-section (2) of
section 80P, the sums specified in s/s. (2) are allowed as deduction in
accordance with and subject to the provisions of the said section, while
computing the total income of the Assessee. The profit exempted is the net
profit included in the total income and not the gross profit of the business.
Sub-section (2) enlists those sums which are allowed as deductions. Clause (a)
of s/s. (2) includes seven kinds of co-operative societies which are entitled
to this benefit, and in respect of the co-operative societies engaged in the
activities mentioned in those seven classes, the whole of the amount of profits
and gains of business attributable to anyone or more of such activities is
exempted from income by allowing the said income as deduction.

The Supreme
Court observed that in the present petition it was concerned with sub-clause
(i) of Clause (a) of sub-section (2) of section 80P, which enlisted a
co-operative society engaged in carrying on the business of banking or
providing credit facilities to its members.

The Supreme
Court observed that there could not be any dispute to the proposition that
section 80P of the Act was a benevolent provision which was enacted by the
Parliament in order to encourage and promote growth of co-operative sector in
the economic life of the country. It was done pursuant to declared policy of
the Government. Therefore, such a provision had to be read liberally,
reasonably and in favour of the Assessee (See-Bajaj Tempo Limited, Bombay
vs. Commissioner of Income Tax, Bombay City-III, Bombay (1992) 3 SCC 78).
It was also trite that such a provision had to be construed as to effectuate
the object of the Legislature and not to defeat it (See-Commissioner of
Income Tax, Bombay and Ors. vs. Mahindra and Mahindra Limited and Ors.
(1983) 4 SCC 392). Therefore, all those co-operative societies which fall
within the purview of section 80P of the Act are entitled to deduction in
respect of any income referred to in s/s. (2) thereof. Clause (a) of s/s. (2)
gives exemption of whole of the amount of profits and gains of business
attributable to anyone or more of such activities which are mentioned in s/s.
(2).

The Supreme
Court held that sub-section (i) of Clause (a) of sub-section (2), with which it
was concerned, recognised two kinds of co-operative societies, namely: (i)
those carrying on the business of banking and; (ii) those providing credit
facilities to its members.

The Supreme
Court referring to its decisions in the case of Kerala State Cooperative
Marketing Federation Limited and Ors. vs. Commissioner of Income Tax (1998)
5 SCC 48, and of the Punjab and Haryana High Court in the case of Commissioner
of Income Tax vs. Punjab State Co-operative Bank Ltd. (2008) 300 ITR 24
(Punjab & Haryana H.C.), observed that if the income of a society is
falling within any one head of exemption, it has to be exempted from tax
notwithstanding that the condition of other heads of exemption are not
satisfied.

The Supreme
Court noted that with the insertion of s/s. (4) by the Finance Act, 2006, which
was in the nature of a proviso to the aforesaid provision, it was made clear
that such a deduction would not be admissible to a co-operative bank. However,
if it was a primary agriculture credit society or a primary co-operative
agriculture and rural development bank, the deduction would still be provided.
Thus, co-operative banks were specifically excluded from the ambit of section
80P of the Act.

According to
the Supreme Court, if one had to go by the aforesaid definition of
‘co-operative bank’, the Appellant did not get covered thereby. It was also a
matter of common knowledge that in order to do the business of a co-operative
bank, it was imperative to have a licence from the Reserve Bank of India, which
the Appellant did not possess. The Reserve Bank of India itself had clarified
that the business of the Appellant did not amount to that of a co-operative
bank. The Appellant, therefore, would not come within the mischief of
sub-section (4) of section 80P.

However,
according to the Supreme Court, the main reason for disentitling the Appellant
from getting the deduction provided u/s. 80P of the Act was not s/s. (4)
thereof. What has been noticed by the Assessing Officer, after discussing in
detail the activities of the Appellant, was that the activities of the
Appellant were in violations of the provisions of the Mutually Aided Co-op
Societies Act, 1995 (MACSA) under which it is registered. It was pointed out by
the Assessing Officer that the Assessee was catering to two distinct categories
of people. The first category was that of resident members or ordinary members.
In the opinion of the Supreme Court, there may not be any difficulty as far as
this category was concerned. However, the Assessee had carved out another
category of ‘nominal members’. These were those members who were making
deposits with the Assessee for the purpose of obtaining loans, etc. and,
in fact, they are not members in real sense. Most of the business of the
Appellant was with this second category of persons who had given deposits which
were kept in Fixed Deposits with a motive to earn maximum returns. A portion of
these deposits was utilised to advance gold loans, etc. to the members
of the first category. It was found, as a matter of fact, that the depositors
and borrowers were quiet distinct. In reality, such activity of the Appellant
was that of finance business and could not be termed as co-operative society.
It was also found that the Appellant was engaged in the activity of granting
loans to general public as well. All this was done without any approval from
the Registrar of the Societies. With indulgence in such kind of activity by the
Appellant, it was remarked by the Assessing Officer that the activity of the
Appellant was in violation of the Co-operative Societies Act. Moreover, it was
a co-operative credit society which was not entitled to deduction u/s. 80P
(2)(a)(i) of the Act.

The Supreme
Court noted that a specific finding was also rendered that the principle of
mutuality was missing in the instant case.

According to
the Supreme Court, these were the findings of fact which had remained unshaken
till the stage of the High Court. Once the aforesaid aspects were taken into
consideration, the conclusion was obvious, namely, the Appellant could not be
treated as a co-operative society meant only for its members and providing
credit facilities to its members.

The Supreme
Court held that such a society could not claim the benefit of section 80P of
the Act. The appeal, therefore, was dismissed with costs.

11.  Offences and Prosecution – If there is an
attempt to evade tax of the amount less than the monetary limit prescribed in
the Circular, no prosecution should be launched.

Suresh
Sholapurmath and Ors. vs. Income Tax Department and Ors. (2017) 397 ITR 145
(SC)

The assessee
was liable to pay Rs.1465. Rs. 465 was paid but, the document was tampered with
by showing it as Rs.1465.

The Karnataka
High Court refused to quash the prosecution proceedings against the Appellants.
The High Court declined to follow the Circular which provided that if there is
an attempt to evade tax of less than Rs.25,000, no prosecution could be
launched. According to the High Court, this was not a case of evasion of tax
but of furnishing of false declaration and hence circular would not be of any
assistance to the assessee.

The Supreme
Court noted that the amount involved is small, and was paid with interest long
ago. According to the Supreme Court, the Circular dated February 7, 1992
squarely applied and, therefore, no proceedings should have been filed as the
amount was below Rs. 25,000. In view of this, the Supreme Court set aside the
judgement of the High Court and quashed the proceeding against the appellants.

12.  Interest on Refund – Whether an assessee is
entitled to interest u/s. 244A of the Income-tax Act, 1961 on excess self
assessment tax – The High Court could not have disagreed with the decision of a
co-ordinate Bench – Appropriate course of action would have been to refer the
matter to a larger Bench

Engineers
India Ltd. vs. Commissioner of Income Tax (2017) 397 ITR 16 (SC)

The issue
before the Supreme Court pertained to grant of interest u/s. 244A of the
Income-tax Act, 1961 for the Assessment Year 2006-07.

The impugned
judgment of the High Court revealed that another judgment of the Co-ordinate
Bench of the same High Court in the case of CIT vs. Sutlej Industries Ltd.
[2010] 325 ITR 331 (Delhi) was cited wherein the view taken was that in such
circumstances the Assessee would be entitled to interest u/s. 244A of the Income-tax
Act on the refund of the self-assessment tax. The High Court however did not
agree with the aforesaid view and made the following observation:

“Having
found the position of law as indicated above, we express, with respect, our
inability to subscribe to, or follow, the view taken by the other Division
Bench of this Court in the case of CIT vs. Sutlej Industries Ltd.”

The Supreme
Court held that in the impugned judgment, the Bench had differed with the
earlier view expressed by the Co-ordinate Bench. In the circumstances,
according to the Supreme Court, the appropriate course of action would have
been to refer the matter to the larger Bench.

The Supreme
Court noted that subsequently in the case of Sutlej Industries Ltd. vs. CIT
(I.T.A. Nos. 493 of 2003 and 120 of 2004) [2005] 272 ITR 180 (Delhi) pending
before the High Court, the High Court had referred the matter to a larger
Bench. In these circumstances, the Supreme Court set aside the impugned
judgment of the High Court and remanded the appeal to the High Court for its
decision afresh along with I.T.A. Nos. 493 of 2003 and 120 of 2004 by a larger
Bench.

The appeal was
disposed of accordingly.

13.  Non-resident – Permanent Establishment – No
part of the main business and revenue earning activity of the two American
companies was carried on through a fixed business place in India put at their
disposal – The Indian company only rendered support services which enabled the
assessees in turn to render services to their clients abroad – This outsourcing
of work to India would not give rise to a fixed place or service PE

ADIT vs.
E-Funds IT Solution Inc. (2017) 399 ITR 34 (SC)

The assesses,
e-Funds Corporation, USA [e-Funds Corp] and e-Funds IT Solutions Group Inc.,
USA [e-Funds Inc] were companies incorporated in United States of America [USA]
and were residents of the said country. They were assessed and had paid taxes
on their global income in USA. e-Funds Corp was the holding company having
almost 100% shares in IDLX Corporation, another company incorporated in USA.
IDLX Corporation held almost 100% shares in IDLX International BV, incorporated
in Netherlands and later in turn held almost 100% shares in IDLX Holding BV,
which was a subsidiary again incorporated in Netherlands. IDLX Holding BV was almost
a 100% shareholder of e-Funds International India Private Limited, a company
incorporated and resident of India [e-Funds India] IDLX International BV was
also the parent/holding company having almost 100% shares in e-Funds Inc.,
which, as noticed above, was a company incorporated in USA.

Both e-Funds
Inc. and e-Funds Corp. had entered into international transactions with e-Funds
India. e-Funds India being a domestic company and resident in India was taxed
on the income earned in India as well as its global income in accordance with
the provisions of the Income–tax Act. The international transactions between
the assessees and e-Funds India and the income of e-Funds India, it was
accepted, were made subject matter of arms length pricing adjudication by the
Transfer Pricing Officer [TPO] and the Assessing Officer [AO] in the returns of
income filed by e-Funds India.

The assessing
authority for assessment years 2000-01 to 2002-03 and 2004-05 to 2007- 08 in
the case of e-Funds Corporation, USA and for assessment years 2000-01 to
2002-03 and 2005-06 to 2007- 08 in the case of e-Funds IT Solutions Group Inc.,
USA decided that the assessees had a permanent establishment [PE] as they had a
fixed place where they carried on their own business in Delhi, and that,
consequently, Article 5 of the India U.S. Double Taxation Avoidance Agreement
of 1990 [DTAA] was attracted. Consequently, the assessees were liable to pay
tax in respect of what they earned from the aforesaid fixed place PE in India.

The CIT
(Appeals) dismissed the appeals of the assessees holding that Article 5 was
attracted, not only because there was a fixed place where the assessees carried
on their business, but also because they were having “service PEs” and “agency
PEs” under Article 5.

In an appeal to
the ITAT, the ITAT held that the CIT (Appeals) was right in holding that a case
of “fixed place PE” and “service PE” had been made out under Article 5, but
said nothing about the “agency PE” as that was not argued by the Revenue before
the ITAT. However, the ITAT, on a calculation formula different from that of
the CIT (Appeals), arrived at a nil figure of income for all the relevant
assessment years.

The appeal of
the assessees to the Delhi High Court proved successful [(2014) 364 ITR 256
(Delhi)] and the High Court, by an elaborate judgment, has set aside the
findings of all the authorities referred to above, and further dismissed the
cross-appeals of the Revenue.

Consequently,
the Revenue was in appeal before the Supreme Court.

The Supreme
Court observed that the Income-tax Act, in particular section 90 thereof, does
not speak of the concept of a PE. This is a creation only of the DTAA. By
virtue of Article 7(1) of the DTAA, the business income of companies which are
incorporated in the US will be taxable only in the US, unless it is found that
they were having PEs in India, in which event their business income, to the
extent to which it is attributable to such PEs, would be taxable in India. The
Supreme Court noted that Article 5 of the DTAA provides for three distinct
types of PEs with which it was concerned in the present case: fixed place of
business PE under Articles 5(1) and 5(2); service PE under Article 5(2) (l) and
agency PE under Article 5(4). According to the Supreme Court, specific and
detailed criteria are set out in the aforesaid provisions in order to fulfill
the conditions of these PEs existing in India. The burden of proving the fact
that a foreign assessee has a PE in India and must, therefore, suffer tax from
the business generated from such PE is initially on the Revenue.

In the context
of fixed place PE, on the behalf of the Revenue, it was argued that under
Article 5(1) of the DTAA, on the facts of these cases, a case of fixed place PE
has been made out. In support of this, it was, inter-alia, pointed out
that: Most of the employees are in India (In fact, the High Court records that
40% of the employees of the entire group are in India). e-Funds Corp has call
centers and software development centers only in India. e-Funds Corp is
essentially doing marketing work only and its contracts with clients are
assigned, or sub-contracted to e-Funds India. The master services agreement
between the American and the Indian entity gives complete control to the
American entity in regard to personnel employed by the Indian entity. It is
only through the proprietary database and software of e-Funds Corp, that
e-Funds India carries out its functions for e-Funds Corp. The High Court
records that the software, intangible data etc. is provided free of cost
and then states that this is irrelevant. The Corporate office of e-Funds India
houses an ‘International Division’ comprising the President’s office and a
sales team servicing e-Funds India and eFunds group entities in the United
Kingdom, South East Asia, Australia and Venezuela. The President’s office
primarily oversees operations of e-Funds India and eFunds group entities
overseas. The sales team undertakes marketing efforts for affiliate entities
also. The Transfer Pricing [TP] Report says that e-Funds India provides
management support and marketing support services to eFunds Corp group
companies outside India. Regarding supervision of personnel rendering the
services, the TP Report states that “The President’s office manages the
operations of eFunds India and eFunds group entities in UK and Australia and
accordingly, employees of these entities report to the President. The
President’s overall reporting is to EFC. Though the personnel rendering
marketing services are employees of EFI, they report to overseas group entities
to the extent that they are engaged in rendering services to such entities.”
Heavy reliance was also placed upon the Form 10 K report dtd. 31/3/2003 filed
by the e-Fund Corp for the group with the United States Securities and Exchange
Commission.

The Revenue’s
counsel had further submitted that on these facts, the assessees satisfy the
requirements of fixed place PE. For this, reliance was also placed on the judgment
of the Apex Court in the case of Formula One World Championship Ltd. [(2017)
394 ITR 80 (SC)] [Formula One] and contented that physically located premises
are at the disposal of the assessees with the degree of permanence required,
viz., the entire year. It was also contended that the High Court was not right
in holding that the place of management PE under Article 5(2)(a) was prima
facie made out, but since the said provision had not been invoked and requires
factual determination, the Revenue’s argument is dismissed on this score. Heavy
reliance was also placed on the MAP settlement made for the Asst. Years 2003-04
and 2004-05 by the assessees to contend that the assessees have admitted for
those years that some income is attributable to their Indian PEs and this
admission would continue to bind the assessees in all subsequent years.

On the other
hand, on behalf of the assessees, it was, inter-alia, contended that the
tests for determining the existence of fixed place PE have now been settled by
the Apex Court in the case Formula One (supra). These require that the
fixed place must be at the disposal of assessees, which means that the
assessees must have a right to use the premises for the purpose of his own
business and that has not been made out in the facts of this case. The TPO has
specifically held that whatever is paid under various agreements between the
assessees and the Indian company are at arm’s length pricing and this being the
case, even if fixed place PE is found, once arm’s length price is paid, the US
companies go out of the net of Indian taxation. Referring to Article 5(6) of
the DTAA, it was further contended that mere fact that a 100 per cent
subsidiary is carrying on the business in India does not by itself means that
the holding company would have a PE in India. It was also further pointed out
that ultimately there are four businesses that the assessees are engaged in
viz., ATM Management Services, Electronic Payment Management, Decision Support
and Risk Management and Global Outsourcing and Professional Services. All these
businesses are carried on outside India and the property through they are
carried out viz., ATM networks, software solutions and other hardware networks
and information technology infrastructure were all located outside India. The
activities of e-Funds India are independent business activities on which, as
has been noticed by the High Court, independent profits are made and income is
assessed to tax in India. For this, a specific reference was also made to the report
of Deloitte Haskins and Sells dated 13/3/2009, which was produced before the
CIT (A). It was further contended that MAP settlement made for the Asst Years
2003-04 and 2004-05 cannot be considered as precedent to hold that there is a
PE in subsequent years. In fact, this settlement was without prejudice to the
assessees contention that they have no PE in India and it is also clarified in
the follow-up letters that the same is not binding on subsequent years.

Since the
Revenue originally relied on fixed place of business PE, the Supreme Court
tackled it first. The Supreme Court observed that under Article 5(1), a PE
means a fixed place of business through which the business of an enterprise is
wholly or partly carried on. According to the Supreme Court, what is a “fixed
place of business” was no longer res integra. In Formula One’s case (supra),
it had after setting out Article 5 of the DTAA, held that the principal test,
in order to ascertain as to whether an establishment has a fixed place of
business or not, is that such physically located premises have to be ‘at the
disposal’ of the enterprise. For this purpose, it is not necessary that the
premises are owned or even rented by the enterprise. It will be sufficient if
the premises are put at the disposal of the enterprise. However, merely giving
access to such a place to the enterprise for the purposes of the project would
not suffice. The place would be treated as ‘at the disposal’ of the enterprise
when the enterprise has right to use the said place and has control thereupon.

Thus, it was
clear that there must exist a fixed place of business in India, which was at
the disposal of the US companies, through which they carry on their own
business. There was, in fact, no specific finding in the assessment order or
the appellate orders that applying the aforesaid tests, any fixed place of
business had been put at the disposal of these companies. The assessing
officer, CIT (Appeals) and the ITAT had essentially adopted a fundamentally
erroneous approach in saying that they were contracting with a 100% subsidiary
and were outsourcing business to such subsidiary, which resulted in the
creation of a PE. The High Court has dealt with this aspect in some detail and
the Supreme Court agreed with the findings of the High Court in this regard.

The Supreme
Court further held that the reliance placed by the Revenue on the United States
Securities and Exchange Commission Form 10K Report, as had been correctly
pointed out by the High Court, is also misplaced. It is clear that this report
evidently speaks of the e- Funds group of companies worldwide as a whole.

According to
the Supreme Court, the Deloitte’s report dated 31/03/2009 [which was produced
before the CIT(Appeals)] showed that no part of the main business and revenue
earning activity of the two American companies was carried on through a fixed
business place in India which had been put at their disposal. It was clear from
the report that the Indian company only rendered support services which enabled
the assessees in turn to render services to their clients abroad. This
outsourcing of work to India would not give rise to a fixed place PE and the
High Court judgment was, therefore, correct on this score.

In the context
of existence of service PE under Article 5(2)(l) of the DTAA, in addition to
some of the facts pointed for fixed place PE [including the fact of TP report
regarding supervision of personnel rendering service], it was, inter-alia,
further pointed out by Revenue’s counsel that: The Master sub-contractor
agreement between e-Funds Corp and e-Funds India discussed in the CIT(A)’s
order provides in clause 1.1(a) that : “Subcontractors personnel assigned to
work with eFunds IT or Customers located in the United States shall be directed
by eFunds IT or by Subcontractors supervisor acting at the direction of eFunds
IT. In the event Subcontractors personnel are assigned to perform such services
in India, the Subcontractor shall supervise such work, acting at the direction
of eFunds IT. eFunds IT shall be the sole judge of performance and capability
of each of subcontractors personnel and may request the removal of one or more
of Subcontractors personnel from a project covered by any statement of work as
follows.” It is submitted that the personnel engaged in providing these
services were ostensibly the employees of e-Funds India but were de facto
working under the control and supervision of eFunds Corp. In this regard,
reference was made to relevant part of the judgement in DIT vs. Morgan
Stanley and Company Inc. [(2007) 292 ITR 416 (SC)]. Furthermore, the AO in
the Assessment Order has observed that e-Funds Corp has seconded two employees
to e-Funds India and these employees worked as Sr. Director Technical Services and Country
Head-Business Development. The activities of the seconded employees go beyond
mere ‘stewardship activities’ in terms of Morgan Stanley’s case [supra].
The term ‘Other Personnel’ has to be seen in the context of the facts of this
case which show that e-Funds India was not an independent subsidiary.

In the context
of service PE, in addition to some of the points made out in connection with
non-existence of fixed place PE,  the
assessee’s counsel, inter alia, further contended that under Article
5(2)(l) of the DTAA, it is necessary that the foreign enterprises must provide
services to customers who are in India, which is not Revenue’s case as all
their customers exist only outside India. It was also pointed out that the
entire personnel engaged only by the Indian company and the facts that the US
companies may indirectly control such employees is only for the purpose of
protecting their own interest. The reliance was also placed on the judgment of
the Supreme Court in Morgan Stanley’s case (supra).

Insofar as a
service PE was concerned, the Supreme Court noted that the requirement of
Article 5(2)(l) of the DTAA was that an enterprise must furnish services
“within India” through employees or other personnel. In this regard, the
Supreme Court referred to its judgment in Morgan Stanley’s case (supra)
and noted that none of the customers of the assessees were located in India or
have received any services in India. This being the case, it was clear that the
very first ingredient contained in Article 5(2)(l) was not satisfied.

However, the
learned Attorney General, relying upon paragraph 42.31 of the OECD Commentary,
had argued that services have to be furnished within India, which does not mean
that they have to be furnished to customers in India. Para 42.31 of the OECD
Commentary states that “Whether or not the relevant services are furnished to a
resident of a state does not matter: what matters is that the services are
performed in the State through an individual present in that State.”

Based upon the
said paragraph, it was argued that in assessment year 2005-06, two employees of
the American company were seconded in India and that, therefore, it was clear
that management of the American company through these employees had obviously
taken place. The High Court, in dealing with this contention, had found it was
not known as to what functions they performed and to whom they reported and it
was also not known whether the services were performed related to services
provided to an associated enterprise in which case clause 5(2)(l)(ii) would be
applicable. According to the High Court, whether the seconded employees were
performing stewardship services or were directly involved with the working
operations was relevant. It was the case of the assessee that they were deputed
to look towards development of domestic work in India and cost of such
personnel was fully borne e-Funds India. They were working under the control
and supervision of e-Funds India. This factual assertion was not negated or
questioned by the AO.

The Supreme
Court agreed with the approach of the High Court in this regard. It held that
para 42.31 of the OECD Commentary does not mean that services need not be
rendered by the foreign assessees in India. If any customer is rendered a
service in India, whether resident in India or outside India, a “service PE”
would be established in India. As noticed hereinabove, no customer, resident or
otherwise, received any service in India from the assessees. All its customers
received services only in locations outside India. Only auxiliary operations
that facilitated such services were carried out in India. This being so, it was
not necessary to advert to the other ground namely, that “other personnel”
would cover personnel employed by the Indian company as well, and that the US
companies through such personnel were furnishing services in India. This being
the case, it was clear that as the very first part of Article 5(2)(l) was not
attracted, the question of going to any other part of the said Article did not
arise. It was perhaps for this reason that the AO did not give any finding on
this score.

The Supreme
Court agreed with the assessee’s counsel that the “agency PE” aspect of the
case need not be gone into as it was given up before the ITAT. However, the
Supreme Court was of the view that for the sake of completeness, it was
necessary to agree with the High Court, that it had never been the case of
Revenue that e-Funds India was authorised to or exercised any authority to
conclude contracts on behalf of the US company, nor was any factual foundation
laid to attract any of the said clauses contained in Article 5(4) of the DTAA.

Dealing with
the issue of effect of MAP settlement for the Asst. Years 2003-04 and 2004-05,
the Supreme Court referred to the relevant paras of OECD Manual on MAP and, in
particular, Best Practice No.3, relied on by the Revenue’s counsel and noted
that this would show that a competent authority should engage in discussion
with the other competent authority in a principled, fair and objective manner,
with each case being decided on its own merits. It is also specifically
observed that, where an agreement is not otherwise achievable, then both
parties should look for appropriate opportunities for compromise in order to
eliminate double taxation on the facts of the case, even though a principled
approach is important. The learned Attorney General also relied upon Best
Practice No. 1 of the said OECD Manual, which requires the publication of
mutual agreements reached that may apply to a general category of taxpayers
which would then improve guidance for the future. According to the Supreme
Court, the Best Practice No. 1 has no application on the facts of the present
case, as the agreement reached applies only to the respondent companies, and not
to any general category of taxpayers. It is clear, therefore, that the
assessee’s counsel Shri Ganesh is right in replying upon para 3.6 of the OECD
Manual, which deals with settlements which are often case and time specific and
they are not considered as precedents for the tax-payers or the tax
administration. It is very clear, therefore, that such agreement cannot be
considered as a precedent for subsequent year, and the High Court’s conclusion
on this aspect is also correct.

Note: In the above case, in the context of fixed place PE, the Court has followed internationally accepted tests confirmed by the Supreme Court in the case of Formula One (supra) and applied the same to the facts found by the High Court in this case. The judgement in Formula One’s case is digested in this column in the last month and since this case, in this respect, follows the same, it is thought fit to consider in this column in this month, which is now also reported in ITR. In the context of service PE, primarily it has relied on its earlier judgment in the case of Morgan Stanley (supra), which has been analysed in greater detail by us in this journal in the column Closements in the months of September/October, 2007. The above judgement is also primarily based on the factual findings of the High Court and also based on certain lack of findings of facts at the lower level. As such, this judgement should be read, understood and applied accordingly. For the purpose of deciding the issues raised in this case, the Court has also referred to and considered the relevant part of OECD commentaries on OECD Model as well as by learned authors Klaus Vogel & Arvind A. Skaar (on PE) and also the OECD Manual on MAP etc. _

BCAJ Admin

5. Pr. CIT vs. NRA Iron and Steel Pvt. Ltd. (2019) 418 ITR 449 (SC)

Notice – Service of notice – Application for recall of ex parte
order – Service of notice on authorised representative – Section 2(35) defines
‘principal officer’ which includes agent of the company and the term ‘agent’
would certainly include a power of attorney holder – No ground for recall of
judgment

An application was filed for recall of the judgment for the A.Y. 2009-10
passed by the Supreme Court on the ground that the applicant company was not
served with the notice of the SLP at its registered office, nor was a copy of
the SLP served on the applicant company.

The applicants submitted that the court notices
were sent to the earlier registered office address of the company, i.e., at
310, 3rd Floor, B-Block, International Trade Tower, Nehru Place, New Delhi.
However, on 19^th May, 2014, the company had changed its registered
office to 211, Somdutt Chambers II, 9, Bhikaji Cama Place, New Delhi 110066.

Thereafter, on 23^rd January, 2019, the registered office was
again changed to 1205, Cabin No. 1, 89 Hemkunt Chambers, Nehru Place, New
Delhi.

The applicants submitted that they learnt of the judgment dated 5^th
March, 2019 passed by the Court from a news clipping published in The
Economic Times on 7^th March, 2019. Subsequently, the application
for recall was filed on 12^th March, 2019.

The company submitted that on an inspection of the court record it
learnt that the affidavit of dasti service filed by the Revenue
Department on 19^th December, 2018 showed an acknowledgement receipt
by Mr. Sanjeev Narayan, the chartered accountant of the applicant company, on
13^th December, 2018.

The company also placed on record the affidavit of Mr. Sanjeev Narayan
wherein he had stated that he was the authorised representative of the company
before the Income Tax authorities but was not engaged before the High Court or
the Supreme Court. He submitted that he had received service on 13^th
December, 2018 from one of the Inspectors of the Income Tax Department, but he bona
fide believed that the documents were ‘some Income Tax return documents
from Income Tax Department.’ He further submitted that he was suffering from an
advanced stage of cataract and had undergone surgery in both eyes, on 4^th
January, 2019 and 23^rd January, 2019, respectively.

The Department in its counter affidavit submitted that the dasti
notice was duly served on Mr. Narayan at his office address, in his capacity as
the authorised representative of the company who was holding a power of
attorney of the company for the A.Y. 2009-10. The POA appointed all four
partners of the firm, i.e., Mr. Mohan Lal, Advocate, Mr. Ashwani Kumar,
Chartered Accountant, Mr. Sanjeev Narayan, Chartered Accountant, and Mr.
Surender Kumar, FCA, as their counsel and authorised them to represent the
company at all stages of the proceedings. The POA executed by the company in
favour of Mr. Sanjeev Narayan was placed on record.

It was further submitted on behalf of the Revenue that even though Mr.
Narayan had stated that he underwent the cataract surgery on 4^th
January, 2019 and 23^rd January, 2019, this was much after the notice
had been served on 13^th December, 2018. Further, Mr. Narayan had
appeared before the tax authorities after the date of service on 13^th December,
2018, and prior to his surgery, to represent the company and its sister
concerns on the 14^th, 21^st, 28^th and 29^th
of December, 2018. In these circumstances, it was pointed out, there was no
merit in the contention raised by the company, and hence no ground was made out
to recall the judgment passed by the Supreme Court.

During oral hearing on the recall application, a submission was made by
the counsel for the company that Mr. Sanjeev Narayan was not the ‘principal
officer’ of the company and hence service could not have been effected upon
him.

* The Supreme Court noted that section 2(35) defines ‘principal
officer’, which includes agent of the company and the term ‘agent’ would
certainly include a power of attorney holder {State of Rajasthan vs.
Basant Nehata [2005 (12) SCC 77]}.

* It held that Mr. Narayan admittedly being the power of attorney holder
of the applicant (M/s. NRA Iron & Steel Pvt. Ltd.) for the A.Y. 2009-10,
was the agent of the company and hence notice could be served on him as the
agent of the company in this case.

* The Supreme Court observed that the ground taken by Mr. Narayan that
even though notice was served on 13^th December, 2018, he assumed
that they were ‘some Income Tax return documents’ lacked credibility. It was
difficult to accept that the envelope containing the dasti notice from
this Court was considered to be ‘some Income Tax return documents’. Also, the
deponent had not disclosed as to whether the envelope containing the dasti notice
was ever opened. Further, the ground urged that the chartered accountant was
suffering from an advanced stage of cataract and hence was constrained from
informing his clients, was again not worthy of credence. The dasti notice
was served on him at his office on 13^th December, 2018 which was
much prior to his surgery which took place on 4^th January, 2019.
Furthermore, Mr. Narayan appeared before the Income Tax authorities to
represent the company and its sister concerns on various dates prior to his
surgery, i.e., on 14^th, 21^st, 28^th and 29^th
December, 2018.

The Supreme Court stated that keeping in view the above-mentioned facts
and circumstances, it was satisfied that the applicant company was duly served
through its authorised representative and was provided sufficient opportunities
to appear before the Court and contest the matter. The company chose to let the
matter proceed ex parte. The grounds for recall of the judgment were
therefore devoid of any merit whatsoever.

The Supreme Court dismissed the application for recall.

6. Pr CIT vs. I-Ven Interactive Limited (2019) 418 ITR 662 (SC)

Assessment – Change of address – Notice – In absence of any application
for change in address and/or change in the name of the assessee in the
Permanent Account Number database, the assessing officer would be justified in
sending the notice at the available address mentioned in the PAN database of
the assessee, more particularly when the return has been filed under e-module
scheme – Mere mentioning the new address in the return of income is not enough
– The change of address in the database of the PAN is a must

The assessee filed return of income for the A.Y.
2006-07 on 28^th November, 2006 declaring total income of Rs.
3,38,71,716. The said return was filed under the e-module scheme and thereafter
a hard copy of the same was filed on 5^th December, 2006. The return
of income was accompanied with the balance sheet and profit and loss account.
The return was processed u/s 143(1) of the Act. A notice u/s 143(2) of the Act
was issued to the assessee on 5^th October, 2007. The notice was sent
at the assessee’s address available as per the PAN database. A further
opportunity was provided to the assessee vide notice u/s 143(2) on 25^th
July, 2008. This notice was also issued at the available address as per the PAN
database. Thereafter, further notices u/s 142(1) were issued to the assessee on
23^rd January, 2008, 25^th July, 2008 and 5^th
October, 2008 along with questionnaires calling for various details and were
duly served on the assessee company.

In response to the said notice, the representative
of the company appeared on 28^th November, 2008 and 4^th
December, 2008. The assessee participated in the proceedings before the AO.
However, the assessee challenged the notice under sections 143(2) and 142(1) on
the ground that the said notices were not served upon the assessee as the assessee
never received those notices and the subsequent notices served and received by
the assessee were beyond the period of limitation prescribed under proviso to
section 143(2) of the Act.

The AO vide assessment order dated 24^th
December, 2008 completed the assessment u/s 143(3) by making disallowance of
Rs. 8,91,17,643 u/s 14A, read with Rule 8 of the Rules, and computed the total
income at Rs. 5,52,45,930.

Being aggrieved by the assessment order dated 24^th
December, 2008, the assessee preferred an appeal before the learned C.I.T.
(Appeals). The C.I.T. (Appeals) allowed the appeal vide order dated 23^rd
December, 2010 holding, inter alia, that the AO completed the assessment
u/s 143(3) without assuming valid jurisdiction u/s 143(2), and therefore the
assessment framed u/s 143(3) was invalid. The C.I.T. (Appeals) observed that as
the subsequent service of notice u/s 143(2) was beyond the period of limitation
prescribed under the proviso to section 143(2) and earlier no notices
were served upon the assessee and / or received by the assessee as the same
were sent at the old address, and in the meantime the assessee changed its
address, therefore the assessment order was bad in law. The Revenue preferred
an appeal before the Income Tax Appellate Tribunal which came to be dismissed
by the I.T.A.T. vide order dated 19^th January, 2015. The orders
passed by the C.I.T. (Appeals) as well as the I.T.A.T. were confirmed by the
High Court.

Hence, the Revenue preferred an appeal before the
Supreme Court.

The Supreme Court noted at the outset that the
notice u/s 143(2) was sent by the AO to the assessee at the address as
mentioned in the PAN database on 5^th October, 2007 and the same was
within the time limit prescribed in the proviso to section 143(2) of the
Act.

It recorded, however, that it was the case of the
assessee that the said notice was not served as the assessee had changed its
name and address and shifted to a new address prior thereto and therefore the
said notice was not served upon the assessee, and by the time when subsequent
notices were served, notice u/s 143(2) was barred by the period prescribed in proviso
to section 143(2). Therefore, the assessment order was bad in law. It was the
case on behalf of the assessee that vide communication dated 6^th
December, 2005 the assessee had intimated to the AO about the new address and
despite this, the AO sent the notice at the old address.

The Supreme Court observed that the alleged
communication dated 6^th December, 2005 was not forthcoming. Neither
was it produced before the AO nor before the Supreme Court. In the affidavit,
too, filed in compliance with the order dated 21^st August, 2019, the
assessee has stated that the alleged communication dated 6^th
December, 2005 was not available. Thus, the assessee had failed to prove the
alleged communication of that date. The only document available was Form No. 18
filed with the ROC.

The Supreme Court held that the filing of Form-18
with the ROC could not be said to be intimation to the AO with respect to
intimation of change in address. According to the Court, it appeared that no
application was made by the assessee to change the address in the PAN database
and in the PAN database the old address continued. Therefore, in absence of any
intimation to the AO with respect to change in address, the AO was justified in
issuing the notice at the address available as per the PAN database. Hence, the
AO could not be said to have committed any error; in fact, the AO was justified
in sending the notice at the address as per the PAN database. If that was so,
the notice dated 5^th October, 2007 could be said to be within the
period prescribed in proviso to section 143(2) of the Act. Once the
notice is issued within the period prescribed as per the said proviso,
the same can be said to be sufficient compliance of section 143(2) of the Act.
And once the notice is sent within the period prescribed in the proviso
to section 143(2), in that case, the actual service of the notice upon the
assessee thereafter would be immaterial.

In a given case it may happen that though the
notice is sent within the period prescribed, the assessee may avoid actual
service of the notice till the period prescribed expired. Even in the case
relied upon by the Assessee [Asst. CIT vs. Hotel Blue Moon (2010) 321 ITR
362 (SC)], it was observed that the AO must necessarily issue notice
u/s 143(2) within the time prescribed in the proviso to section 143(2)
of the Act.

The Supreme Court, therefore, in the facts and
circumstances of the case, held that the High Court was not justified in
dismissing the appeal and confirming the orders passed by the C.I.T. (Appeals)
and the I.T.A.T. setting aside the assessment order solely on the ground that
the assessment order was bad in law on the ground that subsequent service of
notice upon the assessee u/s 143(2) was beyond the time prescribed in the
proviso to section 143(2) of the 1961 Act.

The Supreme Court, in the context of the
observations made by the High Court while concurring with the view of the
Tribunal that merely by filing of return of income with the new address it
shall be enough for the assessee to discharge its legal responsibility for
observing proper procedural steps as per the Companies Act and the Income Tax
Act is concerned, held that mere mentioning of the new address in the return of
income without specifically intimating the AO with respect to change of address
and without getting the PAN database changed, is not enough and sufficient.

In the absence of any specific intimation to the AO
with respect to change in address and / or change in the name of the assessee,
the AO would be justified in sending the notice at the available address
mentioned in the PAN database, more particularly when the return has been filed
under the e-module scheme. It is required to be noted that notices u/s 143(2)
are issued on selection of cases generated under the automated system of the
Department which picks up the address of the assessee from the database of the
PAN. Therefore, the change of address in the database of PAN is a must; in case
of change in the name of the company and / or any change in the registered
office or the corporate office, the same has to be intimated to the Registrar
of Companies in the prescribed format (Form 18) and after completing the said
requirement, the assessee is required to approach the Department with the copy
of the said document and the assessee is also required to make an application
for change of address in the Departmental database of PAN, which in the present case the assessee had failed to do.

Accordingly, the appeal was allowed by the Supreme
Court. The impugned judgment and order passed by the High Court, as well as the
orders passed by the C.I.T. (Appeals) and the I.T.A.T., were quashed and set
aside. The matter was remanded to the C.I.T. (Appeals) to consider the appeal
on merits on other grounds, in accordance with the law.

BCAJ Admin