Income Tax Appellate Tribunal - Delhi
Master Card International Inc., New ... vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'E' DELHI
BEFORE SHRI C.L. SETHI AND SHRI K.G. BANSAL
I.T.A.No. 3384(Del)/2009
Assessment year: 2005-06
Mastercard International Inc., Assistant Director of Income-
C/o Authorised Representatives tax, Circle 3(1), International
S.R. Batliboi & Associates, Vs. Taxation, New Delhi.
8th floor, Golf View Corporate,
Tower-B, Sector-42,
Sector Road, Gurgaon.
I.T.A.No. 3285(Del)/2009
Assessment year: 2005-06
Assistant Director of Income- Mastercard International Inc.,
tax, Circle 3(1), International C/o Authorised Representatives
Taxation, New Delhi. Vs. S.R. Batliboi & Associates,
8th floor, Golf View Corporate,
Tower-B, Sector-42,
Sector Road, Gurgaon.
(Appellant) (Respondent)
Assessee by : Shri Abhishek Chawla & Ms. Anumeha Jain
Department by : Shri Ashwani Kumar, CIT, DR
ORDER
PER K.G. BANSAL : AM These cross appeals of the assessee and the revenue emanate from the order of CIT(Appeals)-XXIX, New Delhi, passed on 9.4.2009 in appeal no. 185/2007-08, and pertain to assessment year 2005-06. The 2 ITA Nos. 3384&3285(Del)/2009 appeals were argued in a consolidated manner by the ld. counsel for the assessee and the ld. DR. Therefore, a consolidated order is passed. 1.1 The assessee has taken three grounds in its appeal, which read as under:-
"1. That the learned Commissioner of Income-tax (Appeals)- XXIX, New Delhi ['Ld. CIT(A)'] has erred in law and on facts and circumstances of the case in proceeding with the assumption that the appellant has a Permanent Establishment ('PE') in India and hence the appellant is liable to be taxed in India with respect to business income received from Indian member banks.
1.1 The ld. CIT(A) also failed to appreciate that the appellant has accepted taxability in India in earlier years merely to buy peace and avoid litigation. The return of income for the subject year was filed on the basis that total profits on revenue received from India, without any attribution of profits to Indian operations carried out by its liaison office in India, are to be taxed in India. However, this does not mean that the appellant agrees that it has a PE in India.
1.2 Without prejudice to above, even if it is assumed that MCII has a PE in India, the ld. CIT(A) has failed to appreciate the fact that since the major operations of the appellant and majority of its assets (along with associated risks and rewards) are situated outside India, only marginal profits arising from Indian member banks and attributed to activities carried out in India, should be taxable in India.
2. Without prejudice to the above, the Ld. CIT(A) has erred in law and on the facts and circumstances of the case by setting aside the assessment and redirecting the case to the Assessing Officer ('AO'). This was done despite the fact that the ld. CIT(A)had come to the conclusion that the 3 ITA Nos. 3384&3285(Del)/2009 Gross Net Operating Margin (GNOM) method which was followed by appellant in the revised return of income on the basis of assessment orders for two immediately preceding years ( i.e., AY 2003-04 and AY 2004-05) for determining taxable income of the appellant appears to be reasonable on grounds of reasonability and consistency.
2.1 That the ld. CIT(A) should have directed the AO to follow the GNOM method for estimating taxable income of the appellant on grounds of consistency and reasonability. 2.2 That the ld. CIT(A) has erred in law and facts of the case in coming to the conclusion that although the GNOM method is an appropriate method on the grounds of reasonability and consistency, the AO is within his jurisdiction to compute the income by the method adopted in the original return of income in case the method adopted in the revised return is not in accordance with law. This was done despite the fact that the ld. CIT(a) had observed that no specific deficiency, inaccuracy, or mistake has been pointed out by the Assessing Officer in the revised return.
3. That the ld. CIT(A) has not adjudicated on the ground raised against levy of interest under section 234B of the Act. The ld. CIT(A) should have decided the issue on merits as against disposing the ground as being consequential." 1.2 Thus, it will be seen that the assessee's grounds relate to three issues regarding -(i) liability to be assessed in India; (ii) computation of income in case it is liable to be so assessed; and (iii) liability to pay interest u/s 234B.
1.3 The only ground taken by the revenue is that on the facts and in the circumstances of the case and in law, the ld. CIT(Appeals) erred in 4 ITA Nos. 3384&3285(Del)/2009 virtually setting aside the case back to the AO, which is beyond the scope of his powers, by directing him to re-compute the disallowance of expenses and deduction u/s 44C without appreciating the fact that the AO had done this exercise already at the time of passing the assessment order.
2. Both the parties referred to the background facts which are in dispute. These have been stated in the written submissions of the assessee filed on 13.1.2010. The facts mentioned therein are that the assessee obtained approval from the Reserve Bank of India for opening a liaison office in Mumbai on 26.5.1992, and such office was subsequently opened. This office was allowed to undertake only liaison activities and to act as a channel of communication between the assessee, which is head office and member banks without involving any profit making activity. The assessee also obtained permission to open an additional liaison office at Gurgaon on similar terms and conditions. The assessee was of the view that since it was not carrying on any business activities in India as it did not have any Permanent Establishment ('PE' for short) in India, it was not liable to be assessed under the Income-tax Act, 1961 ('the Act' for short). However, the AO assessed the assessee 5 ITA Nos. 3384&3285(Del)/2009 for assessment years 1996-97 to 2000-01 on the total fees received from Indian customer banks and financial institutions. In order to resolve the controversy, the assessee moved an application for Mutual Agreement Procedure ('MAP' for short) under Article 27 of the Indo-US Tax Treaty ('DTAA' for short). The competent authorities of the two countries arrived at a resolution for the aforesaid five years, which was accepted by the assessee as all the pending appeals were withdrawn. The main conclusions arrived at by the competent authorities were that-
(i) all amounts received by the assessee from Indian member banks and institutions shall consist business profits under Article 7 of the DTAA;
(ii) the business profits will be taxed in India on the footing that the assessee had a PE in India due to presence of its personnel who visited India and carried out activities which were beyond the preparatory and auxiliary activities; (iii) in determining the net profit, all expenses incurred for the purpose of business of the PE in India shall be allowed, subject to limitation on expenses under the domestic law of India and under Article 7 of the DTAA. The total income of the assessee for the aforesaid years was revised accordingly.
2.1 For assessment years 2001-02 and 2002-03, the assessee submitted returns showing incomes on the basis mentioned in the 6 ITA Nos. 3384&3285(Del)/2009 resolution of the competent authorities. Returns for assessment years 2003-04 and 2004-05 were also furnished in the same manner, showing losses.
2.2 The return for assessment year 2005-06 was also submitted computing income on the basis of resolution of the competent authorities. However, in the assessments for assessment years 2003-04 and 2004- 05, the AO applied Rule 10 of the Income-tax Rules, 1962, for computing the income. In view thereof, the assessee revised the return for assessment year 2005-06 on the basis of assessment for assessment years 2003-04 and 2004-05. In the course of assessment proceedings, the AO called for evidence in support of common expenses incurred abroad. It was explained that the assessee is not in a position to produce such evidence as was the case in earlier years. However, the AO did not accept this explanation. He followed the method mentioned in the resolution of Competent Authorities and also made disallowances from personnel expenses, professional fees, data processing charges, travel and meeting expenses, advertisement and marketing expenses and other operating expenses. This led to disallowance of expenses 7 ITA Nos. 3384&3285(Del)/2009 amounting to Rs. 12.65 crore. The income worked out by him came to 59.43% of the gross revenue.
3. The first issue to be decided in this case is - whether, any income of the assessee is liable to be taxed in India? The case of the ld. counsel was that the assessee accepted the resolution of competent authorities and subsequent assessment orders with a view to avoid litigation and to have certainty in the matter. This does not mean that the issue cannot be pressed now and decided on merits. However, after stating so, this issue was not pressed by him. The case of the ld. DR in reply, mentioned in detail in the written submissions, was that the ground regarding non- existence of PE was decided against the assessee in earlier years and it has not been pressed by the ld. counsel in this year also. In view of the past history of the case and the fact that this ground has not been pressed, this issue is decided in favour of the revenue and against the assessee.
4. Coming to the issue regarding the computation of income, the facts are that the resolution of the competent authorities allowed deduction from the gross revenue in respect of - (i) expenses incurred 8 ITA Nos. 3384&3285(Del)/2009 by liaison office in India, and (ii) expenses incurred outside India relating to revenues sourced in India, and (iii) expenses incurred for carrying out global operations, which could be allocated to the Indian operations. This method has been termed as "Net Margin Method" by the lower authorities. This method was employed in assessment years 1996-97 to 2002-03. However, this method was changed in assessment years 2003-04 and 2004-05 by the AO. In these years, he estimated the income of the assessee under Rule 10 and this method has been termed as Global Net Operating Margin Method ('GNOM' for short). This led to assessments at positive incomes against the losses declared for these years. This very method was also adopted by the assessee while filing the revised return. However, the AO did not follow this method by stating that competent authorities of the two countries did not resolve to adopt this method as they had resolved to compute total income on "Net Margin Method". In appeal, the ld. CIT(Appeals) held that the revised return filed by the assessee was a valid return, which ought to have been taken into account for the computation of the total income. It was further held that the total income has to be determined as per provisions of law and, therefore, the AO had jurisdiction to compute the income on Net Margin Method if GNOM method was not in accordance 9 ITA Nos. 3384&3285(Del)/2009 with law. Thereafter, the ld. CIT(A) considered the claim of the assessee in regard to various expenses and applicability of the local law. He came to the conclusion that looking to the peculiarity of facts and the provision contained in section 44C, this matter has to be re- examined by the AO.
4.1 The case of the ld. counsel before us was that the AO himself had changed the method of computation of total income from Net Margin Method to GNOM method. Therefore, it was in the interest of justice that the same should be followed in this year. The assessee had followed this method in the revised return. Accordingly, it was argued that the total income returned therein ought to have been accepted. It was also argued that the principle of res-judicata was not applicable to the income-tax proceedings as each year is a self-contained unit of assessment. This view was stated to be supported by the decision in the case of Uma Charan Shaw and Bros., 37 ITR 271; Raja Bahadur Visheshwara Singh and Others, 41 ITR 685; Dwarkadas Kesardeo Morarka, 44 ITR 529; and New Jehangir Mills, 49 ITR 137. It was fairly pointed out that the aforesaid rule is subject to some limitations as held in the case of H.S. Shah and Co., 30 ITR 618.
10 ITA Nos. 3384&3285(Del)/20094.2 It was also submitted that after computing profit of the Indian operation, only a part of the same could be allocated to the PE in India as provided in Article 7 of the DTAA. This has not been done by the lower authorities.
4.3 In reply, the ld. DR submitted that in the past the whole of the profits attributable to revenues received from clients in India was considered to be the profit of the PE. This position was accepted by the assessee on the basis of resolution of the competent authorities for assessment years 1996-97 to 2000-01. The assessee continued to file the returns for subsequent years on this basis. However, for the first time in assessment year 2005-06, it was pleaded that profits attributable to PE in India only should be brought to tax. This is contrary to the position accepted in past right up to assessment year 2004-05. Further, it was submitted that the assessee failed to substantiate its claim that certain expenses incurred outside India could be attributed to the PE in India. Therefore, the AO was justified in making certain disallowances before computing the income. The ld. CIT(Appeals), exceeding his jurisdiction, restored the matter to the file of the AO, with a view to take the revised return into account and re-compute the income, although he 11 ITA Nos. 3384&3285(Del)/2009 accepted that the computation of income may be made on a fair basis, which was within the jurisdiction of the AO. It was his case that the order of the AO is required to be confirmed on the basis of principle of consistency.
4.4 In order to support his contentions, reliance was placed on the decision of Hon'ble Supreme Court in the case of Radhasoami Satsang Vs. CIT (1992) 193 ITR 321, in which the Hon'ble Court did take into account the position of law that the principle of res-judicata does not apply to income-tax proceedings, as each year was a self-contained year of assessment. However, it was held that where a fundamental aspect permeates through different assessment years, on which a decision has taken one way of the other and the parties have allowed that decision to hold good, it would not be appropriate to change that position in a subsequent year. The Court was at pains to state that this ratio is confined to the facts of the case only and should not be treated as an authority for general application. Further, reliance was placed on the decision of Hon'ble Delhi High Court in the case of CIT Vs. New Poly Pack (P) Ltd. (2000) 245 ITR 492. In that case, rental income from factory building was being assessed as business income, but the AO 12 ITA Nos. 3384&3285(Del)/2009 assessed the rent under the head "income from house property". The CIT(A) and the Tribunal held the matter in favour of the assessee by pointing out that the income was held to be business income in earlier years. The Hon'ble Court held that for the sake of consistency, the same view should continue to prevail in subsequent years unless there is some material change in the facts of the case. Reliance was also placed on the decision of Hon'ble Delhi High Court in the case of CIT Vs. ARJ Security Printers (2003) 264 ITR 276. In that case, the Tribunal had allowed relief to the assessee u/s 80-I. Therefore, similar relief was granted in subsequent years. The earlier orders were not challenged and had attained finality. The Hon'ble Court held that when there is no change in the business of the assessee, relief u/s 80I cannot be denied to it in respect of some assessment years. Therefore, the order of the Tribunal was upheld.
4.5 We have considered the facts of the case and rival submissions. It is the case of the ld. DR that a consistent approach has to be followed in computing the total income of the assessee. The assessee has been assessed to tax since assessment year 1996-97. As there were disputes about the very existence of the liability as well as the quantum of the 13 ITA Nos. 3384&3285(Del)/2009 liability, the assessee moved an application for resolution of the dispute under MAP. The competent authorities of the two countries came to an agreed resolution that -(i) the personnel of the assessee who visited India and carried out activities on behalf of the assessee constituted its PE as their activities exceeded preparatory and auxiliary activities, (ii) all amounts received by the assessee from its members in India shall constitute the revenue of the PE, and (iii) deduction shall be allowed for all expenses incurred in India and outside India attributable to the receipts from Indian members subject to limitation placed by the domestic law of India. This resolution was accepted by the assessee as all appeals in this matter for assessment years 1996-97 to 2000-01 were withdrawn. The assessments for assessment years 2001-02 and 2002-03 were made on the same lines. However, the AO changed the method of assessment in assessment years 2003-04 and 2004-05 and followed the GNOM method, ostensibly for the reason that the assessee was not in a position to furnish evidence in respect of common expenses incurred outside India. Such was also the position in earlier years. The assessee also accepted these orders. However, on receipt of these orders, the assessee revised its return of income for assessment year 2005-06 to bring it in line with GNOM method of computing the 14 ITA Nos. 3384&3285(Del)/2009 total income. The AO treated this return as invalid and mentioned that this method, permitted under Rule 10, was not the method prescribed by the competent authorities. Therefore, the question is whether, Net Margin Method is the consistent method of GNOM method is the consistent method looking to the history of the case? This is a fundamental question which has arisen and which will arise in all the years. Therefore, according to us the rule of consistency shall prevail in this matter. We are of the view that assessments for 7 years from assessment year 1996-97 to assessment year 2002-03 were made on the basis of the resolution of the competent authorities, i.e., Net Margin Method. This method was revised by the AO in assessment years 2003-04 and 2004-05 to GNOM method. These years are not pending before us because as mentioned earlier these orders were accepted by the assessee. However, acceptance of these orders does not by itself lead to the conclusion that GNOM was the consistent method followed in the past for computing the income, the reason being that Net Margin Method was followed earlier for seven years from assessment year 1996-97 to assessment year 2002-03. The concurrence of the competent authorities in respect of this method of accounting further strengthens our view that Net Margin Method was the consistent method for computation of income notwithstanding the fact 15 ITA Nos. 3384&3285(Del)/2009 that such computation involved certain problems regarding ascertainment of common expenses. Thus, we are of the view that the aforesaid Net Margin Method is the consistent method of computation of the total income of the assessee, which should also be followed in assessment year 2005-06. In this year, the original return was filed on the basis of aforesaid method, but a revised return was also filed on GNOM method because of assessment orders passed by the AO for assessment years 2003-04 and 2004-05. Looking to our finding above, it is held that the method followed in the revised return was not the consistent method of computing the total income. Therefore, the AO is directed to compute the profit on the basis of Net Margin Method. The difficulty in this regard is to allocate general expenses incurred outside India to the income attributable to the PE and applicability of the provision contained in section 44C. We are of the view that such difficulty existed in earlier years also when this method was employed. Therefore, we are also of the view that the income for this year should be computed in the same manner in which incomes of seven years were computed on Net Margin Method basis. We are fortified in this view by the fact that even if books of account are to be rejected on the ground that complete details of common expenses and vouchers are not available, the only recourse left to the AO will be to reject the 16 ITA Nos. 3384&3285(Del)/2009 accounts and estimate income on a reasonable basis, which will invariably involve consideration of the computation of income in the earlier years. Such a consideration would not justify such a higher ratio of profit to the receipt from the Indian clients, as computed by the AO for this year. Having stated as aforesaid, it is expected that the assessee shall place whatever evidence it has before the AO, who shall thereafter take a reasonable view in the matter. In order to achieve this purpose, both the sides will be at liberty to lead any evidence in this regard as thought fit. However, this order will be subject to the limitation that the assessed income shall in no case exceed the earlier assessed income for the reason that the Tribunal has no power to enhance the assessment. Thus, this issue is restored to the file of the AO for fresh adjudication.
5. Ground no. 3 is regarding non-chargeability of interest u/s 234-B. The case of the assessee is that the whole of its revenue was liable to deduction of tax at source u/s 195 of the Act. Therefore, there was no liability to pay advance-tax u/s 209. In such a situation, the assessee could not be fastened with the liability u/s 234-B. We find that this issue stands covered by the order of the Special Bench of the Tribunal in the case of Motorola Inc., 95 ITD 269. Following that decision, it is held that the assessee is not liable to pay interest u/s 234B of the Act. 17 ITA Nos. 3384&3285(Del)/2009
6. The only grievance raised by the revenue is that the ld. CIT(Appeals) exceeded his jurisdiction when computation of income was restored to the file of the AO. We have restored the computation of income to the file of the AO and, thus, this ground becomes infructuous.
7. In the result, the appeal of the assessee is treated as partly allowed for statistical purposes and the appeal of the revenue is dismissed as infructuous.
The order was pronounced in the open court on 19th March, 2010.
Sd/- sd/- (C.L. Sethi) (K.G.Bansal) Judicial Member Accountant Member Date of order: 19th March, 2010. SP Satia Copy of the order forwarded to:- 1. Mastercard International Inc.,Gurgaon.
2. ADIT, Circle 3(1), International Taxation, New Delhi.
3. CIT(A)
4. CIT-
5. DR, ITAT, New Delhi. Assistant Registrar.