Income Tax Appellate Tribunal - Delhi
Pb Asia Ltd., New Delhi vs Assessee on 26 March, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'F' : NEW DELHI
BEFORE SHRI G.E.VEERABHADRAPPA, VICE PRESIDENT AND
SHRI C.L.SETHI,
C.L.SETHI, JUDICIAL MEMBER
ITA No.2484/Del/2010
No.2484/Del/2010
Assessment Year : 2005-
2005-06
M/s P.B.Asia Limited, Vs. Director of Income Tax,
C/o Parsons Brinckerhoff International Taxation-
Taxation-II,
India Pvt.Ltd.,
Pvt.Ltd., New Delhi.
th
6 Floor, Commercial Tower
Structure (West),
Le Meridien Hotel,
Windsor Place, Raisina Road,
New Delhi - 110 001.
PAN : AADCP7124N.
(Appellant) (Respondent)
Appellant by : Shri T.N.Chopra and
Shri Shivendra K.Singh, Advocates.
Respondent by : Shri A.K.Mahajan, CIT-DR.
ORDER
PER C.L.SETHI, JM :
The present appeal, filed by the assessee, is directed against the order dated 26.3.2010 passed by the learned Director of Income Tax (International Taxation)-II, New Delhi under Section 263 of the Income- tax Act, 1961 for the AY 2005-06.
2. The effective ground taken by the assessee in this appeal is that the impugned order of the learned DIT is invalid, illegal and without jurisdiction inasmuch as the requisite conditions for invoking revisional jurisdiction under Section 263 of the Act are not fulfilled.
3. Facts of the case in brief, giving rise to the said appeal may be set out as under.
23.1 The assessee, a non-resident company, filed its return of income on 2.2.2006 declaring total income at Rs.nil. The case was selected for scrutiny by the Assessing Officer. Accordingly, statutory notice u/s 143(2) dated 20.9.2006 was issued and served upon the assessee. The AO then completed the assessment u/s 143(3) of the Act by accepting the returned income as per return of income vide his order dated 28.12.2007. Thereafter, a proposal u/s 263 of the Act was received by the learned DIT from the AO vide letter dated 26.3.2009 alongwith assessment records recommending invoking the provisions of Section 263 of the Act for the reason that the sum of `5,60,01,600/- received by the assessee for providing design and engineering drawing in connection with the Second Vivekanand Bridge Tollway Project (SVBT Project) was not offered for taxation though it should have been taxed at 20% in the light of the fact that assessee received consideration for providing design and engineering drawing from a dependent PE and supervisory PE based on an agreement dated 10.5.2007. The relevant assessment records were then examined by the learned DIT and thereafter, notice u/s 263(1) of the Act was issued to the assessee on 8.4.2009. In response to the show cause notice so issued by the learned DIT, assessee's authorized representative had appeared before DIT and filed written submission. After going through the submission made by the assessee, a final show cause notice was issued by the learned DIT to the assessee on 24.2.2010 fixing the hearing on 4.3.2010. The relevant paragraph of the aforesaid show cause notice dated 24.2.1010 is as under:-
"It is proposed to dispose off the proceedings u/s 263 of the IT Act, 1961 after considering your submissions and the facts on record which indicate that the assessment in question was finalized by the Assessing Officer at Nil income without proper enquiries on the relevant issues as also without application of mind in spite of the fact that the Assessing Officer had issued order u/s 195(2) of the IT Act, 1961 in respect of the same contract where the payment to the assessee was held to be royalty and taxable in India 3 @ 15% on gross basis. Thus, failure on the part of the Assessing Officer to conduct proper enquiries with regard to the claims made by the assessee in the return of income that it had no PE in India during the relevant year and that its income was not taxable otherwise also, makes the order passed by him erroneous and prejudicial to the interest of revenue."
3.2 In response to the above show cause notice, the assessee filed written submission dated 3.3.2010 and 5.3.2010.
3.3 After considering the relevant records of the case and submission of the assessee, the learned DIT passed the impugned order u/s 263 dated 26.3.2010 setting aside the impugned assessment made by the AO u/s 143(3) on the following grounds:-
(i) The assessment had been made by the AO without application of mind to the facts and issues involved in the case.
(ii) No enquiry whatsoever was made by the AO on the issues involved in this case.
(iii) The AO has accepted the return of the assessee in disregard to the order passed u/s 195(2) of the Act as well as the order of the learned CIT(A) upholding the same order passed u/s 195(2).
3.4 It was further observed by the learned DIT that the department has not accepted the order of the Tribunal holding that outright sale of drawings and designs are not covered u/s 9(1)(vi) of the Act, and the Department has filed appeal before the High Court, which was pending.
4. Being aggrieved, the assessee is in appeal before the Tribunal.
45. The learned counsel for the assessee Shri T.N.Chopra, Advocate has submitted that the grounds or reasons adopted by the learned DIT for cancellation of the impugned assessment of the AO are factually and legally erroneous and the impugned order u/s 263 has been passed without valid jurisdiction. He further submitted that the requisite conditions for assumption of jurisdiction are not fulfilled in the instant case. He further submitted that the AO has made the impugned assessment u/s 143(3) after calling for the requisite information and details and scrutinizing the same. During the course of assessment proceedings, the AO specifically called upon the assessee to file a copy of the agreement dated 12.5.2004 entered into between the assessee and Parsons Brinckerhoff India Pvt.Ltd. (hereinafter called as 'PBIPL') for supply of designs and drawings for the SVBT project and this agreement was duly filed vide letter dated 11.12.2007. The learned counsel for the assessee further pointed out that the AO also called for the details of the work done under the contract with PBIPL, and particulars of places where the work of designing etc. was done by the assessee. The AO also made specific enquiries as to whether portion of the work was subcontracted by the assessee company and also indicate what was the percentage of work done by the regular employees of the assessee. The AO also called upon the assessee to furnish details of support from associate enterprises for execution of the work assigned to it under the contract. The AO also called upon the assessee to furnish transfer pricing study report of the assessee company and of Indian company with a view to consider the reasonableness of the consideration received by the assessee company from PBIPL. The entire information as desired by the AO was furnished by the assessee vide letter dated 11.12.2007 and 18.12.2007, and in the light of the details submitted by the assessee, the assessment was made by the AO. In the light of these facts, it was thus submitted that the AO completed the assessment after making necessary enquiries and applying his mind to the issues 5 involved in the assessment. The learned counsel for the assessee, therefore, contended that the learned DIT has misdirected himself on facts in observing and holding that no enquiries were made by the AO and that there was no application of mind on the issues involved. In this respect, the learned counsel for the assessee submitted that merely because there was no elaborate discussion on the issues in the body of the assessment order would not automatically lead to the conclusion that there was no application of mind on such issues by the AO. In this respect, he relied upon the decision of Division Bench of Hon'ble Punjab & Haryana High Court in the case of Hari Iron & Trading Co. - 263 ITR 437 (P&H). He also relied upon the decision of Hon'ble Delhi High Court in the case of CIT Vs. Eicher Limited - 294 ITR 310 (Del), CIT Vs. Anil Kumar Sharma (2010-TIOL-267-HC-DEL-IT) and in the case of M/s Sunbeam Auto (ITA No.1399/2006).
5.1 The learned counsel for the assessee then submitted that the power of suo-moto revision u/s 263 is in the nature of supervisory jurisdiction and the same can be exercised only if the two circumstances i.e. - (i) the order is erroneous and (ii) by virtue of the order being erroneous, a prejudice has been caused to the interests of the Revenue, must exist in a given case. In this respect, he placed reliance upon the decision of Hon'ble Bombay High Court in the case of CIT Vs. Gabriel India Ltd. - 203 ITR 108.
5.2 The learned counsel for the assessee further contended that the Income Tax Appellate Tribunal vide order dated 4.7.2008 in an appeal arising from the order passed u/s 195(2) of the Act in the case of Parsons Brinckerhoff India Pvt.Ltd. (PBIPL) has held that payment made by PBIPL to the assessee was not in the nature of royalty and therefore, the view taken by the AO accepting the assessee's return of income cannot said to be unsustainable or untenable in the eyes of law. The learned counsel for the assessee further submitted that 6 learned DIT was not justified in overlooking the aforesaid order of the Tribunal dated 4.7.2008 merely by making a casual observation that the department is in appeal against the Tribunal's order before the Hon'ble High Court.
5.3 The learned counsel for the assessee has also filed before us the synopsis of submissions in writing before us, which are placed on record.
6. The learned CIT-DR, appearing for the Department, has submitted that the learned DIT was justified in invoking the revisional jurisdiction u/s 263 of the Act inasmuch as while accepting the assessee's return of income, the AO has not applied his mind to the facts of the case and has also not made necessary enquiry with regard to the issues involved. The learned DR pointed out that perusal of the assessment records for the year under consideration would indicate that the AO had conducted only one hearing in this case i.e. on 11.12.2006 and asked the assessee to file certain details. However, none of the queries were related to examine the issue from the point of view of ascertaining whether the relevant receipts by the assessee from PBIPL were in the nature of "fees for technical services" or "royalty" or "business income". The queries raised by the AO do not indicate that any enquiry was conducted by the AO for ascertaining the existence or otherwise of the assessee PE in India. He then pointed out that on 19.12.2007, the assessee merely filed reply and no further hearing had taken place. He further pointed out that the assessment order has been passed only after obtaining the transfer pricing study from the assessee, but without referring the matter to the concerned Transfer Pricing Officer. The AO also made no efforts to examine the service agreement signed between Parsons Brinckerhoff India Pvt.Ltd. (PBIPL) and the assessee. The learned DR produced before us the assessment records to indicate that no enquiry whatsoever was made 7 by the AO to ascertain the nature of the receipts or to ascertain the expenses or otherwise of the assessee's PE in India before accepting the assessee's return of income and determining the income as shown by the assessee. He further submitted that the AO accepted the assessee's return in total disregard to the view taken by the Department in the proceedings under Section 195(2) of the Act where the AO took the view that the receipts were in the nature of 'royalty' within the meaning of Article 12 of Indo-Thai Treaty and directed the payer to deduct tax at source @ 15% of the payment. He, therefore, submitted that it is the case where no enquiry whatsoever was made by the AO, and also it is the case where the AO passed the assessment order without application of his mind and therefore, the order passed by the AO is certainly erroneous as well as prejudicial to the interests of the Revenue within the meaning of Section 263 of the Act.
7. We have heard both the parties and have carefully perused the material on record. We have also deliberated upon the position of law and decided cases cited by both the parties.
8. At this juncture, we find it proper to take note of the principles laid down by the various Courts with regard to the scope and interpretation of the provisions contained in Section 263 of the Act.
9. In the case of Malabar Industrial Co.Ltd. Vs. CIT - 243 ITR 83 (SC), on which reliance has been placed by both the parties, it has been held that a bare reading of Section 263 of the Act makes it clear that the pre-requisite to the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax Officer is erroneous insofar as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If 8 one of them is absent, if the order of the Income-tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue, recourse cannot be had to Section 263(1) of the Act. There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase "prejudicial to the interests of the Revenue" is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy and Co. Vs. S.P.Jain - (1957) 31 ITR 872, the High Court of Karnataka in CIT Vs. T.Narayana Pai - (1975) 98 ITR 422, the High Court of Bombay in CIT Vs. Gabriel India Ltd. - (1993) 203 ITR 108 and the High Court of Gujarat in CIT Vs. Smt. Minalben S.Parikh - (1995) 215 ITR 81 treated loss of tax as prejudicial to the interests of the Revenue.
9.1 In that case, it was further held that the phrase "prejudicial to the interests of the Revenue" has to be read in conjunction with an erroneous order passed by the AO. Every loss of revenue as a consequence of an order of the AO cannot be treated as prejudicial to the interests of the Revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the ITO is unsustainable in law. In the said case, the assessee's claim that the amount was received as compensation and damages for loss of 9 agricultural income was accepted by the AO. The learned CIT having examined the records of the assessment found that the nil assessment order passed by the AO was erroneous and it was prejudicial to the interests of the Revenue. He, therefore, issued a notice u/s 263 of the Act to show cause why the order of assessment should not be set aside and the amount in question should not be assessed under the head 'income from other sources'. After considering the assessee's reply, the learned CIT concluded that the said amount was unconnected with any agricultural operation activity and was liable to be taxed under the head income from other sources. The Commissioner noted that the ITO passed the order of nil assessment without application of mind. The Tribunal on an appeal held that there was evidence before the CIT that the assessment order was erroneous and prejudicial to the interests of the Revenue and the amount in question was a taxable receipt. Indeed, the Hon'ble High Court recorded the finding that the ITO failed to apply his mind to the case in all perspective and the order passed by him was erroneous. It was found that the resolution passed by the Board of the assessee company was not placed before the AO. Thus, there was no material to support the claim of the assessee that the said amount represented compensation for loss of agricultural income. The AO accepted the entry in the statement of account filed by the assessee in the absence of any supporting material and without making any enquiry. On these facts, the conclusion that the order of the AO was erroneous was found to irresistible. The Hon'ble Supreme Court has held that the High Court has rightly held that the exercise of the jurisdiction by the Commissioner u/s 263 was justified.
10. In the case of CIT Vs. Gabriel India Ltd. - 203 ITR 108, the Hon'ble Bombay High Court has held and observed as under:-
"The power to suo motu revision under sub-section (1) is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist.10
Two circumstances must exist to enable the Commissioner to exercise power of revision under this subsection, viz., (i) the order is erroneous; (ii) by virtue of the order being erroneous prejudice has been caused to the interests of the Revenue. It has, therefore, to be considered firstly as to when an order can be said to be erroneous. We find that the expressions "erroneous", "erroneous assessment"
and "erroneous judgment" have been defined in Black's Law Dictionary. According to the definition, "erroneous" means "involving error; deviating from the law".
"Erroneous assessment" refers to an assessment that deviates from the law and is, therefore, invalid, and is defect that is jurisdictional in its nature, and does not refer to the judgment of the Assessing Officer in fixing the amount of valuation of the property. Similarly, "erroneous judgment" means "one rendered according to course and practice of court, but contrary to law, upon mistaken view of law, or upon erroneous application of legal principles".
From the aforesaid definitions it is clear that an order cannot be termed as erroneous unless it is not in accordance with law. If an Income tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. This section does not visualize a case of substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order, unless the decision is held to be erroneous. Cases may be visualized where the Income-tax Officer while making an assessment examines the accounts, makes enquiries, apples his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The Commissioner, on perusal of the records, may be of the opinion that the estimate made by the officer concerned was on the lower side and left to the Commissioner he would have estimated the income at a figure higher than the one determined, by the Income-tax Officer. That would not vest the Commissioner with power to re-examine the accounts and determine the income himself at a higher figure. It is because the Income-tax Officer has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the Commissioner the order in question is 11 prejudicial to the interests of the Revenue. But that by itself will not be enough to vest the Commissioner with the power of suo motu revision because the first requirement, viz., that the order is erroneous, is absent. Similarly, if an order is erroneous but not prejudicial to the interests of the Revenue, then also the power of suo motu revision cannot be exercised. Any and every erroneous order cannot be the subject-matter of revision because the second requirement also must be fulfilled. There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed."
10.1 In that case, it was found that AO had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee has given detailed explanation in that regard by a letter in writing. All these were part of the record of the case. Evidently, the claim was allowed by the AO on being satisfied with the explanation of the assessee. In the light of these facts, it was held that such decision of the AO cannot be had to be erroneous simply because in his order, he did not make an elaborate discussion in that regard.
11. In the case of CIT Vs. Sunbeam Auto Ltd. - (2009) 31 DTR (Del) 1, the Hon'ble High Court has observed as under:-
"As noted above, the submission of learned counsel for the Revenue was that while passing the assessment order, the AO did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order, which apparently does not give any reasons while allowing the entire expenditure as Revenue expenditure. However, that by itself would not be indicative of the fact that the AO had not applied his mind on the issue. There are judgments galore laying down the principle that the AO in the assessment order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the 12 expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of enquiry" and "inadequate inquiry". If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under Section 263 of the Act, merely because he has different opinion in the matter."
12. The aforesaid decision of the Hon'ble Delhi High Court in the case of Sunbeam Auto Ltd. has been relied upon by the same High Court in the case of CIT Vs. Anil Kumar Sharma (supra) where the Hon'ble High Court held that the Tribunal arrived at a conclusive finding that, though the assessment order does not patently indicate that the issue in question has been considered by the AO, the record showed that the AO had applied his mind, and once such application of mind is discernible from the record, the proceeding u/s 263 would fall into the area of the Commissioner having a different opinion.
13. In the case of CIT Vs. Ashok Logani (ITA No.557 of 2010, 487 of 2011 and 488 of 2011), the Hon'ble High Court vide judgment dated 11.5.2011 has upheld the order of the CIT invoking the jurisdiction under Section 263 of the Act when it was found that there was no proper consideration by the AO to the issue at hand, the AO left many loose ends, that too in a case where huge cash was found during search; most of which was surrendered by giving statement at the time of search, though retracted and sought to be explained afterwards. In this case, the Hon'ble High Court held that it was necessary for the AO to properly adjudicate upon the issue and the assessment should have at least reflected that he was satisfied with the explanation disclosing the source of the cash found and that there was a proper and valid retraction. The facts of this case were that in the course of the search conducted u/s 132 of the Act in the group cases of the assessee, a sum of `62,30,300/- was found from the residence of the assessee and in the statement recorded during search, the assessee offered a sum of 13 `61.30 lakhs for taxation as his undisclosed income for the AY 2003-04. However, in the return of income filed by the assessee for AY 2004-05, the assessee had offered a sum of `21 lakhs only against the surrendered amount of `61.30 lakhs at the time of search. The AO completed the assessment accepting the assessee's return of income. Thereafter, on perusal of the records, it was noticed by the CIT that though the assessee had offered a sum of `61.30 lakhs for taxation during search for AY 2003-04, but the same was not offered in the return of income and the AO had not examined this aspect during the assessment proceedings. Accordingly, the CIT passed the order u/s 263 of the Act whereby he set aside the order passed by the AO with direction to him to examine the same in the light of the statement recorded at the time of search and surrounding circumstances. Likewise, he also found that in AY 2004-05, the assessee had offered a sum of `21 lakhs only against the surrendered amount of `61.30 lakhs at the time of search. The assessee then filed appeal before the Tribunal challenging the order passed u/s 263 in respect of these two assessment years. The Tribunal set aside the aforesaid order of the CIT. According to the Tribunal, the AO had examined the issue and had even considered the statement of the assessee recorded on 27.5.2005. The assessee had furnished the cash book of both of his concerns and had explained the cash found at the time of search and the survey except a sum of `21 lakhs. The cash at hand which was available as per books of account in the two concerns of the assessee was `36,95,720/- and after excluding this cash, remaining was only `25,34,580/-. The assessee had offered `21 lakhs for taxation in the year 2004-05 and thus, only a sum of `4,34,580/- remained to be explained. It was explained by the assessee as cash as per his own books. According to the Tribunal, after examining the claim of the assessee verifying the same from the books of account, the AO had accepted the claim of the assessee, though there was no mention of the same in the assessment orders. On this basis, while setting aside 14 the order of the CIT, the Tribunal observed that the order of the CIT was merely on surmises and conjectures. The Tribunal further observed that there are two views possible - one, namely, the subsequent explanation of the assessee was an after thought and, the other, namely, such an explanation was reasonable because it was corroborated and evidenced by the books of account duly audited. In a case like this, when the AO had held the enquiry, it could not be said that his order was erroneous and called for many interferences, and more so when the assessee had retracted the statement as well.
13.1 In the light of these facts, the Hon'ble High Court found the first and foremost aspect which would arise for consideration is as to whether the AO had examined the issue about surrender of `61.30 lakhs at the time of search in his statement recorded during the search out of an amount of `61.30 lakhs found at his residence. In the light of this aspect of the matter, the Hon'ble High Court observed that admittedly, there was no discussion about the same in the orders of the AO which in fact is even taken note of by the Tribunal as well. The Hon'ble High Court further observed that no doubt, the order sheet shows that the AO had asked the assessee to explain cash found. However, whether the AO had, in fact, gone into the issue and accepted the claim of the assessee or not is not discernible from the assessment order. No doubt, the AO is not supposed to write the orders in detail in the same manner as a Judicial Officer is supposed to write the judgments. At the same time, it cannot be ignored that huge cash of `62,30,300/- was found at the time of search and on that date, the assessee had surrendered a sum of `61.30 lakhs and offered the same for tax. However, in his income tax return, the assessee had offered a sum of `21 lakhs only against the surrendered amount of `61.30 lakhs at the time of search. In such scenario, there should have been at least a brief discussion recording a satisfaction on the explanation offered by the assessee. In the light of the fact of keeping 15 cash of `62.30 lakhs, part of which belongs to assessee's sole proprietorship firm but another part to a private limited company of which he is a director, at his residence, may raise certain doubts. It was further noted by the Hon'ble High Court that though in the letter dated 7.1.2004, the assessee had stated that he had kept the cash at his residence in his safe custody, this aspect needed to be properly examined. The Hon'ble High Court noted the discrepancy in the explanation given before the Tribunal and the explanation given in reply to the show cause notice issued by the CIT with regard to the source of the seized amount. The conduct of the assessee gave an impression that it may be an after thought on the part of the assessee to explain the cash. The Hon'ble High Court, therefore, held that under these circumstances, the AO was required to go into this issue in proper perspective and could not be perfunctory in his approach. The AO in his assessment order did not discuss the statement recorded at the time of search. No doubt, as per the assessee, this statement was retracted. In a case like this, it was necessary for the AO to at least reflect that the retraction was proper. Another factor which the Hon'ble High Court highlighted was that the entire cash belonging to two firms was found at the residence. The Hon'ble High Court then observed that In the aforesaid circumstances, the CIT held the view that the matter was not examined by the AO. The Hon'ble High Court was then of the opinion that it was reasonably a fit case for exercising revisionary jurisdiction u/s 263 of the Act. After all, CIT gave another chance to the assessee to explain the source of the cash. Once the High Court was convinced that there was no proper consideration by the AO, the very foundation of the order of the Tribunal was knocked off. The Hon'ble High Court further observed that we had to keep in mind that against the orders passed by the AO, the Revenue is not given right to file an appeal as there is no such provision. Limited jurisdiction is given to the CIT to revise such orders if he finds that the same is prejudicial to the interests of the Revenue. On the facts of 16 that case, when it was found that there was no proper consideration by the AO to the issue at hand, he left many loose ends, that too in a case where huge cash was found during survey most of which was surrendered by giving statement at the time of search, though retracted and sought to be explained afterwards, it was necessary for the AO to properly adjudicate upon the issue and the assessment order should have at least reflected that he was satisfied with the explanation disclosing source of the cash found and that there was proper and valid retraction.
14. In the case of CIT Vs. Nalwa Investments Ltd. (ITA No.270 of 2010 with ITA No.1345 of 2010), the Hon'ble Jurisdictional High Court vide decision pronounced on 11.5.2011 has held as under:-
"13. So far so good. But the relevant question, which is the core one and led CIT to pass the order under Section 263, of the Act is as to whether the AO applied his mind to the issue as to whether the dividend income could be given the character of business income for the purpose of set off. We have already taken note of the order of the AO. He recorded that even a dividend income in question was shown as business income by the assessee. The AO did not agree with the same, as in the previous years this income was shown as dividend income. After saying so, the AO straightaway allowed the set off of this income against the carry forward losses. The assessment order is totally silent and there is no discussion as to how this dividend income was to be given the character of business income for the purpose of set off under Section 72 of the Act. It was for this reason that the CIT held that the AO had not conducted any inquiry. The Tribunal, instead of appreciating these facts, went into the merits of the issue which the AO is supposed to deal with. It addressed the question as to whether dividend income could be given the character of business income and then observed that the view taken by the AO was plausible without appreciating that the AO had not even taken any view on this issue, it could not be said that the AO had not applied his mind. The entire reading of the assessment order clearly demonstrates that no such view is taken at all by the AO on this aspect. It is intriguing, in the circumstances, as to 17 from where the Tribunal came to the conclusion that the view taken by the AO was plausible or that the AO had applied his mind.
14. The Tribunal failed to appreciate the limited scope of appeal; before it, viz., the validity of the order under Section 263 of the Act. Order of the CIT clearly revealed that he had applied his mind on the relevant aspect and had rightly noticed that the character of the said income was not investigated by the AO. This is highlighted by the CIT in Para 7 of the order passed by him, which is already extracted above. Therein, the CIT recorded that the Assessing Officer had failed to conduct the required enquiry and also had failed in application of the provisions of Section 72(1) of the I.T.Act. This rendered order passed by the AO erroneous and prejudicial to the interest of Revenue to that extent. The Tribunal was, thus, supposed to adjudge the validity of such an order and not to go beyond when the challenge before it was limited to the said order passed by CIT in exercising the powers under Section 263 of the Act.
15. Mr.Ajay Vohra, learned counsel appearing for the assessee argued that when the view taken by the AO was plausible one, it was not proper for the CIT in exercise of his revisionary jurisdiction to interfere with that order and referred to the judgment of the Punjab and Haryana High Court in the case of Commissioner of Income Tax Vs. Max India Ltd. 268 ITR 128 which is approved by the Supreme Court in the case of Commissioner of Income Tax Vs. Max India Ltd. 295 ITR 282. However, this argument based on the aforesaid judgment is of no avail in the facts of the present case when it is found that the AO had not examined the issue at all and therefore, question of there being a plausible view does not arise.
16. We, thus, answer the question formulated above, in favour of the Revenue and against the assessee, as a result, the impugned order passed by the Tribunal is set aside."
15. In the case of CIT Vs. Hindustan Marketing and Advertising Co.Ltd. - (2011) 196 Taxman 368 (Delhi), the Hon'ble Delhi High Court has relied upon its earlier decision in the case of CIT Vs. Sunbeam Auto Ltd. - (2009) 31 DTR (Del) 1 and has upheld the order of the Tribunal 18 cancelling the order of the CIT passed u/s 263 of the Act by observing that the Tribunal has rightly held that present case was not a case where the enquiries were not made by the AO or the relevant material was not collected before framing assessment orders. The observation of the CIT that the AO did not make sufficient enquiries is totally subjective. It was not a case of lack of enquiry. The CIT judged the "sufficiency of enquiry" by subjective standards. It appears that according to the CIT, more enquiries should have been made. The observations of the CIT were general in nature.
16. In the light of the aforesaid decisions, we now revert to the facts of the present case. The assessee company, namely, P.B.Asia Limited (PBAL) is incorporated under the laws of Thailand, having its registered office in Bangkok. It has entered into a contract with PBIPL, which is a 100% subsidiary of Parsons Brinkerhoff International Inc., USA. The copy of agreement is placed at pages 4 to 12 of the paper book filed by the assessee. PBIPL was awarded a contract for rendering engineering consultancy services to Larsen & Toubro (L&T) in connection with the Second Vivekananda Bridge Tollway (SVBT) project. PBIPL has subcontracted a part of the contract to assessee vide agreement dated 10.5.2004. The preamble of the agreement narrates that PBIPL is engaged in the business of rendering engineering consultancy services and has been awarded a contract for rendering such services to L&T in connection with SVBT project. The PBIPL's scope of work under the contract included preparation of design, drawings, and the assessee company has the necessary expertise and was capable and willing to provide a part of detailed design required to be prepared by PBIPL for SVBT project. Clause (1) of the agreement provides that the assessee company (PBAL) shall provide the services to PBIPL on the terms and conditions as set forth in Annexure-1 to the agreement. Clause (2) provided that the assessee company will carry out the scope of work under clause (1) 19 above from its Thailand office. In order to execute the scope of work, the assessee company's personnel may require to make short visits to the site in India. The detailed scope of services are stated in Annexure-1 to the agreement. It includes detail designs services for the approach viaduct superstructure of SVBT project including Howrah and Kolkata main line and Ramp A, B, C and D. The design packages shall include preparation and submission of fully dimensioned General Arrangement drawings, segment casting data (such as box geometry data sheet), segment reinforcement drawings, post-tensioning drawings, etc. It will also include design data, and detailing elastomeric bearings supporting the approach viaduct (horizontal and vertical) and seismic buffers. Site visits as necessary to Kolkata and Delhi (CES office) are also included in this package. Detail design submission packages shall include calculations, drawings and records in accordance with Appendix-A of the Detail Design and Construction Supervision Agreement between L&T and CES-PBIPL Consortium. The construction stage support to clarify design, rectification to design errors, omissions etc. is also included in the package. Part 2 of Annexure-1 provided for design review of pile foundation, pile-caps, columns and column-heads for the approach viaduct superstructure of SVBT project including Howrah and Kolkata main line and Ramp A, B, C and D. In addition to the above, it also provided for review of various elements (design by CES) such as embankments, highway alignments, land drainage, tollway booths and walkway tunnel, underpass bridges and tunnels, overpass bridges, retaining walls, electrical, bridge drainage etc. Part 3 of Annexure-1 included the work of detail design and production of final design drawings for Pier P1 and P10 of the Main Bridge (excluding foundation), and submission of milestone dates for Good For Construction (GFC) as committed by PBIPL to L&T, i.e. general arrangement by dated 20.8.2004 and reinforcement by dated 10.9.2004. The package shall be submitted to IBT for checking 40 days prior to GFC submission dates. Clause 13 of the agreement 20 provides that the assessee company shall not during or for a period of one year after the term of the agreement, disclose any trade secrets or confidential or properly proprietary information of PBIPL to any third person for any reason or purposes whatsoever nor assessee shall make use of any such secrets or information for its own purpose or for the benefit of a third person except for (i) any such secrets or information which shall then be generally known by the public or within PBIPL's industry; (ii) any such secrets or information which shall be disclosed by the assessee with PBIPL's express consent and any (iii) any secrets or information which shall be required to be disclosed by assessee pursuant to applicable law or any rule of any Court or government instrumentality. In the event that assessee company is required to disclose any secret or information, it shall promptly notify PBIPL. As of the date of termination of the agreement, the assessee company shall remit and surrender to PBIPL at PBIPL's cost all correspondence, drawings, maps, reports, computer printouts etc. relating to the services provided to PBIPL by the assessee and which assessee company may have in its possession or within its power to acquire possession of at that time. In the terms of the said agreement, PBIPL shall remit the consideration to assessee company in Thailand. Therefore, PBAL made an application u/s 195(2) of the Act to AO requesting him to pass an order authorizing the assessee to remit the amount to the present assessee company without any deduction of tax. The amount to be remitted was `5,60,01,600/-. It was the PBIPL's case before the AO that the amount paid to assessee company for providing designs and drawings etc. shall not be taxable in India because :-
(a) The payment was in the nature of business income, and since the assessee company did not have a permanent establishment in India, the same was not taxable in India 21 under the Indo-Thailand Treaty of Avoidance of Double Taxation;
(b) The payment did not represent fees for technical services (FTS) since there was no specific clause dealing with FTS in the above treaty; and
(c) The payment shall also not be covered as "other income"
within the meaning of Article 22 of the treaty.
16.1 The AO, after considering the application filed by PBIPL u/s 195(2) of the Act, took a view vide his order dated 7.1.2005 that the amount represented royalty within the meaning of Article 12 of the India Thailand Double Taxation Treaty and directed that tax be deducted at source at the rate of 15% of the remittance. The TDS amounting to `84,00,240/- including surcharge and education cess was thus deducted and deposited in the government account on 14.2.2005 and 26.8.2005 as mentioned in the TDS certificate issued by PBIPL to the assessee company. However, PBIPL filed an appeal before the learned CIT(A) u/s 248 of the Act against the order of the AO passed u/s 195(2) of the Act. The learned CIT(A) vide his order dated 8.5.2006 confirmed the order of the AO. PBIPL then preferred further appeal before the Tribunal against the order of learned CIT(A) dated 8.5.2006. After hearing both the parties and considering the facts and circumstances of the case, the ITAT decided the appeal in favour of the PBIPL vide order dated 4.7.2008 by taking a view that the departmental authorities went wrong in their conclusion that the amount remitted by PBIPL to the present assessee was royalty within the meaning of Section 9(1)(vi) of the IT Act and Article 12(3) of the Double Taxation Treaty with Thailand. The Department is in further appeal before the Hon'ble High Court, which is stated to be pending.
16.2 In the meantime, the present assessee company filed its return of income on 2.2.2006 declaring total income at Rs.nil. In the return of 22 income, the assessee claimed the TDS amount of `84,00,240/- deducted by PBIPL as refundable and copy of TDS certificate was also furnished alongwith the return of income. In the return of income, the assessee company has claimed that the income arising in the hands of the assessee company from alleged supply of design and drawing is not chargeable to tax as fees for technical services as there is no specific clause for FTS under the Indo-Thailand DTAA. It was also claimed that the same was taxable as business income under Article 7 of the Indo-Thailand DTAA and such business income is taxable only in Thailand unless the assessee company has a permanent establishment in India. The assessee further claimed that assessee company does not have any PE in India under Article 5 and therefore, income earned by the assessee company is not taxable in India. Accordingly, the assessee filed nil return of income on 2.2.2006. The AO then issued notice u/s 143(2) dated 20.9.2006 which was served upon the assessee. In the meantime, vide order dated 28.11.2007, jurisdiction of the assessee's case was conferred on the present AO, who passed the order u/s 143(3) of the Act on 28.12.2007. Accordingly, he issued notice u/s 143(2) again to the assessee. On 11.12.2007, the assessee's authorized representative CA Namrata Juneja from S.R.Batliboi & Co. appeared before the AO whereupon she was asked to file certain details fixing the matter on 18.12.2007. On 19.12.2007, CA Namrata Juneja and CA Akhil Sambhar from S.R.Batliboi & Co. appeared before the AO and filed reply. Thereafter, the AO completed the assessment u/s 143(3) of the Act on 28.12.2007 by accepting income returned by the assessee.
16.3 Thereafter, on examination of record and after hearing the assessee, the learned CIT invoked his jurisdiction u/s 263 of the Act and passed the order u/s 263 of the Act on 26.3.2010 whereby he cancelled the AO's assessment order with a direction to the AO to make a fresh assessment after conducting proper enquiries on the 23 relevant issues and after giving the assessee adequate opportunity of being heard. The learned CIT found the AO's order to be erroneous as well as prejudicial to the interest of the Revenue for the following reasons:-
(i) The assessment has been made by the AO without application of mind to the facts and issues involved in the case.
(ii) No enquiries whatsoever were made by the AO on the issues which are subject matter of proceedings u/s 263 of the Act.
(iii) The AO has accepted the return of the assessee in disregard of the AO's order u/s 195(2) as well as order of the CIT(A) upholding the same.
(iv) The Department has not accepted the order of the Tribunal passed in the matter of order passed by the AO u/s 195(2) of the Act whereby the Tribunal held that outright sale of designs and drawings are not covered u/s 9(1)(vi) of the Act against which department has field appeal before the Hon'ble High Court which is pending.
16.4 Now, we have to see as to whether the assessment order passed by the AO on 28.12.2009 is without application of his mind and/or whether AO has failed to make necessary enquiry in respect of the issues involved in the case.
16.5 As already noted above, the assessee filed his return of income on 2.2.2006 declaring total income at nil. In the return of income, the assessee has given a note attached to the statement of total income as under:-
24"1. PB Asia Ltd ("PBAT") is a company incorporated in Thailand. It has entered into a contract with Parsons Brinckerhoff India Private Limited ("PBIPL") for supply of design and drawings in connection with the Second Vivekananda Bridge Tollway project. During the previous year relevant to assessment year 2005-06, PBAT received a sum of Rs.56,001,600 as consideration for supply of designs and drawings.
2. The consideration so received by PBAT is not income chargeable to tax as discussed as follows:
a) As per Section 90(2) of the Act, in determining the taxability of a person who is a resident of a country with which India has entered into a Double Taxation Avoidance Agreement ("DTAA"), the provisions of the DTAA will prevail over those contained in the Act to the extent that the provisions of the DTAA are more beneficial than those contained in the Act. PBAT is a tax resident of Thailand.
Accordingly, it shall be taxed under the provisions of the India-Thailand DTAA or the Act, whichever is more beneficial.
b) The income arising in the hands of PBAT from supply of design and drawings is not chargeable to tax as Fees for Technical Services ("FTS") as there is no specific clause for taxation of FTS under the India-Thailand DTAA. Thus, the same is taxable as business income under Article 7 of the India-Thailand DTAA and such income is taxable only in Thailand unless the PBAT has a Permanent Establishment ("PE") in India. As PBAT does not have any PE in India under Article 5, income earned by PBAT is not taxable in India. Accordingly, nil return of income is being filed."
16.6 From this Note, it is seen that assessee is a company incorporated in Thailand and it has entered into contract with PBIPL for supply of designs and drawings in connection with the Second Vivekananda Bridge Tollway project, in respect of which the assessee received a sum of `56,001,600/- as consideration for supply of designs and drawings during the relevant year. In the Note, the assessee claimed that the consideration so received by the assessee from PBIPL was not chargeable to tax by giving the reason that as per Section 92 of the Act, the amount shall be taxed only with reference to the 25 provisions of India-Thailand DTAA or as per local Income-tax Act, which is more beneficial, and that the income arising to the assessee from supply of designs and drawings was not chargeable to tax as fees for technical services as there was no specific clause for taxation of FTS under the India-Thailand DTAA, and that the said receipt is taxable as business income under Article 7 of the India-Thailand DTAA but such income is taxable only in Thailand unless the assessee has a PE in India, and since assessee does not have any PE in India under Article 5, the aforesaid income is not taxable in India. In the light of the aforesaid Note, it was thus necessary and desirable for the AO to make an enquiry and examine the details or particulars as to whether the assessee company had PE in India or whether the income from supply of designs and drawings was a business income or fees for technical services or of any other nature. In this regard, the AO has taken note of Note attached to the statement of total income, which has been partially narrated by him in paragraph 3 of the assessment order as under:-
"3. As per Notes Attached to the Statement of Total Income:
"PB Asia Ltd ("PBAT") is a company incorporated in Thailand. It has entered into a contract with Parsons Brinckerhoff India Private Limited (PBIPL) for supply of design & drawings in connection with the second Vivekananda Bridge Tollway project."
16.7 From the said narration made by the AO in paragraph 3 of the assessment order, it is clear to us that AO has only narrated partially the paragraph 1 of the Note attached to the statement of total income, where the assessee has stated about a contract entered into with PBIPL for supply of designs and drawings in connection with the Second Vivekananda Bridge Tollway Project. On reading the paragraph 1 of the note vis-a-vis the narration made by the AO in paragraph 3 of the assessment order, we find that paragraph 1 of the Note attached 26 to the statement of total income has not been reproduced in full by the AO. The latter part of paragraph 1 that assessee had received a sum of `56,001,600/- as consideration for supply of drawings and designs has not been reproduced in paragraph 3 of the assessment order. In the assessment order, the AO has also not narrated the paragraph 2 of the Note attached to the statement of income where assessee claimed that the consideration received by the assessee was not chargeable to tax inasmuch as it was not chargeable to tax as fees for technical services as there was no specific clause of taxation under FTS under India-Thailand DTAA and it was not taxable as business income in India as assessee has no PE in India. It is also to be noted that in this Note attached to the return of income, the assessee has failed to give any explanation or reason as to why the consideration received by the assessee in respect of the contract work entered into with PBIPL was in the nature of business income. The assessee has merely given a general statement that income arising in the hands of the assessee is taxable as business income under Article 7 of the India Thailand DTAA without giving the reason or explanation as to why it is taxable as business income. The assessee has also stated that it does not have any PE in India under Article 5 but has failed to give the details and the basis in the light of which it could be held that assessee does not have any PE in India. It is thus a case where, in the Notes attached to the return of income, the assessee has not given or furnished any explanation, evidences or details or particulars on the basis of which it could be said that the income arising to the assessee was in the nature of business income or that the assessee did not have any PE in India under Article 5 of the Treaty. At this stage, it is pertinent to take note of the order passed u/s 195(2) of the Act by the AO. In the application filed u/s 195(2) of the Act, PBIPL made a similar claim in the application that the payment in question was in the nature of business income and assessee did not have any PE in India, and that the payment cannot be taxed as FTS since there was no specific clause for taxation of FTS in 27 Indo-Thai Treaty and that the payment was also not covered under Article 22 of the DTAA as payment did not constitute "other income"
within the meaning of the said Article. After considering the PBAT's claim, the AO passed the order u/s 195(2) of the Act by holding that the payment in question was qualified to be covered under the definition of 'royalty' within the meaning of Article 12 of the DTAA between India and Thailand and thus directed the payer to deduct tax at source at the rate of 15% before making remittance to the present assessee. This order passed by the AO u/s 195(2) is dated 7.1.2005 and was known to the assessee. The relevant TDS certificate issued by PBAT to the assessee was also enclosed with the return of income filed by the present assessee. In the Note attached to the statement of total income filed alongwith the return of income, the assessee has not made any whisper explaining as to why the payment in question should not be qualified as royalty within the meaning of Article 12 of DTAA between India and Thailand as was so held by the AO in his order u/s 195(2) of the Act. During the course of assessment proceedings, the AO has also not raised any query regarding the question as to why the consideration received by the assessee should not be treated to be in the nature of royalty within the meaning of Article 12 of DTAA between India and Thailand as was so held in the order passed by the AO u/s 195(2) of the Act. On 11.12.2007, when the assessee was asked by the AO to file certain details, the order passed by the AO u/s 195(2) of the Act got confirmed by the CIT(A) vide his order dated 8.5.2006, and it was thus incumbent on the part of the AO to apply his mind to this aspect of the matter and to ask the assessee to show reason as to why the amount received by the assessee should not be qualified to be in the nature of royalty as so held in the proceedings u/s 195(2) of the Act. But the AO has failed to make any such enquiry and look to the issue from this angle completely in disregard to the view taken in the proceedings u/s 195(2) of the Act, but instead he accepted the assessee's return on the face of it.28
16.8 During the assessment proceedings, on 11.12.2007, assessee's authorized representative CA Namrata Juneja from S.R.Batliboi & Co. had appeared and was asked to file certain details. The order sheet recorded by the AO on 11.12.2007 reads as under:-
"CA Namrata Juneja from S.R.B. & Co. appears. She is asked to file:-
(i) Details of work done.
(ii) Where the work of designing etc. was done (name/names of countries).
(iii) Any portion was subcontracted? If yes details thereof.
(iv) Details of all the help/support from AEs (Indian or others) taken in actual work.
(v) How much % of work was actually done by regular employees of PE Asia Ltd.?
(vi) TP study report of this company and of Indian company.
She seeks time till 18th Dec., 07. Allowed to file complete info."
16.9 On 11.12.2007, the assessee also submitted a letter enclosing therewith a copy of the contract between the assessee and PBIPL and requested the AO that should the AO had any questions or need any clarifications, assessee would be pleased to provide with the same. Thereafter, assessee's authorized representative appeared on 19.12.2007 before the AO and filed reply. The order sheet dated 19.12.2007 recorded by the AO reads as "CA Namrata & CA Akhil Sambhar from S.R.B. Co. appear and file reply". The reply filed on 19.12.2007 is as under:-
"December 18, 2007 The Assistant Director of Income Tax Circle 2(1), International Tax 29 Drum Shape Building New Delhi.
For kind attention of Mr. Lovish Kumar Sir, Re : Parsons Brinckerhoff Asia Ltd ("assessee") Assessment Year 2005-06 We refer to the hearing before your goodself on December 11, 2007. In this regard, we, on behalf of and under instructions from our above-mentioned client, are enclosing herewith the following information/details as desired by your goodself.
1. Details of work done The scope of work under the contract between the assessee and Parsons Brinckerhoff India Private Limited ("PB India") is provided hereunder:
• Preparation of detail design and drawings for the Second Vivekananda Bridge Tollway ("SVBT") project. • Detailed review of design and drawings for the SVBT project after incorporating the inputs from PB India.
• Production of final design and drawings.
The detailed scope of work is provided in Annexure 1 of the contract between the assessee and PB India, which has been submitted before your goodself in our submissions dated December 11, 2007.
2. Where the work of designing etc was done The scope of work, mentioned under the contract, was carried out by the assessee in its Thailand office.
3. Any portion of work subcontracted. If yes, details thereof. How much percentage of work was done by regular employees of PB Asia.
It is humbly submitted before your goodself that the assessee has not subcontracted any portion of the work under the contract. The entire work was executed by the employees of the assessee.
304. Details of support from associates enterprises taken in actual work.
It is pertinent to note that the assessee has not taken support/assistance from its associated enterprises for executing the work done under the contract.
5. TP study report A copy of the transfer pricing study report of PB India for the subject year has been annexed as Annexure I. Trust you find the above in order. In case your goodself is not in agreement with our submissions, would request you to give us a further opportunity of being heard. Should you require any further clarifications and/or information in this regard, please feel free to revert."
16.10 On perusal of the order sheet recorded by the AO on 11.12.2007 and 19.12.2007 and from reply submitted by the assessee on 19.12.2007, when hearing of the case had taken place before the AO, it is not discernible as to whether AO had made any enquiry or asked the assessee to justify the assessee's stand that the income received by the assessee was in the nature of business income and the assessee had no PE in India. In the reply submitted by the assessee on 19.12.2007, the assessee has given no explanation or clarification as to why the receipt should be treated as business income and why it should be held that the assessee had no PE in India.
16.11 From the nature of query raised by the AO and reply given by the assessee, it is clear that a copy of contract between the assessee and PBIPL was furnished during the assessment proceedings. The detailed scope of work is provided in Annexure 1 of the said contract, which have already been narrated above. In the contract agreement and scope of work (Annexure 1 to the agreement), it is clearly stated that the detail design submission packages shall include calculations, drawings and reports in accordance with Appendix-A of the Detail 31 Design and Construction Supervision Agreement between L&T and CES-PBIPL Consortium, but the said Detail Design and Construction Supervision Agreement between L&T and CES-PBIPL Consortium alongwith Appendix-A thereto was not furnished to the AO, which was necessary to ascertain the nature of the detail design submission packages and the work executed by the assessee. The AO has also failed to bring the same on record for his perusal and consideration. The assessee also stated before the AO that the scope of the work mentioned under the contract was carried out by the assessee in its Thailand office and entire work was executed by its regular employees. However, in support of the aforesaid contention, the assessee did not produce any evidences or details before the AO as is clear from order sheet noting recorded by the AO on 19.12.2007 which runs as "CA Namrata and CA Akhil Sambhar from S.R.B.Co. appear and file reply". On 19.12.2007, no evidences or records or documents were produced before the AO in support of the submissions made in the assessee's reply. The AO has simply accepted the reply without verifying and examining the same with reference to relevant details, documents, records and evidences.
16.12 At this stage, it is pertinent to note that in the contract agreement, it has been specifically stated that to execute the scope of work, the assessee's personnel may require to make short visits to the site in India. Site visits as necessary to Kolkata and Delhi (CES office) were also included in the package. The scope of the work provided for preparation and submission of fully dimensioned general arrangement drawings, segment casting data, segment reinforcement drawings and also included detailed design calculations, drawings and reports in accordance with Appendix-A of the Detail Design and Construction Supervision Agreement between L&T and CES/PBIPL Consortium and design review of pile foundation, pile-caps, columns and column-heads for the approach viaduct superstructure of SVBT project including 32 Howrah and Kolkata main line and Ramp A, B, C & D etc. The assessee has not given the details regarding its personnel, who paid visits to the site in India and for how many days. The AO failed to make any enquiry from the assessee regarding visits made by the assessee personnel to the site in India with a view to decide the issue as to whether the assessee had a PE in India with regard to various criteria laid down in the treaty between India and Thailand. The AO also failed to examine the terms of the agreement with reference to the detailed particulars of the work executed by the assessee to determine the nature of the receipt whether business income or royalty or any other nature. The AO has accepted the assessee's reply filed on 19.12.2007 on the face of it without applying his mind and without examining and verifying the related documents and particulars thereof. It is thus a case where AO made no enquiry with regard to the question as to whether the consideration received by the assessee was in the nature of royalty or business income or any other nature or whether the assessee had a PE in India during the year under consideration. The AO has accepted the assessee's return of income without applying his mind to the various criteria for deciding the aforesaid issues involved in the assessment. We are, therefore, in full agreement with the learned CIT in drawing the following conclusions by him:-
(i) None of the queries raised by the AO were related to examining the case from the point of view of ascertaining the relevant receipts whether for fees for technical services or royalty.
(ii) The queries raised by the AO do not indicate that any enquiry was conducted for ascertaining the existence or otherwise of assessee's PE in India.
(iii) Despite a claim made by the assessee that the concerned receipt is taxable as business income under Article 7 of the India Thailand DTAA and it could be taxed only if the 33 assessee had a PE in India, the AO has not addressed the issue from that angle or conducted any enquiries to either determine the nature of the receipts or the existence of PE of the assessee in India.
(iv) The AO has conveniently ignored the order u/s 195(2) dated 7.1.2005 wherein the same receipts were held to be in the nature of royalty income and payer was directed to deduct tax at source on it.
(v) In view of the above, the AO failed to conduct proper and requisite enquiries on the relevant issues before passing the assessment order and accepting the return filed by the assessee.
(vi) Further, the AO has passed assessment order in utter disregard to the stand taken by the Revenue in the proceedings u/s 195(2) of the Act.
17. The learned counsel for the assessee has strongly contended that necessary enquiries were made by the AO regarding issues involved in the assessment as would be established from the fact that the AO specifically called upon the assessee to file a copy of contract agreement, which was duly filed by the assessee, and asked the assessee to file certain information vide order sheet entry dated 11.12.2007. It was further submitted by him that the entire information as desired by the AO were furnished by the assessee vide letters dated 11.12.2007 and 18.12.2007 (filed on 19.12.2007). In the light of these submissions, he then contended that the ld.CIT went wrong in concluding that no enquiry whatsoever was made by the AO on the issue involved and there was no application of mind by the AO on the issues involved. He further submitted that merely because there was no elaborate discussion on the issues involved, in the assessment order would not automatically lead to the conclusion that 34 there was no application of mind. In this regard, he relied upon the following decisions:-
(i) Hari Iron Trading Co. Vs. CIT - 263 ITR 437 (P&H).
(ii) CIT Vs. Eicher Ltd. - 294 ITR 310 (Delhi). (iii) CIT Vs. Anil Kumar Sharma - (ITA No.820 of 2009) (Delhi High Court). (iv) M/s Sunbeam Auto Ltd. (v) CIT Vs. Goyal Private Family Specific Trust - 171 ITR 698. 17.1 The learned counsel for the assessee has contended that merely
because there was no elaborate or detailed discussion on the relevant issues in the assessment order, it would not automatically lead to the conclusion that there was no application of mind on such issues by the AO and no enquiry was made by the AO. There is no quarrel as to the proposition, as held in the number of decisions cited by the learned counsel for the assessee, that the mere fact that the assessment order does not give any reasons for allowing the claim of the assessee would not by itself indicate that the AO has not applied his mind on the issue and/or has not made enquiry before accepting the claim. One has to see from the record as to whether there was application of mind or whether any enquiry was made by the AO before allowing the claim of the assessee. In the present case before us, the relevant issues involved were:-
(i) Whether the consideration received by the assessee towards the work executed by it was in the nature of 'royalty' within the meaning of Article 12 of Indo-Thailand Treaty or was it a 'business income'; and
(ii) Whether the assessee had a PE in India.35
17.2 In the proceedings on an application made u/s 195 of the Act, the AO passed an order u/s 195(2) of the act by qualifying the consideration to be in the nature of 'royalty' and directed the payer to deduct the tax at source. Accordingly, the due tax was deducted at source from the payment made to the present assessee, and the present assessee had furnished tax deduction certificate alongwith the return of income and claimed the amount to be refundable. The order of the AO passed u/s 195(2) was confirmed by the learned CIT(A) vide his order dated 8.5.2006. The assessment order in the case of the present assessee was made on 28.12.2007 accepting the assessee's return. In the assessment order at para 5, the AO has mentioned about the hearing taken place on 11.12.2007 and 19.12.2007 by stating that "Case was discussed & also submissions were filed by assessee on 11-12-07, 19-12-07". Thereafter, he accepted the return filed by the assessee with the mere observation that "With these remarks the income returned as per return is accepted". The nature of information asked for by the AO vide order sheet entry dated 11.12.2007 and the nature of reply dated 18.12.2007 filed on 19.12.2007 has already been discussed above, and from these details, it is not discernible as to whether any enquiry was made by the AO and whether any mind was applied by him on the issues involved in the assessment regarding nature of income and whether assessee had a PE in India. In the assessment order also, these aspects of the matter have not been discussed and no reason has been given by the AO in accepting the return of income filed by the assessee. Whether the AO had, in fact, gone in to the issues involved and accepted the return filed by the assessee or not is not discernible from the assessment order. No doubt, the AO is not supposed to write the assessment order in detail. But, at the same time, the fact that the AO had already passed an order u/s 195(2) of the Act qualifying the income to be in the nature of 'royalty' and, on an appeal, the said order got confirmed by the learned CIT(A) by the time the AO made the impugned 36 assessment in the present assessee's case cannot be ignored when the AO had accepted the assessee's return to the contrary. In such a situation, there should have been at least a query to be raised from the AO as to why the income should not be qualified to be in the nature of royalty and a brief discussion in the assessment order recording a satisfaction on the contrary claim of the assessee made in the return of income. Furthermore, in the return of income or in the reply submitted by the assessee during the assessment proceedings, there is no whisper whatsoever by the assessee as to why the income should not be qualified to be in the nature of royalty or why the view taken by the Department in the proceedings u/s 195(2) should not be adopted in the assessment proceedings of the present assessee. There is no enquiry whatsoever made in this regard by the AO. No evidences or details or records relating to the work executed by the assessee were produced In a case like this, it was necessary for the AO to at least reflect that a departure from the view taken by the Department in proceedings u/s 195(2), was proper on his part.
17.3 The learned counsel for the assessee has further tried to demonstrate and establish that it was not a case where no enquiry at all was conducted by the AO and the AO had not applied his mind before accepting the return filed by the assessee. In this process, he drew a distinction between 'lack of enquiry' and 'lack of inadequate enquiry' and submitted that if there is an enquiry, even inadequate, that would not by itself give occasion to the CIT to pass order under Section 263 of the Act merely because he has a different opinion in the matter. In this respect, he strongly placed reliance upon the decision of Hon'ble High Court in the case of CIT Vs. Sunbeam Auto Ltd. - 227 CTR 133 (Delhi) = (2009) 31 DTR (Delhi) 1.
18. We have carefully gone through the said decision where it has been held that it is only in the case of 'lack of enquiry' that a course of 37 exercising revisionary jurisdiction under Section 263 of the Act would be open and while holding so, Their Lordships have considered the earlier decision of Hon'ble Delhi High Court in the case of Gee Vee Enterprises Vs. Addl.CIT - (1975) 99 ITR 375 (Delhi), and if there was any enquiry, even inadequate, that would not by itself give occasion to CIT to exercise his powers under Section 263 of the Act merely because he has different opinion in the matter. In the case of CIT Vs. Sunbeam Auto Ltd. (supra), the issue involved in the assessment was as to whether the expenditure in question was revenue or capital expenditure. The AO accepted the claim of the assessee of the expenditure being revenue in nature. The CIT invoked his jurisdiction u/s 263 of the Act and set aside the assessment for the reason that the order passed by the AO was erroneous as well as prejudicial to the interests of the Revenue. The Hon'ble High Court took note of the fact that the AO had called for explanation on this very item from the assessee and the assessee had furnished his explanation vide letter dated 26.09.2002. This fact was even taken note of by the CIT himself in para 3 of his order dated 3.11.2004, where reply of the assessee was reproduced. From the reply given by the assessee before the AO, the Hon'ble High Court has observed in para 14 of the judgment that this clearly shows that the AO had undertaken the exercise of examining as to whether the expenditure incurred by the assessee in the replacement of dyies and tools is to be treated as revenue expenditure or not, and it appears that since the AO was satisfied with the aforesaid explanation, he accepted the same. The CIT in his impugned order even accepted the said position by observing that the AO accepted the explanation without raising any further questions and completed the assessment at the returned income. In the light of these facts, the Hon'ble High Court has observed that the grievance of the CIT was that the AO should have made further enquiries rather than accepting the explanation. Therefore, it cannot be said that it was a case of lack of enquiry. However, in the present case before us, 38 as already discussed and observed above, the AO has made no enquiry as to the ascertainment of the nature of income and whether assessee had a PE in India before accepting the assessee's return particularly in the light of the fact that the nature of income was qualified to be in the nature of royalty in the proceedings u/s 195(2) of the Act by the Department, which was upheld by the learned CIT(A) by the time when the assessment was made. The DIT has been able to make out that the present case is a case of lack of enquiry and non-application of mind by the AO. Thus, on facts, this decision of Hon'ble Delhi High Court in the case of CIT Vs. Sunbeam Auto Ltd. is of no assistance to the assessee's contention.
19. A further reliance was placed by the assessee upon the decision of Hon'ble High Court of Delhi in the case of CIT Vs. Hindustan Marketing and Advertising Ltd. - (2011) 196 Taxman 368 (Delhi), where the decision of same High Court in the case of CIT Vs. Sunbeam Auto Ltd. has been referred to, in support of the contention that merely because the CIT expected that the AO should have gone deeper into the matter, the exercise of jurisdiction u/s 263 of the Act was not proper. In that case, it was held by the Hon'ble High Court that when the AO had made reasonably detailed enquiries, collected relevant material and discussed various facets of the case with the assessee, the order of the CIT to direct fresh assessment by going deeper into the matter would not form a valid or legal basis to exercise jurisdiction under Section 263 of the Act. In that case, it was observed by the Tribunal that not only the AO asked for the required details, but those details were supplied as well, and thereafter, in the assessment order passed by the AO, these facts were recorded. In that case, it was found by the Tribunal that the CIT raised the sufficiency of enquiry by subjective standards. Thus, this decision is not applicable to the present case where, as already observed above, no enquiry on various facets or aspects of the case to ascertain the nature of income and 39 whether the assessee had a PE in India were made by the AO and the return of income filed by the assessee was accepted on the face of it without application of mind and without making due enquiry and examining the relevant evidences, records, details and information.
20. The decision of Hon'ble Delhi High Court in the case of CIT Vs. Anil Kumar Sharma (2010-TIOL-267-HC-DEL-IT) is also of any assistance to the assessee's case as, in that case, it was found by the Tribunal that it was not a case of lack of enquiry inasmuch as the AO had asked the assessee to submit the purchase deed in respect of the land at Village Tughlakabad and that the assessee in response thereto had supplied requisite details and submitted a copy of the High Court's decision in relation to the award of compensation etc. It was concluded by the Tribunal that the complete details were filed before the AO and that he applied his mind to the relevant material and facts, although such application of mind is not discernible from the assessment order. However, in the present case, as discussed above, the necessary details and evidences were not filed before the AO to ascertain the nature of receipt and to decide the question whether the assessee had a PE in India particularly in view of the fact that a view was earlier taken by the Department in the proceedings u/s 195(2) of the Act that the receipt was in the nature of royalty, and tax was required to be deducted at source.
21. One more plea has been raised by the learned counsel for the assessee that the order of the AO accepting the assessee's return cannot be treated as erroneous order as well as prejudicial to the interests of the Revenue inasmuch as the AO has taken one possible view, which is in conformity with the view of the Tribunal taken in an appeal arising from the order of the learned CIT(A) passed in the matter of an order made by the AO u/s 195(2) of the act. As already observed above, on an application made by the payer of the amount 40 paid to the present assessee, the AO took the view that the amount represented 'royalty' within the meaning of Article 12 of Indo-Thailand Treaty and directed that tax be deducted at source @ 15% of the remittance vide order dated 7.1.2005. The payer PBIPL filed an appeal before the CIT(A), who had taken the view that the amount constituted royalty under Section 9(1)(vi) of the Act as well as Article 12(3) of the Treaty vide his order dated 8.5.2006. Being aggrieved, the payer preferred further appeal before the Tribunal and the Tribunal vide its order dated 4.7.2008 had taken a view that the departmental authorities went wrong in their conclusion that the amount remitted by the payer PBIPL to the assessee was 'royalty' within the meaning of Section 9(1)(vi) of the Act and Article 12(3) of the Indo-Thailand Treaty. Now, the Department is in appeal before the Hon'ble High Court, which is stated to be pending. The assessment order in the present assessee's case was made on 28.12.2007, when the aforesaid order of the Tribunal dated 4.7.2008 passed subsequently was not available to support the view contended by the assessee. As already observed and discussed above, the AO, in the present case, has not made any enquiry as to the ascertainment of the nature of receipt or raised any query as to why the receipt should not be qualified to be in the nature of 'royalty' nor the assessee had given any explanation on this question as to why the receipt should not be treated in the nature of royalty, as was so held by the AO in his order passed u/s 195(2) of the Act and further upheld by the learned CIT(A), and the AO has failed to examine all aspects of the matter with regard to the ascertainment of the nature of receipt or whether the assessee had a PE in India, and all records, evidences, materials, details or information relating to work undertaken by the assessee were not produced by the assessee for AO's perusal and verification. In such a scenario, it cannot be said that the AO had even taken any view on the issues involved and had applied his mind thereupon. The entire reading of the assessment order and perusal of the record clearly demonstrates that no view has 41 been taken at all by the AO. In these circumstances, where the AO had failed to conduct the required enquiry and also failed in applying his mind before accepting the return of income of the assessee on the face of it, the question of there being a plausible view taken by the AO does not arise. In support of the view we have taken above, a reliance is placed upon the decision dated 11.5.2011 in the case of CIT Vs. M/s Nalwa Investments Ltd. (supra). Therefore, this argument of the assessee's counsel is of no avail on the facts of the present case, and is thus rejected.
22. The learned counsel for the assessee has advanced one more contention that the learned DIT was not justified in overlooking the order of the Tribunal dated 4.7.2008 passed in the proceedings u/s 195(2) of the Act merely by making a casual observation that the Department is in appeal against the Tribunal's order before the Hon'ble High Court. In this case, we are concerned with the issue as to whether the AO has failed to make necessary enquiry before accepting the return of income filed by the assessee and whether the AO has failed to apply his mind to the issues involved in the assessment, in accepting the assessee's return of income. We are not concerned about the final ascertainment of the issue as to whether the receipts received by the assessee were in the nature of royalty or business income or any other income or whether the assessee had a PE in India. In the present case, when the DIT has passed the order u/s 263 of the Act, by setting aside the AO's assessment order for the reason that the AO has failed to make necessary enquiry and has failed to apply his mind, at that stage, the DIT was only required to find out as to whether the AO failed to make necessary enquiry and apply his mind to the issues involved. In this appeal, we are concerned about the propriety of order passed by the learned DIT invoking his jurisdiction or power u/s 263 of the Act keeping in view the scope of that provision. Therefore, this contention of the assessee that the order of the 42 Tribunal on the merits of the issue is required to be followed by the DIT is of no avail in the present proceedings. Thus, this contention of the learned counsel for the assessee is rejected.
23. In the aforesaid circumstances, we, therefore, uphold the view of the DIT that the matter was not examined by the AO and the AO has not applied his mind before accepting the return of income of the assessee. We are, therefore, of the considered opinion that it was a reasonably fit case for exercising revisionary jurisdiction under Section 263 of the Act. We, therefore, uphold the order of the learned DIT in cancelling the assessment order and restoring the matter back to the file of the Assessing Officer for his assessment after conducting proper enquiries on the relevant issues and after giving the assessee adequate opportunity of being heard.
24. In the result, the appeal of the assessee is dismissed.
Decision pronounced in the open Court on 20th September, 2011.
Sd/- Sd/-
(G.E.VEERABHADRAPPA) (C.L.SETHI
(C.L.SETHI)
.L.SETHI)
VICE PRESIDENT JUDICIAL MEMBER
Dated : 20.09.2011
VK.
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
Assistant Registrar