Gujarat High Court
M/S. Transpek Industry Limited vs Deputy Commissioner Of Income Tax on 17 April, 2017
Author: M.R. Shah
Bench: M.R. Shah, B.N. Karia
C/SCA/21471/2016 ORDER
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL CIVIL APPLICATION NO. 21471 of 2016
[On note for speaking to minutes of order dated 13/02/2017 in
C/SCA/21471/2016 ]
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M/S. TRANSPEK INDUSTRY LIMITED....Petitioner(s)
Versus
DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 2 (1)
(1)....Respondent(s)
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Appearance:
MR BS SOPARKAR, ADVOCATE for the Petitioner(s) No. 1
MR KM PARIKH, ADVOCATE for the Respondent(s) No. 1
NOTICE SERVED for the Respondent(s) No. 1
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CORAM:HONOURABLE MR.JUSTICE M.R. SHAH
and
HONOURABLE MR.JUSTICE B.N. KARIA
Date : 17/04/2017
ORAL ORDER
(PER : HONOURABLE MR.JUSTICE M.R. SHAH) In our earlier judgement and order dated 13/2/2017 passed in the present petition, in paragraph Nos. 5.03 and 7.01, words "in India" be read as "outside India".
The note for speaking to minutes stands disposed of accordingly.
Registry is directed to issue fresh writ accordingly.
Sd/-
(M.R. SHAH, J.) Sd/-
(B.N. KARIA, J.) Rafik..
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 21471 of 2016 FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE M.R. SHAH Sd/-
and
HONOURABLE MR.JUSTICE B.N. KARIA Sd/-
========================================================== 1 Whether Reporters of Local Papers may be allowed NO to see the judgment ?
2 To be referred to the Reporter or not ? NO 3 Whether their Lordships wish to see the fair copy of NO the judgment ?
4 Whether this case involves a substantial question of NO law as to the interpretation of the Constitution of India or any order made thereunder ?
========================================================== M/S. TRANSPERK INDUSTRY LIMITED....Petitioner(s) Versus DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 2 (1) (1)....Respondent(s) ========================================================== Appearance:
MR SN ROPARKAR, SENIOR ADVOCATE with MR BS SOPARKAR, ADVOCATE for the Petitioner(s) No. 1 MR KM PARIKH, ADVOCATE for the Respondent(s) No. 1 NOTICE SERVED for the Respondent(s) No. 1 ========================================================== CORAM:HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MR.JUSTICE B.N. KARIA Date : 13/02/2017 Page 1 of 12 HC-NIC Page 3 of 14 Created On Tue Apr 18 00:10:40 IST 2017 3 of 14 C/SCA/21471/2016 JUDGMENT ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE M.R. SHAH) 1.00. RULE. Mr. K.M. Parikh, learned advocate waives service of notice of rule on behalf of the respondent.
2.00. In the facts and circumstances of the case and with the consent of the learned advocates appearing on behalf of the respective parties, present petition is taken up for final hearing today.
3.00. By way of this petition under Article 226 of the Constitution of India, the petitioner has prayed for an appropriate writ, order and/or direction to quash and set aside the impugned notice dated 30/3/2016 issued upon the petitioner assessee under section 148 of the Income Tax Act, 1961 (hereinafter referred to as "the Act" for short), by which the A.O. has sought to reopen the assessment for the A.Y. 2009-2010 alleging inter-alia that the income chargeable to tax for the A.Y. 2009-2010 has escaped assessment within the meaning of section 147 of the Act.
4.00. Facts leading to the present Special Civil Application, in nutshell, are as under :-
4.01. That the petitioner assessee engaged in the business of manufacturing and trading of chemicals, filed its return of income for the A.Y. 2009-2010 declaring total income at Rs.10,40,01,690. Subsequently the return was selected for scrutiny and notice under section 143(2) of the Act was issued. A further Notice under section 142(1) of the Act along Page 2 of 12 HC-NIC Page 4 of 14 Created On Tue Apr 18 00:10:40 IST 2017 4 of 14 C/SCA/21471/2016 JUDGMENT with the questionnaire was also issued to the petitioner. That thereafter the A.O. framed scrutiny assessment under section 143(3) of the Act accepting the returned income. That thereafter beyond the period of four years, the A.O. has issued the impugned notice by which the assessment for the A.Y. 2009-2010 is sought to be reopened.
4.02. At the request of the assessee, the A.O. has furnished reasons recorded to reopen the assessment for the A.Y. 2009-2010, which read as under :
"On verification of details, it was observed that as per section 40(a) [(I) any interest (not being interest on a loan issued for public subscription before the 1st day of April 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable, -
(A) Outside India; or
(B) In India to a non-resident, not being a company or
to a foreign company,
On which tax is deductible at source under Chapter XVII-B and such has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200 shall be allowed as deduction.
Further, as per section 195(1) of the Act, any person responsible for paying to non-resident, not being a company, any interest of any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries") shall, at the time of credit of such income to the account of the Page 3 of 12 HC-NIC Page 5 of 14 Created On Tue Apr 18 00:10:40 IST 2017
5 of 14 C/SCA/21471/2016 JUDGMENT payment thereof in cash or by the issue of a cheque or draft of by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. Failure to deduct tax at source make the expenditure disallowance under section 40(a)(i). Besides this, mandatory penalty equal to amount of tax is also leviable under section 271C.
Further as per Section 2(28A) of the Income Tax Act, 1961 "interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.
It was seen from the Note 19(xii) of the Notes of Accounts (Schedule 22) of the Balance Sheet ending as on 31st March 2009 that the following payments were made in foreign currency on cash basis :
Particulars Amount in
Lakhs
Tanker Hire charges 111.96
Interest 93.57
Total 205.53
The Tanker Hire Charges of Rs.111.96 lakh and interest of Rs.93.57 lakh which were paid in foreign currency attracts the provisions of section 195 which says TDS was required to be deducted on interest or any sum payable to a non-resident. The interest charges debited to the profit and loss account were in Page 4 of 12 HC-NIC Page 6 of 14 Created On Tue Apr 18 00:10:40 IST 2017 6 of 14 C/SCA/21471/2016 JUDGMENT nature of interest under section 2(28A) r.w.s. 115A and thus under the provisions of the Act there is a requirement to deduct tax at source. In view of the above, the assessee was liable to deduct TDS under section 195 of the amount of Rs.205.53 lakh.
Failure of deduct TDS on 205.53 lakh under section 195 attracts the provisions of section 40(a)(i), under which the interest expenses on which the tax was deductible at source in accordance with the provisions of section 195 under Chapter XVII-b and such tax has not been deducted or after deduction has not been paid into Central Government's Account during the previous year or in subsequent year before the expiry of the time prescribed under section 200(1), shall not be allowed for computing the income chargeable under the head "profit and gains of the business or profession.
The assessee company has paid the Tanker Hire Charges mainly to UK and France parties. As per Article 9 of the DTAA with UK and France, no TDS is required to be deducted for the above payment. Thus, having regard to the applicable provisions of the act and the DTAA between India and other countries, no tax is required to be withhold from the remittance of Tanker Hire Charges. It is also a fact that under normal taxation provision, the above income is not accrued or arise in India and also not received or deemed to be received in India and therefore not taxable in India.
Section 9 of the Act includes income by way of royalty payable by a person who is resident in India to a non-resident. The term "royalty" is defined in the Act to mean consideration for use or the right to sue any industrial, commercial or scientific equipment. The Page 5 of 12 HC-NIC Page 7 of 14 Created On Tue Apr 18 00:10:40 IST 2017 7 of 14 C/SCA/21471/2016 JUDGMENT word "equipment" has not been defined in the India tax laws. As per Article 13 of the tax treaty (DTAAA) with France, the definition of "royalty" included receipts arising from the use or right to use of industrial, commercial and scientific equipment. Thus, lease income receipts were included under royalty. Time charter being one for usage of ship and the consideration is for the right to use the ship, the transaction would fall within the ambit of "use" under Clause (iva) of explanation 2 to section 9(v)(vi) of the Act. Section 43(3) of the Act defines plant to include ships, vehicles, books scientific apparatus and surgical equipment used for the purpose of the business or profession. Based on the inclusive definition in section 43(3) of the Act, the word "plant"is widely defined to include a ship. Since, the payments made by the India chartered under time charter agreement or for the use of ship between the ports in India, constitutes royalty under section 9(1)(vi) of the Income Tax Act, 1961 (the Act) for the relevant tax treaties. As per Section 43(3) the inclusive definition the word "plant" is widely defined to include a ship and therefore, a ship is equipment of the business of a ship owner.
The moving ship has a place of business in the place where the ship docked and the fact that the ship moved from one point to another is the result of the nature of business contract. Also, the ship movement is an integrated one having business and geographical coherence. Accordingly, the foreign enterprise has the place of Permanent establishment (PE) in India. Even though the berth is a PE of the foreign enterprise yet the royalties paid not being effectively connected with or attributed to such PE, the payment would fall for consideration only under Article 13 (related to royalties and fees for technical services and payments for the Page 6 of 12 HC-NIC Page 8 of 14 Created On Tue Apr 18 00:10:40 IST 2017 8 of 14 C/SCA/21471/2016 JUDGMENT use of equipment) and not under Article 8 of the tax treaty. Now, as per the tax treaty with UK, rental income from hire/lease of ships incidental to the activity directly connected with the operation of ships in international traffic is specifically included from the definition of the term royalty and the said income is taxable as per the shipping article of the said tax treaties.
However, as in the case of treaty with France, if the agreement states that the payments received by foreign shipping companies are for use and hire of the vessel, based on judicial pronouncements discussed above, the said income may partake the character of royalty under the tax treaty.
Thus, payment for time charter of ship in respect of parties of France was taxable as royalty and was liable for TDS under section 195 of the Act. Thus, by not deducting TDS on the same assessee became assessee in default attracting the provisions of section 40(a)(i) of the Act.
Hence, that "I have reason to believe that Rs.205.53 lakhs which was income chargeable to tax has escaped assessment or that the assessee has failed to make a return of his income for that assessment year or that the assessee has failed to disclose fully and truly all material facts necessary for assessment of that year, as per the case may be" within the meaning of section 147 of the IT Act, 1961.
Therefore, I am satisfied that this is the fit case for initiation of proceedings under section 147 of the Act."
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C/SCA/21471/2016 JUDGMENT
4.03. On receipt of the reasons recorded to reopen the assessment for the A.Y. 2009-2010, the assessee submitted detailed objections. It was specifically submitted before the A.O. that as such no payment of Tanker Hire Charges was made to the resident of France during the year under considerate and the interest was also made to the Banks situated in India.
4.04. Despite the above, without dealing with the specific objections raised by the assessee and observing that the submissions of the assessee runs into 15 pages and same is too broad and general in nature and not tenable in law, the A.O. has disposed of the objections and has not agreed with the objections raised by the assessee and hence the petitioner has referred present Special Civil Application under Article 226 of the Constitution of India challenging the impugned reassessment proceedings.
5.00. Mr.S.N. Soparkar, learned Senior Advocate appearing on behalf of the assessee has vehemently submitted that in the facts and circumstances of the case the impugned notice under section 148 of the Act and the reassessment proceedings are absolutely bad in law, which deserves to be quashed and set aside.
5.01. Mr.S.N. Soparkar, learned Senior Advocate appearing on behalf of the assessee has further submitted that, as such, the assessment for the A.Y. 2009-2010 is sought to be reopened beyond the period of four years. It is submitted that unless and until the conditions mentioned in the proviso to section 147 of the Act are satisfied, i.e. there is any failure on Page 8 of 12 HC-NIC Page 10 of 14 Created On Tue Apr 18 00:10:40 IST 2017 10 of 14 C/SCA/21471/2016 JUDGMENT the part of the assessee in not disclosing the true and correct facts necessary for the assessment, reopening beyond the period of four years is not permissible. It is submitted that there was no failure on the part of the assessee in not disclosing true and correct facts necessary for the assessment for th year under consideration.
5.02. Mr.S.N. Soparkar, learned Senior Advocate appearing on behalf of the assessee has further submitted that even otherwise, there was no tangible material available with the A.O. that any amount towards Tanker Hire Charges was paid to any resident of France, on which T.D.S. was required to be deducted. It is submitted that the assessee specifically pointed out before the A.O. so stated in the objections that no payment towards Tanker Hire Charges to the resident of France during the year under consideration was made. He has submitted that however, the same has not been dealt with the by the A.O. It is submitted that, therefore, assumption of the jurisdiction by the A.O. to reopen the assessment and that too beyond the period of four years is wholly without jurisdiction and bad in law, which deserves to be quashed and set aside.
5.03. Mr.S.N. Soparkar, learned Senior Advocate appearing on behalf of the assessee has further submitted that as such no interest was paid to any of the banks situated in India and therefore, the impugned reopening on the aforesaid ground is also bad in law.
6.00. Mr.K.M. Parikh, learned counsel appearing on behalf of the revenue has tried to oppose the present petition, however, when a pointed question was asked to him that Page 9 of 12 HC-NIC Page 11 of 14 Created On Tue Apr 18 00:10:40 IST 2017 11 of 14 C/SCA/21471/2016 JUDGMENT though in the petition it was specifically pointed out that by the assessee that no payment of Tanker Hire Charges to the resident of France during the year under consideration was made, the A.O. has not dealt with the same, Mr.Parikh, learned counsel appearing on behalf of the revenue is not in a position to satisfy the Court that the same has been in fact dealt with by the A.O. We also asked the learned counsel for the revenue to point out whether any tangible material was available with the A.O. to show that any payment of Tanker Hire Charges to the resident of France during the year under consideration was made by the assessee, but he is not in a position to point out any such material on the basis of which the A.O. has formed an opinion that the income chargeable to tax has escaped assessment. However, he has submitted that after considering the Notes to the Accounts of the Balance- sheet in which the assessee itself has stated that Rs.111.96 Lacs was paid in foreign currency on cash basis towards Tanker Hire Charges, the A.O. has formed his opinion that on the aforesaid amount, T.D.S. has not been deducted and therefore, income chargeable to tax has escaped assessment. However, when again a pointed question was asked to the learned counsel appearing on behalf of the revenue that in the Notes of Balance-sheet nothing has been mentioned that any payment was made towards Tanker Hire Charges in foreign currency on cash basis to any of the resident of France, again he has no answer. However, the learned counsel appearing on behalf of the revenue has submitted that In light of the aforesaid facts and circumstances of the case, present petition is required to be dismissed.
7.00. Having heard the learned counsel appearing on Page 10 of 12 HC-NIC Page 12 of 14 Created On Tue Apr 18 00:10:40 IST 2017 12 of 14 C/SCA/21471/2016 JUDGMENT behalf of the respective parties and considering the material on record and more particularly the reasons recorded and the decision disposing of the objections, it appears that according to the A.O. by not deducting T.D.S. on the payment of Tanker Hire Charges to the resident of France during the year under consideration, there is escapement of income from the assessment and therefore, the assessment is sought to be reviewed beyond the period of four years. However, it is required to be noted that it was specific case on behalf of the assessee so stated in the objection that there is no payment of Tanker Hire Charges to the resident of France during the year under consideration. The same has not been dealt with by the A.O. while disposing of the objection by the A.O. From the objections it appears that payment of Tanker Hire Charges was made to the resident of U.K. and Singapore only. The learned counsel appearing on behalf of the revenue is not in a position to point out any tangible material available with the A.O. in support of his belief that any payment of Tanker Hire Charges was made to the resident of France, on which T.D.S. was required to be deducted. Under the circumstances, there is not tangible material available with the A.O. to form an opinion that the income chargeable to tax has escaped assessment within the meaning of section 147 of the Act. Under the circumstances, and more particularly considering the fact that the assessment is sought to be reopened beyond the period of four years and there does not appear to be any failure on the part of the assessee in not disclosing the true and correct facts necessary for assessment and also on the ground that there was no tangible material available with the A.O. with respect to any payment of Tanker Hire Charges to the resident of France, on which T.D.S. was required to be Page 11 of 12 HC-NIC Page 13 of 14 Created On Tue Apr 18 00:10:40 IST 2017 13 of 14 C/SCA/21471/2016 JUDGMENT deducted and thereby no income chargeable to tax has assessed the assessment, the impugned reassessment proceedings cannot be sustained and the same deserves to be quashed and set aside.
7.01. It is required to be noted that one of the grounds on which the assessment is sought to be reopened is that the interest was paid to the banks situated in India. However, the same is factually not correct. As per the specific case on behalf of the assessee so stated even in the objections, no amount of interest was paid to any of the banks situated in India. Under the circumstances, assumption of jurisdiction to reopen the assessment on the aforesaid ground is on incorrect factual premise. Under the circumstances also the impugned reassessment proceedings deserve to be quashed and set aside.
8.00. In view of the above and for the reasons stated above, present petition succeeds. The impugned notice issued upon the assessee under section 148 of the Income Tax Act, 1961 for the A.Y. 2009-2010 is hereby quashed and set aside. Rule is made absolute accordingly. In the facts and circumstances of the case, there shall be no order as to costs.
Sd/-
(M.R. SHAH, J.) Sd/-
(B.N. KARIA, J.) Rafik...
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