1.Petitioner-L.G. Electronics India (P.) Ltd., a Company, incorporated under the Companies Act has filed this writ petition for quashing of the notice dated 28.03.2013 issued by the Assistant Commissioner of Income Tax, NOIDA for the Assessment Year 2006-07 under Section 148 of the Income Tax Act, 1961 (herein after referred to as the 'Act, 1961') wherein it has been stated that the officer has reasons to believe that the income chargeable to tax at the hands of the assessee for the year 2006-07 has escaped assessment within the meaning of Section 147 of the Act, 1961 in respect of which the assessee was assessable. The assessee was called upon to submit the return of the income within 30 days for which he is assessable in the said year. The notice has been enclosed as Annexure-1 to the present petition.
The reasons for initiating proceedings under Section 147 of the Act, 1961 have been communicated to the petitioner under letter dated 28.03.2013 and it reads as follows:
"It is seen that M/s. L.G. Electronics India Ltd. (Henceforth LGEIL) has made the following remittances during the F.Y. 2005-06 relevant to A.Y. 2006-07 to its parent company (M/s. LG Electronics Korea) and other Associated Enterprises, on which no TDS has been deducted. The same expenses are dis-allowable u/s 40 (a) (i) of the Income Tax Act. The details of the remittances made by the Company are as follows :
| Sl. No. | Description of transaction | F.Y. 2005-06 | |
| 1. | Import of raw material and consumables, service spares and spare parts | 3,134,465,989/- | |
| 2. | Import of finished goods | 2,003,499,385/- | |
| 3. | Import of capital goods | 29,153,894/- | |
| 4. | Export Commission paid | 99,157,209/- | |
| 5. | Reimbursement of Expenses | 119,094/- | |
| TOTAL | 5,26,63,95,571/- |
Necessary approval of the Commissioner of Income Tax, Noida has been obtained u/s 151(1) of the I.T. Act through his letter dated 28.03.2013."
2.The notice has been challenged on the ground that the assumption of jurisdiction by the respondent authorities was bad as the basic requirements of Section 147 of the Act, 1961 were not satisfied. It has been stated that initiation of re-assessment proceedings beyond a period of four years as provided for under proviso to Section 147 of the Act, 1961 without stating that any income has escaped assessment on account of any failure on the part of the assessee to disclose complete and full facts/concealment of facts is bad.
3.Shri S. Ganesh, Senior Advocate assisted by Shri Deepak Chopra, Advocate submitted before us that there is no allegation by the first respondent that the petitioner has failed to disclose truly and fully material facts relating to the assessment, hence this ground for initiation of re-assessment proceeding was bad. For the purpose he has placed reliance upon the judgements in the case of Wel Intertrade (P.) Ltd. v. ITO [2009] 308 ITR 22/178 Taxman 27 (Delhi), CIT v. SIL Investments [2011] 339 ITR 166/202 Taxman 96/9 taxmann.com 143 (Delhi), Haryana Acrylic v. CIT [2009] 308 ITR 38/[2008] 175 Taxman 262 (Delhi) and D.T. and T.D.C. Ltd. v. Asstt. CIT [2010] 324 ITR 234 (Delhi).
4.Counsel for the petitioner also contended that at the time of assessment the petitioner assessee had furnished all the particulars in the balance-sheet along with the original return. Assessment was made considering these details. Mere change of opinion cannot be the basis for re-opening of a complete assessment and does not confer jurisdiction for proceeding under Section 147 of the Act, 1961. It is his case that all the transactions mentioned as the reasons for initiating reassessment proceedings had specifically been disclosed and considered in the original assessment proceeding. The transactions undertaken during the year were duly disclosed in Form 3-CD. The Assessing Officer had applied his mind on the transactions. As a matter of fact vide letter dated 06.08.2009 a detail questionnaire was issued to the assessee which was duly replied. Additional queries were also made by the Assessing Officer and it is only thereafter that the assessment proceedings were completed. Lastly it is submitted that the objections filed by the petitioner in the matter of existence of reasons to believe under Section 148 of the Act, 1961 have been disposed of by a non-speaking order dated 28.02.2014.
5.Counsel for the assessee has referred the following judgments :
| 1. | J. Jamna Lal Kabrav. ITO [1968] 69 ITR 461 (All.) |
| 2. | CITv. Pradeshiya Industrial and Investment Corp. of U.P. Ltd. [2011] 332 ITR 324/[2010] 186 Taxman 131 (All.) |
| 3. | Vodafone West Ltd.v. Asstt. CIT [2013] 354 ITR 520/215 Taxman 456/32 taxmann.com 213 (Guj.) |
| 4. | Vodafone West Ltd.v. Asstt. CIT [2013] 354 ITR 572/215 Taxman 412/32 taxmann.com 159 (Guj.) |
| 5. | Hindustan Lever Ltd.v. R. B. Wadkar, Asstt. CIT [2004] 268 ITR 332/137 Taxman 479 (Bom.). |
| 6. | Hindustan Lever Ltd.v. R.B. Wadkar, Asstt.CIT [2004] 268 ITR 339/138 Taxman 40 (Bom.). |
| 7. | Transmission Corpn. of A.P. Ltd.v. CIT [1999] 239 ITR 587/105 Taxman 742 (SC). |
| 8. | DIT (International Taxation)v. Morgan Stanley and Co. [2007] 292 ITR 416/162 Taxman 165 (SC). |
| 9. | Indra Prastha Chemicals (P.) Ltd.v. CIT [2004] 271 ITR 113/[2005] 142 Taxman 205 (All.). |
| 10. | Gwalior Rayon Silk Co. Ltd.v. CIT [1983] 140 ITR 832/14 Taxman 99 (MP). |
| 11. | CITv. Suren International (P.) Ltd. [2013] 357 ITR 24/[2014] 225 Taxman 88 (Mag.)/35 taxmann.com 398 (Delhi). |
| 12. | CITv. S. Khader Khan Son [2008] 300 ITR 157 (Mad.). |
| 13. | Remfry and Sagarv. CIT [2013] 351 ITR 75/213 Taxman 268/30 taxmann.com 338 (Delhi). |
| 14. | Qualcomm Incorporatedv. Asstt. DIT [2013] 58 SOT 97/30 taxmann.com 30 (Delhi - Trib.). |
| 15. | Crompton Greaves Ltd.v. Asstt. CIT [2015] 229 Taxman 545/55 taxmann.com 59 (Bom.). |
| 16. | L.G. Electronics Incorporationv. Asstt. DIT SLP (C) No. 2445 of 2014. |
| 17. | The Government of the Republic of India and the Government of the Republic of Korea,Article 10 of DTAA. |
7.Counsel for the department however disputes the correctness of the pleas raised by the petitioner assessee. It is pointed out that on 10.06.2010 a survey operation was carried out at the business premises of the Company leading to the impounding of certain vital documents. The reasons for the statements of Visiting Heads of Divisions of the Korean Company, other expatriates and the employees of the Indian Company were recorded and it is transpired that the non-resident Company was carrying on business operations through permanent establishment in India.
What logically followed was that the non-resident Company namely the Korean Company and other associated entities were chargeable to tax in India in respect of payment received from the petitioner Indian Company. As a necessary corollary the petitioner-assessee had committed default of non-deductions of tax at the time of making payments to the said Korean Company which had a P.E. in India in contravention of provisions contained in Section 195 of the Act, 1961.
Because of the said facts, three consequences follow :
| (a) | Initiation of proceedings against the Korean Co. and its related entities to bring to tax the chargeable income in their hands. | |
| (b) | Initiation of proceedings against the petitioner-Company for recovery of amount of tax, not deducted at source, under Section 210 of the Act, 1961. | |
| (c) | Initiation of proceedings against the petitioner-Company for disallowing the related expenses under Section 40(a) (i) for failure to deduct taxes. |
9.The Court has also been informed that proceedings have been initiated against the petitioner under Section 201 of the Act, 1961 for recovery of tax which has not been deducted and necessary orders calling upon the Company to make the payment after holding it to be assessee in default has been made on 24.02.2015.
10.On behalf of the Department it is clarified that non-deduction of tax has two consequences :
| (a) | Recovery of tax not deducted. |
| (b) | Dis-allowance of corresponding expenditure under Section 40 (a) (i) of the Act. |
12.It is submitted that the disclosure in the accounts/tax audit report was not full and true as from the evidence collected through survey operation it had been clearly brought out that the payee Company had a taxable presence in India and its income was chargeable to tax.
13.Counsel for the department clarifies that sufficient reasons have been recorded for arriving at a satisfaction that the Korean Company to whom the payments have been made had a permanent establishment in India and chargeable to tax which information has not been disclosed nor forms part of the records of the assessment proceedings. Consequently, the initiation of proceedings of reassessment is legally justified in the facts of the case.
So far as Article 25(7) of DTAA is concerned, it is pointed out that the issue is being raised for the first time before this Court. It can always be agitated during re-assessment proceedings at the first instance before the authority concerned. Even otherwise the assessee has a right to file an appeal, if he is so advised, in that regard. The judgement of the Apex Court relied upon by the assessee is clearly distinguishable in the facts of the case.
14.We have heard learned counsel for the parties and have examined the records.
15.The Apex Court in the case of Indi-Aden Salt Mfg. and Trading Co. (P.) Ltd. v. CIT [1986] 25 Taxman 356/159 ITR 624 in paragraph nos. 7 and 8 has held as follows :
"7. The assessee's contentions is that the ITO could have found out the position by further probing. That, however, does not exonerate the assessee to make full disclosure truly. The Explanation 2 to section 147 of the Act makes the position abundantly clear. The principles have also been well settled and reiterated in numerous decisions of this Court (Hazi Amir Mohd. Mir Ahmed v. CIT [1977] 110 ITR 630 (Punj. and Har.) and ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC)) that mere production of evidence before the ITO was not enough, that there may be omission or failure to make a true and full disclosure, if some material for the assessment lay embedded in the evidence which the revenue could have uncovered but did not, then, it is the duty of the assessee to bring it to the notice of the assessing authority. The assessee knows all the material and relevant facts, the assessing authority might not. In respect of the material failure, the omission to disclose may be deliberate or inadvertent. That was immaterial. But if there is omission to disclose material facts, then, subject to the other conditions, jurisdiction to reopen is attracted. It is sufficient to refer to the decision of this Court in Calcutta Discount Co. Ltd.'s case (supra) where it had been held that if there are some primary facts from which reasonable belief could be formed that there was some non-disclosure or failure to disclose fully and truly all material facts, the ITO has jursdiction to reopen the assessment. This position was again reiterated by this Court in the case of Malegaon Electricity Co. (P.) Ltd. v. CIT [1970] 78 ITR, 466.
8. Furthermore, bearing these principles in mind in this particular case whether there has been such non-disclosure of primary facts which has caused escapement of income in the assessment was basically a question of fact."
At the very outset we may record that the legal principle which flows from the various judgements cited by the counsel for the parties in the matter of reopening of the assessment beyond a period of four years is that there should be two conditions satisfied simultaneously before issuance of notice of re-opening namely :
| (a) | The Assessing Officer has reasons to believe that the income, profits or gain chargeable to income tax have been un-addressed and; |
| (b) | he must have reasons to believe that such under assessment has occurred by reasons of either omission or failure on the part of the assessee to return his income or omission or failure on the part of the assessee to disclose fully or truly material facts necessary for his assessment that year. Facts material necessary for re-assessment will differ from case to case. |
| L.G. Electronics India Private Limited | ANNEXURE--H | |
| FINANCIAL YEAR 2005-06 | ||
| Amount inadmissible under Section 40 (a) (ia) | ||
| Provisions on which tds was not deducted. |
| Nature of Expenses | Amount (in Rs.) |
| Advertisement | 3,831,722 |
| Service Compensation Payable | 50,908,508 |
| Transportation Charges | 7,851,262 |
| Legal Charges | 2,174,498 |
| Printing and Stationery | 24,657 |
| Conveyance | 247,093 |
| Bus Hiring Charges | 167,721 |
| Welfare | 68,846 |
| Service Charges | 243,282 |
| Sales Commission | 2,489,690 |
| Service Franchisee Expenses | 406,493 |
| Vehicle Running Expenses | 37,084 |
| Repairs | 247,935 |
| Miscellaneous | 296,045 |
| TOTAL : | 68,994,836 |
| L.G. Electronics India Private Limited | ANNEXURE--I | |
| FINANCIAL YEAR 2005-06 | ||
| Statement showing particulars of payments made to persons specified under section 40a(2)(b) of the income tax act, 1961 during the year ended 31st march, 2006. |
| Sl. No. | NATURE OF EXPENSES | |
| 1. | ------------------------------------------------------ | |
| 2. | Paid to L.G. Electronics Inc., Korea, the Holding Company :- | |
| Purchase of Raw Materials, Stores and Spares and Service Components | Rs.3,134,391,293 | |
| Purchase of Finished Goods | Rs.2,003,499,385 | |
| Purchase of Fixed Assets | Rs. 29,153,894 | |
| Royalty Payment | Rs.1,007,153,457 | |
| Export Sales Commission | Rs. 99,157,209 | |
| Design and Development Fees | Rs. 221,357,954 | |
| Service Charges | Rs. 1,207,325 | |
18.In our opinion in the reasons disclosed for initiating the reassessment proceedings in the facts of the case, as noticed above, no fault can be found as the assessee had failed to disclosed fully and truly the complete facts in respect of L.G. Electronics, Korea having a P.E. In India to which payments have been made.
19.In view of the said conclusion, we find that there is a nexus between the reasons recorded and the belief that income had escaped assessment because of fully and truly information having not been furnished by the assessee. The Assessing Officer has given valid reasons to believe that income had escaped assessment.
20.We may refer to the judgment of the Apex Court in the case of Morgan Stanley and Co. (supra). Relevant paragraph reads as follows :
"The object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. Under Article 7(2) nor all profits of MSCo would be taxable in India but only those which have economic nexus with P.E. In India. A foreign enterprise is liable to be taxed in India on so much of its business profit as is attributable to the P.E. In India. The quantum of taxable income is to be determined in accordance with the provisions of the Income-tax Act. All provisions of the Income-tax Act are applicable, including provisions relating to depreciation, investment losses, deductible expenses, carry forward and set off losses etc."
So far as the issue with regards to the arms length price is concerned, we are of the opinion that it is not material at the stage of issuance of notice. In any case it shall be open to the assessee to take a stand that no further tax could be levied during re-assessment proceedings. At this stage while examining the validity of the notice issued under Section 148 of the Act, 1961 the issue is limited only to see as to whether there exist reasons for the Assessing Authority to believe that the income has escaped assessment because of fully disclosure having not been made by the assessee.
Similarly, so far as the Clause 25(3) of the DTAA is concerned, the issue is left open to be agitated during reassessment proceedings and it is for the Assessing Officer to examine all aspects of the matter.
21.For the reasons recorded herein above, we do not find any illegality in the notice issued under Section 148 of the Act, 1961 and for initiating re-assessment proceedings under Section 147 of the Act, 1961 nor in the order rejecting the objections of the petitioner calls for any interference under Article 226 of the Constitution of India.
22.Writ petition lacks merit and is accordingly dismissed.
23. Interim order, if any, stands discharged.