Reserved HIGH COURT OF UTTARAKHAND, AT NAINITAL Writ Petition No.2192 of 2009 (M/S) M/s National Petroleum Construction Company (through its CEO) Shri Aqueel A Madhi PO Box 2058, Abu Dhabi … Petitioner Versus Union of India & others …. Respondents Dated:- 20th August, 2011 Hon’ble Tarun Agarwala, J. 1. By means of this writ petition, the petitioner has challenged the validity and legality of the notice dated 31st March, 2009 issued by the Assessing Officer under Section 148 of the Income Tax Act, 1961 (hereinafter referred to as the Act) as well as the order dated 15.12.2009 by which the objection of the petitioner to the initiation of the reassessment proceedings was disposed off. 2. The facts leading to the filing of the writ petition is, that the petitioner is a company incorporated under the existing laws of United Arab Emirates and, is engaged in the business of fabrication and installation of onshore and offshore oil facilities and sub-marine pipelines and pipelines coatings. 3. For the assessment year 2002-2003, the petitioner filed its return of income declaring a total income of Rs.5,02,34,840/- disclosing its total income on the basis of income returned and assessed in the preceding years. The petitioner declared its gross revenues at US$ 25,406,750/- and offered revenues of US$ 871,694/- for inside India activities and revenue of US$ 1,63,695/- for outside India operations @ 10% and 1% respectively. The income offered by the petitioner was under the presumptive scheme under the Act by adopting income @ 10% for revenues earned inside India and @ 1% for revenues accrued 2 outside India. The return was processed under Section 143(1) of the Act, but, subsequently, it was selected for scrutiny. The Assessing Officer issued a notice dated 28th June, 2004 under Section 142 (1) of the Act directing the petitioner to furnish various details and information. The information sought by the Assessing Officer is as under :- i. Copy of the work order / contract. ii. State the reason as to how article 11 of the DTAA is available. iii. Detail of employees who came to India during the relevant assessment period, and whether returns in respect of these have been filed. iv. A certificate stating period of stay of the employees during the last three years and during the relevant year. v. Copies of invoices alongwith the attachments submitted to relevant contractors. vi. Copy of TDS returns. vii. Justification of allow ability of sub-contractor cost. 4. The petitioner submitted all the information in its reply dated 17.11.2004. The copy of the contract / work order was furnished alongwith the revised pricing schedule to the contract. The petitioner also submitted the amounts offered to tax, the description of work executed and the basis of taxation of contract receipts. The Assessing Officer, after making due enquiry and verification and after applying its mind and, upon a scrutiny of the evidence and other material placed before it, passed a speaking order dated 24.11.2004 under Section 143 (3) of the Act computing the total income of the petitioner at Rs.5,02,34,840/-. The assessment order indicated the taxability of the income of the petitioner which was earned from inside activities in India and operations outside India. The relevant portion of the assessment order passed under Section 143 (3) of the Act is extracted hereunder :- “3. It may now be seen that the income of the assessee has been computed at Rs.5,02,16,381/- by considering 10% of the contractual revenues from the work done 3 inside India after claiming deduction of sub-contractions cost covered by TDS and by considering cost covered by TDS and by considering 1% of the contractual revenues from the work done outside India based on the principle and rationale laid down in instruction No.1767 of CBDT, New Delhi. 4. The Assess NRC has filed the return claiming benefit of Double Taxation Avoidance Agreement between India and UAE (“the treaty”). As per Section 90(2) of the IT Act, 1961 the assessee can compute its income either under the DTAA or under the Income Tax Act, 1961, whatever is more beneficial to it. The DTAA being more beneficial to the assessee NRC, the assessee has claimed the benefit of Article 7(3) which lays down that expenses incurred for the purposes of its business of the Permanent Establishment (“PE”) including executive general administrative expenses will be allowed. Expenses, therefore, claimed towards sub-contractors covered by TDS are, therefore, likely to be allowable if it is incurred for the purposes of business. 5. The submissions made by the assessee has been perused with the Article 7 Para 3 which says “In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere.” 6. During the financial year under consideration the assessee received revenues from ONGC vide contract No.ZA WELL PLATROM (ZA-PWW) Project (Job No.37) and contract No.MRBC/E&C/MM/ZA-WPP/02/2000. In the previous assessment years the gross total income of the assessee was arrived at after allowing sub- contractors & other cost as deduction from the gross receipts (on which tax has been deducted at source) and on the balance amount, 10% was estimated as taxable profits of the assessee under Article 7(3). The provision of Article 7(6) of the DTAA provides that profit of PE shall be determined by the same method year by year unless there is good and sufficient reasons to the contrary. Therefore, for this year also assessment is being completed on the same method as adopted in the assessee’s own case for the previous assessment years.” 5. After a lapse of more than four years, the Assessing Officer issued a notice dated 31st March, 2009 under Section 148 of the Act calling upon the petitioner to show cause as to why the reassessment proceedings should not be initiated on the ground 4 that the income of the petitioner company has escaped assessment. Pursuant to the impugned notice, the petitioner furnished its return of income under protest objecting to the proceedings initiated by the Assessing Officer and requested that a copy of the reasons recorded for reopening the assessment proceedings be supplied. The reasons recorded was subsequently supplied to the petitioner. For facility, the extract of the reasons recorded under Section 148 of the Act is quoted hereunder :- “The assessee company is incorporated under the laws of United Arab Emirates Return of income declaring income of Rs.5,02,34,830/- was filed on 29.10.2002. Later on the case was selected for scrutiny and accordingly assessment was completed under Section 143(3) vide order dated 24.11.2004 on total income of Rs.5,02,16,381/- and income from other sources Rs.18,459/- the assessee company has claimed to be assessed under DTAA with India and UAE. The company has claimed gross revenues of US$ 10,35,389 and offered revenues of US$ 87,16,938 for inside operations @ 10% and Revenues of US$ 1,63,69,535 for outside India operations have been offered for being taxed @ 1%. Accordingly assessment was completed on total income of Rs.5,02,16,381/- as under:- Particulars US$ US$ Work Inside India Gross Revenues 90,34,215 Less :- Sub contractors cost 3,17,275 Net revenues 87,16,939 Profits @ 10 % 8,71,694 Work Outside India Profit @ 1% 1,63,695 10,35,389 Total Taxable income converted into INR 5,02,16,381 Income from other sources 18,459 The assessee has shown gross receipts to the extent US$ 90,34,215/- in respect of inside India operation and has claimed expenses to the extent of Rs. US$ 3,17,275 in respect of which TDS was deductible. No P&L A/c and Balance Sheet has been filed. Similarly, the assessee has shown outside India revenues to the extent of US$ 1,63,69,535 and has offered 1% of the same for taxation. As the return of the income has been filed in view of the provisions of DTAA and the assessee was supposed to file the P&L A/c and Balance Sheet alongwith return of income which has not been filed. The assessee’s incomes from outside India is required to be brought to tax in view of the decision of Hon’ble Supreme Court in the case of Hyundai Heavy Industries wherein it has been observed that “the attraction rule implies that when an enterprise (GE) sets up PE in another country, it brings itself within the fiscal jurisdiction of that another country to such a degree that such another country can tax all profits from the GE derives from the source country whether though PE or not. It is the act of setting out a PE which triggers the taxability of transaction in the source State and other applicable ruling of the Hon’ble Court”. Keeping in view of above, I have reasons to believe that income of the assessee as alleged to have earned outside India has escaped assessment as the same has been offered to tax only 1% of the gross revenues whereas the same should have been assessed in view of the provision of the DTAA. The income escaping assessment is more than Rs.1 Lacs.” 6. Pursuant to the procedure evolved by the Supreme Court in the case of GKN Driveshafts (India) Ltd. Vs. Income Tax Officer & others 259 I.T.R. 19 (SC), the petitioner filed a detailed objection questioning the validity of the proceedings initiated under Section 147 & 148 of the Act. The petitioner submitted that in the reasons recorded, there is no allegation or even a whisper that the assessee had failed to disclose fully and truly all material facts which is sine-quo-non for initiating 6 proceeding under Section 147 of the Act. The petitioner submitted that in the absence of any allegation that the assessee has failed to disclose fully and truly all material facts, no proceedings could be initiated under the proviso to Section 147 of the Act after the expiry of 4 years from the end of the relevant assessment year. The petitioner further submitted that there was no satisfaction of the Assessing Officer to the effect that there has been a failure on the part of the assessee to disclose fully and truly all material facts nor the allegation that the assessee has failed to disclose fully and truly all material facts emanates from the “reasons to believe” nor does it exists. In the light of the aforesaid, the petitioner submitted that the proceedings initiated under Section 147 & 148 of the Act was barred by limitation. It was further submitted that the reasons to believe recorded by the Assessing Officer was nothing else, but a change of opinion which was not permissible and that the reassessment proceedings which has been initiated does not bring on record any new fact or information to substantiate that any income chargeable to tax has escaped assessment. 7. The Assessing Officer, by its order dated 15.12.2009, rejected the contention of the petitioner holding that a valid notice has been issued under Section 148 of the Act. The Assessing Officer held that even though, the notice was issued after the expiry of 4 years, nonetheless, the case was reopened before 6 years upon an approval being granted by the Commissioner who was satisfied that the assessee had not disclosed fully and truly all material facts and therefore there was a clear cut failure on the part of the assessee. The Assessing Officer contended that no profit and loss account was submitted with the return of income which was mandatory in law. The description of revenues disclosed by the assessee being done inside India and outside India was not divisible on account of the fact that the contract executed was a turnkey contract which was signed and executed in India and that the assessee had misled the Income Tax Department in thinking that there were two separate contracts. It was further contended that the assessee had misled the department that it does not have a Permanent Establishment (P.E.) in India whereas it had a P.E. in India for negotiation and execution of the contract. It was further pointed out that the assessee had misled the department into thinking that the inside India works started only at the time of installation, whereas the projects started from the day the agreement was executed and therefore there was a clear cut failure on the part of the assessee to disclose fully and truly all material facts. It was submitted that in view of the decision of the Supreme Court in the case of Commissioner Income Tax & another Vs. Hyundai Heavy Industries Co. Ltd. 291 I.T.R. 482 (SC), the P.E. of the assessee came into existence before the project started and none of the material was supplied to ONGC outside India and in fact the title of the goods were transferred in India. 8. The petitioner, being aggrieved by the aforesaid notice and the order passed by the Assessing Officer, has filed the present writ petition. 9. In the light of the aforesaid facts, the court has heard Mr. C. S. Agarwal, the learned senior counsel assisted by Mr. P. R. Mullick, the learned counsel for the petitioner and Mr. Arvind Vashisht, the learned counsel assisted by Mrs. Monika Pant, the learned counsel for the respondents. 10. The learned senior counsel for the petitioner submitted that the notice issued under Section 148 of the Act does not contain any reason and, therefore, on this short ground, the notice was liable to be quashed. In support of his submission, the learned senior counsel for the petitioner placed reliance upon a decision of Delhi High Court in Haryana Acrylic Manufacturing Co. Vs. Commissioner of Income Tax & another 308 I.T.R. 38. The learned senior counsel for the petitioner further submitted that in the reasons recorded there is no whisper that the assessee has failed to disclose fully and truly all material facts necessary for the assessment and in the absence of any satisfaction being recorded by the Assessing Officer to this effect, no proceedings for reassessment could be initiated in view of the embargo imposed under the proviso to Section 147 of the Act. In support of his submission, the learned senior counsel placed reliance upon a decision in I.B.M. World Trade Corporation Vs. N. D. Bhatt, IAC of Income Tax, Foreign Companies Range-I, Bombay & another 138 I.T.R. 742 and McDermott International Inc. Vs. Additional Commissioner of Income Tax & other 259 I.T.R. 138. 11. On the other hand, Mr. Arvind Vashisht, the learned counsel for the Income Tax Department submitted that the writ petition was not maintainable and was liable to be dismissed on the ground of alternative remedy. The learned counsel for the department submitted that pursuant to the proceedings initiated under Section 147 of the Act, a draft assessment order has been issued by the Assessing Officer. The petitioner has objected to the draft assessment order and has filed its objection before the Dispute Resolution Panel under Section 144 C of the Act. The Panel has issued certain directions on the basis of which the Assessing Officer has passed a final assessment order. Consequently, the learned counsel submitted that the petitioner has an alternative remedy to challenge the assessment order 9 before the Tribunal and that the writ petition has been rendered infructuous. 12. On the merits of the case, the learned counsel for the Income Tax Department submitted that there is no requirement to furnish reasons while issuing a notice under Section 148 of the Act and that reasons so recorded for reopening the proceedings were duly supplied to the petitioner. The learned counsel for the department further submitted that in the reasons recorded for reopening the proceedings, it was sufficient for the Assessing Officer to record that he has reasons to believe that the income chargeable has escaped assessment and that it was not necessary that the reasons should record that the assessee had failed to disclose fully and truly the material facts necessary for his assessment. In support of his submission, the learned counsel for the department placed reliance upon the decision of the Supreme Court in Calcutta Discount Co. Ltd. Vs. Income- Tax Officer, Companies District I, Calcutta & another, 41 I.T.R. 191. The learned counsel further submitted that the Assessing Officer, while passing the assessment order under Section 143 (3) of the Act, had relied mechanically on the assessment made in the earlier assessment years and consequently on the basis of the information gathered by the department, reassessment proceeding has been initiated. The learned counsel further submitted that the satisfaction recorded by the Assessing Officer that he has reasons to believe that the income chargeable to tax has escaped assessment was based on relevant facts which did not amount to a change of opinion. 13. In the light of the rival stand adopted by the parties, it would be appropriate for the court to deal with the preliminary objection raised by the learned counsel for the department with regard to the maintainability of the writ petition. 14. On 24.12.2009, the court passed an interim order which is extracted hereunder:- “Mr. C. S. Agarwal, Senior Advocate assisted by Mr. P. R. Mullick, Advocate for the petitioner. Mr. Arvind Vashisth, Advocate for the respondents. Counter affidavit to be filed within three weeks. Rejoinder affidavit to be filed within two weeks thereafter. List this matter on 9.2.2010 in the daily cause list. Meanwhile the assessing authority shall proceed with the reassessment of the matter under Section 147 of the Income Tax Act and pass appropriate orders thereon in accordance with law. However, the orders passed therein shall not be given effect to except by leave of this Court.” 15. Subsequently, the writ petition was admitted on 01st July, 2010 and the interim order dated 24.12.2009 was modified to the extent that the Assessing Officer was restrained from passing a final assessment order till the next date of listing, the order dated 01st July, 2010 is extracted hereunder:- “Mr. C. S. Agarwal, Senior Advocate assisted by Mr. P. R. Mullick, Advocate for the petitioner. Mr. Arvind Vashisth, Standing Counsel (Income Tax) for the respondents. Heard learned counsel for the parties. Admit the petition. The interim order dated 24.12.2009, passed by this court, is modified to the extent that the Assessing Officer shall not pass final assessment till the next date of listing. Other proceedings may go on. Counter and rejoinder affidavits between the parties have already been exchanged. List on 12.08.2010 for final hearing.” 16. The matter could not be decided and the interim order was extended from time to time. On 18th September, 2010, the interim order was extended till the disposal of the writ petition. The order dated 18.09.2010 is extracted hereunder:- “Mr. C. S. Agarwal, the learned senior counsel for the petitioner. Mr. Arvind Vashist, the learned counsel for the respondents. Heard the learned senior counsel for the petitioner at length. The hearing is not concluded. List this matter for further hearing on 05th October, 2010. Interim order, if any to continue till the disposal of the writ petition.” 17. The matter, at that stage, was pending before the Dispute Resolution Panel. It transpires that the Dispute Resolution Panel issued certain directions, by its order dated 30th September, 2010, to the Assessing Officer, pursuant to which, the Assessing Officer passed a final assessment order dated 29th October, 2010 alongwith a notice of demand under Section 156 of the Act. The said assessment order and the notice of demand was passed in gross violation of the interim order dated 01st July, 2010 by which the Assessing Officer was restrained from passing any final assessment order. The petitioner, being aggrieved by the issuance of the final assessment order and issuance of a demand notice under Section 156 of the Act, filed an amended writ petition before this Court which could not be taken on record since there was no application praying to amend the writ petition nor was there any order of the court permitting the petitioner to amend the writ petition or file an amended writ petition. Consequently, till the hearing of the petition, the petitioner chose not to file an application to amend the writ petition, but, submitted that all orders passed by the Assessing Officer in contravention to the interim order dated 01st July, 2010 was a nullity and that any subsequent action taken by the respondents would also be a nullity in the eyes of law. 18. In Surjit Singh Vs. Harbans Singh AIR 1996 SC 135, the Supreme Court held:- “4. ……………………………. In defiance of the restraint order, the alienation/assignment was made. If we were to let it go as such, it would defeat the ends of justice and the prevalent public policy. When the Court intends a particular state of affairs to exist while it is in seisin of a lis, that state of affairs is not only required to be maintained, but it is presumed to exist till the Court orders otherwise. The Court, in these circumstances has the duty, as also the right, to treat the alienation/assignment as having not taken place at all for its purposes.” 19. Similarly, in All Bengal Excise Licensees Association Vs. Raghabendra Singh & others AIR 2007 SC 1386, the Supreme Court held that a party to the litigation cannot be allowed to take an unfair advantage by committing breach of an interim order. The Supreme Court further held :- “A party to the litigation cannot be allowed to take an unfair advantage by committing breach of an interim order and escape the consequences thereof. By pleading misunderstanding and thereafter retaining the said advantage gained in breach of the order of the Court and the wrong perpetrated by the respondent-contemnors in contumacious disregard of the order of the High Court should not be permitted to hold good. In our opinion, the impugned order passed by the High court is not sustainable in law and should not be allowed to operate as a precedent and the wrong perpetrated by the respondent- contemnors in utter disregard of the order of the High Court should not be permitted to hold good.” 20. In Gurunath Manohar Pavaskar Vs. Nagesh Siddappa Navalgund AIR 2008 SC 901, the Supreme Court held that a Court, in exercise of its inherent jurisdiction under Section 151 of the Code of Civil Procedure, 1908, in the event of coming to the conclusion that a breach to an order of restraint had taken place, may bring back the parties to the same position as if the order of injunction had not been violated. The Supreme Court held that any order passed by an authority having knowledge of the interim order of the court, was of no consequence and that the said order remained a nullity in the eyes of law. The Supreme Court held that the order passed by the State Government in contravention of the interim order remains unenforceable and in-executable. 21. In P.K. Nair Vs. I.T.O. A-Ward Alwaye & others 90 I.T.R. 512 (Kerala), it was held :- “We have already referred to the question whether we will justified in interfering in view of the assessment orders having been passed for the five years after we issued notice on this petition. We think the procedure will have to be following by us. Any assessments completed during the pendency of this writ application, we consider, must depend on the decision that we take in this case and if there was no jurisdiction to take action under Section 147 of the Act the whole proceedings are vitiated as without jurisdiction and it necessarily follows that the assessment orders that followed such action cannot stand. We think that in the interest of justice the assessment orders should be set aside. 22. In the light of the aforesaid, a party to the litigation could not be allowed to take unfair advantage by committing a breach of the interim order and thereafter turn around and contend that the writ petition has been rendered infructuous and that the petitioner has an alternative remedy which