Case: Monitor India Private Limited Vs. The Union of India & Another

ORAL JUDGMENT: DR. D.Y. CHANDRACHUD, J.1. Rule; with the consent of Counsel for the parties returnable forthwith. With the consent of Counsel and at their request the Petition is taken up for hearing and final disposal.2. The challenge in these proceedings is to a notice that was issued to the Petitioner on 22 March 2011 under Section 148 of the Income Tax Act, 1961, by which an assessment for Assessment Year 2004-05 is sought to be reopened. The Petitioner is a subsidiary of a Dutch Company, Monitor Group Holdings Netherlands B.V., which in turn is a wholly owned subsidiary of Monitor Company Group L.P. United States. The U.S. based principal is an international strategy consulting firm. During the course of Assessment Year 2004-05, the Petitioner made a payment of Rs. 1.56 crores to its U.S. based principal. This, according to the Petitioner, was a reimbursement for costs incurred for providing Group Management, Finance and Benefits, Training and Professional Development, Information Resources and allocations of human resources services to the Petitioner. On 12 October 2004, the Petitioner filed an application under Section 195(2) to the Deputy Commissioner of Income Tax, CircleI(2), International Taxation, New Delhi. The application sought a no objection certificate authorising the Petitioner to remit the amount to its U.S. principal without deduction of tax at source. According to the Petitioner, the amount was not chargeable to tax in India as it represented reimbursement of expenses incurred on behalf of the Petitioner. The Petitioner filed a return of income on 1 November 2004 for Assessment Year 2004-05 declaring a total income of Rs.1.53 crores. The computation of total income disclosed expenses allocated by a Group Company on which tax has not been deducted at source in the amount of Rs. 1.56 crores. Note 4 appended to the return of income contained the following disclosure:4. The company has filed an application under Section 195 in respect of such corporate allocations payable by the assessee to Monitor Company Group Limited Partnership (Monitor Company). Monitor Company provides administrative and management support services to Monitor India. In this connection costs incurred by Monitor Company for which the various cost centres are identified and costs are allocated at actuals to various subsidiaries globally that benefit from the service provided. The costs so allocated to Monitor India are reimbursed by Monitor India to Monitor Company at actuals and there is no markup. Hence, the assessee feels that there is no income tax liability arising on such corporate allocations and the company is hopeful of a nil order of withholding. But pending the order from the Revenue authorities this amount has been disallowed. The assessee reserves the right to revise the return after receipt of favourable order.The Profit and Loss Account contained inter alia a disclosure of operating and other expenses in Schedule 10. Schedule 10 contains a reference to expenses allocated by a group Company in the amount of Rs. 1.56 crores. The note to account inter alia contain the following note:(e) Corporate Allocation:Corporate allocation represents proportionate and specific costs incurred by ultimate holding company on behalf of the Company. Such expenses have been charged in the accounts on the basis of advice received from ultimate holding Company.Besides, there was also a statement to the effect that the Petitioner was in the process of filing an application before the Income Tax Authority for not withholding tax on expenses allocated by a Group Company amounting to Rs. 1.56 crores. However, it was stated that income tax provision for the year has been made by considering it as an inadmissible expenses. In the Tax Audit Report which was furnished together with the income tax return, the Petitioner disclosed in Item 17 amounts debited to the profit and loss account inter alia as being inadmissible under Section 40(a). Against Item 17(f) was a reflection of the expenses allocated by a Group Company of Rs.1.56 crores. However, there was a statement to the effect that the Petitioner had filed an application before the Income Tax Authorities for not withholding tax on those expenses.3. On 15 March 2005, an order was passed on the application made by the Petitioner under Section 195(2) by which the Petitioner was authorised to remit a total sum of Rs. 1.74 crores to the U.S. Company without deducting withholding tax on the amount which represented reimbursement of expenditure incurred by the Payee for providing support services to the Petitioner. The Petitioner filed a revised return of income on 1 April 2005. In the revised return, an amount of Rs. 1.56 crores was claimed as a deduction. In the original return of income that amount had been added back and had been treated as a disallowance of expenditure in Note 4 which has been adverted to above. In the revised computation, the amount of Rs. 1.56 crores was not added back. A covering letter was filed with the revised return dated 23 March 2005 stating that in the original return of income, the amount of Rs.1.56 crores was recorded as disallowance for reasons explained in Note4. Following the receipt of an order under Section 195, the amounts which had been disallowed earlier were claimed as allowable expenditure against the taxable income computed.4. During the course of the assessment proceedings, the Petitioner furnished an explanation on 14 September 2005 explaining the basis for filing a revised return. The allocation agreement which was entered into between the Petitioner and the U.S. principal and the methodology followed in computing the expenditure allocated and copies of the relevant documents were annexed. The Assessing Officer by a notice dated 9 November 2006 under Section 143(2) sought details. This was followed by a further notice dated 14 November 2006 seeking an explanation in respect of the reason and services involved for the reimbursement of expenditure by the Petitioners associate enterprises. A determination of how the quantum had been arrived at was also sought. The Petitioner submitted an explanation on 27 November 2006. Once again on 30 November 2006, a further disclosure was required by the Assessing Officer seeking a breakup of the expenditure of Rs.1.56 crores. The Petitioner responded on 12 December 2006 and while furnishing a response submitted that payments received by the U.S. based principal from the Petitioner were in the nature of reimbursement of expenses. Hence, it was urged that there was no real income earned by the U.S. Company and since the same was not taxable, no withholding tax was required. On 19 December 2006, a reconciliation was submitted by the Petitioner of the amount disclosed as allocation fees in the application submitted under Section 195.5. An order of assessment was passed on 20 December 2006. The Assessing Officer accepted the business income as computed in the revised return of income.6. A notice has been issued to the Petitioner under Section 148 on 22 March 2011. The following reasons have been disclosed to the Petitioner for reopening the assessment:It is evident that the assessee had made application for non-deduction of TDS after the books for the period under consideration, i.e. A.Y. 200405 had been finalized and the amount of Rs.1.56 crore had already been credited to the account of Monitor Company. It has been clarified vide Circular 774 of 1999 that, any certificate u/s.197 is valid only for payments or credit made after the date on which certificate has been issued. As the assessee had already credited the amount to the account of the company in its books, the said certificate for nondeduction of tax is not valid in respect of payment of Rs. 1.56 crore, as the certificate was issued after the amount of Rs.1.56 crore had been credited in the books. Further, the amount mentioned in the certificate also does not tally with the amount credited/paid by the assessee for the period under consideration for which the certificate has been issued.The Petitioner submitted objections to the reopening of the assessment which have been disposed of by an order dated 27 July 2011.7. Counsel appearing on behalf of the Petitioner submitted that (i) The reopening of the assessment, beyond a period of four years in the present case, is based on a mere change of opinion; (ii) There was no failure on the part of the Petitioner to disclose fully and truly all material facts necessary for assessment, nor is it even alleged that there was any failure of that nature; (iii) The only basis on which the assessment is sought to be reopened is that the certificate that was issued under Section 197 was not valid. This is fallacious because, in the first place, the certificate was sought and given under Section 195. Moreover, the certificate which has been issued to the Petitioner continues to remain valid and has not been revoked; (iv) In the reasons which have been furnished to the Petitioner, there is not even a reference as to how the payment which is made by the Petitioner to its U.S. principal is chargeable to tax. Section 195 applies only where any sum is chargeable to tax; and (v) The Petitioner had disclosed fully and truly all material facts necessary for the assessment,including the payment made, the fact that it was a reimbursement, the agreement with the foreign principal, the manner of allocation expenses and the order under Section 195(2). Consequently, the jurisdictional condition for reopening the assessment beyond four years has not been fulfilled.8. On the other hand, Counsel appearing on behalf of the Revenue submits that (i) Section 195 makes no distinction between a credit and payment. Since the amount was credited in the books of account of the Petitioner as of 31 March 2004, withholding tax was liable to be deducted. The application was made under Section 195 on 12 October 2004 much after the credit was taken. In these circumstances, the Assessing Officer had reason to believe that income has escaped assessment; (ii) In the reply that was filed by the Petitioner during the course of the assessment proceedings on 12 December 2006, no details were furnished to the Assessing Officer of how the payment which was made to the foreign principal represented reimbursement. The Assessing Officer proceeded to accept the computation of income as made in the revised return without a proper enquiry. In these circumstances, there was a valid basis to reopen the assessment even beyond a period of four years.9. The rival submissions now fall for determination.10. The basis on which the assessment for Assessment Year 2004-05 is sought to be reopened is set out in the reasons which were disclosed to the Petitioner on 22 March 2011. The reasons set out that the Petitioner made an application for nondeduction of TDS after the books for Assessment Year 2004-05 had been finalized and the amount of Rs.1.56 crores had been credited to the account of the U.S. Company. According to the Assessing Officer, under Circular 774/99, a certificate under Section 197 is valid only for payment or credits made after the date on which a certificate had been issued. Since the Petitioner had already credited the amount in its books of account, the Assessing Officer has opined that the certificate for nondeduction of tax is not valid in respect of the payment of Rs.1.56 crores. Moreover, it has been stated that the amount mentioned in the certificate does not tally with the amount credited or paid by the Petitioner. Now, reading the reasons as they stand, it is evident that there is not even an allegation to the effect that there was a failure on the part of the Petitioner to fully and truly disclose all material facts necessary for the assessment. But for the purposes of the present discussion, it is not necessary to rest the view which we are inclined to take, merely on the absence of any averment that there was a failure to disclose on the part of the Petitioner. The record before the Court indicates that even when the original return was filed, the Petitioner had in the note (Note4) annexed to the return of income, expressly clarified that the Petitioner had filed an application under Section 195 in respect of the corporate allocation payable to its principal. The Note indicated that the principal provided administrative and management support services and the costs which were incurred were allocated at actuals to various subsidiaries globally that benefited from the service provided. The Petitioner stated that the costs which were allocated were reimbursed to the foreign principal at actuals and that there was no markup. The Petitioner stated that it believed that there was no income tax liability arising on such corporate allocations and the company was hopeful that a nil order of withholding would be passed. However, pending the order from the Revenue authorities, the amount was treated as being disallowed, but the Petitioner reserved its right to revise the return after receipt of the order from the Revenue. This was also duly elaborated upon in the Profit and Loss Account as well as in the Tax Audit Report. After an order was passed under Section 195(2) on 15 March 2005, a revised return of income was filed on 1 April 2005. During the course of the assessment proceedings, the Assessing Officer made enquiries specifically in regard to the manner in which the allocation has been made and sought an explanation from the Petitioner both in regard to the basis and quantum of the allocation. During the course of the replies which were supplied by the Petitioner during the course of the assessment proceedings, the Petitioner disclosed the following facts: (i) That a payment was made in the amount of Rs.1.56 crores by the Petitioner to its foreign principal; (ii) The payment which was made represented a reimbursement on the basis of actuals to the foreign principal in respect of costs incurred on behalf of the Petitioner for providing services; (iii) That there was an agreement between the Petitioner and the foreign principal, a copy of which was placed on record; (iv) The allocation of expenses was carried out in accordance with the methodology which was placed on record; (v) An order had been passed under Section 195(2) by the Assessing Officer. There was, therefore, in these circumstances, a full disclosure of all primary and material facts necessary for the assessment. As we have noted earlier, the Assessing Officer has not even indicated in the reasons that have been recorded that there was any failure to disclose fully and truly all material facts. But quite apart from the facts and as indicated above, we find merit in the contention of the Petitioner that there was a full and true disclosure of all necessary material for assessment for Assessment Year 2004-05.11, The assessment has been sought to be reopened purely on the basis that (i) A certificate was issued to the Petitioner under Section 197; (ii) That by virtue of Circular 774/99 a certificate under Section 197 would be valid only for payment or credit made after the issuance of the certificate; and (iii) Since the Petitioner had already credited an amount in its books, the certificate was not valid. The Assessing Officer has, in our view, erroneously proceeded on the basis that the certificate was issued under Section 197. The certificate, as a matter of fact, was issued on an application that was filed under Section 195(2) and was a certificate under that provision. But perhaps more fundamental is the fact that the provisions of Section 195 are attracted where any person is responsible for paying to a nonresident any interest or any other sum chargeable under the provisions of the Act. It is in such cases that the requirement of deducting income tax at the time of credit of such income to the account of the Payee or at the time of payment arises. The Assessing Officer has, in the reasons which have been recorded, made no reference at all to whether the payment which was effected to the foreign principal represented income chargeable under the provisions of the Act. The contention of the Petitioner all along has been that this payment represented only a reimbursement of costs incurred and should, therefore, not be treated as income. On this aspect, the reasons contain no disclosure to the effect that the Assessing Officer is of the view that this represented income which was chargeable.12. In the circumstances, having regard to the fact that the reopening of the assessment has taken place beyond a period of four years of the end of the relevant Assessment Year, we find merit in the case of the assessee that the jurisdictional condition for reopening of the assessment has not been fulfilled. There has been clearly no failure on the part of the Petitioner to disclose fully and truly all material facts necessary for the assessment. Moreover, as we have noted earlier that is not even the case of the Assessing Officer for reopening of the assessment.

Decision reasoning: 1[ds]10. The basis on which the assessment for Assessment Yearis sought to be reopened is set out in the reasons which were disclosed to the Petitioner on 22 March 2011. The reasons set out that the Petitioner made an application fornondeduction of TDS after the books for05 had been finalized and the amount of Rs.1.56 crores had been credited to the account of the U.S. Company. According to the Assessing Officer, under Circular 774/99, a certificate under Section 197 is valid only for payment or credits made after the date on which a certificate had been issued. Since the Petitioner had already credited the amount in its books of account, the Assessing Officer has opined that the certificate for nondeduction of tax is not valid in respect of the payment of Rs.1.56 crores. Moreover, it has been stated that the amount mentioned in the certificate does not tally with the amount credited or paid by the Petitioner. Now, reading the reasons as they stand, it is evident that there is not even an allegation to the effect that there was a failure on the part of the Petitioner to fully and truly disclose all material facts necessary for the assessment. But for the purposes of the present discussion, it is not necessary to rest the view which we are inclined to take, merely on the absence of any averment that there was a failure to disclose on the part of the Petitioner. The record before the Court indicates that even when the original return was filed, the Petitioner had in the note (Note4) annexed to the return of income, expressly clarified that the Petitioner had filed an application under Section 195 in respect of the corporate allocation payable to its principal. The Note indicated that the principal provided administrative and management support services and the costs which were incurred were allocated at actuals to various subsidiaries globally that benefited from the service provided. The Petitioner stated that the costs which were allocated were reimbursed to the foreign principal at actuals and that there was no markup. The Petitioner stated that it believed that there was no income tax liability arising on such corporate allocations and the company was hopeful that a nil order of withholding would be passed. However, pending the order from the Revenue authorities, the amount was treated as being disallowed, but the Petitioner reserved its right to revise the return after receipt of the order from the Revenue. This was also duly elaborated upon in the Profit and Loss Account as well as in the Tax Audit Report. After an order was passed under Section 195(2) on 15 March 2005, a revised return of income was filed on 1 April 2005. During the course of the assessment proceedings, the Assessing Officer made enquiries specifically in regard to the manner in which the allocation has been made and sought an explanation from the Petitioner both in regard to the basis and quantum of the allocation. During the course of the replies which were supplied by the Petitioner during the course of the assessment proceedings, the Petitioner disclosed the following facts: (i) That a payment was made in the amount of Rs.1.56 crores by the Petitioner to its foreign principal; (ii) The payment which was made represented a reimbursement on the basis of actuals to the foreign principal in respect of costs incurred on behalf of the Petitioner for providing services; (iii) That there was an agreement between the Petitioner and the foreign principal, a copy of which was placed on record; (iv) The allocation of expenses was carried out in accordance with the methodology which was placed on record; (v) An order had been passed under Section 195(2) by the Assessing Officer. There was, therefore, in these circumstances, a full disclosure of all primary and material facts necessary for the assessment. As we have noted earlier, the Assessing Officer has not even indicated in the reasons that have been recorded that there was any failure to disclose fully and truly all material facts. But quite apart from the facts and as indicated above, we find merit in the contention of the Petitioner that there was a full and true disclosure of all necessary material for assessment for Assessment YearThe assessment has been sought to be reopened purely on the basis that (i) A certificate was issued to the Petitioner under Section 197; (ii) That by virtue of Circular 774/99 a certificate under Section 197 would be valid only for payment or credit made after the issuance of the certificate; and (iii) Since the Petitioner had already credited an amount in its books, the certificate was not valid. The Assessing Officer has, in our view, erroneously proceeded on the basis that the certificate was issued under Section 197. The certificate, as a matter of fact, was issued on an application that was filed under Section 195(2) and was a certificate under that provision. But perhaps more fundamental is the fact that the provisions of Section 195 are attracted where any person is responsible for paying to a nonresident any interest or any other sum chargeable under the provisions of the Act. It is in such cases that the requirement of deducting income tax at the time of credit of such income to the account of the Payee or at the time of payment arises. The Assessing Officer has, in the reasons which have been recorded, made no reference at all to whether the payment which was effected to the foreign principal represented income chargeable under the provisions of the Act. The contention of the Petitioner all along has been that this payment represented only a reimbursement of costs incurred and should, therefore, not be treated as income. On this aspect, the reasons contain no disclosure to the effect that the Assessing Officer is of the view that this represented income which was chargeable.12. In the circumstances, having regard to the fact that the reopening of the assessment has taken place beyond a period of four years of the end of the relevant Assessment Year, we find merit in the case of the assessee that the jurisdictional condition for reopening of the assessment has not been fulfilled. There has been clearly no failure on the part of the Petitioner to disclose fully and truly all material facts necessary for the assessment. Moreover, as we have noted earlier that is not even the case of the Assessing Officer for reopening of the assessment.