Oracle Financial Services Software Limited v. Assistant Commissioner Of Income Tax

Digitallysigned bySHRADDHASHRADDHAKAMLESHKAMLESHTALEKARTALEKARDate:2022.01.1218:07:06+0530 IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO. 3545 OF 2019 Oracle Financial Services Software Limitedvs. ...Petitioner 1. Assistant Commissioner of Income Tax,Circle (13(1)(1) & 2 Ors. ...Respondents Shri G.C. Srivastava a/w. Shri Sukhsagar Syal i/b Shri Sameer Dalal forpetitioner. Shri Akhileshwar Sharma for respondent Nos.1 and 2. CORAM :K.R. SHRIRAM &N. J. JAMADAR, JJ.DATE :10[th] JANUARY, 2022(THROUGH VIDEO CONFERENCE) P.C.: 1.At the outset, Shri Sharma points out that there is an error inparagraph 4 of the affidavit-in-reply filed by one Ashok Charan, affirmedon 20[th] March 2020 inasmuch as it is erroneously mentioned that theassessment is opened within a period of four years from the relevantassessment year. Shri Sharma states that there is another matter of thesame petitioner for a different assessment year and hence the error hascrept in. Shri Sharma prays that paragraph 4 of the affidavit-in-reply beconsidered as deleted. We accept the statement of Shri Sharma and orderaccordingly. Petitioner is impugning a notice dated 6[th] March 2019 issued under 2. section 148 of the Income Tax Act, 1961 ('The said Act') by respondentNo.1 seeking to reopen the assessment for the Assessment Year 2013-14and the order dated 18[th] October 2019 disposing of the objections raisedby petitioner. 3.Petitioner is engaged in the business of providing comprehensiveinformation technology solutions to banks and other financial institutionsworldwide. Petitioner develops and markets software products andoperates in primarily in two business segments : (i) Products and (ii)Services. Under the product business, petitioner markets its packageapplication software and derives revenue from license fee, customizationfee and annual maintenance charges. Under the Service business,petitioner provides services to customers which includes IT solutions andconsulting and professional services according to customer's requirementsand standards. 4.Petitioner has subsidiaries in different countries, who function as avalue added distributors and market/distribute software products andservices in their respective jurisdictions. 5.Each of the subsidiaries scout for potential customers, negotiate the terms of sale and enter into contracts with them for selling petitioner’sproducts and services, in their respective jurisdictions. For distributing thesoftware products and services of petitioner to foreign customers thereexists a ‘Marketing Service Agreement’ between petitioner and its overseassubsidiaries (‘MSA’). 6.Having entered into contracts with customers, the overseassubsidiaries, in turn, subcontract some of the contract work to petitioner,for the task of execution. 7.The installation and implementation of the product at the locationof the overseas customers requires the presence and supervision oftechnical personnel. These personnel are temporarily seconded bypetitioner on employment basis to the overseas subsidiaries to performsuch functions. During the period of secondment, the personnel are kepton employment and payroll of the overseas subsidiaries, which, meetstheir salary and related expenses. In terms of the Marketing ServicesAgreement entered into between petitioner and the overseas subsidiaries,these expenses are then reimbursed by petitioner to the said subsidiaries,on a cost to cost basis. 8.For the assessment year under consideration, A.Y. 2013-14,petitioner filed its return of income on 29[th] November 2013. The return ofincome was processed and an intimation under section 143(1) of the Actwas issued. 8.For the assessment year under consideration, A.Y. 2013-14,petitioner filed its return of income on 29[th] November 2013. The return ofincome was processed and an intimation under section 143(1) of the Actwas issued. 9.Petitioner's case was selected for scrutiny assessment and in thecourse of assessment, petitioner filed, inter-alia, a copy of its AuditedFinancial Statements, Tax Audit report in Form 3CD under section 44AB ofthe Act and Accountant’s report in Form 3CFB under section 92E of theAct. In the course of assessment proceedings, petitioner was asked to filedetails of foreign remittances made by it. In its reply dated 6[th] December2016, petitioner explained that the foreign remittance made by it duringthe year were towards reimbursement of expenses incurred by theoverseas subsidiaries on its behalf. Petitioner filed necessary detailsincluding Form 15CA and Form 15CB which contained details ofremittances made to foreign companies and Accountant’s report onwhether such remittances required deduction of tax at source or not.Several invoices and debit notes raised by the overseas subsidiaries onpetitioner for reimbursing the employees cost were also filed. 10. A Reference was made by respondent No.1 to joint Commissioner ofIncome Tax, Transfer Pricing Officer, 3(1), Mumbai (‘TPO’). TPO gave areport/order dated 20[th] September 2016. 11. An Assessment order came to be passed on 27[th] February 2017.More than four years after relevant assessment year, petitioner receivedthe impugned notice dated 6[th] March 2019 under section 148 of the Act.Petitioner also received by a communication dated 31[st] May 2019, thereasons for reopening the assessment. Paragraph Nos. 2, 3, 4, 5 and 6 ofthe reasons read as under : 2. It is found from Note 31 (expenditure in foreigncurrency) of the Financial Statements for A.Y. 2013-14 of theassessee company that the assessee has debited a amount ofRs.655.277 Crores as ‘Employees Costs’. 3 It is pertinent to mention here that in A.Y. 2015-16, anamount of Rs.693.406 Crore is debited as employee cost. Outof total employee cost of Rs.693.406 Crore, a sum ofRs.626.416 Crore (90.33% of 693.406) has been disallowedu/s. 40(a)(i) of the Act as per various Double TaxationAvoidance Agreements (DTAAs) for non-deduction of TDS u/s.195 of the Act in assessment order u/s. 143(3) of the Act.This amount of Rs.626.416 crore is termed as ‘reimbursementof the employee salary and related expenses’ as persubmission made by the assessee company. 4. During the scrutiny assessment for A.Y. 2015-16, theassessee had contended that payments made on account ofsalary expenditure are mere reimbursement of expenseswithout any markup, which was actually incurred by theforeign subsidiaries on behalf of the Indian company. Further,stated that these expenses are incurred during the course ofbusiness activity of the Indian company for earning incomefrom the sources situated outside India and hence the same is not taxable as Fee for Technical Services (FTS). Also,submitted that there was no service made available to theIndian company due to the fact that the service was actuallyrendered by the Indian company. However, the contentions ofthe assessee were rejected on the following grounds : ……… 5. The nature of expenses under the head ‘Employee Cost’in the note 30 in the financial year i.e., F.Y. 2014-15 and inNote 31 in F.Y. 2012-13 is the same. Although further break-upof employee cost of Rs.655.277 Crore in A.Y. 2013-14 is notavailable on record, a sum of Rs.591.911 Crore (90.33 % oftotal employee cost) is liable to be disallowed on pro-ratabasis in A.Y. 2013-14 being reimbursement of employee salaryand related expenses as it is similar to the nature of amount ofRs.626.416 Crores in the A.Y. 2015-16. ………. ……… 5. The nature of expenses under the head ‘Employee Cost’in the note 30 in the financial year i.e., F.Y. 2014-15 and inNote 31 in F.Y. 2012-13 is the same. Although further break-upof employee cost of Rs.655.277 Crore in A.Y. 2013-14 is notavailable on record, a sum of Rs.591.911 Crore (90.33 % oftotal employee cost) is liable to be disallowed on pro-ratabasis in A.Y. 2013-14 being reimbursement of employee salaryand related expenses as it is similar to the nature of amount ofRs.626.416 Crores in the A.Y. 2015-16. ………. 6. It is pertinent to mention here that assessmentrecords for A.Y. 2013-14 is duly perused and it is found thatthe issue in question here is neither discussed nor consideredand examined by way of any questionnaire, order-sheet,noting and assessee’s submission during the originalassessment proceedings and the assessing officer has not givenany opinion on the issue in the A.Y. 2013-14. Therefore, thereopening or assessment does not involve any change ofopinion.………….” 12. Since the reopening has been proposed more than four years afterrelevant assessment year and as scrutiny assessment under section 143(3)of the Act has been completed, proviso to section 147 of the Act applies.In view thereof, the onus is on respondents to show that there was failureon the part of petitioner to truly and fully disclose material facts.Respondents have thought it necessary to reopen on two grounds: first, ina later assessment year, i.e., assessment year 2015-16, the contention ofassessee that payments made on account of salary expenditure are mere reimbursement of expenses without any markup, and these expenses wereincurred during the course of business activity of the Indian company forearning income from the sources situated outside India and there was noservice made available to the Indian company due to the fact that theservice was actually rendered by the Indian company were rejected. Thesecond ground is that the issue in question here, as noted in the reasons,was neither discussed nor considered and examined by way of anyquestionnaire, order-sheet noting an assessee’s submission during theoriginal assessment proceedings and the Assessing Officer has not givenany opinion on the issue and hence it does not involve change of opinion. 13. Shri Shrivastava straightaway went to deal with the second pointraised, non-consideration of the issue in the original assessmentproceedings and submitted that the Assessing Officer who has formed anopinion to reopen the assessment is not correct. 14. We also agree with Shri Shrivastava. If one considers thecommunication dated 6[th] December 2016, copy whereof is at Exh. ‘E’ tothe petition, from petitioner to the Deputy Commissioner of Income Tax13(1)(1), item 8 therein refers to details/nature of Foreign Remittances.The same reads as under : “We refer to the captioned notices, our submissions dated 6[th] May 2016, 28[th] July 2016, 23[rd] August 2016, 7[th] October 2016and 24[th] October 2016 and also to our time to time discussionswith your good-self for the captioned proceedings. In thisregard, we further submit as under : …………………. 8.Details/Nature of Foreign Remittances : During the course of the earlier hearing, your goodself hadasked us to provide details of foreign remittances made bythe Company. In this regard, we submit that details of theremittance (i.e. purpose of remittances, amounts, etc.) areappearing in the copy of ITS subsequently provided to us. In this regard, as would be noted from the ITS form, theforeign remittances made by the Company during the year,are towards reimbursement of expenses incurred byforeign group companies on the Company’s behalf, fees forprofessional and technical services, foreign tax payments,rent payments, insurance premium, referral commission,etc. In this regard, we are enclosing, as annexure J, samplecopies of Form 15CA / 15CB, alongwith relevant invoicecopies, which evidence the nature of the remittance.” During the course of the earlier hearing, your goodself hadasked us to provide details of foreign remittances made bythe Company. In this regard, we submit that details of theremittance (i.e. purpose of remittances, amounts, etc.) areappearing in the copy of ITS subsequently provided to us. In this regard, as would be noted from the ITS form, theforeign remittances made by the Company during the year,are towards reimbursement of expenses incurred byforeign group companies on the Company’s behalf, fees forprofessional and technical services, foreign tax payments,rent payments, insurance premium, referral commission,etc. In this regard, we are enclosing, as annexure J, samplecopies of Form 15CA / 15CB, alongwith relevant invoicecopies, which evidence the nature of the remittance.” 15. We have also seen the annexures to the said letter which are placedin the petition and those annexures do refer to payment made on accountof reimbursement of payroll expenses to subsidiaries incurred outsideIndia and paid to Oracle Financial Services Software INC on behalf ofpetitioner. The documents expressly mention that since the payment is tobe made on account of reimbursement only, no tax is required to bededucted. Therefore, a query has been raised and it has been answered. 16. We should also note that an order under section 92CA(3) of the Actwas passed by TPO. Shri Sharma submitted that the order under section 92CA(3) is only concerning whether the amount paid to the companiesoutside India was correct. Of course, Shri Sharma is correct but what isrelevant to note is that this subject has also been discussed by the TPO inhis order dated 20[th] September 2016 (internal page 8). TPO’s order findsa mention and reference in the impugned order dated 27[th] February 2017at paragraph 4.1.2 and paragraph 4.1.3. Therefore, entire issue regardingpetitioner paying huge reimbursement cost on account of salaryreimbursement cost of its employee every year was in the activeconsideration before the Assessing Officer. 17. Shri Sharma was right in stating that this issue has not beendiscussed specifically in assessment order. But it is settled, law as held in1 Aroni Commercials Ltd. Vs. Deputy Commissioner of Income-Tax-2(1) ,once a query is raised during the assessment proceedings and the assesseehas replied to it, it follows that the query raised was a subject ofconsideration of the Assessing Officer while completing the assessment. Itis not necessary that an assessment order should contain reference and/ordiscussion to disclose its satisfaction in respect of the query raised. 18. In view of the above, we are satisfied that it is nothing but a changeof opinion on the part of the new Assessing Officer, who issued the notice 1[2014] 44 taxmann.com 304 (Bombay) under section 148 of the Act. Change of opinion does not constitutejustification and/or reasons to believe income chargeable to tax hasescaped assessment. 18. In view of the above, we are satisfied that it is nothing but a changeof opinion on the part of the new Assessing Officer, who issued the notice 1[2014] 44 taxmann.com 304 (Bombay) under section 148 of the Act. Change of opinion does not constitutejustification and/or reasons to believe income chargeable to tax hasescaped assessment. 19. Shri Sharma also submitted that during the scrutiny for theAssessment Year 2015-16, the Assessing Officer had rejected petitioner’scontention as made and recorded in the reasons. We are not going intothe merits of the decision of the Assessing Officer for the Assessing Year2015-16. But still, the query that we posed to Shri Sharma was, if adifferent opinion/view is expressed by an Assessing Officer in the lateryears, can that be considered as non-disclosure of material facts by anassessee in an earlier year. Shri Sharma stated that in the Assessment year2015-16, new material was called for by the Assessing Officer. That stillwould not help respondents because the Assessing Officer who passed theoriginal assessment order for the assessment year 2013-14 was satisfiedwith the explanation given to him and perhaps might have even called forthe same material and formed an opinion different from what theAssessing Officer has formed for Assessment year 2015-16. In our view,just because an Assessing Officer has asked some extra queries and cometo an opinion in later year, different from the opinion which wasexpressed conclusively by an officer in the earlier year, would not help respondents to take their case out of the restrictions imposed by proviso tosection 147 of the Act. 20. In these circumstances, we allow the petition in terms of prayerclause (a), which reads as under : “(a)this Hon’ble Court may be pleased to issue aWrit of Certiorari or writ in the nature of Certiorari orany other appropriate writ, order or direction underArticle 226 of the Constitution of India calling for therecords of the Petitioner’s case and after examining thelegality and validity thereof quash the notice dated 6[th]March 2019 issued by Respondent No.1 under section148 of the Act seeking to reopen the assessment for theassessment year 2013-14 and the order dated 18[th]October 2019 passed by Respondent No.1, disposing offthe objections raised by the Petitioner.” 21. Petition disposed. (N. J. JAMADAR, J.) (K.R. SHRIRAM, J.)