Qualcomm Incorporated v. Asistant Director Of Income Tax

THE HIGH COURT OF DELHI AT NEW DELHI %Judgment delivered on: 29.08.2012 +W.P.(C) 7959/2010 QUALCOMM INCORPORATED ... Petitioner versus ASISTANT DIRECTOR OF INCOME TAX ... Respondent Advocates who appeared in this case:For the Petitioner: Mr Percy Pardiwala, Sr Advocate with Mr NishantThakkar, Mr Salil Kapoor and Mr Ankit GuptaFor the Respondent: Mr Sanjeev Sabharwal with Mr Puneet Guptaand Mr Gyatri Verma CORAM:-HON’BLE MR JUSTICE BADAR DURREZ AHMEDHON’BLE MR JUSTICE SIDDHARTH MRIDUL JUDGMENT BADAR DURREZ AHMED, J (ORAL) 1.This writ petition has been filed seeking quashing of the notice dated30.03.2010 purportedly issued under Section 148 of the Income Tax Act,1961 (hereinafter referred to as ‘the said Act’) as also the order dated27.10.2010 passed by the Assessing Officer on the objections preferred onbehalf of the petitioner. 2.We may point out, at the outset, that this is the second occasion onwhich a notice under Section 148 of the said Act has been issued by the WP(C) 7959/2010 Assessing Officer to the petitioner in respect of the assessment year 2003-04.It is also an admitted position that the notice dated 30.03.2010 has beenissued beyond the period of four years from the end of the assessment year2003-04 and, therefore, the conditions stipulated in the proviso to Section147 of the said Act would be applicable. 3.The point on which the purported notice under Section 148 of the saidAct has been issued is that the petitioner had not fully and truly disclosed thefact that the petitioner has a permanent establishment (PE) in India. It is thecase of the revenue that inasmuch as, according to the revenue, thepetitioner/ assessee has a permanent establishment in India, the petitionerwould be subjected to the higher rate of tax of 20% on the gross amount ofroyalty. According to the petitioner, even if the petitioner has a permanentestablishment in India, it would still not be subjected to the higher rate of taxof 20%. However, it is the contention of the petitioner that that it does nothave a permanent establishment in India and, therefore, in any event, it couldonly be subjected to the rate of tax of 15%. The entire controversy in thepresent writ petition centres on the point as to whether the petitioner has ordoes not have a permanent establishment in India. Moreover, the conditions stipulated in the proviso to Section 147 of the said Act, have to be fulfilledbefore the petitioner could be subjected to the proceedings under Section147. It was, therefore, contended on behalf of the petitioner that before theproviso to Section 147 could be invoked, the respondents should have a clearcase that the petitioner had failed to disclose fully and truly all material factsnecessary for its assessment and as a result whereof, income chargeable totax has escaped assessment in the said assessment year. It was contended bythe learned counsel for the petitioner that the revenue has not been able toindicate as to how the petitioner failed to disclose fully and truly all materialfacts necessary for the assessment. The failure to fully and truly disclose allmaterial facts has to be connected with the question of the petitioner havinga permanent establishment in India. 4.Before we examine this aspect of the matter, it would be necessary toset out the steps which have taken place leading to the issuance of the noticeunder Section 148 on 30.03.2010. Initially, the petitioner had not filed anyreturn in respect of the assessment year 2003-04. The petitioner’s claim wasthat it was not liable to pay any income tax in India. However, the stand ofthe revenue was that the petitioner was liable to pay income tax on the 4.Before we examine this aspect of the matter, it would be necessary toset out the steps which have taken place leading to the issuance of the noticeunder Section 148 on 30.03.2010. Initially, the petitioner had not filed anyreturn in respect of the assessment year 2003-04. The petitioner’s claim wasthat it was not liable to pay any income tax in India. However, the stand ofthe revenue was that the petitioner was liable to pay income tax on the royalty that it received. Consequently, the Assessing Officer issued a noticeunder Section 148 of the said Act on 29.03.2007.The reasons for theissuance of the said notice under Section 148 of the said Act were alsoprovided to the petitioner. In the said reasons dated 29.03.2007, it was, interalia, alleged that the petitioner had full-fledged research and developmentcentres in India.It was also alleged that many of the technologicaldevelopments were undertaken at these development centres located in Indiaand the products were patented by the petitioner and were exploitedcommercially worldwide including in India. On the basis of this, it was therevenue’s case that the petitioner was earning royalties from patenting thetechnological innovations in the field of communication technology and thatthe petitioner was conducting its core business of research and developmentfrom the centres located in India. It was, therefore, contended on behalf ofthe revenue that the locations in India constituted the business connection aswell as the permanent establishment of the petitioner in India. 5.The said notice under Section 148 dated 29.03.2007 and the reasonstherefor were objected to by the petitioner in view of the petitioner’sobjections dated 14.09.2007. In the said objections, the petitioner submitted that it did not have research and development centres in India nor did thepetitioner conduct any research and development in India. It was pointed outthat two related Indian companies conduct research and development onbehalf of a subsidiary of the petitioner. The said subsidiary did not generatelicencing revenue.However, the said subsidiary paid the related Indiancompanies arm’s length service fees for research and development servicesperformed in India.It was further mentioned that the related Indiancompanies were being assessed to income tax separately before therespective jurisdictional officer in India.It was, therefore, contended onbehalf of the petitioner that it had no other business connection or permanentestablishment in India insofar as the assessment year 2003-04 is concerned.It was also contended that under the double taxation avoidance agreementbetween India and the U.S.A, the executive meetings and fees for includedservices, which had been referred to by the revenue, did not constitute apermanent establishment. 6.After considering the said objections dated 14.09.2007, the AssessingOfficer passed an order on 30.11.2007 holding that the petitioner shouldcooperate in the assessment proceedings and submit the details / information as called for by the notices issued during the assessment proceedings underthe said Act. In the said order dated 30.11.2007, it was specifically noted thatthe objection to the allegation that the petitioner had a permanentestablishment through research and development centres in India, needed nocomment as the same was yet to be verified. 6.After considering the said objections dated 14.09.2007, the AssessingOfficer passed an order on 30.11.2007 holding that the petitioner shouldcooperate in the assessment proceedings and submit the details / information as called for by the notices issued during the assessment proceedings underthe said Act. In the said order dated 30.11.2007, it was specifically noted thatthe objection to the allegation that the petitioner had a permanentestablishment through research and development centres in India, needed nocomment as the same was yet to be verified. 7.Subsequent to the said order dated 30.11.2007, the assessmentproceedings were continued and it culminated in the assessment order dated31.12.2007.It is relevant to note that after considering the submissionsmade on behalf of the petitioner and examining all the details of the casebefore her, the Assessing Officer assessed the total income of the petitionerat`377,451,421/-outofwhichthecomponentofroyaltywas` 357,375,000/-. The total tax payable was worked out to ` 5,66,17,713/- atthe rate of 15%. It was submitted by the learned counsel for the petitionerthat from the assessment order dated 31.12.2007 this much is evident that thesubmissions made by the petitioner with regard to the petitioner not havingany permanent establishment in India was accepted and it is for this reasonthat the lower rate of 15% was employed and not the higher rate of 20%. Itis another matter that the petitioner had filed an appeal against the said assessmentorderwhichhasalsoculminatedintheorderoftheCommissioner of Income Tax (Appeals), whereby the same rate of 15% hasbeen employed. The learned counsel for the petitioner states that now thematter is pending in appeal before the Income Tax Appellate Tribunal. 8.The matter rested there for some time, that is, till 30.03.2010, whenthe Assessing Officer, once again, issued a notice under Section 148 of thesaid Act. The purported reasons for issuing the notice under Section 148were as under:- “Reasons for the belief that income has been under assessedin the case of M/s Qualcomm Inc for A.Y 2003-04 The assessee, M/s Qualcomm is a foreign company engaged inthe design, development, manufacture marketing & licensing ofdigital wireless telecommunications products and servicesbased on its code division multiple access (CDMA) technology.For the year under review, order u/s 143(3)/ 147 was passedassessing the income of the assessee at Rs. 37,74,51,420- asagainst returned income of Rs 20,07,76,421/-. The additionalincome was assessed as royalty income and taxed @ 15% inaccordance with the provisions of section 9(1)(vi) and Article12(7)(b) of the DTAA. Subsequently, it was observed that the assessee has businessconnection and PE in various form, in India, under provisionsof section 9(1)(i) of IT Act and in terms of Article 5 of theDTAA,respectively.TheassesseecompanyisearningRoyalties in India from utilization of its patented productsincludingCDMAtechnologyembeddedinthehandsets supplied to Indian telecom operators. Moreover, Fees forTechnical Services is earned from providing technical supportservices for facilitating the utilization of its products in India.As the year under review pertains to F.Y. prior to 01.04.2003 itis therefore implied that the agreements must/ should have beenexecuted well before 01.04.2003. Therefore, this income mustbe taxed @ 20% gross instead of 15%. It was the duty of the assessee to disclose fully and truly allmaterial facts necessary for the assessment but it has not doneso. The facts pertaining to existence of PE and businessconnection in India has not been fully disclosed. This has led totaxation of the royalty income at 15% instead to 20%.Therefore, I have reasons to believe that income of more thanRs 1 lakh of the assessee company for AY 2003-04, hasescaped assessment. I am therefore satisfied that it is a suitablecase to be reopened for reassessment.” It was the duty of the assessee to disclose fully and truly allmaterial facts necessary for the assessment but it has not doneso. The facts pertaining to existence of PE and businessconnection in India has not been fully disclosed. This has led totaxation of the royalty income at 15% instead to 20%.Therefore, I have reasons to believe that income of more thanRs 1 lakh of the assessee company for AY 2003-04, hasescaped assessment. I am therefore satisfied that it is a suitablecase to be reopened for reassessment.” 9.From the said purported reasons, it is evident that there is an allegationthat the petitioner did not fully and truly disclose all material facts necessaryfor the assessment. It is pointedly mentioned therein that the facts pertainingto the existence of the permanent establishment and business connection inIndia had not been fully disclosed. According to the said reasons, it is thisnon-disclosure which has led to the taxation of the royalty income at the rateof 15% instead of 20%. 10.The petitioner submitted its objections on 26.07.2010, wherein thepetitioner, inter alia, took the specific plea that the re-assessment proceedings were barred by limitation. On this aspect, the petitioner took the following objections:- “B.On law and facts- Reassessment proceedings barred bylimitation The assessment was reopened by your kind office under section147 of the Act vide notice dated March 30, 2010 after theexpiry of four years from the end of the relevant AY i.e. AY2003-04. In accordance with the proviso to section 147 of theAct, QCOM vide its letter of May 3, 2010 had challenged thevalidity of the 148 notice stating that the notice is barred bylimitation. Accordingly, QCOM requested your good self todrop the reassessment proceedings. However, in the reasons recorded for reopening the assessment,your good office has wrongly alleged that QCOM has notdisclosed fully and truly all material facts pertaining to theexistence of PE and business connection in India. At the outset, we wish to submit that a reference to the reasonsshow that it is not explained by your good self as to how thetrue and full particulars were not disclosed in as much as thereason pertain to the same record and not to any new material /information which has come subsequently to the notice of yourkind office. With due respect, we submit that the above citedallegation of non disclosure of facts is without any basis and thesame is not supported by any justification or explanation as tohow the assessee has failed to disclose fully and truly all thematerial facts necessary for the assessment. The above allegation by your kind office is completely contraryto the facts and evidences on record. In this regard, it ispertinent to bring to your kind notice all the information sought/required for determining the existence of PE in India that wasfurnished during the course of assessment proceedings……….” It was also pointed out by the learned counsel for the petitioner that theimpugned notice dated 30.03.2010 and the purported reasons of the samedate were misconceived inasmuch as the entire issue of the petitioner havinga permanent establishment in India had been gone into in the first round, thatis, pursuant to the notice dated 29.03.2007 which had been purportedlyissued under Section 148 of the said Act and which culminated in theassessment order dated 31.12.2007.Therefore, according to the learnedcounsel for the petitioner, the objection that the impugned notice dated30.03.2010 was barred by limitation, was fully justified.However, theAssessing Officer did not pay any heed to these objections and passed anorder dated 27.10.2010. The objections were disposed of in the followingmanner:- “3.The objections raised by the assessee have been carefullyperused: “3.The objections raised by the assessee have been carefullyperused: (a)The assessee argues that the reason to believe in theinstant case is based on the same set of facts as mentioned inthe earlier 148 notice dated March 29, 2007. The subsequentnotice amounts to change of opinion on the facts which alreadyexisted. The assessee has relied upon a plethora of case laws tosupport its argument. However, this assertion of the assessee isbased upon a wrongful appreciation of law. The reasonsrecorded, as also provided to the assessee, clearly show that the assessing officer had sufficient reason based on which theproceedings u/s 147 were initiated. Hence, this objection of theassessee deserves to be rejected. (b)It is argued by the assessee that the re assessmentproceedings have been barred by limitation. This again does nothold water. The proceedings have been initiated within time asprescribed in the Act. There was reason to believe that incomeof more than Rs 1 Lakh has escaped assessment for the yearunder review and after recording the reasons the notice u/s 148was issued in Financial Year 2009-10 for AY 2003-04 which iswithin the prescribed time frame of 6 years. Hence, it isfactually incorrect to say that the notice is barred by limitation. (c)The assessee has objected that the reopening proceedinginitiated is based- on the audit objection. To this, it must bepointed out that reasons were recorded before issuing the noticeu/s 148 after application of mind by the AO. The copy of thesereasons recorded was provided to the assessee on request. Aperusal of the reasons would show that there is no mention ofany audit objection. Hence, it is factually incorrect to say thatthe initiation of the proceedings is based on audit objection.This objection, of the assessee also deserves to be rejected. 4.Accordingly,theobjectionsoftheassesseestanddisposed off. The assessee is directed to co-operate in theassessment proceedings and submit the details / information ascalledforvidenoticeu/s142issuedalongwiththequestionnaire (attached).” 11.It is clear that in the order dated 27.10.2010 there is no finding, evenprima facie, that the petitioner had failed to disclose fully and truly allmaterial facts with regard to the allegation that the petitioner had a PE inIndia. Despite that, the objections of the petitioner have been rejected. Even where the order dated 27.10.2010 deals with the question of limitation, itdoes not indicate as to how the impugned notice dated 30.03.2010 would bewithin limitation when admittedly, it was issued after four years from theend of the assessment year 2003-04. 12.Being aggrieved by the said notice dated 30.03.2010 and the orderdated 27.10.2010, the petitioner has filed this writ petition seeking thequashing of the same. On the first date of hearing, that is, on 29.11.2010,this Court, inter alia, directed that the assessment proceedings couldcontinue but no final order was to be passed without the leave of this Court. 13.In this factual backdrop, we have to decide as to whether theimpugned notice dated 30.03.2010 and the impugned order dated 27.10.2010can be sustained in law or not. From what has been mentioned above, it isevident that the question of the petitioner having a permanent establishmentin India had been gone into in the first round.This is apparent from thereasons dated 29.03.2007 read with the objections dated 14.09.2007 and theorderdated30.11.2007andultimatelytheassessmentorderdated31.12.2007, wherein the lower rate of tax of 15% was employed. We havealready indicated that throughout the proceedings in the earlier round, one of 13.In this factual backdrop, we have to decide as to whether theimpugned notice dated 30.03.2010 and the impugned order dated 27.10.2010can be sustained in law or not. From what has been mentioned above, it isevident that the question of the petitioner having a permanent establishmentin India had been gone into in the first round.This is apparent from thereasons dated 29.03.2007 read with the objections dated 14.09.2007 and theorderdated30.11.2007andultimatelytheassessmentorderdated31.12.2007, wherein the lower rate of tax of 15% was employed. We havealready indicated that throughout the proceedings in the earlier round, one of the questions that had been raised was with regard to the petitioner having apermanent establishment in India. Once that aspect of the matter had beengone into in the earlier round, it was not open to the Assessing Officer to re-agitate it in the second round without any other / fresh material. No suchother or fresh material has even been alleged in the reasons in the secondround. It has also not been indicated as to how the petitioner has failed tofully and truly disclose all material facts with regard to the question of thepetitioner having a permanent establishment in India. Whatever informationwas required from the petitioner in the first round by the Assessing Officeron this question of permanent establishment, has been given by thepetitioner. It is obvious from the assessment order dated 31.12.2007 that thesubmissions of the petitioner that it did not have a permanent establishmentin India had been accepted and that is the reason why the petitioner wassubjected to the lower tax rate of 15% and not the higher tax rate of 20%,which might have been the case, if the petitioner had a permanentestablishment in India. 14.It is well settled that re-opening of assessments cannot be done merelyon the basis of change of opinion. It is also a settled position in law that unless and until the conditions stipulated in the proviso to Section 147 arefully satisfied, such re-opening cannot be done beyond the period of fouryears from the end of the relevant assessment year. In the present case, wefind that not only is there a change of opinion but also the re-opening isbarred by limitation inasmuch as the condition that the escapement ofincome must have resulted from the failure on the part of the petitioner tofully and truly disclose all material facts, has not been satisfied.Theimpugned order dated 27.10.2010 merely glosses over the objections raisedby the petitioner with regard to limitation.As we have already observedabove, there is no finding in the order dated 27.10.2010 that there was afailure on the part of the petitioner to fully and truly disclose all materialfacts particularly in connection withthe issue of the petitioner having apermanent establishment in India. On the contrary, the above facts revealthat the issue of permanent establishment was specifically raised and dealtwith in the first round which culminated in the assessment order dated31.12.2007. The issue of permanent establishment having been addressed inthe first round, the allegation that the petitioner had not fully and trulydisclosedthematerialparticularsinrelationtheretohasnobasis.Consequently the condition stipulated in the proviso to Section 147 is not satisfied and, therefore, the notice dated 30.03.2010, being admittedlybeyond four years from the end of the relevant assessment year (i.e., 2003-04), is barred by limitation. 15.As a result of the foregoing discussion, the impugned notice dated30.03.2010 and the impugned order dated 27.10.2010 cannot be sustained inlaw. Resultantly, the same are quashed. So, too, all proceedings pursuant tothe said notice dated 30.03.2010. The writ petition is allowed. There shallbe no order as to costs. BADAR DURREZ AHMED, J AUGUST 29, 2012SR SIDDHARTH MRIDUL, J