Wp/29828/2011 Of Infosys Limited v. The Deputy Commissioner Of Income Tax

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 1/ DAY OF JUNE, 2019 BEFORE, THR HON’BLE MRS.JUSTICEK S.SUJATHA WRIT PETITION No.29828/2011 c/wW.P.No.14424/2013 AND W.P.No.53886/2013 (TIT) BETWEEN : INFOSYS LIMITED,(FORMERLY KNOWN AS INFOSYSTECHNOLOGIES LIMITED) ©ELECTRONIC CITY, HOSUR ROAD,BANGALORE- 560 100,REP BY ITS PRINCIPAL — CAG,Mr. P.PRAKASH|_ PRHTITTIONER(COMMON) (BY SRI T.SURYANARAYANA, ADV.) IN W.P.No.29828/2011: AND : THERE DEPUTLY COMMISSIONER OF INCOME TCIRCLE-11 (4), ROOM NO.9516,"[‘T]FLOOR, R.P. BHAVAN,|OPP. RBI, NRUPATHUNGA ROAD.BANGALORBE-560001_. RESPONDENT. (BY SRI E.I.SANMATHI, ADV.) IN W.P.No.14424/2013: AND : 1.|THER DEPUTY COMMISSIONER OF INCOME TAXCIRCLE-11 (4), ROOM NO.9516,"[‘T]FLOOR, R.P. BHAVAN,|OPP. RBI, NRUPATHUNGA ROADBANGALORE-5D6000| -9.- «|THE COMMISSIONBR OF INCOMB TAXCHENTRAL REVBENUB BUILDINQUEENS ROADBANGALORBE-560001~_ RESPONDENTS (BY SRI E.I.SANMATHI, ADV.) IN W.P.No.53886/2013: AND : 1.|THE ASSISTANT COMMISSIONEROF INCOME TAX, CIRCLE-11(4), |ROOM NO.516, 9 FLOOR, R.P. BHAVAN, |OPP. RBI NRUPATHUNGA ROAD,BANGALORE -560001. «|THERE DEPUTLY COMMISSIONER OF INCOME TCIRCLE-11 (4), ROOM NO.9o16," FLOOR, R.P. BHAVAN,|OPP. RBI, NRUPATHUNGA ROAD.BANGALORBE-560001 3.|THERE COMMISSIONER OF [INCOME TCHNITRAL REVENUE BUILDINGQUEENS ROADBANGALORBE-560001~_ RESPONDENTS (BY SRI E.L.SANMATHI, ADV.) THIS WRIT PETITION No.29828/2011 IS FILED UNDER]ARTICLE 226 OF THE CONSTITUTION OF INDIA PRAYING TO.DECLARE THAT THE IMPUGNED PROCEHKEDINGS INITIATED BTHERE RESPONDENT UNDBR SBCTION 147 RBEAD WITH SBCTI148 OF THR ACT ARB BARRED BY LIMITATION & OPPOSED TO.THESAIDPROVISIONSANDTHRBRBFOREWITHOUTJURISDICTION AND BTC.” THIS WRIT PETITION No.14424/2013 IS FILED UNDER]ARTICLE 226 OF THE CONSTITUTION OF [INDIA PRAYING TODBCLAREB THAT THR IMPUGNBD PROCBEDINGS INITIATED BYTHE 1[Si]RESPONDENT UNDBR SBCTION 147 RBAD WITHSECTION 148 OF THE ACI ARE BARRED BY LIMITATION AND|OPPOSED TO JHE SAID PROVISIONS AND THEREFORE!WITHOUT JURISDICTION AND EITC. THIS WRIT PETITION No.53886/2013 IS FILED UNDER]ARTICLE 226 OF THE CONSTITUIION OF [INDIA PRAYING TODBCLAREB THAT THR IMPUGNBD PROCBEDINGS INITIATED BYTHE 1 RESPONDENT UNDBR SBCTION 147 RBAD WITHSECTION 148 OF THR ACT ARB BARRED BY LIMITATION AND|OPPOSED TO THR SAID PROVISIONS AND THBRBFORE|WITHOUT JURISDICTION AND EITC. THESEPRTITIONS|HAVINGBEHENHBHAR]ANT)RESERVED, ARE COMING ON FOR PRONOUNCEMENT OF)ORDER THIS DAY,S.SUJATHA J..PASSBD THR FOLLOWING: | ORDER These petitions involving similar and akin issues,| have been considered together and are disposed of bythis common order. 2 |Petitioner has challenged the proceedingsinitiated by the respondent under Section 147 r/wsection 148 of the Income Tax Act, 1961 |'Act' for short]relating to the assessment years 2004-05, 2005-06 and2006-0 7. 3.|The petitioner’s regular assessments underthe provisions of the Act relating to the atoresaidassessment years were concluded by the respondent -4- whereby623respondentauthorityallowedthepetitioner’s claim for deduction under Section 10-Awhile disallowing a small portion of the deductionon certain grounds. To the extent of disallowanceof a portion of the deduction under Section 10-A>in the original assessment orders, the matters weretaken in appeal and the appeals were pending. a |In the meanwhile, the Addl. Commissionertook up the petitioner’s assessment _ relating to theassessment year 2007-2008 and concluded the sameunder the provisions of Section 143(3) of the Act by >order dated 28.12.2010 wherein the petitioner’s claimfor deduction under Section 10-A has been disallowed substantially. Taking clue form the above order relatingto assessment year 2007-08, the respondent issuednotices under Section 148 proposing to re-assess thepetitioner for the assessment years in question on theeround that certain income had escaped assessment. It -5- a |In the meanwhile, the Addl. Commissionertook up the petitioner’s assessment _ relating to theassessment year 2007-2008 and concluded the sameunder the provisions of Section 143(3) of the Act by >order dated 28.12.2010 wherein the petitioner’s claimfor deduction under Section 10-A has been disallowed substantially. Taking clue form the above order relatingto assessment year 2007-08, the respondent issuednotices under Section 148 proposing to re-assess thepetitioner for the assessment years in question on theeround that certain income had escaped assessment. It -5- transpires that the petitioner had replied to the said |notices asserting that there is no escapement ofassessment|ot anyincomeandrequestedthe|respondent to furnish a copy of the reasons recorded, ifany. In response to the same, the respondent issued aletter along with the reasons recorded under Section148. It is the contention of the petitioner that thereasons recorded for issue of notice has been furnished|after the expiry of the extended period of limitation ofsix years for invoking the provisions of section 147.Further the respondent issued notices under Sections142(1) and 143(2) calling upon the petitioner to producecertain documents and appear before him. The|petitioner submitted detailed reply questioning thejurisdiction of the respondent and raising the plea oflimitation and accordingly requested the respondent todispose of the objections on these issues treating thesame as Preliminary Issue. The respondent passed anorder negating all the objections raised. 5It is thecontention of the petitioner that the|proceedings initiated by the respondent to re-assess thepetitioner for the assessment years in question, whilethe issue of deduction under Section 10-A was inéappeal, is against the third proviso to Section147 and is"without jurisdiction. The re-assessment proceedingsare time barred as the petitioner has not failed todisclose any material facts for the assessment and thereasons recorded for issuing notice under Section 148were furnished to the petitioner only after the expiry ofextended period of six years. 6.|Learnedcounselsri.T.Suryanarayana appearing for the petitioner has raised four grounds,namely, 1.All material facts were fully and trulydisclosed by the assessee. Initiation ofproceedings by the Assessing Officer under -~Tf- section 147/148 of the Act is withoutjurisdiction.| DO| The re-assessment notices issued under!section 147 r/w 148 of the Act are barred bylimitation and it is only change of opinion ofthe Assessing Officer. 3. Reasons recorded by the Assessing Officerindicates that there was no independentapplication of mind but it was only aborrowedsatisfaction based.OT]the.assessment order of the year 2007-2008.passed under Section 143(3) of the Act. 4The issues relating to Section 10-A werepending before the Appellate Forum and as.such re-assessment proceedings initiatedunder Section 147 r/w 148 are contrary tothe third proviso to section 147 of the Act.| ToElaborating the arguments on these points, learned counsel argued that ‘reason to believe’ is anessential prerequisite for exercise Of powers undersection 14/7 and such belief regarding escapement of assessment cannot be formed on mere _ suspicionsurmises or conjectures. 3. Reasons recorded by the Assessing Officerindicates that there was no independentapplication of mind but it was only aborrowedsatisfaction based.OT]the.assessment order of the year 2007-2008.passed under Section 143(3) of the Act. 4The issues relating to Section 10-A werepending before the Appellate Forum and as.such re-assessment proceedings initiatedunder Section 147 r/w 148 are contrary tothe third proviso to section 147 of the Act.| ToElaborating the arguments on these points, learned counsel argued that ‘reason to believe’ is anessential prerequisite for exercise Of powers undersection 14/7 and such belief regarding escapement of assessment cannot be formed on mere _ suspicionsurmises or conjectures. 8.|The phrase ‘reason to believe’ envisages thepresence of some material, a nexus between suchmaterial and the belief of escapement of income fromassessment, application of mind by the officer to suchmaterial and an inference based on reason drawn bythe officer that income has escaped assessment. Such‘reason to believe’ could not be borrowed satisfaction andthe same do not conifer any jurisdiction to initiate reassessment proceedings. It was argued that the noticesissued to withdraw Section 10A benefits considering theprofits from onsite development of computer software asdeputation of technical manpower is nothing but changeof opinion. There was no failure on the part of thepetitioner in disclosing all material facts, fully and truly.‘Note’ on expenditure incurred in Foreign Countries andAnnual Report were referred to. Reference was made to -9Q- the order of Dispute Resolution Panel relating to theA.Y.2O010-11. OQ Learned counsel Sri.E.I.Sanmathi appearingfor the Revenue argued that Master Service Agreements,Work Orders, Scope of Works and invoices were notplaced before the Assessing Officer at the time of theoriginal assessment. It is only during the scrutiny|proceedings conducted for the assessment year 200/72008 on their visit at the Head Office of the petitioner’scompany, various information including large number ofMaster Service Agreements, Work Contracts, Scope ofWorks, Invoices and other details related to thededuction claimed under Section 10-A and 10-AA of theAct were called for. It was noticed that the petitioner’scompany is deputing technical man power onshoreabroad relating to software development activity whichhas no link whatsoever with the STP/SEZ undertakingsin India. The said revenue receipt from onshore activity was treated as not related to the undertaking eligible fordeduction under Sections 10-A/10-AA of the Act.Business of Deputing Technical Manpower (DTM)abroad was eligible for deductions under Section 80-|HHE of the Act and could not be included as an eligibleactivity under Section 10-A and 10-AA of the Act. Thepetitioners company had claimed the revenue receiptfrom such DTM as_ software development activity anddeductions were allowed under Section 10-A as claimed|which being wrongly allowed, the same called forinitiation of reassessment proceedings. It was arguedthat the subject mater of the appeal which was pendingbefore this Court was on a different issue, not related to.the issue on hand. The Assessing Officer being of clearsatisfaction that there is reason to believe the'escapement of tax during the relevant assessmentyears, proceeded with the re-assessment proceedings.Preliminary order was passed rejecting the objections.The assessment order passed for the assessment year -|]]-| 2007-2008 disallowing the deductions under Section10-A for this DTM activities has been confirmed by thefirst Appellate Authority. Thus, it was argued that thewrit petition is not maintainable. — 10.|Both the learned counsel have _ placereliance on host ofjudgments in their support. | 11.)|havecarefullyconsideredtherival submissions of the learned counsel appearing for theparties and perused the material on record. -|]]-| 2007-2008 disallowing the deductions under Section10-A for this DTM activities has been confirmed by thefirst Appellate Authority. Thus, it was argued that thewrit petition is not maintainable. — 10.|Both the learned counsel have _ placereliance on host ofjudgments in their support. | 11.)|havecarefullyconsideredtherival submissions of the learned counsel appearing for theparties and perused the material on record. 12.It is the contention of the petitioner that|the note on software development and the note onexpenditure incurred in foreign currency as_ wellas details of expense incurred in foreign currencywere placed before the Assessing Officer pursuant—to the query made. The said note clearly indicatesthe different stages of the software developmentproject. Requirement analysis indicates that this -10-| stage is typically carried out at the customer's site. —Aiter requirement analysis, the next stage of prototyping which is a stage to gather complete requirements.and the execution of the stage could happen either atthe client site or offshore location. Then at the stage ofdesign it is executed either at the client site or at theoffshore development centre. Running the system for arestricted set of users parallel with the existing systemexposing the critical functionality of the system i.e., theprivate stage is executed either at the client site or attheoffshoredevelopmentcentre.similarly1nNaprogramming language, the build stage produces thesource code, executables and the test data is carried out)either at the customer’s' site or at the oftshordevelopment centre. All these activities are carried atcustomer’s site or at offshore software developmentcentre. _ -13-| 13.)Note on expenditure incurred in foreign currency reads thus: “Infosys incurs expenditure in foreigncurrency in connection with the execution ofsoftware development projects abroad for itsglobal client base. The expenditure in foreigncurrency can be categorized into two sets UVIZ.,alDirectexpenditureincurredandattributable to the software development|contractsexecutedandb]expenditureincurred on sales and marketing and general|administrative activities abroad. Both these|categories are discussed in detail in the|following section. alDirect Expenditure incurred onsoftware development projects As mentioned in the earlier section, asoftware development projects undergoesvarious stages and some or all of the stages|are executed at the onsite location of the|client. Here, the company incurs expenditure|in foreign currency that are directly related|and attributable to the software developmentproject carried out. These costs are includedin the pricing of the projects that are billed to|the clients. The major heads of expenditure underthis category are as follows: a)Maintenance allowance paid to employees|who are deputed abroad,who are deputed abroad, b)Company’s contribution to social securityand taxes on the maintenance allowances|paid to employees,and taxes on the maintenance allowances|paid to employees, CcMedical insurance costs of the employees, d)Expenditure on travel abroad, e}Data communication costs, p)software for own use that are required forSpecific projects,Specific projects, g)Other expenses. bfExpenditure tncurred on salesand marketing general administrativeactivities abroad: In order to support and market thesoftware development projects, it is necessary for the company to incur expenditure onadministrative and sales and marketing|activities. These activities are critical for|providing support to the execution of softwaredevelopment projects and maintaining the|competitive edge of the company in a highly|competitive global market environment. The major heads of expenses under thiscategory are as follows: a)Maintenance allowances paid to employees|in support and sales functions,in support and sales functions, b)Rentals, maintenance and related costs of|offices maintained abroad for support and|sales activities,offices maintained abroad for support and|sales activities, -15-| bfExpenditure tncurred on salesand marketing general administrativeactivities abroad: In order to support and market thesoftware development projects, it is necessary for the company to incur expenditure onadministrative and sales and marketing|activities. These activities are critical for|providing support to the execution of softwaredevelopment projects and maintaining the|competitive edge of the company in a highly|competitive global market environment. The major heads of expenses under thiscategory are as follows: a)Maintenance allowances paid to employees|in support and sales functions,in support and sales functions, b)Rentals, maintenance and related costs of|offices maintained abroad for support and|sales activities,offices maintained abroad for support and|sales activities, -15-| CcExpenditure on traveling and conveyance|etc abroad by these functions,etc abroad by these functions, d)Other expenses. " 14.|The Annual Report discloses the Revenue by location. For eg., Annual Report |2003-04|_ Revenue by locationDOO |DOOSOnSite|53%54.7%|Off Shore47% |45.3% 15.TheDispute|ResolutionPanelwhileconsidering the issue relating to Sections 1OA and 10AA_vis-a-vis the onsite activity of the assessee company’s.STPI/SEZ units amounted to manpower supply and.hence not eligible for deduction relating to assessmentyear 2010-11 has observed that the Assessing Officer’sconclusions is not based on the critical analysis of thevoluminous documents filed by the assessee in supportof the claim that none of the revenue attributed to the|exempt units could be said to be related to DTM activity,or to wholesale onsite activity. .... There is no bar undethe provisions of Sectionl1OA/10OAA that no part of th -16-| contract for export of software service could beperformed onsite. .......... The deductions cur/restricted in an ad-hoc manner based on the estimateacross the units, without reference to the eligible profits, eligible export turnover, and without identifying therevenue which could not be said to be part of eligiblebusiness. 16.|The reasons recorded by the AssessingOfficer for issue of notice |assessment year — 2004-05].under Sections 147/148 reads thus: “The assessee company had filed its return|ofincomedeclaringan.income|ofRs.99,21,75,620/-. The details of return filed bythe assessee are @s under: Gross receipts*Rs.¢761 croresIncome before 10ADeduction“Rs. 1470 croresLOA deduction claimed :Rs.14¢10 croresBusiness Income |*Rs.22.52 croresIncome from otherSources%Rs.83.24 croresGross total income‘Rs. 105. 76 crore -1/-| SOHHERs. 76.69 lakhsS50G Rs.5.71 croresTotal IncomeRs.99.21 crores Deduction claimed u/s. 1OA Profits of businessRs. 1426.95 croresExport Turnover|Rs.4678 croresTotal Turnover|Rs.4732 croresDeduction claimed |Rs.1410.50 crores D2 The said return had been taken upfor scrutiny and an order u/s 143/3/ dated29.12.2006 had been passed arriving at a totalincome of Rs.426,24,51,540/-. The various issuesof additions and disallowances made in theassessment order as below’: 1.Payment made to foreign companiestowards bandwidth charges Rs. 10,37,42,694/-. D2 subscriptions paid to Gartner group& other [u/s 40/a/fi/] Rs. 7,75,87,889/7- 3.|Provision for post sale customersupport Rs.29,87,075/-. 4.|Recomputation of deduction u/s 10A) a)Communication expenses incurred inconnection with delivery of software not reducedfrom total turnover. -18 - | b)Reduction of expenses in foreigncurrency and providing technical services outsideIndia from export turnover — Rs.1041,17,04,887/- C)|Reduction of bad debts written offamounting to Rs.14,16,04,817/- from exportturnover. 1.Payment made to foreign companiestowards bandwidth charges Rs. 10,37,42,694/-. D2 subscriptions paid to Gartner group& other [u/s 40/a/fi/] Rs. 7,75,87,889/7- 3.|Provision for post sale customersupport Rs.29,87,075/-. 4.|Recomputation of deduction u/s 10A) a)Communication expenses incurred inconnection with delivery of software not reducedfrom total turnover. -18 - | b)Reduction of expenses in foreigncurrency and providing technical services outsideIndia from export turnover — Rs.1041,17,04,887/- C)|Reduction of bad debts written offamounting to Rs.14,16,04,817/- from exportturnover. “3DuringtheCOUTSECofscrutinyproceedings conducted for A.Y. 2007-08, as visitwas carried out at the head office of InfosysTechnologyLimitedOnl11.12.2010.Variousinformation including a large number of Masterservice Agreements, Work Contracts/ Scope ofworks, Invoices and other details related to thededuction claimed u/s IOA and 1OAA of theIncome Tax Act were called for. On account ofdetailed fact finding during the course of thisScrutiny proceedings for A.Y. 2007-08, thefollowing additions/ disallowances to the returnedincome for A.Y. 2007-08, were made a)It is noticed that the assessee company 1Srendering a large body of work onshore|abroad related to software developmental|activities. However, it was detected that none|of the said software development activities|onshore abroad had any link whatsoever withthe STP/SEZ undertakings in India. It had been noticed that the assessee had claimed all|Tevenuefromsoftwaredevelopmentalactivities under STPs/SEZs based in Indiaonly. No part of the income had ever been|admitted as generated out of the company’s|activitiesabroad.DuringtheCOULSeCofinvestigation conducted, it had been detectedon facts as per various contracts/SOW, work|orders and invoices that a large body of work|related to software development with theSTP/SEZ units in India. The said revenuereceipt from onshore activity was treated as|not related to the undertaking eligible for'deduction u/s 1OA/1OAA of the IT. Act. Suchonshore receipts were treated as company|wide software receipts not related to the|STP/SEZ undertakings in India. This had beencomputed and the deduction claimed u/sIOA/ 10AA of the LT. Act had been drastically|reduced. b)During the course of said fact finding it hadalso been detected that the assessee companyis in the business of deputing technical man.power (DTM) of providing short duration|technical man power abroad. Such businessactivity commonly known as Body Shoppingwas eligible for deduction u/s SOHHE of the. -920 - | [.T. Act and was not included as an eligible|activity u/s 1OA/10AA of the LT. Act. It had|been noticed from the contracts and invoices|that the assessee company had substantialrevenue from such DIM activity and it claimedthe revenue receipt from the same as software|development activity. It had been detected thatassessee had made similar claims for earlier|Assessment Year also. CcAssessee was also seen claiming capitalExXPeNnseincurredOnlDGinstallation,landscaping done forfirst time, curtain glazing|and similar such civil expenditure as revenue|ExXPeNnseunderthe.headrepairandmaintenance of buildings. This had beendetected as capital expenses as treated as.such thereby reducing the revenue expensesclaimed. During the course of assessment for A.Y.2007-08, it had been clearly detected that|similarISSUES|ofadditions/ disallowanceswere there for previous Assessment Year also.In fact the assessee company is in the same|business for the last few years and_ thebusiness agreements and business practicesof A.Y. 2007-08 had actually continued from| -21 - | the last several years. This had been noticedwith respect of the MSAs, Work orders, SOWs|and Invoices called for and seen during the|course of assessment proceedings for A.Y.|2007-08. A good number of MSAs executed bythe assessee had been entered into from1.4.2000 to 31.3.2003.. During the course of assessment for A.Y.2007-08, it had been clearly detected that|similarISSUES|ofadditions/ disallowanceswere there for previous Assessment Year also.In fact the assessee company is in the same|business for the last few years and_ thebusiness agreements and business practicesof A.Y. 2007-08 had actually continued from| -21 - | the last several years. This had been noticedwith respect of the MSAs, Work orders, SOWs|and Invoices called for and seen during the|course of assessment proceedings for A.Y.|2007-08. A good number of MSAs executed bythe assessee had been entered into from1.4.2000 to 31.3.2003.. The details of revenues declared by theassessee onsite and offshore and the expenditure|incurred by the assessee in foreign currency areas belowfor the assessment year 2004-05: XXX XXX As per A.Y. 2007-08, 10% of the total onsite|revenues by the assessee have been held to beout of deputation of technical man power receipts.similarly 20% of the total onsite receipts of theassessee have been held to be on account ofonshoreTevenuesnotrelatedTothe STP|undertakings in India. As per this preliminaryestimation and considering similar percentages ofDTM actwity and onshore revenue activities forthe year, more than Rs.224 crores of softwareservices revenue claimed by the assessee for theyear is not eligible for deduction u/s 10A of the[..T. Act. -29 - | None of these facts of DTM actwity conducted,|onshore revenues earned without any link to the STPundertakings in India and capital expenditure forbuilding constructions claimed as revenue expenditureshave been disclosed by the assessee in the return ofincome and the Annual Reports submitted. It is alsoseen, that failure on the part of assessee to disclosefully and truly all material facts with regard todeduction u/s 1OA has resulted in allowing excess’deduction u/s 1OA for AY 2004-05 and allowing ofcapital expenditure as revenue expenditure- Similar reasons are recorded tor the other assessment years in question. 17.Relevant portion of Section 147 of the Act' during the relevant assessment years read thus: “147.Income escaping assessment.If the Assessing Officer has reason to believe that anyincome chargeable to tax has escaped assessmentjor any assessment year, he may, subject to theprovisions of sections 148 to 153, assess or reassesssuch income and also any other income chargeableto tax which has escaped assessment and whichcomes to his notice subsequently in the course of theproceedings under this section, or recompute theloss or the depreciation allowance or any other -93 - | allowance,|as|the CASECmaybe,fortheassessment year concerned (hereafter in thissection and in sections 148 to 153 referred to asthe relevant assessment year) : Provided that where an assessment under|sub-section (3) of section 145 or this section has_been made for the relevant assessment year, noaction shall be taken under this section after theexpiry offour years from the end of the relevantassessment year unless any income chargeabletotax.hasescapedassessmentforsuchassessment year by reason of the failure on the.part of the assessee to make a return undersection 139 or in response to a notice issuedunder sub-section (1) of section 142 or section|148 or to disclose fully and truly all material factsnecessaryforhis|assessment,forthatassessment year. Provided further that nothing contained inthe first proviso shall apply in a case where any|income in relation to any asset (including|financial interest in any entity) located outside|India, chargeable to tax, has escaped assessment|for any assessment year: Provided also that the Assessing Officer|may assess or reassess such income, other thanthe income involving matters which are _ th subject matters of any appeal, reference orrevision, which is chargeable to tax and has.escaped assessment.” Provided further that nothing contained inthe first proviso shall apply in a case where any|income in relation to any asset (including|financial interest in any entity) located outside|India, chargeable to tax, has escaped assessment|for any assessment year: Provided also that the Assessing Officer|may assess or reassess such income, other thanthe income involving matters which are _ th subject matters of any appeal, reference orrevision, which is chargeable to tax and has.escaped assessment.” 18.|The twin conditions to be satisfied to reopenthe assessment beyond four years are that |i] theassessing officer has reason to believe that the incomechargeable to tax has escaped assessment |1i] no fulland true disclosure of the material tacts at the time otoriginal assessment was made by the assessee. 19.|To conter jurisdiction under this section inrespect of assessment beyond the period of four yearsbut from the end of the relevant assessment year, thepre-requisite condition is that the Assessing officer musthave ‘reason to believe’ that any income chargeable totax has escaped assessment AQ.The third proviso contemplates that the’ Assessing Officer is conferred with a jurisdiction toassess or reassess such income, other than the income) -95 - | involving matters which are the subject matter of any appeal, reference or revision, which is chargeable to tax and has escaped assessment. D1 «The notice issued by the Assessing Officer under Section 148 of the Act reads thus: 4Notice under Section 148 of the'Income*tax Tax 1961 To, M/s. Infosys Technologies LtdElectronics City, Hosur Road., Bangalore-560100. Whereas I have reason to believe thatyour income chargeable to tax for theassessmentYear|IOQO4-05has.escapedassessment within the meaning of Section|147 of the Income-Tax Act. I, therefore propose to reassess theincome under section for the said assessmentyear and hereby require you to deliver to me.a return in the prescribed form ofyour incomefor the said assessment year within 30 days.from the date of service of this notice. ThisNotice.1S|beingissuedafterobtaining the necessary approval of the|Commissioner of Income-tax.”~ -96 - | DQ?|TheHon'bleBombay|High|CourtIn Multiscreen Media P. Ltd., V/s. Union of India and Another[No.1][&]>[authoredby|Hon’ble|Justice Dr.D.Y.Chandrachud as his lordship then was/has observed thus: “12) The notice issued by the AssessingOfficer under section 148 does not state that|there was a failure on the part of the|assessee to fully and truly disclose all|material facts necessary for the assessment|forassessmentyearYIOO?2-O3Theassessment was sought to be reopened after|the expiry of a period of four years from the|end of the relevant assessment year. In such|a case the Jurisdictional condition precedentStipulated by the proviso to Section 147 is afailure on the part of the assessee to fully andtruly disclose all material facts necessary for|assessmentforthatassessment|YEA|consequent upon which income chargeable to|tax has escaped assessment. That has not|been fulfilled. The notice does not even|purport to state so. The ground furnished inthe notice for reassessment would at the|highestindicatethataccordingtothe|AssistantCommissionerof|Income.Tax,|allocationof|EXPeNnsesas|between§the|petitioner and the foreign principal ought tohave been originally considered by _theAssessingOfficerwhentheorderof| 1}2010] 324 TTR 43 [Bom] -O7 - | 1}2010] 324 TTR 43 [Bom] -O7 - | assessmentLUGSpassedundersection143(3). That however would not give a valid|reason to reopen the assessment beyond a|period offour years, even assuming that theAssessing Officer had erred in not doing so,unless there was a failure on the part of the|assessee to fully and truly disclose all|material facts necessary for assessment.|Absent the existence of the jurisdictionalcondition precedent, assessment cannot be.reopened beyond a period offour years after|the expiry of the relevant assessment year, ashas been done in the present case. In thecircumstances, the notice for reassessment 1sliable to be quashed and set aside solely on|the ground that the Revenue has failed to|establish the existence of the jurisdictional|condition precedent to the exercise of the|power to reopen an assessment beyond aperiod of four years of the expiry of therelevant assessment year. YO3 Thus, it can be held that the notice issuedunder Section 148 of the Act does not fulfil the!jurisdictional condition precedent stipulated by theproviso to section 147 of the Act in as much as thefailure on the part of the assessee to fully and trulydisclose all material facts has resulted in escapement ofassessment of the income chargeable to tax. -98 - | D4As aforesaid, it is the contention of thepetitioner that all the material facts were fully and trulydisclosed in terms of the notes referred to above and theannual report of the company wherein income fromsoitware services and products is shown as overseasand domestic as well as revenues by location onsite andoftshore. These aspectsWEeETconsideredby theassessing officer at the time of original assessment. TheAssessing Officer based on the material facts hasconcluded the assessments allowing the deductionunder Section 10-A of the Act. Subsequently on the garb—of assessment order passed for the assessment yeartreating the onsite revenue as revenue collected fromDTM activities, revenue’ is intending to disallowsection 1OA deduction, invoking Section 147/148 ofthe Act. 5.|The next question would be whether such|information collected by the assessing officer through the assessments concluded for the assessment year2007-O8 would be construed as reason to believe|escapement of tax or borrowed satisfaction. 26.The Hon’ble High Court of Rajasthan in thecase oft Commissioner otIncome Tax Vs. Shree§Rajasthan Syntex Limited[5], dealing with the question |about validity of assumption of jurisdiction undersections 147 and 148 by the Assessing Officer, heldthat, the prerequisite condition which is said to be sinequa non is that the Assessing Officer ‘has reason tobelieve’ that income chargeable to tax has escapedassessment. The Assessing Officer had taken thedecision aiter considering all the facts and reopeningproceedings on account of the opinion of anotherAssessing Officer and came to the conclusion that theopinion of the Assessing Officer cannot replace theopinion of another Assessing Officer. In such a case, lawdoes not permit re-assessment on change of opinion2(2009) 313 TTR (Raj) and it was a ‘borrowed satisfaction’ under the opinion ofthe Assessing Officer at Mumbai, not sufficient to conferpower on the Assessing Officer at Rajasthan to initiatere-assessment proceedings. It is observed that if theAssessingOfficeraT|Mumbaihadnotalloweddepreciation allowance to the lessee based on the verylease deeds, the re-assessment proceedings would nothave been initiated at Rajasthan. | OT|The Division Bench of this Court in the case|oT|Commissioner of Income Tax & another Vs.|Hewlett-Packard Globalsoft Pvt. Limited[9], Whileconsidering the substantial question of law that,Whether on the facts and circumstances of the case, theTribunal was correct in holding that the reopening ofassessment is by mere change of opinion, withoutappreciating the fact that the expenditure related to on-sitedevelopmentoT|computer.sottwareWaS not 3(2016)330 ITR 3386 (Kar OT|The Division Bench of this Court in the case|oT|Commissioner of Income Tax & another Vs.|Hewlett-Packard Globalsoft Pvt. Limited[9], Whileconsidering the substantial question of law that,Whether on the facts and circumstances of the case, theTribunal was correct in holding that the reopening ofassessment is by mere change of opinion, withoutappreciating the fact that the expenditure related to on-sitedevelopmentoT|computer.sottwareWaS not 3(2016)330 ITR 3386 (Kar examined in the original assessment and as such is nota deemed opinion to hold change of opinion, held that,while completing the assessment under Section 143(3)of the Act, the Assessing Officer has gone into thequestion of excluding certain sum from the exportturnover on the ground that it was expenditure incurredin foreign exchange for providing technical servicesoutside India. The Assessing Officer had examined theclaim of expenditure incurred in foreign currency forproviding technical services by allocating the sumbetween the five STP units in the ratio of export sales.Certain queries were raised and considering the detailreply given by the assessee, the issue was thoroughlyaddressed, considered and the plea of the assesseecame to be accepted. In that view of the matter, itcannot be construed that there was either non-disclosure by the assessee or the Assessing Officer hadobtained material subsequent to framing of theassessment order so as to arrive at a conclusion that| there was escapement of income from tax. In suchcircumstances it was held that, the Tribunal was. justified in arriving at a conclusion that the re-openingof assessment was ‘change of opinion’ and the issueregarding eligibility of the income derived fromrendering technical services abroad to be eligible fordeduction under Section 10-A or not, had already beenconsidered by the Assessing Officer in the assessment ©concluded under Section 143 (3) of the Act. 28 ~The Cognate Bench of this Court in the case oT|M/s. Kotarki Constructions Put. Ltd., V/s. TheAsst. Commissioner of Income Tax and Another>[)]has observed thus: “... hthe deduction allowed to theextent of 68.75% only for the works which fell|within the four corners of Section 8O-IA/4/ of|the Act could not have been disallowed or'intended to be disallowed by resort to Section|147/148 of the Act under the garb of|subsequent Assessment order passed forthe subsequent A.Y.2013-14, which alsoprima-facie indicates that the Assessing )W.P.No.61671/2016 |D.D.02.01.2018| - 33 - | Authority has been swayed by the|words “Improvement, repairs and widening| DY _Theassessmenfs|concluded|for.thesubsequent year 2007-08 would not be construed as theindependent satisfaction of the assessing officer in as—much as the reason to believe that income chargeable totax has escaped assessment. The fact that the petitionerwas rendering technical services was considered by theassessing officer at the time of original assessment. It is"observed in the assessment order as thus: “Hence, the telecommunication chargesattributable to the delivery of computer'software outside India and expenses inforeign exchange|in|providingtechnicalservices outside India are to be reduced fromthe export turnover. The assessee company|submitted that in its own case, the BangaloreTribunal in ITA No.50/ 793 to 795, 742 and732 to 734 has confirmed that Infosys 1s not|involved in rendering of technical services|and therefore, no exclusion can be made of|any expenditure incurred in foreign currency|is to be made other than that already|excluded by the assessee company. However,the contention of the assessee company 1s not|acceptable since on the same issue, the.department has appealed before the Hon’ble| - 34 - | “Hence, the telecommunication chargesattributable to the delivery of computer'software outside India and expenses inforeign exchange|in|providingtechnicalservices outside India are to be reduced fromthe export turnover. The assessee company|submitted that in its own case, the BangaloreTribunal in ITA No.50/ 793 to 795, 742 and732 to 734 has confirmed that Infosys 1s not|involved in rendering of technical services|and therefore, no exclusion can be made of|any expenditure incurred in foreign currency|is to be made other than that already|excluded by the assessee company. However,the contention of the assessee company 1s not|acceptable since on the same issue, the.department has appealed before the Hon’ble| - 34 - | High Court in the assessee’s own case. Alsothe assessee company stated that there is no|elementof|technicalSCTUICESinvolved.However, this submission of the assesseecompany is not acceptable since there mightbe certain exclusive contracts for providing|technical services and also certain element ofproviding technical services in every contract. This issue is a recurring one and is pending|before the appellate authorities. Out|of|the|totalexpenditureof|Rs. 1926,63,15,664/-incurredinforeignexchange by the assessee company, an|amount of Rs. 1923,96,68,110/- relates to theLOA.unitandthe|balanceamountof|Rs.2,66,47,554/- relates to SOHHE units. Theassessee company has furnished a break-up|of the expenditure of Rs.1923,96,68,110/-|which 1s enclosed to this order as Annexure|A. As per the details furnished, an amount ofRs.872,42,20,529/- is in relation to marketing|expenses and other expenses. The balance ofRs.1051,54,47,581/-/including telecommunication|charges]LUGSfurther|bifurcated as under: Travel Expenses —Professional Charges _Data CommunicationChargesEmployee relatedTotal — 41,39,49,7112,42,98,265|10,37,42,694997,34,569111051,54,47,581 At|theSametime,theaSSCSSEFEcompany could not categorize/quantify the - 35 - | above sum as per the definition of the ExportTurnover ...... 3Q.In the case oftCommissioner of Income Tax, Gujarat Vs. Bhanji Lavuj[<], the Hon'ble Apex|Court while considering Section 34/1] [a] of the IncomeTax Act, 1922, observed that it is not for the assessee to)satisfy the Income-tax Officer that there was noconcealment with regard to any question; it is for theIncome-tax Officer, if that issue is raised, to establishthat the assessee had failed to disclose fully and trulycertain facts material to the assessment of income which had escaped assessment. Section 34]1]/a] does.not cast any duty upon the assessee to instruct theIncome-tax Officer on questions of law. Income-taxOfficer may, if he is satisfied that on account of failureon the part of the assessee to disclose fully and truly allmaterial facts necessary for the purpose of assessment,income has escaped assessment, he may assess or 5(1971) 79 TTR 983 (8.C) - 36 - | reassess the income. But when the primary tactsnecessary for assessment are fully and truly disclosed,he is not entitled on change of opinion to commenceproceedings for the reassessment. 31.)It is beneficial to refer to the caseIndian Oil Corporation Vs. Income Tax Officer, Central CircleV, Calcutta and Others[,], wherein the Hon'ble ApexCourt has observed thus: “AS is well-settled now by the severalauthorities of this court and of several High|Courts, there must be materials to come to the|conclusion that there was “omission or failure|to disclose fully and truly all material facts|necessary for the assessment of the year’. It|postulates a duty on every assessee todisclose fully and truly all material facts|necessary for the assessment. Therefore, an|obligation is to disclose facts; secondly, those|which are material; thirdly, the disclosure|must be full and, fourthly, true. What facts|are material and necessary for assessment|will differ from case to case. In every|assessment proceeding, for computing or|determining the proper tax due from the|assessee, it is necessary to know all the facts|which help the assessing authority in coming| 6(1986) 199 TTR 997(8.C.) “AS is well-settled now by the severalauthorities of this court and of several High|Courts, there must be materials to come to the|conclusion that there was “omission or failure|to disclose fully and truly all material facts|necessary for the assessment of the year’. It|postulates a duty on every assessee todisclose fully and truly all material facts|necessary for the assessment. Therefore, an|obligation is to disclose facts; secondly, those|which are material; thirdly, the disclosure|must be full and, fourthly, true. What facts|are material and necessary for assessment|will differ from case to case. In every|assessment proceeding, for computing or|determining the proper tax due from the|assessee, it is necessary to know all the facts|which help the assessing authority in coming| 6(1986) 199 TTR 997(8.C.) - 37 - | to the correct conclusion. From the primary|facts in his posn, whether on disclosure by.the assessee, or discovered by him on the|basis of the facts disclosed, or otherwise, the|assessing authority has to draw inferences|as to certain other facts. But on the primary|fact, it is for the taxing authority to drawninferences. It is not necessary for the|assessee to drawn inferences for him. See, in|this connection, the observations in Calcutta|Discount Co., Ltd.,’s case [1961] 41 ITR 191)[SC//. In.thisCAUSE,it1S NECESSATLY.....ceccccceccceessesseeseewhat was done, what was being claimed by|the London office and the dzifficulties inproducing the accounts or the opinion of theauditors for which the Income-tax Officers|had called upon the assessee, were allknown to the Income-tax Officers at the time|of making the original assessments. In spite|of the same, the Income-tax Officer chose to|assess the assessee in the manner he did.” 32.|In the case ofIncome Tax Officer, I Ward, Distt. VI, Calcutta & others Vs. Lakhmanit Mewal Das[v]>the Hon'ble Apex Court has observed thus: As stated earlier, the reasons for the|formation of the belief must have a rationalconnection with or relevant bearing on the|formation of the belief. Rational connection 7(1976) 103 ITR 437 (8.C.) -38 - | postulates that there must be a direct nexus|or live link between the material coming to the|notice of the Income-tax Officer and_ theformation of his belief that there has beenescapement of the income of the assessee|from assessment in the particular yearbecause of his failure to disclose fully and|truly all material facts. It is no doubt true that|the court cannot go into the sufficiency or|adequacy of the material and substitute its|own opinion for that of the Income-tax Officer|on the point as to whether action should be|initiated for reopening assessment. At the|Same time we have to bear in mind that it 1s}not any and every material, howsoever vague|and indefinite or distant, remote and far-|fetched, which would warrant the formationof the belief relating to escapement of the|income of the assessee from assessment. The|fact that the words ‘definite information”which were there in section 34 of the Act of|1922 at one time before its amendment in|1948 are not there in section 147 of the Act of|1961 would not lead to the conclusion thatactioncannotbe.takenforreopeningassessment even if the information is wholly|vague, indefinite, far-fetched and remote. The|reason for the formation of the belief must be|held in good faith and should not be a mere|pretence. The powers of the Income-tax Officer toreopen assessment though wide are not|plenary. The words of the statute are "reasonto belteve" and not "reason to suspect”. The.reopening of the assessment after the lapse ofmany years 1s a serious matter. The Act, no| - 39 - | The powers of the Income-tax Officer toreopen assessment though wide are not|plenary. The words of the statute are "reasonto belteve" and not "reason to suspect”. The.reopening of the assessment after the lapse ofmany years 1s a serious matter. The Act, no| - 39 - | doubt, contemplates the reopening of the|ass