Wp/7699/2018 Of Hsbc Software Development (India) Pvt v. The Deputy Commissioner Of Income Tax Circle 11, Pune And Anr

IN THE HIGH COURT OF JUDICATURE AT BOMBAYAPPELLATE SIDE CIVIL JURISDICTION WRIT PETITION NO. 7699 OF 2018 HSBC Software Development (India) Pvt. Ltd., ..Petitioner.v/s.The Deputy Commissioner of Income TaxCircle-11, Pune & Others ..Respondents. Mr. Nitesh Joshi i/b. Mr. A. K. Jasani, for the Petitioner.Mr. Charanjeet Chanderpal with Ms. Pragya Chandra, for theRespondents. P.C:- CORAM: AKIL KURESHI & M.S.SANKLECHA, JJ.DATE : 14[th] FEBRUARY, 2019. Petition taken up for final disposal at this stage. 2Petitioner has challenged a notice dated 16[th] March, 2018 ofre-opening of an assessment issued by Respondent No.1-Assessing Officer. 3Brief facts are as under:- (i)Petitioner is a company, registered under the Companies Act, 1956 and is engaged in the business of providing Software Development Services. Petitioner is a part of HSBC group of Companies Worldwide. wp-7699-2018 (ii)For the Assessment Year 2011-12, Petitioner had filed return of income, which was taken in scrutiny by the Assessing Officer. He passed an order of assessment under Section 143(3) of the Income Tax Act, 1961 (in short "the Act") on 30[th] March, 2013.income, which was taken in scrutiny by the Assessing Officer. He passed an order of assessment under Section 143(3) of the Income Tax Act, 1961 (in short "the Act") on 30[th] March, 2013. (iii)To re-open such assessment, the Assessing Officer issued the impugned notice, which can be seen, was done beyond a period of four years from the end of relevant Assessment Year. In order to do so, the Assessing Officer had recorded the following reasons:-impugned notice, which can be seen, was done beyond a period of four years from the end of relevant Assessment Year. In order to do so, the Assessing Officer had recorded the following reasons:- -Reasons for reopening of the Assessment in the case of M/s. HSBC-Software Development (Indai) Pvt. Ltd.: During the period relevant to A.Y. 2011-12, the assesseecompany was engaged in the business of Software Development asrequired for Banking Operation of the HSBC Group. The assesseecompany also undertook value added Information Technologicalservices, acted as an in-house software development centre anddeveloped solutions and software implementation services forgroup companies of HSBC spread across the globe. Return ofincome for A.Y. 2011-12 was filed electronically by the assesseecompany on 25/11/2011 declaring total income ofRs.31,99,35,403/-. Order u/s. 143(3) of the Act was passed on30/03/2015 determining total income at Rs.146,32,01,943/-. Inthe scrutiny assessment, additions of Rs.113,15,18,134/- andRs.1,20,60,460/- were made to the returned income by makingdisallowance u/s. 10B(7) r.w.s. 80IA and u/s. 14A r.w. Rule 8Drespectively. 2.On examination of the case records, it is gathered that theassessee company had been paying huge amount to its partnercompany i.e. HSBC Holdings Plc,, United Kingdom every year forusage of common platform created for development of IT Domainsunder an IT Domains under an IT Domains Cost SharingAgreement (CCA). Expenses had been claimed for such paymentsbut tax had not been deducted at source thereon u/s. 195 of theIncome Tax Act, 1961. While completing the assessment 2.On examination of the case records, it is gathered that theassessee company had been paying huge amount to its partnercompany i.e. HSBC Holdings Plc,, United Kingdom every year forusage of common platform created for development of IT Domainsunder an IT Domains under an IT Domains Cost SharingAgreement (CCA). Expenses had been claimed for such paymentsbut tax had not been deducted at source thereon u/s. 195 of theIncome Tax Act, 1961. While completing the assessment proceedings in the case of assessee company for A.Y. 2013-14, itwas concluded that tax should have been deducted at sourceagainst the payments of IT Domain cost u/s. 195 r.w.s. 90 of theAct and Article 13 of the DTAA as the same was either in thenature of Fees for Technical Services or Royalty. Afterexamination of the facts in the case and after duly considering thecontentions/ submissions of the assessee company, expensesclaimed on account of IT Domain cost paid to the parent companywas disallowed u/s. 40(a)(i) of the Act by the undersigned aftermaking elaborate discussions in the assessment order passed inthe case of assessee company for A.Y. 2013-14. It is further notedthat the above action of the Assessing Officer has duly ratified bythe Ld. Commissioner of Appeals while deciding the appeal filedbefore him by the assessee company on said issue. 3.It is gathered that during assessment year 2011-12, theassessee company had made payments under the nomenclature atIT Domain Cost to HSBC Holdings Plc., UK to the tune ofRs.65,67,13,183/- on which tax was not deducted at source.Therefore, in view of the facts stated above, expenses claimed onaccount of IT Domain Cost amounting to Rs.65,67,13,183/- wasnot an allowable expenses. The assessee company had notdisallowed on its own while filing return of income for A.Y. 2011-12. Also, the same was not disallowed u/s. 40(a)(i) of the Act inthe assessment order dated 30/03/2015 passed u/s. 143(3) of theAct for A.Y. 2011-12. I, therefore, have reasons to believe thatincome to the tune of Rs.65,67,13,183/- has escaped assessmenton account of failure on the part of the assessee company withinthe meaning of Explanation 1 to Section 147 of the Act as it hadnot disclosed fully and truly all material facts necessary for theassessment for A.Y. 2011-12 which have been gathered duringsubsequent assessment proceedings. 4.In this case, a return of income was filed for A.Y. 2011-12and regular assessment u/s. 143(3) of the Act was made on30/03/2015. Since, four years from the end of the relevant yearhas expired in this case, the requirements to initiate proceedingsu/s. 147 of the Act are reason to believe that income for the yearunder consideration has escaped assessment because of failure onthe part of the assessee company to disclose fully and truly all material facts necessary for the assessment for the assessment yearunder consideration. It is pertinent to mention here that reasonsto believe that income has escaped assessment for the year underconsideration have been recorded above at paragraph 3. I havecarefully considered the assessment records containing thesubmissions made by the assessee company in response to variousnotices issued during the assessment proceedings and have notedthat the assessee company has not fully and truly disclosed thematerial facts necessary for the assessment for the year underconsideration. Thus, it is evident from the above facts that theassessee company had not truly and fully disclosed all materialfacts necessary for the assessment for the year under considerationthereby necessitating reopening u/s. 147 of the Act. 5.It is true that the assessee company has filed a copy ofannual report and audited P & L A/c and balance sheet alongwith return of income where various information/ material weredisclosed. However, the requisite full and true disclosure of allmaterial facts, necessary for assessment has not been made asnoted above. It is pertinent to mention here that even though theassessee company has produced books of accounts, annual reportand audited P & L A/c and balance sheet or other evidence asmentioned above, the requisite material facts as noted above inthe reasons for reopening were embedded in such a manner thatmaterial evidence could not be discovered by the Assessing Officerand could have been discovered with due diligence, accordinglyattracting provisions of Explanation 1 of Section 147 of the Act. 6.It is evident from the above discussions that in this case, theissue under consideration was never examined by the AssessingOfficer during the course of regular assessment. This fact iscorroborated from the contents of notices issued by the AssessingOfficer u/s. 143(2)/142(1) of the Act on various dates during thecourse of regular assessment proceedings for A.Y. 2011-12. It isimportant to highlight here that material facts relevant for theassessment on the issue under consideration were not filed duringthe course of regular assessment proceedings and the same may beembedded in annual report, audited P & L A/c. balance sheet andbooks of account in such a manner that it would require duediligence by the Assessing Officer to extract these information. For aforestated reasons, it is not a case of change of opinion by theAssessing Officer. 7.In this case, more than four years have lapsed from the endof assessment year under consideration. Hence, necessary sanctionto issue notice u/s. 148 has been obtained from PrincipalCommissioner of Income Tax-1, Pune as per the provisions ofsection 151 of the Act which has been communicated vide hisoffice letter No.PN/Pr. CIT-1/u/s. 148/HSBC/2017-18/3624dated 09/03/2018.” (iv)Upon being supplied the reasons, the assesses raised objections to the notice of re-opening under letter dated 4[th] May, 2018. Such objections were disposed of by the Assessing Officer by an order dated 31[st] May, 2018. Hence, the Petition.the notice of re-opening under letter dated 4[th] May, 2018. Such objections were disposed of by the Assessing Officer by an order dated 31[st] May, 2018. Hence, the Petition. 4Taking us through the reasons recorded by the AssessingOfficer and other documents on record, Counsel for the Petitioner raisedfollowing contentions:- (i)that the impugned notice was issued beyond a period of four years from the end of the relevant Assessment Year. There was no failure on the part of the assessee to disclose truly and fully all material facts. The notice of re-opening of assessment was, therefore, invalid;from the end of the relevant Assessment Year. There was no failure on the part of the assessee to disclose truly and fully all material facts. The notice of re-opening of assessment was, therefore, invalid; (ii)In the present case, there was no income chargeable to tax which had escaped assessment. Counsel pointed out that, the Assessing Officer had computed the assessee's tax liability as per the normal provisions but by virtue of the reliefs granted by the Commissioner (Appeals), such computation was made under Section 115JB of the Act. Even if, the proposed additions as per reasons recorded, were to be made, the Company would still continue to be governed by had escaped assessment. Counsel pointed out that, the Assessing Officer had computed the assessee's tax liability as per the normal provisions but by virtue of the reliefs granted by the Commissioner (Appeals), such computation was made under Section 115JB of the Act. Even if, the proposed additions as per reasons recorded, were to be made, the Company would still continue to be governed by the MAT provisions; the MAT provisions; (iii)Counsel submitted that the expenditure in question, referred to in the reasons recorded, was subjected to transfer pricing scrutiny. Thus, the re-opening of assessment was, based on change of opinion; and (iv)Counsel lastly contended that sanction was granted by the Principal Commissioner on 9[th] March, 2018 whereas the reasons appeared to have been recorded on 16[th] March, 2018. Thus, nullifying the sanction granted by the Principal Commissioner. 5On the other hand, Counsel for the Revenue opposed thePetition, contending that, the issue raised by the Assessing Officer in thereasons recorded, was never decided by him in the original assessmentproceedings. This is, therefor, no case of change of opinion. What effect,the additions may have on the assessee's tax liability, cannot be foreseenat this stage. He pointed out that copy of reasons produced and annexedat Exh.N conveys the reasons recorded and it also records in para 7thereof the factum of sanction obtained from competent authority. Thiswould not mean that the reasons were recorded on 16[th] March, 2018 ascontended. More importantly, Counsel contended that mere productionbefore the Assessing Officer all books of accounts or other evidence fromwhich material evidenced for due diligence, have been discarded by theAssessing Officer, will not amount to full and true disclosure within themeaning of first proviso to Section 147 of the Act. He, of course, relied onExplanation 1 to Section 147 of Act. 6Having heard the learned Counsel for the parties and having perused the facts and documents on record, we may analyze the reasonsrecorded by the Assessing Officer. Paragraphs 2 and 3 of the reasonsrecorded form foundation of the belief of the Assessing Officer that,income chargeable to tax, has escaped assessment. In these paragraphs,the Assessing Officer pointed out that, assesses during the period relevantto Assessment Year, had made payments to its partner-company HSBCHoldings Plc, United Kingdom for usage of common platform. However,on said expenses, tax was not deducted at source in terms of Section 195of the Act. Therefore, the expenditure to the tune of Rs.65.67 Crores hadto be disallowed as per Section 40(a)(i) of the Act. He further recordsthat, that is how he has treated the expenditure by passing AssessmentOrder for the Assessment Year 2013-14. In paragraph 5, Assessing Officerrecorded as under:- “It is true that the assessee company has filed a copy of annualreport and audited P & L A/c and balance sheet along with returnof income where various information/ material were disclosed.” However, he goes on to record that, the assessee had nottruly and fully disclosed all material facts necessary for assessment. 7We fail to see how the Assessing Officer can sustain hiscontention of lack of true and full disclosure by assessee. Plain facts of thecase are that, the assessee had, even as admitted by the Assessing Officer,filed full details, particulars, and audited accounts along with the return,in which, the payments in question, were duly reflected. The onus of theassessee to make disclosure would end upon such disclosure of primaryfacts. It is well settled, through series of judgments, starting from the ApexCourt decision in Calcutta Discount v/s. ITO 41 ITR 191, the responsibility of the assessee is to disclose primary facts. What furtherenquiring, inference and in law is to be drawn from said facts, is fullywithin the realm of the Assessing Officer's jurisdiction. 8In paragraph 3 of the reasons, in order to support lack of trueand full disclosure, the Assessing Officer referred to the fact that, theassessee had not on its own disallowed expenditure in terms of Section40(a)(i) of the Act. Thus, Assessing Officer expects the assessee to makethe disallowance involuntarily to be able to claim full and true disclosure. responsibility of the assessee is to disclose primary facts. What furtherenquiring, inference and in law is to be drawn from said facts, is fullywithin the realm of the Assessing Officer's jurisdiction. 8In paragraph 3 of the reasons, in order to support lack of trueand full disclosure, the Assessing Officer referred to the fact that, theassessee had not on its own disallowed expenditure in terms of Section40(a)(i) of the Act. Thus, Assessing Officer expects the assessee to makethe disallowance involuntarily to be able to claim full and true disclosure. 9To reiterate the entire reasons recorded by the AssessingOfficer proceeded on material already on record. It is not the case of theAssessing Officer that after completion of the original scrutiny assessment,he came upon some additional or alien material which had an effect ontaxability of the expenditure in question. 10The Assessing Officer in his reply has admitted that theassessee had filed Form 3 CEB, in which, the expenditure in question wasduly reflected. In fact, as pointed out by the Counsel for the Petitioner,such expenditure also came up for scrutiny during the enquiry in relationto the transfer pricing. 11In absence of lack of full and true disclosure on the part ofthe assessee, the Assessing Officer could not have re-opened theassessment by issuing impugned notice, which was done after four yearsfrom the end of the relevant Assessment Year. 12In view of this conclusion, it is not necessary to examine thePetitioner's second contention of no income chargeable to tax, havingescaped assessment, which would require us to take into account variouscontentions such as - whether the order of Commissioner (Appeals) hasachieved finality and whether after notionally adding the expenditurereferred to in the reasons recorded, the Petitioner-Company would stillcontinue to be governed by the MAT provisions. 13However, we do not accept the third and forth contentions ofthe Counsel for the Petitioner. Firstly, admittedly, the present issue wasnot examined by the Assessing Officer during original scrutiny assessmentand, therefore, he had not formed any opinion at this stage. Secondly, thecommunication of reasons contained in paragraph 7 refers to the sanctionorder of the Principal Commissioner which was granted on 9[th] March,2018. This communication is dated 16[th] March, 2018 which does notmean that the reasons were recorded on 16[th] March, 2018 . 14In the result, Petition is allowed. Impugned notice is setaside. (M.S.SANKLECHA,J.) (AKIL KURESHI,J.)