Precilion Holdings Limited v. The Deputy Commissioner of Income-tax, International Taxation -3(3)(2), Mumbai & Ors
[Citation -2019-LL-0225-31]

Citation 2019-LL-0225-31
Appellant Name Precilion Holdings Limited
Respondent Name The Deputy Commissioner of Income-tax, International Taxation -3(3)(2), Mumbai & Ors.
Court HIGH COURT OF BOMBAY
Relevant Act Income-tax
Date of Order 25/02/2019
Assessment Year 2011-12
Judgment View Judgment
Keyword Tags tax residency certificate • international transaction • reopening of assessment • associated enterprise • escapement of income • source of investment • reason to believe • beneficial owner • transfer pricing • interest income • double taxation • foreign company • dtaa • convertible debenture • full and true disclosure • arm length price • fishing and roving enquiry
Bot Summary: During the course of the assessment of the petitioner assessee for the subsequent assessment years, the entire issue was examined by the Assessing Officer at length and he has come to the 6 of 18 ::: Uploaded on - 27/02/2019 ::: Downloaded on - 28/02/2019 12:00:31 ::: 1. Os wp 3342 18.doc assessment year 2012-13, the Assessing Officer has not raised any query on the above issue and the same was not verified during the course of the assessment proceedings for the assessment year 2012-13. In the quoted portion of the reasons, he goes on to suggest that the Assessing Officer during the scrutiny for assessment year 2012.13 had not raised any query on this aspect and had not verified the same during the assessment. His reference to the subsequent assessment, in absence of any additional material outside of the present assessment proceedings would not form a valid source of information permitting him to reopen assessment. If during the assessment of the later assessment year, the Assessing officer collects or chances upon new material which may have bearing on the assessment of the assessee, and in case where the assessment is sought to be reopened beyond four years, he can also establish lack of true and full disclosures on the part of the assessee, it may be open for him to reopen assessment of the earlier year. Under these circumstances, the Assessing Officer's reference to further exercise undertaken while carrying out scrutiny assessment for the assessment year 2014-15 during which he decided to tax the assessee at higher rate would not enable the Assessing Officer in the present case to reopen the assessment beyond four years. In case of Rabo India Finance Ltd Vs. Deputy CIT2, this Court observed that the judgments of the Supreme Court lay down a principle that the Assessing Officer acts within jurisdiction in reopening the assessment on the basis of the information which comes to him after the original assessment and during the course of the assessment proceedings for subsequent assessment years.


IN HIGH COURT OF JUDICATURE AT BOMBAY O.O.C.J. WRIT PETITION NO. 3342 OF 2018 Precilion Holdings Limited .. Petitioner Versus Deputy Commissioner of Income Tax, International Taxation -3(3)(2), Mumbai & Ors. .. Respondents .. Mr. Jehangir Mistri, Senior Counsel a/w Mr. Madhur Agrawal i/by Atul Jasani for Petitioner Mr. P.C. Chhotaray for Respondents ... CORAM : AKIL KURESHI & M.S. SANKLECHA, JJ. DATE : FEBRUARY 25, 2019. ORAL JUDGMENT (Per Akil Kureshi, J.) 1. petitioner has challenged notice of reopening of assessment dated 3.4.2018. 2. Brief facts are as under:- 2.1 Petitioner is company incorporated in Cyprus enjoying tax residency certificate issued by Cyprus Authorities. Petitioner's principal activity is to act as investment holding company. During assessment year 2011-12, petitioner had made investment in Compulsory Convertible 1 of 18 ::: Uploaded on - 27/02/2019 ::: Downloaded on - 28/02/2019 12:00:31 ::: 1. os wp 3342 18.doc Debentures of M/s. Wadhwa Residency Pvt Ltd, company incorporated in India, of sum of Rs. 161.31 crore (rounded off). On such investment, petitioner had received interest amount of Rs. 11.93 crore (rounded off) during relevant period. petitioner had filed return of income for assessment year 2012-13 declaring total income of Rs. 11.93 crore being interest eared by petitioner and offered same to tax @ 10%, placing reliance on Article 11 of Double Taxation Avoidance Agreement ("DTAA" for short) between India and Cyprus. It is undisputed that M/s. Wadhwa Residency Pvt Ltd is associated enterprise of petitioner and receipt of interest income was subject to transfer pricing mechanism. order of assessment came to be passed by Assessing Officer on petitioner's said return of income under Section 143(3) of Income Tax Act, 1961 ("the Act) for short) on 23.3.2016. income was taxed at 10%, as offered by petitioner. In order to reopen such assessment, Assessing Officer had issued impugned notice. For doing so, Assessing Officer had recorded following reasons:- 2 of 18 ::: Uploaded on - 27/02/2019 ::: Downloaded on - 28/02/2019 12:00:31 ::: 1. os wp 3342 18.doc "THE REASONS FOR INITIATING PROCEEDINGS U/S 148 FOR A.Y. 2012-13 return of income for A.Y. 2012-13 was e-filed on 30.11.2012 declaring total income of Rs. 11,93,41,710/- On which assessee has deducted TDS of Rs. 1,19,34,170/. @ 10%. return was processed u/s 143(1) on 31.12.2013. 2. assessee company ie. Precilion Holding Limited is company incorporated in Cyprus. assessee has offered interest income at tax rate of 10% claiming beneficial ownership of interest income as per Article 11 of DTAA. 3. case was selected for scrutiny and assessment order u/s 143(3) r.w.s. 92CA(3) of I. T. Act was passed on 23.03.2016 accepting returned income. 4. draft assessment order u/s 143(3) r.w.s 92CA(3) r.w.s. 144C(1) of Income Tax Act, 1961 was completed for A.Y. 2014-15 on 29.12.2017. During course of assessment proceedings following facts merged out and assessee was denied beneficial ownership of interest income. 5. In this case for A.Y. 2014-15, assessee is Cyprus based Foreign Company. It holds investments in Compulsory Convertible Debentures (CCD's) in various Indian companies and offers for tax interest income on such investments on receipt basis. said income of Rs. 55,01,17,499/- has been offered to tax @ 10% as per provisions of Article 11(2) of DTAA by assessee as beneficial owner of interest income. 6. To be beneficial owner of interest income assessee should be independent and free to utilize its interest income on its own and it should have substantial commercial activity in Cyprus. 7. In order of interest income at lower tax rate @ 10%, assessee has to be beneficial owner of such interest income. 8. Accordingly in order to verify same movement of receipts and payments through bank account transfer was verified and analyzed. Source of investment made by assessee was inquired into and 3 of 18 ::: Uploaded on - 27/02/2019 ::: Downloaded on - 28/02/2019 12:00:31 ::: 1. os wp 3342 18.doc nature of payback to investors was analyzed. inquiry regarding whether assessee has any office and employees on its payroll in Cyprus was made. Activities of directors were studied and related party transactions if any were looked into. Articles of Association and memorandum of association of company were gone through and terms and conditions of issue of various types of shares were studied. 9. Thus, it is clearly established that assessee has invested in CCD's of Indian company out of its share holders funds. Upon receipt of interest income related to CCD's, invariably within 6 to 20 days, this income amount is transferred to share holder by paying dividend. Pay out of income is dependent on receipt of interest income in terms of timing and availability of funds. Assessee does not have single employee and any substantial economic activity in Cyprus and working of company is controlled by beneficial share holder of company by hiring of services of working as directors from employees of IPS Mauritius by whom local address is given in Mauritius to beneficial owner of Assessee Company. 10. In assessment proceedings, it is held that assessee is not beneficial owner of this income on these tests and thus treaty benefits are denied to assessee to extent of interest income only in present case. Interest income of Rs. 55,01,17,499/- is taxed at rate @ 20% as per provision of section 115A(1)(a)(ii) of I.T. Act, 1961 instead of 10% offered by assessee. 11. In view of this, it was held that assessee is not beneficial owner of this income on these tests and thus treaty benefits are denied to assessee in respect of interest income. Interest income is taxed at rate @ 20% as per provision of Section 115A(1)(a)(ii) of I.T. Act, 1961. 12. It is pertinent to note that during assessment proceedings, order u/S. 143(3) r.w.s. 92CA(3) of I.T. Act, 1961 for A.Y. 2012-13 was passed on 23.03.2016. assessing officer has not raised any query on above issue and same was not verified during course of assessment proceedings for A.Y. 2012-13. Keeping in view of above fact, issue is required to be verified for A.Y. 2012-13. 4 of 18 ::: Uploaded on - 27/02/2019 ::: Downloaded on - 28/02/2019 12:00:31 ::: 1. os wp 3342 18.doc 13. In view of above facts, it is clear that interest income is taxed at low rate of 10% instead of 20% and I have reason to believe that provisions of clause (c) of Explanation 2 to Section 147 of Income Tax Act are applicable to facts of this case and assessment year under consideration is deemed to be case where income which is more than Rs. 1,00,000/- chargeable to tax @ 20% rate tax has escaped assessment. 14. In this case, more than four years have lapsed from end of assessment year under consideration. Hence, necessary sanction to issue notice u/S. 148 has been obtained separately from Commissioner of Income Tax(IT)-3, Mumbai as per provisions of Section 151 of Act." 2.2 petitioner raised objections to notice of reopening of assessment under communication dated 28.5.2018. Such objections were disposed of by Assessing Officer by order dated 25.9.2018. Upon which, this petition came to be filed. 3. Appearing for petitioner, learned senior counsel Shri. Mistri raised following contentions in support of challenge:- i. impugned notice has been issued beyond period of four years from end of relevant assessment year. petitioner had made true and full disclosures in return filed. Assessing Officer, therefore, could not have 5 of 18 ::: Uploaded on - 27/02/2019 ::: Downloaded on - 28/02/2019 12:00:31 ::: 1. os wp 3342 18.doc reopened assessment; ii. During scrutiny assessment, entire issue was examined by Assessing Officer. Only after which order of assessment was passed accepting stand of petitioner that interest income was correctly offered to tax @ 10%. Even in order of assessment, this aspect has been referred by Assessing Officer; iii. Even on merits, Assessing Officer's stand is completely incorrect. petitioner enjoys tax residency certificate issued by Cyprus Authorities. Assessing Officer cannot disregard such certificate to hold belief that assessee company is not genuine company based in Cyprus and that, therefore, benefit of reduced rate of tax as per DTAA was wrongly claimed. 4. On other hand, learned counsel Shri. Chhotaray opposed petition contending that Assessing Officer has recorded proper reasons. During course of assessment of petitioner assessee for subsequent assessment years, entire issue was examined by Assessing Officer at length and he has come to 6 of 18 ::: Uploaded on - 27/02/2019 ::: Downloaded on - 28/02/2019 12:00:31 ::: 1. os wp 3342 18.doc conclusion that assessee had wrongly claimed reduced rate of tax on interest income. Thus, formation of belief of Assessing Officer in present case is based on information available subsequent to framing of assessment. He relied on several decisions reference to which would be made at appropriate stage. 5. Having thus, heard learned counsel for parties, we may record that impugned notice has been issued beyond period of 4 years from end of relevant assessment year. Under these circumstances, additional requirement flowing from first proviso of Section 147 of Act that escapement of income chargeable to tax should be due to failure on part of assessee to disclose truly and fully all material facts, must be satisfied. We may peruse materials on record on such basis. 6. perusal of reasons recorded by Assessing Officer would show that according to Assessing Officer, in order to claim benefit of Article 11 of DTAA, assessee had to be beneficial owner of interest income 7 of 18 ::: Uploaded on - 27/02/2019 ::: Downloaded on - 28/02/2019 12:00:31 ::: 1. os wp 3342 18.doc and in turn, assessee should be independent and free to utilize its interest income on its own and should have substantial commercial activities in Cyprus. He has further recorded during course of assessment for assessment year 2014-15 to verify movement and receipt of payments, bank account was verified and analyzed. Source of investment of assessee was inquired into and nature of payback to investors was analyzed by Assessing Officer. He has also verified activities of directors and related party transactions. He had also gone through Articles of Association and Memorandum of Association of company. On basis of such material, Assessing Officer had come to certain important conclusions ultimately leading to his belief that assessee was not beneficial owner of interest income and that, therefore, reduced rate of tax @ 10% was not available, instead, assessee would have to pay tax at higher rate on such income. 7. In reasons, Assessing Officer further records that in respect of scrutiny assessment for 8 of 18 ::: Uploaded on - 27/02/2019 ::: Downloaded on - 28/02/2019 12:00:31 ::: 1. os wp 3342 18.doc assessment year 2012-13, "the Assessing Officer has not raised any query on above issue and same was not verified during course of assessment proceedings for assessment year 2012-13". Keeping in view above fact, issue requires to be verified for assessment year 2012-13" 8. We notice that during course of assessment proceedings for assessment year 2012.13, Assessing Officer had raised multiple queries and elicited replies from petitioner assessee. For example, under letter dated 16.2.2016, Assessing officer had called for, besides other, following information:- "7. Furnish details of share holding / investments / loans / advances & interest earned / paid with M/s. Wadhwa Residency Pvt Ltd as on 31.3.2011, 31.3.2012 and 31.3.2013. 8. Furnish details of purchases of debentures / shares from Wadhwa Residency Pvt Ltd; 9. Furnish list of directors of company along with details of their share holdings; 10.Furnish details of investments made / interest with M/s. Wadhwa Residency this is your associated enterprises." In reply to such queries, assessee under communication dated 2.3.2016 had provided following 9 of 18 ::: Uploaded on - 27/02/2019 ::: Downloaded on - 28/02/2019 12:00:31 ::: 1. os wp 3342 18.doc information and documents :- "A. At outset, we wish to inform you that assessee is investment holding company incorporated in Cyprus on 20 April 2011. assessee has made investment in compulsory convertible debentures ("CCDs") of Wadhwa Residency Private Limited ("WRPL") amounting to Rs. 1,61,53,50,000 during year under consideration. Further, assessee has received interest on CCDs amounting to Rs. 11,93,41,705/- assessee has earned interest on CCDs and has not earned any other income in India during year under consideration. B. ........ 3. Copy of incorporation certification is enclosed as Annexure III 5. Copy of financial statements is enclosed as Annexure VI. Further, assessee is foreign company and made investment in India and therefore, assessee is not required to prepare tax audit report. 7. assessee has earned interest on CCDs from WRPL as follows:- AY 2011-12 - Nil. Investment was made in CCDs in AY 2012- 13 AY 2012-13 - Rs. 11,93,41,705 AY 2013-14 - Rs. 32,30,70,000 8. Copy of agreement in respect of investment in CCDs of WRPL is enclosed as Annexure VII. 9. Directors of assessee company are as follows: a. Briantserve Limited b. Ceantrust Limited c. Basanta Lala Couldiplall Shareholding structure of assessee is as under:- 10 of 18 ::: Uploaded on - 27/02/2019 ::: Downloaded on - 28/02/2019 12:00:31 ::: 1. os wp 3342 18.doc Sr. No. Name of Shareholder Percentage of shareholding 1 IL & FS Realty Fund II LLC 74.46% 2 Saffron India Real Estate Fund I 25.54% Total 100% 10. Please refer point above. 12. Copy of bank account and bank statement is enclosed as Annexure IX and Annexure X. Along with this communication, petitioner had annexed certain documents which included bank statement. On 16.3.2016, petitioner supplied further information to Assessing Officer which included following:- "The total grossed up amount of interest was INR 119,341,705. WRPL deducted tax at rate of 10 percent as per Article 11 of Double Taxation Avoidance Agreement between India and Cyprus. 3. assessee company was formed on 20 April 2011. IL&FS Realty Fund II LLC and Saffron India Real Estate I invested into 74.46% and 25.54% of equity shares of assessee respectively. assessee had invested money received against equity shares into CCDs of WRPL. Copy of bank statement depicting flow is enclosed as Annexure III. 4. Details of shareholders of assessee are as under Sr. No. Name of Shareholder Percentage of shareholding 1 IL & FS Realty Fund II LLC 74.46% Address : IFS Court, Twenty Eight Cybercity, Ebene, Mauritius 11 of 18 ::: Uploaded on - 27/02/2019 ::: Downloaded on - 28/02/2019 12:00:31 ::: 1. os wp 3342 18.doc 2 Saffron India Real Estate Fund I 25.54% Address : Rogers House, 5 Joh N. President Cennedt Street, Port Lueis Mauritius Total 100% We further confirm that above entities are tax residents of Mauritius and do not have any upstream shareholders in India." Under letter dated 21.3.2016, petitioner supplied following additional documents: "Further, without prejudice to above, as requested by your goodself, we submit as under:- 1. Shareholding structure of IL&FS Realty Fund II LLC as on 31 March 2012 as Annexure I 2. Shareholding structure of Saffron India Real Estate Fund I as on 31st March 2012 as Annexure II 3. Bank statement for period from 1 January 2011 to 31 March 2013 of IL&FS Realty Fund II LLC as Annexure III 4. Bank statement for period from 1 January 2011 to 31 March 2013 of Saffron India Real Estate Fund I as Annexure IV." It was after such exchange of communications that Assessing Officer had passed the order of assessment on 23.3.2016 in which he has observed as under:- "4. assessee i.e Precilion Holdings Limited is company incorporated in Cyprus. Principal activity of assessee is to act as investment holding company. 5. During year, assessee has received interest on compulsory convertible debentures amounting to Rs. 11,93,41,705/- from Wadhwa Residency Private Limited, which is Associated Enterprises of assessee. 12 of 18 ::: Uploaded on - 27/02/2019 ::: Downloaded on - 28/02/2019 12:00:31 ::: 1. os wp 3342 18.doc 6. Arm's length price of international transaction as reported by assessee has been accepted by transfer pricing officer. details furnished by assessee have been verified and discussed. 7. In view of facts of case as discussed above, total income of assessee is assessed on income of Rs. 11,93,41,705/- i.e income returned. 8. Assessed accordingly under Section 143(3) r.w.s. 92CA(3) of Act at total income of Rs. 11,93,41,710 (round off) as interest income. Give credit for TDS and taxes paid, if any after due verification. Charge interest as applicable. Issue D.N./R.O/ Challan accordingly." 9. It can thus be seen that entire financial activity of petitioner during relevant period came up for scrutiny before Assessing Officer during original scrutiny assessment. petitioner had limited financial activities during said period resulting into only one principal transaction of earning interest income. Assessing officer had inquired about nature of activities of assessee and nature of source of income. Even if, it is believed that question of taxing such interest income at concessional rate as per DTAA was not in mind of Assessing Officer when such queries were raised and order of assessment was passed, one thing that cannot be denied is that there was no failure on part of assessee to disclose truly and fully all material facts 13 of 18 ::: Uploaded on - 27/02/2019 ::: Downloaded on - 28/02/2019 12:00:31 ::: 1. os wp 3342 18.doc necessary for assessment. Whatsoever allegations by Assessing Officer in reasons recorded that there was no failure on part of assessee to disclose true and full all material facts. assessee had filed return of income making all necessary declaration. Detailed scrutiny examination during original assessment was carried out. assessee supplied full information called for by Assessing Officer and also placed on record voluminous documents for his consideration. Nowhere in reasons, Assessing Officer contends that in process of such scrutiny also, there was any failure on part of assessee to disclose truly and fully all material facts. Whatever be validity of Assessing Officer's contention that assessor's interest income in case on hand could not be taxed at concessional rate, reopening of assessment beyond period of four years was simply not permissible. 10. Even in reasons, Assessing Officer's logic revolves around further scrutiny carried out by Assessing Officer for assessment year 2014-15 during 14 of 18 ::: Uploaded on - 27/02/2019 ::: Downloaded on - 28/02/2019 12:00:31 ::: 1. os wp 3342 18.doc which he formed belief that income should have been charged at high rate of 20%. In quoted portion of reasons, he goes on to suggest that Assessing Officer during scrutiny for assessment year 2012.13 had not raised any query on this aspect and had not verified same during assessment. In that view of matter, he was of opinion that issue requires verification; which would tantamount to fishing or roving inquiry. His reference to subsequent assessment, in absence of any additional material outside of present assessment proceedings would not form valid source of information permitting him to reopen assessment. If during assessment of later assessment year, Assessing officer collects or chances upon new material which may have bearing on assessment of assessee, and in case where assessment is sought to be reopened beyond four years, he can also establish lack of true and full disclosures on part of assessee, it may be open for him to reopen assessment of earlier year. However, merely because in later year, Assessing Officer takes different view on basis of similar material, which may have been collected 15 of 18 ::: Uploaded on - 27/02/2019 ::: Downloaded on - 28/02/2019 12:00:31 ::: 1. os wp 3342 18.doc during such process, would not permit him to reopen assessment. Under these circumstances, Assessing Officer's reference to further exercise undertaken while carrying out scrutiny assessment for assessment year 2014-15 during which he decided to tax assessee at higher rate would not enable Assessing Officer in present case to reopen assessment beyond four years. 11. We may now refer to decisions cited by learned counsel for Revenue. In case of Raymond Woolen Mills Ltd Vs. ITO1, information was obtained in assessment proceedings for subsequent year which would suggest that disclosures by assessee during year under consideration were untrue. It was on that basis that reopening of assessment was permitted, however, observing that at that stage, Court would consider only whether there was prima facie material on which assessment could be reopened. 1 236 ITR 54 (SC) 16 of 18 ::: Uploaded on - 27/02/2019 ::: Downloaded on - 28/02/2019 12:00:31 ::: 1. os wp 3342 18.doc 12. In case of Rabo India Finance Ltd Vs. Deputy CIT (Bom)2, this Court observed that judgments of Supreme Court lay down principle that Assessing Officer acts within jurisdiction in reopening assessment on basis of information which comes to him after original assessment and during course of assessment proceedings for subsequent assessment years. This principle was reiterated in later judgment in case of Multiscreen Media Pvt Ltd Vs. Union of India & Anr. 3. With this proposition, there cannot be any doubt or dispute. What is to be gathered in given case as in present one is whether Assessing Officer can be stated to have received any such additional information during course of subsequent assessment. Significantly, in both these cases, notice of reopening was issued within period of four years. 13. In case of Sociedade De Formento Industrial P Ltd Vs. Asst. CIT & Anr.4, this Court had not turned down assessee's challenge to notice of reopening of 2 [2013] 356 ITR 200 (Bom) 3 [2010] 324 ITR 54 (Bom) 4 [2011] 339 ITR 595 (Bom) 17 of 18 ::: Uploaded on - 27/02/2019 ::: Downloaded on - 28/02/2019 12:00:31 ::: 1. os wp 3342 18.doc assessment but had merely refused to act in exercise of writ jurisdiction observing that challenge could be more conveniently dealt with in proceedings under Income Tax Act rather than Writ Petition. 14. Reference to decision in case of Asst. CIT Vs. Rajesh Jhaveri Stock Brokers P Ltd5 was limited to observations suggesting that at stage of deciding legality of reopening of assessment, Court would be considering only with prima facie satisfaction of reasons recorded. 15. In view of above discussion, impugned notice of reopening of assessment cannot be sustained. We, however, make it clear that we have not examined contention of petitioner that even on merits, additions could not have been made. In result, impugned notice is quashed. petition is allowed and disposed of accordingly. [ M.S. SANKLECHA, J. ] [ AKIL KURESHI, J ] 5 [2007] 291 ITR 500 (SC) 18 of 18 ::: Uploaded on - 27/02/2019 ::: Downloaded on - 28/02/2019 12:00:31 ::: Precilion Holdings Limited v. Deputy Commissioner of Income-tax, International Taxation -3(3)(2), Mumbai & Or
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