* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 8th October, 2012.
% Date of Decision: 12th December, 2012.
+ WP(C) No.6468/2010
CONVERGYS CUSTOMER MANAGEMENT .... Appellant
Through Ms. S. Ganesh, Sr. Adv. with Mr.
Anand Sukumar and Mr. Bhupesh Kumar
Pathak, Advs.
VERSUS
ASSISTANT DIRECTOR OF INCOME TAX & ANR. ..Respondents
Through Mr. Sanjeev Sabharwal, sr. standing
counsel with Mr. Puneet Gupta and Ms.
Gayatri Verma, Advs.
CORAM:
MR. JUSTICE S. RAVINDRA BHAT
MR. JUSTICE R.V. EASWAR
R.V. EASWAR, J.:
This petition under Article 226/227 has been filed in the following
circumstances. The petitioner is a company incorporated in USA. It is engaged
in the business of providing business process outsourcing services to its clients
located worldwide. It has a subsidiary in India which is known as Convergys
India Services Pvt. Ltd. (hereinafter referred to as "CISPL"). CISPL renders
back office services exclusively to the petitioner-company.
2. In respect of the assessment years 2002-03 and 2004-05, notices for
reopening the assessments were issued by the first respondent on 30.3.2007.
WP(C) 6468/2010 Page 1 of 9
There were three broad grounds upon which the assessments were sought to be
reopened. The first was that the financial statements of CISPL, the subsidiary
company of the petitioner, showed that the petitioner received certain payments
which in substance represented "fees for technical services" within the meaning
of Section 9(1)(vii) of the Income Tax Act, 1961 (,,Act, for short) paid in the
guise of reimbursement of salary of its employees rendering services to CISPL.
It was the view of the first respondent that these payments made to the
petitioner by its subsidiary were taxable in the hands of the petitioner. The
second reason given in the reasons recorded was that the petitioner had
advanced an interest-free loan to CISPL, which was not at arms length because
on the loan taken by the petitioner from City Bank, NA, the bank was charging
interest from the petitioner. According to the first respondent no interest was
charged by the petitioner from CISPL only because they were associated
enterprises. The interest was chargeable under Section 9(1)(b) of the Act as
well as under Article 11 of the Agreement for the Avoidance of Double
Taxation entered into between India and USA. The third and last reason was
that the petitioner had a "business connection" in India within the meaning of
Section 9(1)(i) of the Act. Not only was there a business connection because of
CISPL, but CISPL was also the petitioners "permanent establishment" in India
within the meaning of Article 5 of the Double Tax Treaty.
3. On the basis of the aforesaid three reasons, the first respondent sought to
reopen the assessments. The petitioner challenged the notices in WP(C)
No.2991/2007 before this Court and by order dated 23.11.2009, this Court
directed the petitioner to file returns and simultaneously ask for the reasons for
issuance of the reassessment notices upon which the assessing officer would
WP(C) 6468/2010 Page 2 of 9
grant an opportunity to the petitioner of being heard; the petitioner was
permitted to file objections to the reopening of the assessments, which were
directed to be decided by a speaking order including the preliminary issue of
jurisdiction. The writ petition was disposed of in these terms.
4. The petitioner thereafter filed detailed objections to the notices issued
under Section 148 raising various contentions, the summary of which is this:
a) the petitioner was not liable to file any returns of income in India since no
income accrued or arose to it in India under the Act read with the Indo-US Tax
Treaty. The first respondent therefore did not have any jurisdiction to issue the
notices to the petitioner;
b) CISPL had withheld the applicable taxes on the interest income and therefore
the petitioner had no obligation to file returns in India;
c) the transfer pricing officer, in the course of the assessment made on CISPL
had examined the international transactions between the petitioner and CISPL
and after due examination the arms length price stood accepted, pursuant to the
orders of the CIT(Appeals) for both the years. In any case, even if any addition
is to be made, it can be made only in the hands of the CISPL and not in the
hands of the petitioner; and
d) there was no reason to believe that income chargeable to tax had escaped
assessment nor was there any tangible material on the basis of which the
reopening notices could be issued.
5. The objections were considered and disposed of by the first respondent
by order passed on 07.09.2010. In these orders the first respondent rejected all
the objections of the petitioner and directed it to participate in the reassessment
WP(C) 6468/2010 Page 3 of 9
proceedings and submit the details/information called for by the notices issued
by him.
6. It is against the notices issued under Section 148 of the Act on
30.03.2007 and the orders passed on 07.09.2010 disposing of the petitioners
objections that the petitioner has filed the present petition seeking quashing of
the notices and the orders for both the years.
7. The main arguments put forward on behalf of petitioner are that (a) there
is no nexus between the materials which were present before the assessing
officer (the first respondent herein) and his belief that income chargeable to tax
had escaped assessment; (b) no case has been made out in the reasons recorded
to show escapement of income chargeable to tax; (c) no dealings between the
petitioner and CISPL have been pointed out in the reasons recorded nor was
there anything to justify the finding of business connection. With reference to
the fees for technical services, it was submitted that just because one employee
was seconded by the petitioner to CISPL and was paid salary by CISPL it
cannot be assumed, without anything more, that the salary paid to that
employee represented fees for technical services in the hands of the petitioner
and in support of this submission a copy of the circular No.5 issued by the
CBDT on 28.9.2004 was relied upon. With regard to the interest it was
submitted that in the assessment year 2002-03, there was no loan given by the
petitioner to CISPL and therefore there was no question of charging any interest
and that in the assessment year 2004-05 the loan was not given interest-free but
interest was charged. As regards the existence of business connection it was
contended that there was no material brought out in the reasons recorded to
WP(C) 6468/2010 Page 4 of 9
sustain even a prima facie the belief that there was a business connection within
the meaning of Section 9(1)(i). It was contended that even proceeding on the
basis that CISPL was a permanent establishment of the petitioner in India, the
reopening notices cannot be justified because there was no income attributable
to the PE.
9. These contentions were resisted by the revenue and the learned standing
counsel submitted that the petitioner did not even file returns of income which
default per se attracted the provisions of Section 147 read with Explanation
2(a), that at the stage of recording reasons on the basis of the materials available
before the assessing officer he is expected to only reach a prima facie belief of
the escapement of income, that there were materials before the assessing officer
to show that there was another subsidiary of the petitioner in Hyderabad, India,
which was not subjected to transfer pricing study and thus there was failure on
the part of the petitioner to disclose the source of income in India and all these
constituted relevant material for reopening the assessments on the ground of
escapement of income. Reliance was placed on the judgment of this Court in
Reach Cable Networks Ltd. Vs. Deputy Director of Income Tax (2008) 299
ITR 316. It was accordingly contended that the notices issued under Section
148 were valid and the first respondent was justified in rejecting the objections
of the petitioner.
10. On a careful consideration of the matter we are of the opinion that there
is no merit in the petition. It is a well settled proposition that at the time of
issuance of the notices under Section 148, the Assessing Officer is not expected
to form any definite or conclusive opinion about the taxability of the disputed
WP(C) 6468/2010 Page 5 of 9
amounts and that he is only expected to form a tentative or prima facie belief
regarding the escapement of income chargeable to tax. The mere failure to file
the return of income (though liable to) would invite action to reopen the
assessment on the ground of escapement of income and this has been provided
in Explanation 2(a) below Section 147. It is also well-settled that there should
be material before the assessing officer which should afford a live link or nexus
with the formation of the belief regarding escapement of income; the material
should not be mere hearsay, gossip or rumour.
11. The reasons recorded by the first respondent have to be scrutinized by
the application of the aforesaid tests.
12. The first respondent has brought out in the reasons recorded, that at least
prima facie there is a case for the application of Section 9(1)(i) of the Act on the
footing that the petitioner had a business connection in India. CISPL is
admittedly a subsidiary of the petitioner in India and it renders services
exclusively to the petitioner. This prima facie indicates that there is business
connection. The role of the subsidiary is to provide customer management
services in fulfillment of contracts negotiated by the petitioner for its US based
clients. The Assessing Officer further observed in the reasons recorded that
when the core business of the petitioner is business process outsourcing and the
core business itself was outsourced to CISPL, there is prima facie material to
hold that CISPL is a fixed place of business which is at the disposal of the
petitioner. This would also mean that apart from the prima facie existence of a
business connection there is also material to entertain the belief that CISPL is a
permanent establishment of the petitioner in India. It has been held in
WP(C) 6468/2010 Page 6 of 9
Commissioner of Income Tax, Punjab Vs. R D Aggarwal and Co. and Anr.
(1964) 56 ITR 20 as under :
"The expression "business" is defined in the Act as any trade,
commerce, manufacture or any adventure or concern in the
nature of trade, commerce or manufacture, but the Act contains
no definition of the expression "business connection" and its
precise connotation is vague and indefinite. The expression
"business connection" undoubtedly means something more than
,,business". A business connection in section 42 involves a
relation between a business carried on by a non-resident which
yields profits or gains and some activity in the taxable territories
which contributes directly or indirectly to the earning of those
profits or gains. It predicates an element of continuity between
the business of the non-resident and the activity in the taxable
territories: a stray or isolated transaction is normally not to be
regarded as a business connection. Business connection may take
several forms : it may include carrying on a part of the main
business or activity incidental to the main business of the non-
resident through an agent, or it may merely be a relation between
the business of the non-resident and the activity in the taxable
territories, which facilitates or assists the carrying on of that
business. In each case the question whether there is a business
connection from or through which income, profits or gains arise
or accrue to a non-resident must be determined upon the facts
and circumstances of the case."
In the light of the above observations, where the existence of a business
connection was held to depend on the facts of each case, we are of the view that
there was prima facie material in the possession of the Assessing Officer to
form a tentative belief that Section 9(1)(i) was attracted. This reason by itself
constituted a relevant ground to reopen the petitioners assessments.
13. On the question of the existence of a permanent establishment, it was
made clear on behalf of the petitioner in the course of the arguments that the
WP(C) 6468/2010 Page 7 of 9
argument against the notices would proceed on the basis that the petitioner had
a PE in India. If that much is admitted, the tax implications of having a PE in
India both under the Act and under the Double Tax Avoidance Agreement
would fall to be examined. The assessing officer was therefore justified in
taking the prima facie view that CISPL constituted the petitioners permanent
establishment in India.
14. So far as the assessability of the interest under Section 9(1)(v) is
concerned it would appear that clause (b) of Section 9(1)(v) is applicable.
Under this clause income by way of interest payable by a resident is taxable in
the hands of the non-resident, except under specific circumstances, as for
example, where the interest was payable in respect of the monies borrowed and
used for the purpose of a business carried on by the resident outside India.
Prima facie the Section can said to be attracted, at least for the assessment year
2004-05, for which year admittedly the petitioner had charged interest on the
loan advanced to CISPL.
15. As far as fees for technical services are concerned, we do not find any
material in the reasons recorded to show that the salary paid to the employees
seconded by the petitioner to CISPL and who were rendering services,
represented fees for technical services paid in the guise of salary. The
conclusion to the contrary found in the reasons recorded seems to us to be based
on conjecture.
16. In the course of the submissions, it was submitted on behalf of the
petitioner that for the two assessment years under consideration before us, the
transfer pricing officer, in the course of the assessments of CISPL had gone into
WP(C) 6468/2010 Page 8 of 9
the question of arms length price in detail and for the assessment year 2002-03
had accepted the price declared by CISPL and has not made any adjustments;
for the assessment year 2004-05 he made an adjustment of `27.58 crores. The
addition made for the assessment year 2004-05 was deleted by the
CIT(Appeals) but an appeal to the Tribunal is pending at the instance of the
revenue. These facts have no relevance to the present petition since there is no
reference to the assessments of CISPL in the reasons recorded. If anything,
these facts may impinge on the merits or additions, if any, proposed to be made
in the reassessments. It is neither necessary nor proper for us to comment upon
those facts or their impact on the reassessment of the petitioner.
17. for the above reasons we see no merit in the writ petition which is
dismissed. All interim orders stand vacated. The petitioner shall pay the cost
of the revenue which we assess at `75,000/-
We clarify that we have not expressed any opinion on the merits of the
petitioners objections.
(R.V. EASWAR)
JUDGE
(S. RAVINDRA BHAT)
JUDGE
DECEMBER 12, 2012
vld
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