$~12 & 13
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Dated of decision : 11.12.2012
+ ITA 908/2011
+ ITA 909/2011
DIRECTOR OF INCOME TAX ..... Appellant
Through: Mr. Rohit Madan, Sr. Standing
Counsel.
versus
MC DONALDS CORPORATION ..... Respondent
Through: Mr. G. C. Shrivastava with Mr.
Robin David, Mr. Chitranshul Sinha
and Mr. Febin Mathew, Advocates.
CORAM:
MR. JUSTICE S. RAVINDRA BHAT
MR. JUSTICE R.V. EASWAR
S. RAVINDRA BHAT, J: (OPEN COURT)
In these appeals the Revenue impugns a common order of the Income Tax
Appellate Tribunal (,,Tribunal, for short) dated 18.02.2011 made in ITA No.4433
& 4434/Del/2010. The common question of law framed is as follows: -
"Whether the Income Tax Appellate Tribunal was right in holding
that jurisdictional pre-condition for issuance of notice under
Section 147/ 148 of the Income Tax Act, 1961 are not satisfied in
the present case and, accordingly, the re-assessment proceedings
are bad in law?"
2. The assessee entered into a master licensing agreement ("MLA") on
01.01.1996 with McDonalds India Private Limited ("MIPL"). In terms of that
arrangement the MIPL was granted non-exclusive right to use the McDonalds
system at agreed locations in India. The terms also required MIPL to pay the
assessee initial franchise fee of USD 45000 upon the opening of each restaurant
and royalty on recorded monthly sales of each restaurant during the period. For
the relevant assessment years i.e. 2000-01 and 2001-02, scrutiny assessments were
completed after the relevant documents and materials were considered. On
ITA 908/2011 & 909/2011 Page 1 of 6
13.11.2003 notice was issued under Section 148 proposing to reopen the
proceedings under Section 148. The assessee filed its return and assessment was
completed. On that occasion the assessing officer accepted the assessees
submissions that the rate of taxation applicable was 15% as originally held and
assessed the royalty receipts of `2,61,33,570/- and `3,95,03,200/- in respect of the
relevant assessment years.
3. After completion of re-assessment proceedings, again in respect of the
same assessment years i.e. 2000-01 and 2001-02 the Assessing Officer sought to
initiate proceedings afresh on the second notice under Section 147 issued on
26.03.2007. The reasons recorded on that occasion which has led to the present
proceedings would reveal that the Assessing Officer had in mind the same very
royalty income received by the assessee. In the reasons to be recorded while
reopening the assessment the Assessing Officer stated that: -
"Therefore, it is clear that MIPL is working as fully
dependent agent of McDonald Corporation USA and parent
company is directly doing business through the permanent
establishment (MPIL) in India.
Article 12(6) read with article 7 of Double Taxation
Avoidance Agreement between Government of India and USA
provides that where an assessee is earning income in the nature of
Royalty or Fees for Technical Services through a permanent
establishment situated in the other state, such income is taxable as
business income in accordance with the domestic provisions of the
state of source.
As per article 5(1) and 5(2) of Double Taxation Avoidance
Agreement "permanent establishment" means a fixed place of
business through which the business of an enterprise is wholly or
partly carried on and it includes ,,a place of management.
Therefore, in such case section 44D of I.T. Act, 1961,
should be applied. Under section 44D read with section 115A of
the Income Tax Act, Royalty or Technical Fee received by a
foreign company from Government or Indian concern under an
agreement made before 31st May, 1997 is to be taxed at the rate of
thirty percent.
ITA 908/2011 & 909/2011 Page 2 of 6
Hence, royalty income received by McDonald Corporation
from India should have been charged at the rate of thirty percent
instead of fifteen percent.
Considering the above I have reasons to believe that
thorough application of mind that income ,,chargeable to tax has
escaped assessment."
4. The assessee filed its return in response to the notice on 20.04.2007 and
the reassessment proceedings were completed on 28.05.2007. This time the
income was held to be taxable in terms of section 115A read with section 44D @
30%. The assessee being aggrieved appealed to the CIT (Appeals) who was of the
opinion that since the basic facts relevant for the royalty income had been
disclosed by the MLA and all the other materials, the inference sought to be
drawn could hardly be characterised as "reasons to believe". On these grounds the
CIT (Appeals) accepted the assessees contention and set -aside the re-
assessments. The Revenue thereafter unsuccessfully appealed to the Tribunal.
The Tribunal after hearing the grounds and the contentions, dismissed the appeals
recording as below: -
"10. We have hard both the parties and gone through the
material available on record. From the facts stated above, there is
no dispute that the material on the basis of which 2nd reassessment
proceedings were initiated was available on record and was
considered by the A.O. while making assessment u/s 147/ 143(3)
on 7.3.2005. There is also no dispute about the fact that 2nd
reassessment proceeding had been initiated on the same material.
The A.O. in the reasons recorded has not recorded satisfaction that
there was a failure on the part of the assessee to disclose fully and
truly all the material facts necessary for his assessment. In the
absence of such reasons, the assessment-framed falling under the
proviso to Section 147 have to be declared bad in law. In the
instant case, original assessment was made u/s 147/ 143(3) on
7.3.2005 and assessment could be reopened under main provisions
of Section 147 within the period of 4 years from the end of the
Assessment Year in which the income was first assessable. For the
Assessment Year 2000-01, the assessment could have been
reopened under the main provisions of Section 147 by 31.03.2005
ITA 908/2011 & 909/2011 Page 3 of 6
and for the Assessment Year 2001-02 by 31.03.2006. However,
assessment can be reopened under the proviso to Section 147
beyond the period of 4 years if there was failure on the part of the
assessee to disclose fully and truly all material facts necessary for
his assessment. In the case before us, all the facts and the MLA
which has been relied upon by the A.O. for reopening of
assessments 2nd time was available at the time when original
reassessment was made. Therefore, in the absence of any specific
recording that there was failure on the part of the assessee to
disclose fully and truly all material facts necessary for his
assessment, the assessments made on 26.12.2007 are bad in law.
The assessment made cannot be upheld as there is a change of
opinion in 2nd assessment proceedings when material, which
formed the basis for 2nd reassessment was available at the time of
original reassessment and was duly considered by the A.O. while
arriving at certain conclusion. Therefore, in our considered
opinion, Ld. CIT(A) has rightly cancelled the assessments.
Accordingly, we do not find any infirmity in the orders passed by
the Ld. CIT(A) cancelling the assessment for both the years."
5. Learned counsel for the appellant/ revenue relied upon the decision of the
Supreme Court in ACIT v. Rajesh Jhaveri Stock Brokers Pvt. Ltd., (2007) 291 ITR
500 (SC) and the judgment in Honda Siel Power Products Ltd. v. DCIT, W.P. (C)
No.9036/2007 decided on 14.02.2011. It was argued that the expression "reason
to believe" cannot be read as implying that Assessing Officer should have finally
ascertained the fact by legal evidence or conclusion and that the final outcome of
the proceedings is not relevant so long as basic facts are before the assessing
officer to infer that some income exists which had escaped assessment. The
observations of this Court in Honda Siel Power Products Ltd. (supra) particularly
were highlighted as under: -
"10. Thus, the petitioner has accepted and admitted that he had
not given details with regard to proportionate expenses relatable
to tax free or exempt income, which were claimed as a deduction
under the cumulative head "expenditure". It is pleaded and stated
that the petitioner was not required to disclose the said fact as
when they had filed the return, Section 14A was not in the statute
book. Sequitor, there was no omission and failure on the part of
the assessee-petitioner to make full and true disclosure. The term
"failure" on the part of the assessee is not restricted only to the
ITA 908/2011 & 909/2011 Page 4 of 6
income-tax return and the columns of the income-tax return or the
tax audit report. This is the first stage. The said expression "failure
to fully and truly disclose material facts" also relate to the stage of
the assessment proceedings, the second stage. There can be
omission and failure on the part of the assessee to disclose fully
and truly material facts during the course of the assessment
proceedings. This can happen when the assessee does not disclose
or furnish to the Assessing Officer complete and correct
information and details it is required and under an obligation to
disclose. Burden is on the assessee to make full and true
disclosure."
6. This Court is of the opinion that the assessment record reveals that the
MLA had been placed on the record of the assessing officer in the very first
instance when the assessment was completed under section 143(3). Thereafter the
reassessment proceedings were initiated in November, 2003 and completed in
March, 2005; for those proceedings too what drove the Revenue to issue notice
and reopen the proceedings was the master licensing agreement and the nature of
,,royalty income. The assessing officer in that instance consciously after goi ng
through the material concluded that the rate of taxation was 15% in the
reassessment proceedings. The scope was the same as in the original proceeding
and in the first reassessment proceedings i.e. the taxability of the royalty income
under section 44D. Having regard to these, this Court is of the opinion that the
declaration of law by the Supreme Court in Calcutta Discount Co. v. ITO, (1961)
41 ITR 191 applies; squarely to the facts in this case it was held by the Supreme
Court that the duty of the assessee to make full disclosure extends to primary
facts. Once that is done, it is the Assessing Officers duty to draw the conclusion
and inference flowing from the disclosure so made. This aspect was highlighted
in the following terms: -
"Does the duty, however, extend beyond the full and
truthful disclosure of all primary facts? In our opinion, the answer
to this question must be in the negative. Once all the primary facts
are before the assessing authority, he requires no further
assistance by way of disclosure. It is for him to decide what
inferences of facts can be reasonably drawn and what legal
ITA 908/2011 & 909/2011 Page 5 of 6
inferences have ultimately to be drawn. It is not for somebody else
far less the assessee to tell the assessing authority what
inferences, whether of facts or law, should be drawn. Indeed,
when it is remembered that people often differ as regards what
inferences should be drawn from given facts, it will be meaningless
to demand that the assessee must disclose what inferences
whether of facts or law he would draw from the primary facts.
If from primary facts more inferences than one could be
drawn, it would not be possible to say that the assessee should
have drawn any particular inference and communicated it to the
assessing authority. How could an assessee be charged with
failure to communicate an inference, which he might or might not
have drawn?
It may be pointed out that the Explanation to the sub-
section has nothing to do with "inferences" and deals only with
the question whether primary material facts not disclosed could
still be said to be constructively disclosed on the ground that with
due diligence the Income-tax Officer could have discovered them
from the facts actually disclosed. The Explanation has not the
effect of enlarging the section, by casting a duty on the assessee to
disclose "inferences" to draw the proper inferences being the
duty imposed on the Income-tax Officer.
We have, therefore, come to the conclusion that while the
duty of the assessee is to disclose fully and truly all primary
relevant facts, it does not extend beyond this."
7. Having regard to the previous discussion this Court is of the opinion that
the conclusions drawn by the CIT (Appeals) and ITAT cannot be faulted in law.
The substantial question of law is answered in favour of the assessee and against
the Revenue in both the cases and consequently the appeals are dismissed.
S. RAVINDRA BHAT, J
R.V.EASWAR, J
DECEMBER 11, 2012
hs
ITA 908/2011 & 909/2011 Page 6 of 6
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