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Oracle Systems Corporation Vs. Assistant Director Of Income Tax Circle2(1) Intern
December, 03rd 2015
$~36 & 38

*      IN THE HIGH COURT OF DELHI AT NEW DELHI

                                          Judgment delivered on: 08.10.2015

+      W.P.(C) 12856/2009 & CM No. 13676/2009

ORACLE SYSTEMS CORPORATION                                  ...     Petitioner

                              versus

ASSISTANT DIRECTOR OF INCOME TAX CIRCLE2(1)
INTERNATIONAL TAXATION , NEW DELHI        ...                       Respondent



+      W.P.(C) 12870/2009 & CM No. 13692/2009

ORACLE SYSTEMS CORPORATION                                  ...     Petitioner

               versus

ASSISTANT DIRECTOR OF INCOME TAX CIRCLE2(1),
INTERNATIONAL TAXATION NEW DELHI          ...                       Respondent


Advocates who appeared in this case:
For the Petitioner  :     Mr M.S. Syali, Sr. Advocate with Mr Mayank Nagi,
                          Advocate
For the Respondents :     Mr Rahul Chaudhary, Senior Standing Counsel for
                          the Revenue

CORAM:
HON'BLE MR. JUSTICE BADAR DURREZ AHMED
HON'BLE MR. JUSTICE SANJEEV SACHDEVA




W.P.(C) 12856/2009 & 12870/2009                                   Page 1 of 15
                              JUDGMENT

       JUSTICE BADAR DURREZ AHMED (ORAL)

1.     These writ petitions are taken up together as they involve common
questions. The writ petition being W.P.(C) No. 12870/2009 relates to the
assessment year 2002-03 and W.P. (C) 12856/2009 pertains to the
assessment year 2003-04. In both these writ petitions, the challenge is to the
notices under Section 148 of the Income Tax Act, 1961 (hereinafter referred
to as ,,the said Act) as also to the orders disposing the objections. The
section 148 notice was issued on 10.12.2008 in respect of assessment year
2002-03 and on 22.09.2008 in respect of assessment year 2003-04. The
orders disposing the objections both dated 11.09.2009 in respect of both the
assessment years were passed by the Dy. Assistant Director, Department of
Income Tax rejecting the objections. Being aggrieved thereby, the present
writ petitions have been filed.

2.     The facts and circumstances are virtually identical in respect of both
the assessment years and, therefore, we shall be referring to the facts of the
assessment year 2002-03. In respect of this year, the original assessment
under Section 143(3) was completed on 28.03.2005. More than 4 years from
the end of the said assessment year, the impugned notice under Section 148
of the said Act was issued on 10.12.2008.    Pursuant to the reasons having
been furnished, the petitioner/assessee submitted its objections to the
reopening of assessment on 31.08.2009 which, as indicated above, has been
rejected by virtue of the impugned order dated 11.09.2009. The learned


W.P.(C) 12856/2009 & 12870/2009                                Page 2 of 15
counsel for the petitioner/assessee submitted that the impugned notices and
the orders rejecting the objections are liable to be set aside, primarily on two
grounds. First of all, it is contended that there has been a change of opinion
and, secondly, it has been contended that the pre-conditions as stipulated in
the first proviso under Section 147 have not been satisfied. Particularly,
there is no failure on the part of the assessee to disclose fully and truly all
the material facts for assessment.

3.     Before we examine these two points, it would be necessary to set out
the purported reasons which have been recorded for reopening of the
assessment for the assessment year 2002-03. It may be pointed out at this
juncture itself that the reasons recorded for 2003-04 are virtually identical.
The reasons recorded for assessment year 2002-03 are as under:-

       Reasons recorded for reopening of assessment for AY 2002-03
       "The assessee is a company incorporated in USA and into the
       business of supplying and replication of software. The
       assessment order u/s 143(3) of the Act was passed for the
       relevant assessment year on March 28, 2005 wherein it was
       established that the assessee has PE in India under Article 5 of
       the DTAA as well as ,,business connection u/s 9(1)(i) of the Act.
       The receipts of the assessee i.e. ,,receipts from software have
       been treated as ,,royalty. The receipts from software were
       treated as ,,royalty and have been taxed at gross basis as per
       the DTAA at the rate of 15%.

       In view of the fact that the assessee has PE in India and that
       receipts from software were treated as ,,royalty the ,,force of
       attraction rule would be involved and the income in the nature
       of royalty should be attributed to the PE by virtue of this rule.


W.P.(C) 12856/2009 & 12870/2009                                 Page 3 of 15
       Then as per section 44D of the Act no expenses are allowable
       and the receipts are to be taxed as royalty u/s 115A of the Act at
       the rate of 20% in place of 15% as done in the assessment
       order.

       In view of the foregoing, I have reasons to believe that income
       chargeable to tax amounting to more than Rs. 1 lakh has
       escaped assessment within the meaning of section 147 of the
       Act. The case is covered under deemed escapement of income
       under Explanation ­ 2 to section 147 of the Act.

       In view of the above, I further have the reasons to believe that
       the income of the assessee for the relevant year has escaped
       assessment by reason of failure on the part of the assessee to
       disclose fully and truly all material facts necessary for
       assessment for that year."

4.     On going through the reasons, it appears that the focus seems to be on
the royalty payments which have been received by the assessee from its
Indian subsidiary (Oracle Indian Private Limited ­ OIPL). The allegation is
that since the assessee has a Permanent Establishment (PE) in India and that
the receipts by the assessee from licensing of the duplicate software has
been treated as ,,royalty the ,,force of attraction rule would be attracted and
that the income in the nature of royalty should also be attributed to the
Permanent Establishment by virtue of the said rule. It is therefore, alleged
that as per Section 44D of the said Act, no expenses would be allowable and
the receipts are to be taxed as royalty under section 115A of the Act at the
rate of 20% in place of 15% as was done and accepted in the assessment
order. On the basis of this, it has been recorded by the Assessing Officer that
he has reasons to believe that the income chargeable to tax in excess of Rs. 1

W.P.(C) 12856/2009 & 12870/2009                                 Page 4 of 15
lakh had escaped assessment within the meaning of section 147 of the Act. It
was also contended that the case was covered under the provision of deemed
escapement of the income incorporated in Explanation -2 under Section 147
of the Act. At this juncture, it may be clarified that the petitioner has not
raised any issue as to whether the deeming provision of Explanation ­ 2 is
attracted in this case or not. In fact, we have proceeded on the basis that
there is escapement of income as alleged by the Revenue although that may
not have happened.

5.     It is further noted in the recorded reasons that the escapement of
income had occurred by reason of the "failure on the part of assessee to
disclose fully and truly all material facts necessary for assessment for that
year". It would be pertinent to point out that no so-called material fact has
been specified which, according to the Assessing Officer had not been fully
and truly disclosed. There is only a general statement that there has been
failure on the part of the assessee to disclose fully and truly all material facts
necessary for the assessment.



6.     Taking up first point with regard to change of opinion, it may be
pointed out that the Double Taxation Avoidance Agreement between India
& USA, inter-alia, comprises of Article 7 of the DTAA between India and
USA which speaks of business profits as under:-

       "ARTICLE 7 - Business profits ­



W.P.(C) 12856/2009 & 12870/2009                                   Page 5 of 15
       1. The profits of an enterprise of a Contracting State shall be
       taxable only in that State unless the enterprise carries on
       business in the other Contracting State through a permanent
       establishment situated therein. If the enterprise carries on
       business as aforesaid, the profits of the enterprise may be taxed
       in the other State but only so much of them as is attributable to
       (a) that permanent establishment; (b) sales in the other State of
       goods or merchandise of the same or similar kind as those sold
       through that permanent establishment ; or (c) other business
       activities carried on in the other State of the same or similar
       kind as those effected through that permanent establishment.
       2. Subject to the provisions of paragraph 3, where an enterprise
       of a Contracting State carries on business in the other
       Contracting State through a permanent establishment situated
       therein, there shall in each Contracting State be attributed to
       that permanent establishment the profits which it might be
       expected to make if it were a distinct and independent enterprise
       engaged in the same or similar activities under the same or
       similar conditions and dealing wholly at arms length with the
       enterprise of which it is a permanent establishment and other
       enterprises controlling, controlled by or subject to the same
       common control as that enterprise. In any case where the
       correct amount of profits attributable to a permanent
       establishment is incapable of determination or the
       determination thereof presents exceptional difficulties, the
       profits attributable to the permanent establishment may be
       estimated on a reasonable basis. The estimate adopted shall,
       however, be such that the result shall be in accordance with the
       principles contained in this Article."





7.     On a reading of Article ­ 7 (1), it becomes clear that profits of the
assessee, which is a US company, would be taxable only in USA until and
unless and the assessee carries on business in India through a Permanent


W.P.(C) 12856/2009 & 12870/2009                                Page 6 of 15
Establishment situated here. It is further clear that if the assessee carries on
business as aforesaid, the profits of the assessee may be taxed in India but
only so much of them as are attributable to; (a) that permanent
establishment; (b) sales in USA of goods or merchandise of the same or
similar kind as those sold through that permanent establishment; or (c) other
business activities carried on in USA of the same or similar kind as those
effected through that permanent establishment. This is what is commonly
known as the "force of attraction rule" and this is the rule which the
Assessing Officer now wants to apply to the assessee upon reopening of the
assessment proceedings.



8.     We may also now notice the provisions of Article 12 of the DTAA
between India and USA. The same, to the extent relevant, reads as under:

               "ARTICLE 12 ­ Royalties and fees for included services
               ­ 1. Royalties and fees for included services arising in a
               Contracting State and paid to a resident of the other
               Contracting State may be taxed in that other State.

               2. However, such royalties and fees for included services
               may also be taxed in the Contracting State in which they
               arise and according to the laws of that State; but if the
               beneficial owner of the royalties or fees for included
               services is a resident of the other Contracting State, the
               tax so charged shall not exceed :

               (a) in the case of royalties referred to in sub-paragraph
                   (a) of paragraph 3 and fees for included services as



W.P.(C) 12856/2009 & 12870/2009                                 Page 7 of 15
                   defined in this Article [other than services described
                   in sub-paragraph (b) of this paragraph] :

                   (i) during the first five taxable years for which this
                       Convention has effect,

                        (a)   15 per cent of the gross amount of the
                              royalties or fees for included services as
                              defined in this Article, where the payer of
                              the royalties or fees is the Government of
                              that Contracting State, a political sub-
                              division or a public sector company ; and

                        (b)   20 per cent of the gross amount of the
                              royalties or fees for included services in all
                              other cases ; and
                   (ii) during the subsequent years, 15 per cent of the
                        gross amount of royalties or fees for included
                        services ; and

               (b) in the case of royalties referred to in sub-paragraph
                   (b) of paragraph 3 and fees for included services as
                   defined in this Article that are ancillary and subsidiary
                   to the enjoyment of the property for which payment is
                   received under paragraph 3(b) of this Article, 10 per
                   cent of the gross amount of the royalties or fees for
                   included services.

                   xxxxx            xxxxx        xxxxx        xxxxx

               6.     The provisions of paragraphs 1 and 2 shall not
               apply if the beneficial owner of the royalties or fees for
               included services, being a resident of a Contracting State,
               carries on business in the other Contracting State, in
               which the royalties or fees for included services arise,
               through a permanent establishment situated therein, or


W.P.(C) 12856/2009 & 12870/2009                                    Page 8 of 15
               performs in that other State independent personal services
               from a fixed base situated therein, and the royalties or
               fees for included services are attributable to such
               permanent establishment or fixed base. In such case the
               provisions of Article 7 (Business Profits) or Article 15
               (Independent Personal Services), as the case may be shall
               apply."



9.     Article 12 (1) clearly indicates that Royalty and Fees for included
services arising in India and paid to a resident of United States may be taxed
in USA. However, by virtue of the provisions of Article 12(2) such royalty
and fees for included service could also be taxed in India. But there is a cap
on the tax. The cap (as is applicable in the present case) is to the extent of
15% of the gross amount of royalty and fees for included services. This is so
because in the present case Article 12 (2) (a) (ii) would be applicable
according to the learned counsel for the assessee. Article 12(6) carves out an
exception, in as much as, the provisions of paragraphs 1 and 2 of Article 12
would not apply where the beneficial owner of the royalties or fees for
included services, being a resident of a Contracting State (USA) carries on
business in the other Contracting State (India), in which the royalties or fees
for included services arise, "through a permanent establishment situated
therein".



10.    To appreciate the submissions made by the learned counsel for the
petitioner, it is necessary to clarify that the assessee has paid 15% tax in


W.P.(C) 12856/2009 & 12870/2009                                 Page 9 of 15
terms of Article 12 (2) (a) (ii) of the DTAA and this has been accepted by
the Assessing Officer at the time of original assessment under 143(3) of the
said Act. It is now the contention of the Assessing Officer that Article 12 (2)
(a) (ii) would not apply because the royalties are connected with the
Permanent Establishment of the assessee in India and therefore, by virtue of
Article 12(6), the royalties should have been taxed under Article 7.


11.    The learned counsel for the petitioner/assessee submitted that this
would amount to a change of opinion. This is so because in the first instance
when the original assessment was being framed, the Assessing Officer
examined the attribution of income to the Permanent Establishment and
while doing so attributed only that part of the income of the assessee which
falls within Article 7. This was on the basis of the consideration that the
assessee carried on two distinct businesses: (1) through its distribution unit
and 2) its development unit. This fact is noticed in the assessment order
itself. The royalties were attributable to the distribution unit whereas the
profits and gains of business arising out of the development unit had been
held attributable to the PE of the assessee in India. The distribution unit has
not been held to be a PE of the assessee. Therefore, according to the learned
counsel for the assessee, apart from the fact that on merits also the tax on
royalties could only be taxed under Article 12 and not under Article 7, this
aspect of attribution has been examined and noticed by the Assessing Officer
during the original assessment.




W.P.(C) 12856/2009 & 12870/2009                                Page 10 of 15
12.    The learned counsel for the respondent/Revenue submitted that the
Assessing Officer has not examined this aspect at all and, had he done so,
the ,,force of attraction rule would have been applied. We are unable to
agree with the submissions made by the learned counsel for the Revenue for
the simple reason that clause (6) of Article 12 itself carves out an exception.
When the Assessing Officer has accepted the assessees contentions that the
royalty was to be taxed under Article 12 (2) (a) (ii) at the rate of 15%. It
has to be presumed that the Assessing Officers attention was attracted to the
entire Article 12 of the DTAA. As stated above, that Article itself carves out
an exception under clause (6) thereof. Therefore, it cannot be accepted, as is
sought to be made out by the learned counsel for the Revenue, that the
Assessing Officer had not applied his mind to this aspect of the matter. In
this context, we may refer to CIT vs. Usha International Ltd: (2012) 348
ITR 485 (Delhi). A full bench of this Court clearly observed that there may
be cases where the Assessing Officer does not and may not raise any written
query but still the Assessing Officer in the first round/original proceedings
may have examined the subject matter, claim, etc., because the aspect or
question may be too apparent and obvious. The court also observed that in
such cases it would be contrary and opposed to normal human conduct to
hold that the Assessing Officer in the first round did not examine the
question or subject-matter and form an opinion. Of course, the cases have to
be examined individually. In the present case, having examined all the
relevant facts and circumstances, it is clear that the aspect of attribution was


W.P.(C) 12856/2009 & 12870/2009                                 Page 11 of 15
too obvious and apparent for the Assessing Officer to have been ignored in
the first round/original proceedings. In Usha International Ltd. (Supra), it is
also noted that sometimes application of mind and formation of opinion can
be ascertained and gathered even when no specific question or query in
writing had been raised by the Assessing Officer. It is also observed that the
aspects and questions examined during the course of assessment proceedings
itself may indicate that the Assessing Officer must have applied his mind on
the entry, claim or deduction, etc. In the present case, in the circumstances
narrated above, it is evident that the when the Assessing Officer was
examining the entire issue of royalty and its taxability the Assessing Officer
must have examined Article 12 of the DTAA in its entirety, which also
contained the exception mentioned in clause (6) thereof. We may also note
that in CIT vs. Kelvinator of India Ltd: [2002] 256 ITR 1 / 123 Taxman
433 (Delhi) a full bench of this court held as under:-

       "We also cannot accept the submission of Mr. Jolly to the
       effect that only because in the assessment order, detailed
       reasons have not been recorded an analysis of the materials
       on the record by itself may justify the Assessing Officer to
       initiate a proceedings under section 147 of the Act. The said
       submission is fallacious. An order of assessment can be passed
       either in terms of sub-section (1) of section 143 or sub-section
       (3) of section 143. When a regular order of assessment is
       passed in terms of the said sub-section (3) of section 143 a
       presumption can be raised that such an order has been passed
       on application of mind. It is well known that a presumption
       can also be raised to the effect that in terms of clause (e) of
       section 114 of the Indian Evidence Act judicial and official
       acts have been regularly performed. If it be held that an order


W.P.(C) 12856/2009 & 12870/2009                                Page 12 of 15
       which has been passed purportedly without application of
       mind would itself confer jurisdiction upon the Assessing
       Officer to reopen the proceeding without anything further, the
       same would amount to giving a premium to an authority
       exercising quasi-judicial function to take benefit of its own
       wrong."


13.    It has been clearly observed that when a regular assessment is
completed in terms of Section 143(3), a presumption can be raised that such
an order has been passed upon a proper application of mind.



14.    Therefore, in our view, what the Assessing Officer is now seeking to
do amounts to a clear change of opinion and that is not permissible.



15.    Apart from this the second point urged by the learned counsel for the
petitioner/assessee has also to be accepted. The point was that the Revenue
has been unable to point out as to which         material fact had not been
disclosed fully or truly. Even the reasons do not specify or indicate as to
which material fact had not been disclosed fully or truly by the assessee.



16.    In Swarovski India Pvt. Ltd. Vs. Deputy Commissioner of Income
Tax 368 ITR 601 (Delhi), a division bench of this court observed that the
escapement of income by itself is not sufficient for reopening the assessment



W.P.(C) 12856/2009 & 12870/2009                                Page 13 of 15
in a case covered by the proviso to section 147 of the said Act, unless and
until there was failure on the part of the assessee to disclose fully and truly
all the material facts necessary for assessment. It was also made clear that
unless and until the recorded reasons specifically indicated as to which
material fact or facts was/were not disclosed by the petitioner in the course
of the original assessment under section 143(3), there could not be any
reopening of assessment.



17.    The decision of Swarovski India Pvt. Ltd. (Supra) has been followed
in several other decisions including the decision in the case of Global Signal
Cables (India) Pvt. Ltd. V. Deputy Commissioner of Income-Tax (2014)
368 ITR 609 (Delhi). As already mentioned above, in the present case there
is not even any allegation as to which material fact had not been disclosed
fully or truly by the petitioner/assessee.     To the contrary, the reasons
recorded indicate that on the basis of very same facts which were before the
Assessing Officer at the time of original assessment under Section 143(3),
the reopening of the assessment has been proposed. No new material fact has
been relied upon.






18.    Thus, on both counts, the writ petition [WP(C) No. 12870/2009]
pertaining to Assessment Year 2002-03 has to succeed. This very reasoning
would also apply to assessment year 2003-04 [WP(C) No. 12856/2009]. As
such, both the writ petitions are allowed. The impugned notices under


W.P.(C) 12856/2009 & 12870/2009                                Page 14 of 15
Section 148 of the said Act and all proceedings pursuant thereto including
the orders disposing of the objections are quashed. There shall be no order as
to costs.



                                        BADAR DURREZ AHMED, J



                                             SANJEEV SACHDEVA, J
OCTOBER 08, 2015
rs




W.P.(C) 12856/2009 & 12870/2009                                Page 15 of 15

 
 
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