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M/S SWAROVSKI INDIA PVT LTD Vs. DEPUTY COMMISSIONER OF INCOME TAX
September, 01st 2014
         IN THE HIGH COURT OF DELHI AT NEW DELHI

                                              Judgment delivered on: 08.08.2014

W.P.(C) 1909/2013



M/S SWAROVSKI INDIA PVT LTD                                             ..... Petitioner

                             versus



DEPUTY COMMISSIONER OF INCOME TAX                                   ..... Respondents
Advocates who appeared in this case:
For the Petitioner  : Mr M.S. Syali, Sr. Advocate with Ms Husanl Syali and Mr Mayank
                      Nagi, Advocates.
For the Respondent  : Mr Kamal Sawhney, Advocate with Mr Sanjay Kumar, Advocate.



CORAM:
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE SIDDHARTH MRIDUL


                                 JUDGMENT


BADAR DURREZ AHMED, J (ORAL)

1.      By way of this writ petition a writ of certiorari has been sought for

quashing the notice dated 23.03.2012 issued by the Assistant Commissioner

of Income Tax under section 148 of the Income Tax Act, 1961 (hereinafter

referred to as ,,the said Act) as also the order dated 25.02.2013 passed by the




WP(C) 1909/2013                                                               Page 1 of 12
Deputy Commissioner of Income Tax disposing the objections raised by the

petitioner in respect of the assessment year 2005-2006.

2.      Admittedly, the issuance of the notice under section 148 of the said

Act is beyond the period of four years from the end of the relevant

assessment year i.e. assessment year 2005-2006. Consequently, there is no

dispute that the first proviso to section 147 of the said Act would be relevant.




The first proviso to Section 147 of the said Act is reproduced hereinbelow:-

                  "147. .... Provided that where an assessment under
                  sub-section (3) of section 243 or this section has
                  been made for the relevant assessment year, no
                  action shall be taken under this section after the
                  expiry of four years from the end of the relevant
                  assessment year, unless any income chargeable to
                  tax has escaped assessment for such assessment
                  year by reason of the failure on the part of the
                  assessee to make a return under section 139 or in
                  response to a notice issued under sub-section (1) of
                  section 142 or section 148 or to disclose fully and
                  truly all material facts necessary for his
                  assessment, for that assessment year."

3.      The facts are that the petitioner had filed its return of income on

31.10.2005 whereunder it had claimed a deduction of `6,34,90,243/- under

section 10B of the said Act on the ground that it is a 100 per cent export

oriented unit at Pune which had been set up in the assessment year 2000-

2001 and had earned profit to the extent of `6,34,90,243/- which were not




WP(C) 1909/2013                                                          Page 2 of 12
exigible to tax on account of the fact that it was engaged in

manufacturing/production activity in the said unit.          According to the

petitioner it was engaged in the business of manufacturing/processing of raw

beads into finished imitation pearls.

4.      The assessment order was passed by the Assessing Officer on

28.11.2008 under section 143(3) of the said Act after incorporating the order

passed by the Transfer Pricing Officer (TPO) under section 92CA of the said

Act with regard to computation of the Arms Length Price in relation to

international transactions with associated enterprises reported in form 3CEB.

5.      Thereafter a notice under section 154 of the said Act was issued on

21.04.2010 whereby it was proposed that the deduction of `6,34,90,243/-

claimed under section 10B of the said Act ought to be disallowed inasmuch

as the petitioner had undertaken activities on ,,job work basis. There was

another proposal also that the ,,other income of `1,32,97,000/- had not been

taxed separately and had been included in the deduction claimed under

section 10B of the said Act.

6.      The petitioner filed detailed submissions in reply to the said notice on

24.05.2010. The petitioner indicated that it would eligible for the deduction

under section 10B of the said Act for the Pune Unit inasmuch as the




WP(C) 1909/2013                                                       Page 3 of 12
petitioner was engaged in the manufacturing/production of finished imitation

pearls after carrying out the processing activities on raw beads. On the

submission of the said reply by the petitioner, no further action was taken by

the Department pursuant to the said notice under section 154 of the said Act.

7.      In the meanwhile, a notice under section 148 of the said Act had been

issued on 19.03.2010 within the period of four years from the end of the

relevant assessment year (i.e., 2005-06). The said notice culminated in the

re-assessment order dated 26.10.2010. Subsequent thereto the impugned

notice dated 23.03.2012 was issued under section 148 of the said Act. The

purported reasons for issuance of the said notice were also furnished to the

petitioner. Thereafter, the petitioner filed its objections dated 14.01.2013,

which have been rejected by virtue of the order dated 25.02.2013. It is in this

background that the present writ petition has been filed challenging the

notice dated 23.03.2012 and the order dated 25.02.2013.

8.      The point urged by Mr Syali, the learned Senior Counsel appearing on

behalf of the petitioner, was that in a case where the proviso to section 147

of the said Act was applicable, it must be clearly indicated that the

escapement of income was on account of the failure on the part of the

assessee to fully and truly disclose all material facts necessary for the




WP(C) 1909/2013                                                      Page 4 of 12
assessment. Mr Syali took us through the purported reasons behind the

issuance of the notice under section 148 of the said Act. The purported

reasons as indicated by the Assistant Commissioner of Income Tax were as

under:-

                  1   Reasons for the belief   The original assessment u/s
                      that   income     has    143(3) was completed in
                      escaped assessment       December 28/11/2008, at
                                               64,36,160 u/s 143(3) as
                                               against the returned loss of
                                               Rs.(-)4,71,20,033/-. Perusal
                                               of records revealed that the
                                               assessee      had     claimed
                                               deduction u/s 10B on Pune
                                               Unit        amounting       to
                                               Rs.6,34,90,243/- as 100%
                                               EOU,       which    undertook
                                               activities on job work basis.
                                               This section applies to any
                                               undertaking             which
                                               manufacturing or produces
                                               any article on things or
                                               computer software. Hence,
                                               the deduction u/s 10B should
                                               have been disallowed. This
                                               has resulted in incorrect
                                               allowance of deduction u/s
                                               10         amounting        to
                                               Rs.6,34,90,243/-. Secondly,
                                               the assessee has not taken the
                                               income from the other
                                               sources to the tune of
                                               Rs.1,32,97,000/- separately
                                               and included in deduction
                                               which should have been
                                               separately considered and
                                               taxed. The mistake resulted
                                               in under assessment of
                                               income to the tune of
                                               Rs.1,32,97,000/- involving







WP(C) 1909/2013                                                                 Page 5 of 12
                                           potential tax effect.

                                           I have therefore, reason to
                                           believe that an amount of
                                           Rs.7,67,87,243/- has escaped
                                           assessment      within      the
                                           meaning of section 147(c) of
                                           the IT Act, 1961.          The
                                           escapement of the income
                                           has been by the reason of
                                           failure on the part of the
                                           assessee to disclose fully and
                                           truly, all material fact
                                           necessary for assessment.
                                           Since the assessment has
                                           been completed u/s 143(3) of
                                           the IT Act, 1961 and 4 years
                                           have since elapsed.        The
                                           assessment record is being
                                           submitted for kind perusal
                                           and approval u/s 151(1) of
                                           the IT Act, 1961 for issuance
                                           of notice u/s 148 of the IT
                                           Act, 1961.

9.      On going through the above reasons, it is evident that while the

Assessing Officer mentioned that income had escaped assessment because of

the failure on the part of the assessee to fully and truly disclose the material

facts for assessment, he has not indicated as to which material fact had not

been fully and truly disclosed by the assessee. Presumably the material fact

could have been the fact that the assessee was carrying out its activities at its

Pune unit on a ,,job work basis. In this backdrop, the point we have to

consider in this case is whether the petitioner had, in fact, failed to disclose

fully and truly all the material facts which were necessary for the purposes of


WP(C) 1909/2013                                                              Page 6 of 12
assessment.

10.     The learned counsel for the petitioner placed reliance on a decision of

this court in the case of Haryana Acrylic Manufacturing Co. vs.

Copmmissione rof Income-Tax and Another: [2009] 308 ITR 38 (Delhi).

While considering the provisions of sections 147 and 148 of the said Act, in

particular the first proviso thereof, this court observed as under:-

                  "29. In the reasons supplied to the petitioner, there
                  is no whisper, what to speak of any allegation, that
                  the petitioner had failed to disclose fully and truly
                  all material facts necessary for assessment and that
                  because of this failure there has been an
                  escapement of income chargeable to tax. Merely
                  having a reason to believe that income had escaped
                  assessment, is not sufficient to reopen assessments
                  beyond the four year period indicated above. The
                  escapement of income from assessment must also
                  be occasioned by the failure on the part of the
                  assessee to disclose material facts, fully and truly.
                  This is a necessary condition for overcoming the
                  bar set up by the proviso to section 147. If this
                  condition is not satisfied, the bar would operate
                  and no action under section 147 could be taken.
                  We have already mentioned above that the reasons
                  supplied to the petitioner does not contain any such
                  allegation. Consequently, one of the conditions
                  precedent for removing the bar against taking
                  action after the said four year period remains
                  unfulfilled.    In our recent decision in Wel
                  Intertrade Private Ltd. [2009] 308 ITR 22 (Delhi)
                  we had agreed with the view taken by the Punjab
                  and Haryana High Court in the case of Duli Chand
                  Singhania [2004] 269 ITR 192 that, in the absence



WP(C) 1909/2013                                                           Page 7 of 12
                  of an allegation in the reasons recorded that the
                  escapement of income had occurred by reason of
                  failure on the part of the assessee to disclose fully
                  and truly all material facts necessary for his
                  assessment, any action taken by the Assessing
                  Officer under section 147 beyond the four year
                  period would be wholly without jurisdiction.
                  Reiterating our view-point, we hold that the notice
                  dated March 29, 2004, under section 148 based on
                  the recorded reasons as supplied to the petitioner
                  as well as the consequent order dated March 2,
                  2005, are without jurisdiction as no action under
                  section 147 could be taken beyond the four year
                  period in the circumstances narrated above."
                                                   (underlining added)

11.     The same view has been expressed in Rural Electrification

Corporation Ltd. vs. Commissioner of Income Tax: [2013] 355 ITR 356. It

may not be out of place here to mention that this court in Microsoft

Corporation (I) Pvt Ltd vs. Deputy Commissioner of Income Tax & Anr:

[WP(C) 284/2013 decided on 23.05.2013] had observed as under:-

                    "From the above, it is evident that merely having a reason
                    to believe that income had escaped assessment is not
                    sufficient for reopening the assessment beyond the four
                    year period referred to above. It is essential that the
                    escapement of income from assessment must be occasioned
                    by the failure on the part of the assessee to, inter alia,
                    disclose material facts, fully and truly. If this condition is
                    not satisfied, there would be a bar to taking any action
                    under Section 147 of the said Act."

12.     It is clear that the escapement of income by itself is not sufficient for

reopening the assessment in a case covered by the first proviso to Section



WP(C) 1909/2013                                                                Page 8 of 12
147 of the said Act unless and until there is failure on the part of the assessee

to disclose fully and truly all the material facts necessary for assessment. In

the present case, it has not been specifically indicated as to which material

fact or facts was/were not disclosed by the petitioner in the course of its

original assessment under Section 143(3) of the said Act. We can, as pointed

out above, presume that the assessing officer had in mind the fact that the

petitioner was carrying out its activities on ,,job work basis when he

observed that the petitioner had failed to disclose fully and truly all material

facts. But even on this presumption we find that the Assessing Officer was

not correct. This is so because in the Transfer Pricing Report submitted by

the assessee it had been clearly indicated that it had processed raw beads to

the extent of 1,03,213 Kgs into finished imitation pearls in the financial year

2004-2005 which related to the assessment year 2005-2006. The entire

process had been set out in the Transfer Pricing Report as under:-

                  "The following are the steps of processing carried
                  out by SIPL:

                  1. Raw beads are examined by SIPL;
                  2. Raw beads are fixed on the frames;
                  3. Beads are dipped in a lacquer based on nitro
                     cellulose (made of nitro cellulose, Butyl
                     Acetate & Ethanol) within DSW developed
                     machinery supplied to EOU.
                  4. Subsequent to dipping the glass beads are



WP(C) 1909/2013                                                        Page 9 of 12
                     subjected to several coating processes, which
                     impart the qualities of a pearl.
                  5. Beads are then enameled.
                  6. After dipping and coating, the semi-finished
                     pearls are pre-dried and removed from the
                     frames.
                  7. Thereafter the pearls are baked in ovens to
                     ensure that the layers coated on the glass beads
                     are permanently stable.
                  8. The next step is to wash the pearls in soft water
                     to remove any extraneous material.
                  9. Process of visual quality control.
                  10.Quality control is carried out on the standard
                     operating procedures of DSW.
                  11.Pearls are knotted, packed, babeled and sent
                     back to DSW."

13.     Apart from this, in the course of the original assessment proceedings

the petitioner, in response to a notice under Section 143(2) and 143(1) of the

said Act submitted information on the point raised by the Assessing Officer

with regard to the business activity of the petitioner. The petitioner had

submitted a letter dated 09.09.2008 which clearly indicated as under:-

                  "2. Point 2: Brief Note on Business Activity.
                  Swarovski India Pvt. Ltd. is a group company of
                  Swarovski AG, Austria and has two divisions in
                  India viz. Pune Unit and Delhi Unit.

                  Pune Unit is a 100% Export Oriented Unit (EOU)
                  and is undertaking activities such as coating of raw
                  beads, polishing, stringing and knotting, quality
                  control customs bonded warehousing etc. on job
                  work basis."
                                                  (underlining added)



WP(C) 1909/2013                                                          Page 10 of 12
14.     It is evident from the above that the petitioner had categorically stated

that the Pune Unit was a 100 per cent export oriented unit and was

undertaking activities on raw beads such as coating, polishing, stringing and

knotting etc., on "job work basis". Therefore, it is abundantly clear that the

petitioner had on a specific query raised by the Assessing Officer informed

the Assessing Officer that it was carrying out the manufacturing/production

activity on "job work basis".

15.     It may be further pointed out that even in the re-assessment order

dated 26.10.2010, pursuant to the first re-assessment notice for this very year

i.e. assessment year 2005-06, the Assessing Officer has categorically noted

that the petitioner was engaged in the business of manufacturing/processing

imitation pearls and in the business of import and sale of crystal and related

items in India. From this, also, it is evident that the entire activity and

particularly the nature of manufacturing/production activity carried out by

the petitioner "on job work basis" was clearly revealed before the Assessing

Officer in the original round as well as in the round of re-assessment.

Therefore, the statement of the Assessing Officer in the purported reasons in

support of the impugned notice dated 23.03.2012 that there had been failure

on the part of the petitioner/assessee to fully and truly disclose the material



WP(C) 1909/2013                                                        Page 11 of 12
facts, is completely belied by the records of the case.

16.     Consequently, the notice dated 23.03.2012 as also the order dated

25.02.2013 are liable to be quashed and set aside. It is ordered accordingly.

All the proceedings pursuant to the said notice dated 23.03.2012 also stand

quashed.

17.     The writ petition is allowed. There shall be no order as to costs.



                                               BADAR DURREZ AHMED, J




                                                   SIDDHARTH MRIDUL, J
AUGUST 08, 2014
dn




WP(C) 1909/2013                                                        Page 12 of 12

 
 
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