Reopening Notice Quashed for Lack of Prima Facie Belief of Escaped Income.

ORDER

M. Balaganesh, Accountant Member.- The Assessee Huawei International Pte Ltd (hereinafter referred to as „assessee) by filing the present appeal sought to set aside the impugned order dated 30.03.2024 passed by the Assessing Officer (AO) under section 147 r.w.s. 144C(13) of the Income Tax Act, 1961 (for short „the Act⁷) inconsonance with the order passed by the Dispute Resolution Panel (DRP) dated 26.02.2024 u/s 144C.

2. The Ground Nos. 3 & 3.1. raised by the assessee are challenging the validity of assumption of jurisdiction by the Learned AO under section 147 of the Act. Since this goes to the root of the matter, they are taken up first for adjudication.

3. We have heard the rival submissions and perused the materials available on record. The Assessee is a tax resident of Singapore. The Assessee has not filed its return of income in India for the assessment year 2014-15. Specific information was received that the Assessee company had received consideration amounting to Rs. 3,90,32,787/- from M/s. Vodafone Digilink Ltd and had not offered the same for taxation in India. Further, it was noticed that Assessee had also not offered Rs. 37,41,17,707/- as per Form 26AS for taxation in India. The learned AO accordingly concluded that the nature and taxability of amount received from M/s Vodafone Digilink and other parties remained unexplained and proceeded to entertain a belief that income of the Assessee had escaped assessment after passing an order under section 148A(d) of the Act on 27-7-2022 which is as under:-

“Sir/Madam/ M/s,

Subject: Proceedings u/s 148A(d) in consequence to Hon’ble SC Order dated 04.05.2022 – Order

Order under clause (d) of section 148A of the Income Tax Act, 1961

In this case, specific information was received that the assessee company, M/s Huawei International Pte. Limited (hereinafter referred as the assessee) had received consideration amounting to Rs. 3,90,32,787/- from M/s Vodafone Digilink Limited and did not offer the same for taxation as the assessee failed to file its return of income. Further, the assessee has also not offered Rs. 37,41,17,707/- (as per form 26AS) for taxation as the assessee failed to file its return of income for the year under consideration. Thereafter, proceedings u/s 147 of the Act were initiated in this case vide notice u/s 148 dated 15.04.2021.

2. On the analysis of information, the assessee being a non-resident company was statutorily required to file the return of income for the year if its income exceeds maximum amount which is not chargeable to Income-tax without giving effect to the provisions of chapter VI of the Income-tax Act, 1961. However, the assessee has not filed its return of income for AY 2014-15. In absence of return of income, the nature and taxability of amount received from M/s Vodafone Digilink Limited and other parties as per form 26AS remained unexplained.

3. Thereafter, complying with the directions of Hon’ble Supreme Court vide judgment dated 04.05.2022 (2022 SCC online SC 543) in the case of UOI v. Ashish Aggarwal and subsequent CBDT’s instructions No. 01/2022, the assessee was issued a letter dated 27.05.2022 having having DIN ITBA/COM/F/17/2022- 23/1043213421(1), wherein the assessee was asked to treat the original notice issued under section 148 of the Income Tax act dated 15.04.2021 as show cause the information relied upon to reopen the case and the same was served on the registered mail of the assessee.

4. In response, the assessee vide letter dated 10.06.2022, furnished its reply and stated as under :-

A. Captioned letter dated 27.05.2022 issued under section 148A(b) of the Act is bad in law and liable to be quashed.

A.1 Notice under section 148 of the Act cannot be issued in the present case for subject AY pursuant to the first proviso to section 149 of the Act under new regime

The objections of the assessee are not acceptable for the reason that the notice u/s 148 of the Act was issued to the assessee as per the provisions of the Income Tax act which were in force at the time of issuance of notice. Further, vide notification dated 31.12.2020, the time barring dates for all actions under the Income Tax Act as on 31.03.2020 (i.e. which were earlier getting time barred on 31.03.2020) were extended to 31.03.2021, which was further extended to 30.06.2021. Hence, the case of the assessee was rightly reopened under section 148 of the Act as AY 2014-15 was falling within the six years as on 31.03.2020 from the end of relevant assessment year.

Further, as far as date of issuance of notice u/s 148 of the Act dated 15.04.2021 is concerned, the Supreme Court vide its judgment dated 04.05.2022 (2022 SCC online SC 543) in the case of UOI v. Ashish Aggarwal has reinstated the proceedings in which notices under section 148 of the Act were issued after 31.03.2021.

Thereafter, following the directions as per CBDT’s instructions No. 01/2022, the notice dated 27.05.2022 was issued to the assessee for necessary compliance. The relevant extract of CBDT’s instructions No. 01/2022 is reproduced hereunder:-

Further, the Hon’ble SC in its order at Para 8 (i) adjudicated that respective impugned section 148 notices issued to the respective assessee shall be deemed to have been issued under section 148A of the IT Act and treated to be show cause notices in terms of section 148A(b). The Hon’ble SC has not adjudged notices issued then, as null or void or not being in accordance with law.

A.2 No evidence which reveal that income represented in the form of asset has escaped assessment for more than INR 50,00,000/-

The objections of the assessee are not acceptable for the reason that the notice u/s 148 of the Act was issued to the assessee as per the provisions of the Income Tax act which were in force at the time of issuance of notice. Further, vide notification dated 31.12.2020, the time barring dates for all actions under the Income Tax Act as on 31.03.2020 (i.e. which were earlier getting time barred on 31.03.2020) were extended to 31.03.2021, which was further extended to 30.06.2021.

Further, the Supreme Court vide its judgment dated 04.05.2022 (2022 SCC online SC 543) in the case of UOI v. Ashish Aggarwal has reinstated the proceedings in which notices under section 148 of the Act were issued after 31.03.2021. Thereafter, following the directions as per CBDT’s instructions No. 01/2022, the notice dated 26.05.2022 was issued to the assessee for necessary compliance

Further, the assessee stated that its case does not fall in sub-clause (b) of section 149(1) of the Act as there is no income represented in the form of asset which has escaped assessment.

In this connection, it is stated that the income represented in the form of asset has escaped assessment and clearly falls under sub-clause (b) of section 149(1) of the Act.

Therefore, necessary provision are duly met by assessee company, which reflects that the said income has escaped assessment.

A.3 Reassessment proceedings are not valid as per new regime (amended by Finance Act, 2021) as the reassessment proceedings were initiated merely on the basis of information received

In this regard, the contentions of the assessee are not acceptable for the reason that in case of the assessee had received consideration/remittance amounting to Rs. 3,90,32,787/- from M/s Vodafone Digilink Limited during the year under consideration and did not offer the same for taxation as the assessee failed to file its return of income

Further, the tax authorities have stated it as one of the points for consideration. The said information is not the sole point of contention basis which the assessee can rely upon. The merits of the case are yet to be evaluated, which will be done separately in proceedings u/s 147 of the Act. The assessee will get ample opportunities to explain the case u/s 147 of the Act (during reassessment proceedings). Reliance is again placed on case of Raymond Mills (SC), where it was held that the AO just needs a prima facie satisfaction to reopen the case and other aspects of the case will be verified during the reassessment proceedings u/s 147 of the Act.

Further, as mentioned above, the assessee did not file its ITR for the relevant assessment year, the revenue authorities were never given an opportunity to evaluate the claim of the assessee, on merits. The eligibility of claim of any exemption w.r.t. to any income received during the year is only be claimed by filing of return of income or by assessment proceedings. Mere a conceptual argument is not the basis of evaluation of eligibility of claiming any exemption without considering all the aspect of the case.

A.4 Opening of reassessment proceedings basis suspicion and presumptions is bad in law

The objections of the assessee are not acceptable for the reason that the assessing officer had enough information which reveals that the income chargeable to tax has escaped assessment. The assessee has failed to file its return of income therefore receipts of Rs. 37,41,17,707/- (as per form 26AS), were not offered to taxation by the assessee. Hence, it was not mere suspicion and presumption but “information” in the possession of the department which led to reopening of the case.

Further, the income of foreign company for the subject year whether accrue or arise or deemed to accrue or arise under section 5 read with section 9 of the Act is the subject matter of the assessment proceedings mere considering only one aspect without any conclusive findings cannot sufficient to ascertain genuineness of financial transaction undertaken by the assessee during the assessment year and source of the funds involved. Hence, the objection raised by the assessee is considered to be wrong and stands disposed off.

A.5 Approval of appropriate authorities to be obtained before initiating proceedings and the same was not shared with the Assessee

The assessee was provided with the information relied upon for reopening of the case u/s 148 vide notice dated 26.05.2022 in order to file its objections in response of show cause notice u/s 148A(b) of the Act (earlier notice u/s 148 dated 22.04.2021). Further, in respect of providing of copy of approval obtained under section 151 of the Act, it is stated that the Hon’ble vide its judgment dated 04.05.2022 in the case of UOI v. Ashish Aggarwal has adjudicated that the respective impugned section 148 notices to the respective assessees shall be deemed to have been issued under section 148A of the IT Act and treated them to be show cause notices issued under section 148A (b) of the Act. Therefore, it shall be deemed that the notice u/s 148 so issued is in accordance with the new provisions of the Act alongwith approval of specified authority u/s 151 under the Act also been fulfilled. Further, the CBDT in its instruction no. 01/2022 in para 8.1 stated that “the extended reassessment notices are deemed to be show cause notices under clause (b) of section 148A of the Act in accordance with the judgement of Hon’ble Supreme Court. Therefore, all requirement of new law prior to that show cause notice shall be deemed to have been complied with.” Hence, the objection raised by the assessee stands disposed off.

B. Without prejudice to above, no escapement of income as per merits and facts of the case

The Assessee is a company incorporated in Singapore and is engaged in the business of providing information and communications technology (ICT) infrastructure solutions.

In this regard, it is submitted that during the subject AY, the Assessee has made telecom equipment supplies to various customers (including customers in India) on offshore basis. The sales were made from outside India and payments were also received outside India.

Accordingly, in the absence of Permanent Establishment / business connection in India, no income accrued or arose in India which can be subjected to tax in India under the provisions of the Act and/or beneficial provisions of the India-Singapore tax treaty. Software transferred by the Assessee is in the nature of transfer of ‘copyright article’ and not transfer of ‘a copyrighted right’. Payments made for acquiring the right to use the copyrighted product itself, without allowing any ‘right to use the copyright’ in the copyrighted product, are not covered within the scope of ‘Royalty’ under the provisions of the Act and India-Singapore Tax Treaty.

As per Hon’ble Supreme Court ruling in the case of Engineering Analysis Centre of Excellence (P.) Ltd. v. Commissioner of Income-tax  ITR 471 (SC)/Engineering Analysis Centre of Excellence Private Limited  (SC), it is now settled position that the consideration received for supply of software along with the telecom equipment is not in the nature of royalty. In the absence of the Assessee constituting a PE in India, the same cannot be per se held to be liable to taxation in India. In this regard, reliance is also placed on following rulings:

In this regard, the contentions of the assessee are not acceptable for the reason that in case of the assessee, the information was provided to the assessee. which was suggestive that amount/remittance so received by the assessee from M/s Vodafone Digilink Limited has escaped assessment. Further, following the directions of Hon’ble Supreme Court in the case of UOI v. Ashish Aggarwal and subsequent CBDT’s instructions No. 01/2022, the information as available with the assessing officer/department has been provided to the assessee.

Further, the tax authorities have stated it as one of the points for consideration. The said information is not the sole point of contention basis which the assessee can rely upon. The merits of the case are yet to be evaluated, which will be done separately in proceedings u/s 147 of the Act. The assessee will get ample opportunities to explain the case u/s 147 of the Act (during reassessment proceedings

Further, the eligibility of claim of any exemption w.r.t. to any income received during the year is only be claimed by filing of return of income and by assessment proceedings subsequently. Mere a conceptual argument is not the basis of evaluation of eligibility of claiming any exemption without considering all the aspect of the case. The assessee has relied upon certain rulings, which are case specific and respectfully not followed here. Hence, this argument also fails.

Further, it is again reiterated that the assessee did not file its ITR for the relevant assessment year, therefore, the revenue authorities were never given an opportunity to evaluate the claim of the assessee, on merits. Now, the assessee has submitted that the said receipts are on offshore basis, hence not taxable in India and also relied upon Hon’ble SC ruling in the case of Engineering Analysis Centre of Excellence Private Limited. Further, the assessee has claimed that it has not permannet establishment/busineess connection in India.

The above contentions of the assessee were considered but not found acceptable as the claims of the assessee are not supported by any documentary evidence. The claims of offshore services, non existence of PE can be verified only after the detailed investigation which is not possible at this juncture as the assessee failed to provide copy of agreements, copy of purchase orders and copy of invoices to support its claim. The Revenue Department has also filed review petition in the case of Engineering Analysis Centre of Excellence (P.) Ltd. v. Commissioner of Income-tax  ITR 471 (SC)/Engineering Analysis Centre of Excellence Private Limited before the Hon’ble Supreme Court even if the facts of the case are similar to that of the assessee.

Therefore, in view of above facts and circumstances and on the basis of material available on record, including the reply of the assessee the case of M/s Huawei International Pte. Limited is a fit case for issuance of notice u/s 148 of the Act for AY. 2014-15 as the income amounting to Rs. 41,31,50,494/- has escaped assessment.

Further, the assessing officer has evidence which reveals that the income chargeable to tax, represented in the form of asset, has escaped assessment, which amounts to fifty lakh rupees or more as per provisions of section 149(1)(b) of the Act.

This order is passed with the prior approval of the Specified authority as per section 148A r.w.s 151 of the Income Tax Act.”

4. From the above order under section 148A(d) of the Act passed by the Learned AO, it could be seen that the assessment was sought to be reopened only for two reasons:-

4.1. It could be seen that the Learned AO had practically conceded the fact that the facts of the assessee and facts before the Engineering Analysis Centre of Excellence (P.) Ltd. (supra), are identical. With regard to the review petition filed before the Hon’ble Supreme Court against the decision of Engineering Analysis, we find that the same has been dismissed by the Hon’ble Supreme Court in the case of CIT v. GE India Technology Centre (P.) Ltd.  ITR 389 (SC),both on the ground of delay as well as on merits vide order dated 23-04-2024. Yet another order was passed by the Hon’ble Supreme Court in the case of Deputy DIT v. Vodafone Idea Ltd.  (SC), wherein the review petition against the decision of Engineering Analysis (supra) was dismissed vide order dated 26-07-2024. Hence, the very basis of formation of belief of the Learned AO vanishes pursuant to the decision of the Hon’ble Supreme Court dismissing the review petition of the revenue. Hence the reopening made on this count deserve to fail.

4.2. From the perusal of the aforesaid order under section 148A(d) of the Act in page 7 last paragraph thereon where emphasis had been supplied by the Learned AO himself, it is very clear that the Learned AO through the garb of reopening was only trying to make detailed investigation on the claim of offshore services of the assessee and non-existence of Permanent Establishment (PE) in India of the assessee. This by any stretch of imagination cannot be construed as formation of belief warranting reopening of assessment. The Learned AO is only stating that he would like to make detailed investigation on the claims made by the assessee with regard to taxability of the receipts in India. This cannot be treated as a formation of belief. He is only trying to make fishing and roving enquiries through the reopening, which is not permissible in law. The Learned AO issued show-cause notice to the assessee under section 148A(b) of the Act after the issuance of initial notice under section 148 of the Act dated 15-04-2021. The material available with the Learned AO was indeed furnished to the assessee. The assessee had filed its objections in that regard justifying the fact of it being not required to file return of income. After taking the reply of the assessee, the Learned AO in the instant case had not formed any belief that income of the assessee had escaped assessment. Instead, he only wanted to make detailed investigation and enquiries so as to find out whether the claims made by the assessee are correct or not. This cannot be done in the reopening proceedings under section 147 of the Act as there was no legal and valid formation of belief made by the Learned AO while passing an order under section 148A(d) of the Act and hence the very assumption of jurisdiction under section 147 of the Act is void ab initio.

4.3. It is not that in every case where the initial notice under section 148 of the Act has been issued by an assessing officer to an assessee, it should get culminated in the issuance of final notice under section 148 of the Act after the passing of under section 148A(d) of the Act and reopening proceedings should be initiated. If pursuant to the show-cause notice issued by an assessing officer to an assessee under section 148A(b) of the Act forwarding the materials and information available with the assessing officer to the assessee, the assessee had duly replied to the same with supporting evidences, it is the duty of the assessing officer to go through the said reply in an objective manner and if the reply is found to be in order, the assessing officer should drop the reopening proceedings. In the instant case, even though the Learned AO is apparently convinced with the reply given by the assessee which is evident from the fact that he has conceded in his order under section 148A(d) of the Act by stating that the facts of the assessee’s case are identical to the facts of Engineering Analysis decision of Hon’ble Supreme Court, still he has only proceeded to reopen the assessment of the assessee only to make detailed investigation and enquiry with regard to the claims made by the assessee. This sort of reopening if accepted to be legal, would only amount to giving premium to the revenue for making reopening each case in an arbitrary manner. There was not even a prima facie belief entertained by the Learned AO that income of the assessee had escaped assessment in the instant case. Hence the assumption of jurisdiction for reopening the case fails.

4.4. We find that assessee in its reply to Show-Cause Notice under Section 148A(b) of the Act had clearly brought on record that it is a tax resident of Singapore engaged in the business of providing information and communications technology (ICT) infrastructure solutions ; that it had supplied telecom equipments to various customers including customers in India on offshore basis ; that the sales were made from outside India and payments were also received outside India ; that it has no permanent establishment (PE) or business connection in India and that no income accrued or arose to it in India either under the provisions of the Act or under the beneficial provisions of India Singapore Double Taxation Avoidance Agreement. It was specifically pointed out that software transferred by the assessee is in the nature of transfer of ‘copyright article’ and not transfer of ‘a copyrighted right’. It was submitted that the payments made for acquiring the right to use the copyrighted product itself, without allowing any „right to use the copyright’ in the copyrighted product, are not covered within the scope of ‘royalty’ under the provisions of the Act and India Singapore Treaty. The assessee also placed reliance on the decision of Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. (supra), in support of its contentions. It was submitted that the consideration received by the assessee for supply of software along with the telecom equipment is not in the nature of royalty more so in the absence of assessee constituting a PE in India, the same cannot be held liable to tax in India. The case of the revenue is that assessee should have filed its return in India and claimed exemption in respect of the aforementioned receipts. When there is no obligation for an assessee to file its return in India, it cannot be forced to file the return and claim exemption. Hence the absence of return of income cannot be viewed adverse to the assessee herein. We find that the learned DR before us placed reliance on the decision of Hon’ble Supreme Court in the case of Ernst and Ernst & Young U.S. LLP v. Asstt. CIT  (SC), wherein it was held that it was not necessary for the assessing officer to come across any fresh tangible material to form a belief that income by way of professional services charged had escaped assessment for the purpose of reopening, in the case where the assessee had not filed its return of income. In our considered opinion, this is not the issue before us at all. The validity of reopening of assessment made by the Learned AO is not sought to be addressed on the existence of tangible material with the Learned AO in the instant case. The legality of the material available with the Learned AO is being addressed in subsequent part of this order. The validity of reopening is being addressed on a completely different facet in the instant case. Hence the reliance placed by the learned DR before us on the decision of Hon’ble Supreme Court supra is factually distinguishable and does not advance the case of the revenue.

4.5. Further, we find that the information which was in possession of the Learned AO, which has been forwarded to the assessee along with the show-cause notice under section 148A(b) of the Act, which is enclosed in page 4 of the paper book, clearly denotes that the nature of remittance to be on account of sale of software and sale of communication equipment hardware and software. Since the said information forwarded to the assessee was unsigned and undated, the assessee preferred writ petition before the Hon’ble Delhi High Court. The said writ petition was disposed of by the Hon’ble Delhi High Court in Huawei International Pte Ltd. v. Asstt. CIT [WP (C ) No. 17561 of 2022 and CM APPL. No. 56083-84 of 2022, dated 22-12-2022], wherein it was held as under:-

“9.1 Besides this, the charge levelled against the petitioner is, that it has received foreign remittances against the sale of software, and sale of communication equipment hardware and software. The amount received, which according to the respondents/revenue, has escaped assessment, is Rs. 41,31,50,494/-.

10. It is also not disputed, that the remitter i.e., Vodafone Digilink Ltd., has deducted tax at source qua the remittance made.

11. What is also not in dispute, is that the petitioner is located in Singapore. It is also an admitted position that the petitioner has not filed its returns.

12. According to Ms Jha, the impugned order does not advert to the nature of the remittance.

13. We may note, that Mr Hossain cannot but accept, that the notice issued under Section 148A(b) of the Act does not expound, as to what is the nature of the remittance.

14. However, Mr Hossain contends, that the fact that there is a reference in the notice issued under Section 148A(b) of the Act that remittance constitutes income, which according to the revenue/department is chargeable to tax, and therefore, the proceedings for assessment/reassessment can be triggered.

14.1 This, in our view, is not sufficient. The charge against the noticee should indicate, as to what is the nature of the income which constitutes income chargeable to tax.

15. We may also note, that Ms Jha, in anticipation that the remittance could be erroneously treated as royalty vis-a-vis use of or right to use copyright, has relied upon the judgment of the Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (2021) 432 ITR 471 (SC).

15.1 Ms Jha says, that in any event, since it is the petitioner’s case that it has no Permanent Establishment in India, and hence remittances cannot be brought to tax.”

4.6. In view of the aforesaid observations, we have no hesitation to hold that the assumption of jurisdiction under section 147 of the Act by the Learned AO is flawed and void ab initio and consequentially the reassessment proceedings are hereby quashed. Accordingly, the Ground Nos. 3 to 3.1. raised by the assessee are hereby allowed.

5. Since the entire reassessment proceedings are quashed for invalid assumption of jurisdiction, the adjudication of other grounds raised by the assessee would become academic in nature.

6. The Stay application of the assessee in SA 298/Del/2025 was also heard along with the main appeal. Since the main appeal is decided, the stay application becomes infructuous.

7. In the result, the appeal of the assessee is allowed and stay application of the assessee is hereby dismissed as infructuous.