In a significant ruling for cross-border taxation and TDS litigation, the Supreme Court has clarified that where the sole foundation of the Section 148 notice is the alleged failure to deduct tax under Section 201 read with disallowance under Section 40(a)(i), and the ITAT has held that the assessee is not an ‘assessee-in-default’, the reassessment collapses and no remand is warranted. The Court held that Section 147/148 notice confined to a single ground cannot be repackaged at the assessment stage by importing fresh grounds to justify escapement of income.
The Apex Court explained that a favourable ITAT order under Section 201, holding that the foreign payee has no tax liability and consequently no obligation to withhold under Section 195, directly extinguishes any Section 40(a)(i) disallowance on the same facts. Thus, the DRP/FAA methodology of attributing profits at a 20% markup on 50% of expatriate salary cost to the alleged PE of the foreign entity was upheld as a valid basis for the ITAT’s ‘no tax liability’ finding.
A Section 250 appellate order communicated on blank papers, with the concerned CIT (Appeals) later suspended, leaves the assessee remediless and justifies interference by the High Court at the notice stage. Accordingly, the assessee must place the Supreme Court’s order and the ITAT order under Section 201 before the Assessing Officer, who is bound to close the reassessment as unenforceable, added the Court.
Briefly, the reassessment was proposed for Assessment Years 2006-07, 2007-08 and 2008-09 on the premise that the parent company, M/s LG Electronics Korea, and its associated enterprises were running a Permanent Establishment (PE) in India, which allegedly obliged the assessee to deduct tax at source on remittances made to the foreign group entities. The corresponding notices under Section 148 were issued, and the Revenue’s case was that the failure to deduct TDS triggered a disallowance of the related expenses under Section 40(a)(i) of the IT Act.
Before the High Court, the assessee raised the plea of limitation, contending that there was nothing to show that income had escaped assessment due to any failure on its part to disclose full facts, and that the reassessment was a mere change of opinion. The India-Korea DTAA was also pressed into service. The Division Bench noted that parallel proceedings had been taken against the Korean company and its related entities, that proceedings under Section 201 had been initiated against the appellant for recovery of tax not deducted at source, and that a survey under Section 133A had led to the present proceedings to disallow expenses under Section 40(a)(i).
The Court left the DTAA question to be considered in reassessment and rejected the limitation plea, observing that there was no disclosure regarding the Permanent Establishment of the Korean company operating in India. During the reassessment proceedings, an appellate order under Section 250 was communicated to the assessee on blank papers with nothing written on it, and the incumbent CIT (Appeals), NOIDA, who issued that blank order, was later suspended, leaving the assessee effectively remediless unless the Section 148 notice was interfered with.
A Two-Judge Bench comprising Justice J.B. Pardiwala and Justice K. Vinod Chandran noted that the parallel proceedings under Section 201 had already been allowed in favour of the assessee by the Income Tax Appellate Tribunal. From a reading of that order, the Court observed that on the directions of the Dispute Resolution Panel (DRP), the First Appellate Authority had modified the order by determining profits at a 20% markup on 50% of the salary cost of the expatriate employees attributed to the Permanent Establishment of LG Korea in India; the assessment proceedings against LG Korea were quashed by the ITAT for non-implementation of the DRP directions, and the appellate orders for AY 2005-06 to 2010-11 were not challenged owing to low tax effect.
The ITAT had further held that there was no tax liability on the payee, namely LG Korea, and consequently no obligation on the assessee to withhold tax under Section 195 of the Act, with the result that the assessee could not be treated as an ‘assessee-in-default’ under Section 201. The Apex Court further recorded that the Additional Solicitor General sought to contend that reassessment may have been carried out on other grounds as well, but the Court declined to subscribe to that submission, observing that the notice under Section 147 was confined to the alleged default under Section 201 and the consequential disallowance under Section 40(a)(i).
