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Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
Acts
  • Section 274 read with section 271 (1)(c) of the Income Tax Act, 1961
  • Section 147/148 of the Income Tax Act, 1961
  • SECTION 148 INCOME TAX ACT 1961
  • Rule 10 of the Income Tax Rules, 1982
  • Section 148 read with section 143(3)
  • Section 9 of the I.T. Act, 1961
  • Section 271 (1)(c)
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
Acts
  • Section 274 read with section 271 (1)(c) of the Income Tax Act, 1961
  • Section 147/148 of the Income Tax Act, 1961
  • SECTION 148 INCOME TAX ACT 1961
  • Rule 10 of the Income Tax Rules, 1982
  • Section 148 read with section 143(3)
  • Section 9 of the I.T. Act, 1961
  • Section 271 (1)(c)
See more information ...
Smart Summary

Structured Summary of the Opinion — ITA Nos.1118 /Del/2013 to 1123 /Del/2013

Factual and Procedural Background

The assessee is a company incorporated in the United Kingdom engaged in India in supplying aero-engines, spare parts and rendering technical services to Indian customers (notably Hindustan Aeronautical Limited and the Indian Air Force). Rolls Royce India Limited (RRIL), a United Kingdom incorporated company and a 100% subsidiary of the assessee, maintained offices in India (New Delhi and other locations) and performed liaison/marketing activities.

The assessee had not filed a return for relevant years. A notice under Section 148 of the Income Tax Act, 1961 was issued on 29.03.2004; the assessee filed a return on 31.05.2004 declaring nil income. The Assessing Officer (AO) held that the assessee had a business connection in India under Section 9 and a permanent establishment (PE) in India under Article 5 of the India–UK DTAA, the PE being constituted by RRIL. The AO completed reassessments under Section 148 read with Section 143(3), attributed profits to the PE (invoking Rule 10), and issued penalty notices under Section 271(1)(c).

On appeal, the CIT(A) initially confirmed existence of PE but limited profit attribution (the order reflects a restriction to 75% at one stage). The Tribunal (Delhi Bench C) reduced the attribution to 35%. The Delhi High Court, by judgment dated 30.08.2011, held that the New Delhi office of RRIL constituted a PE of the assessee under Article 5 and upheld 35% profit attribution. The assessee filed Special Leave Petitions (SLPs) in the Supreme Court (SLP Nos. 1042–1047 of 2012), which were admitted on 02.08.2013; the quantum appeal was pending before the Supreme Court at the time of this decision.

The AO levied penalties under Section 271(1)(c) for concealment of income for assessment years 1997-98, 1998-99, 1999-2000, 2000-01, 2002-03 and 2003-04 (specific amounts are recorded below). The assessee appealed against confirmation of those penalties; the present ITAT bench heard the appeals and pronounced judgment on 15.03.2018.

Legal Issues Presented

  1. Whether penalty under Section 271(1)(c) of the Income Tax Act is exigible where the underlying addition / tax liability arises from an issue that is debatable and has been admitted for hearing by the Supreme Court (i.e., whether a debatable question precludes imposition of penalty under Section 271(1)(c)).
  2. Contextual (framed by the Delhi High Court in earlier proceedings): (a) whether reassessment proceedings under Sections 147/148 were valid; (b) whether RRIL's New Delhi office constituted a permanent establishment of the assessee under Article 5 of the India–UK DTAA; (c) if so, what proportion of profits was attributable to that PE; and (d) whether the Tribunal's findings on PE were perverse. (Those substantial questions were the subject of further appeal to the Supreme Court.)

Arguments of the Parties

Assessee's (Appellant's) Arguments

  • The issue of whether the assessee had a PE in India and the appropriate attribution of profits was a highly debatable question that had travelled up to the Supreme Court (SLPs admitted on 02.08.2013).
  • Because the question was debatable and involved substantial questions of law, penalty under Section 271(1)(c) was not exigible against the assessee.

Departmental Representative's (Respondent's) Arguments

  • The Department supported the orders of the lower authorities (AO and CIT(A)) and argued for confirmation of the penalty under Section 271(1)(c).

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
CIT vs. H.B. Leasing and Finance Co. Ltd., (2011) 334 ITR 361 (Delhi) On a debatable issue, penalty under Section 271(1)(c) is not leviable. The bench relied on this jurisdictional High Court decision to support the proposition that penalties under Section 271(1)(c) should not be imposed where the disputed tax question is debatable.
Santosh Hazari vs. Purushottam, 251 ITR 84 (SC) Defines what constitutes a "substantial" (debatable) question of law: it must be debatable, not previously settled by the law of the land or a binding precedent, and must call for discussion or an alternate view. The Court cited this Supreme Court authority to explain the standard for deeming a question "substantial" and debatable, reinforcing why the present issue qualified as debatable.
Rupam Mercantiles Ltd. vs. DCIT, 91 ITD 237 (Ahd) (TM) No penalty under Section 271(1)(c) is exigible once the High Court has held that the issue represents a substantial question of law. The bench applied this Tribunal decision as further support for the proposition that a substantial question of law (as recognized by a High Court) precludes imposition of penalty under Section 271(1)(c).
Jiyajeerao Cotton Mills vs. Income Tax Officer, (1981) 130 ITR 710 (Cal) Explains that even where the Supreme Court settles a point, that does not obliterate the existence of the earlier debate or doubt which justified litigation; Supreme Court decisions settle law but do not negate that a question was previously debatable. The bench relied on this authority to emphasize that the existence of a dispute prior to Supreme Court resolution suffices to treat the question as debatable for purposes of penalty assessment.

Court's Reasoning and Analysis

The Court proceeded by examining (a) the factual matrix of reassessment and appeals, (b) the procedural posture (High Court framed substantial questions of law and dismissed the assessee's appeal; the assessee's SLP was admitted by the Supreme Court), and (c) the legal principle that penalty under Section 271(1)(c) is not imposable where the underlying tax issue is debatable.

Step-by-step analysis of the reasoning as set out in the opinion:

  1. Factual foundation: The AO completed reassessments under Section 148/143(3), attributing income to the assessee on account of a PE in India (RRIL) and levied penalties under Section 271(1)(c) for concealment for multiple assessment years. The CIT(A) and the Tribunal had limited the profit attribution (ultimately to 35%), and the Delhi High Court upheld the Tribunal on both PE existence and 35% attribution.
  2. Procedural posture: The assessee filed SLPs which were admitted by the Supreme Court on 02.08.2013; the quantum appeal was pending before the Supreme Court, indicating the issue had moved to the highest forum and was recognized as raising substantial questions.
  3. Legal principle: The bench identified an established position of law — that penalty under Section 271(1)(c) cannot be imposed on a debatable issue — and cited authority of the Delhi High Court (CIT vs. H.B. Leasing) and the Supreme Court (Santosh Hazari) to clarify what constitutes a substantial/debatable question.
  4. Application of authority: The bench also cited Tribunal and High Court decisions (Rupam Mercantiles; Jiyajeerao Cotton Mills) to show that when an issue represents a substantial question of law (and is the subject of higher court scrutiny), penalty is not exigible and that the existence of a bona fide debate suffices to preclude penalty.
  5. Conclusion from law to facts: Because the dispute on PE and attribution was admitted before the Supreme Court after being treated as raising substantial questions by the High Court, and because the issue was plainly debatable, the Court concluded that penalties under Section 271(1)(c) were not exigible in the instant case.

The bench therefore set aside the penalty orders confirmed by the lower authorities and deleted the penalty amounts levied in the specified assessment years. The reasoning is confined to the recorded facts and the cited authorities; the Court did not elaborate further substantive reappraisal of the PE or attribution question beyond noting its debatable character and pendency before the Supreme Court.

Holding and Implications

Core Ruling: THE APPEALS ARE ALLOWED; THE PENALTIES UNDER SECTION 271(1)(c) ARE DELETED.

Direct effect on the parties (as recorded in the opinion):

  • The Tribunal set aside the orders of the lower authorities and deleted the penalties levied under Section 271(1)(c) for the assessment years and amounts listed below:
    • Assessment Year 1997-98: Rs. 3,65,45,057/-
    • Assessment Year 1998-99: Rs. 3,71,56,555/-
    • Assessment Year 1999-2000: Rs. 8,34,05,256/-
    • Assessment Year 2000-01: Rs. 7,97,24,456/-
    • Assessment Year 2002-03: Rs. 3,41,97,448/-
    • Assessment Year 2003-04: Rs. 2,42,42,280/-
  • The ground of appeal of the assessee in all the years under appeal was allowed; the appeals were pronounced allowed on 15.03.2018 at New Delhi.

Broader implications: The opinion expressly grounds relief on settled authorities for the proposition that penalties under Section 271(1)(c) are not imposable on debatable issues, particularly where substantial questions have been framed and/or the matter is pending before a higher court. The judgment does not purport to lay down a new legal principle beyond those precedents; accordingly, no fresh binding precedent was announced by this order beyond its application to the facts of these appeals.

Order pronounced on: 15 March 2018 — Bench: (Beena Pillai) Judicial Member & (N.S. Saini) Accountant Member; ITAT, New Delhi.

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    Rolls Royce Plc, New Delhi v. DDIT, New Delhi

    PER N.S. SAINI, AM.: These appeals filed by the assessee against the separate orders of learned CIT(A)-XXII, New Delhi all dated 30.10.2012 for the assessment Assessee by Sh. Mukesh Bhutani & Sh. S.S. Tomar, Adv Respondent by Sh. G.K. Dhall, CIT (DR), Sh. S.S. Shah Date of hearing 14.03.2018 Date of pronouncement 15.03.2018 ITA Nos.1118 /Del/2013, 1119/Del/2013, 1120/Del/2013, 1121/Del/2013, 1122/Del/2013 & 1123/Del/2013 years, 1997-98, 1998-99, 1999-2000, 2000-01, 2002-03 & 2003-04 respectively.

    2. In all the appeals, the common issue involved is that the learned CIT(A) erred in confirming an order of the AO levying penalty under Section 271 (1)(c) of the Act Rs. 3,65,45,057/- in assessment year 1997-98, Rs. 3,71,56,555/- in assessment year 1998-99, Rs. 8,34,05,256/- in assessment year 1999-2000, Rs. 7,97,24,456/- in assessment year 2000-01, Rs. 3,41,97,448/- in assessment year 2002-03 & Rs. 2,42,42,280/- in assessment year 2003-04.

    3. The brief facts of the case are that the assessee is a company incorporated in United Kingdom. The assessee is engaged in India in the business of supplying of Aero-Engines, spare parts and rendering technical services to Indian Customers mainly to M/s Hindustan Aeronautical Limited, Indian Air Force.

    4. Rolls Royce India Limited (RRIL), is another company of Rolls Royce group incorporated in United Kingdom which is claimed to have been engaged in liaison activities on behalf of Rolls Royce Plc. RRILs immediate immediately parent company is Rolls Royce India limited which is subsidiary of Rolls Royce India Limited Plc, the assessee company. Hence, Rolls Royce India Limited becomes a subsidiary of assessee company. RRIL has established his offices in India at New Delhi and ITA Nos.1118 /Del/2013, 1119/Del/2013, 1120/Del/2013, 1121/Del/2013, 1122/Del/2013 & 1123/Del/2013 additional offices at International Airport, New Delhi, Bangalore, Kanpur and Goa.

    5. No return of income was filed by the assessee. Notice under Section

    148 of the Income Tax Act, 1961 was issued to the assessee on 29.3.2004, in response to which the assessee filed its return of income on 31.5.2004 declaring nil income. The Assessing Officer on examination of the facts and circumstances of the case observed that the assessee was having a business connection in India under Section 9 of the I.T. Act, 1961 as well as permanent establishment (PE) under Article 5 of the DTAA between India and United Kingdom. The business connection and permanent establishment were found to be in existence in India in the form of Rolls Royce India Limited, which is a United Kingdom incorporated subsidiary company of the assessee. It was observed by the Assessing Officer that the assessee had carried out its business activities through the PE situated in India including marketing and sale of goods to Indian customers.

    6. The Assessing Officer held that the assessee was having permanent establishment (PE) in India which was contrary to the claim of the assessee, and the assessment was completed on 14.3.2005 under Section 148 read with section 143(3) and penalty notice under Section 274 read with section

    271 (1)(c) of the Income Tax Act, 1961 was issued. The Assessing Officer invoked Rule 10 of the Income Tax Rules, 1982 and attributed 100 per cent of the profits arising from the sale of goods to Indian customers in India to ITA Nos.1118 /Del/2013, 1119/Del/2013, 1120/Del/2013, 1121/Del/2013, 1122/Del/2013 & 1123/Del/2013 permanent establishment and completed the assessment at a taxable income of Rs. 22,11,69,973/- in assessment year 1998-99, Rs. 49,64,59,850/- in assessment year 1999-2000, Rs. 47,45,50,337/- in assessment year 2000- 01, Rs. 14,65,60,491/- in assessment year 2002-03 and Rs. 12,36,85,105/- in assessment year 2003-04.

    7. On appeal, the learned CIT(A), vide order dated 27.2.2007 confirmed the order of the AO that the assessee was having a permanent establishment in India though the attribution of profits to the PE was restricted to 75 per cent of profits arising out of sale of goods to Indian Customers in India.

    8. On further appeal, the Delhi Bench C of the Tribunal vide its order dated 26.10.2007 in ITA No. 1501/Del/2007 also upheld that the assessee was having a permanent establishment in India but restricted the attribution of profits to the PE to 35 per cent of profits arising from the sale of goods to Indian Customers in India.

    9. On further appeal, the Honble Delhi High Court vide order dated 30.8.2011 also held that the office of Rolls Royce India Limited at New Delhi constituted a permanent establishment of the assessee under article 5 of the double taxation avoidance agreement between India and United Kingdom. The Honble High Court also upheld the order of the Tribunal regarding the attribution of profit to 35 per cent profits arising out of the sale of goods to Indian Customers in India. ITA Nos.1118 /Del/2013, 1119/Del/2013, 1120/Del/2013, 1121/Del/2013, 1122/Del/2013 & 1123/Del/2013

    10. Thereafter, the Assessing Officer issued notice under Section 271 (1)(c) to the assessee and levied penalty for concealment of income of Rs. 3,71,56,555/- in the assessment year 1998-99, Rs. 8,34,05,256/- in the 1999-2000, Rs. 7,97,24,456/- in assessment year 2000-01, Rs. 3,41,97,448/- in assessment year 2002-03, Rs. 2,42,42,280/- in assessment year 2003-04.

    11. Before us, the AR of the assessee submitted that the Assessing Officer in his order passed has attributed 100 per cent of the profits arising from the sale of goods to customers in India to the permanent establishment and determined the income of the assessee. On appeal, the learned CIT(A) reduced the same to 35 per cent of the profits arising from sale of goods to Indian customers in India. On further appeal, the Tribunal confirmed the order of the learned CIT(A). On further appeal, the Honble Delhi High Court also confirmed the order of the Tribunal that office of Rolls Royce India Limited at New Delhi constituted a permanent establishment that the assessee under article 5 of the double taxation avoidance agreement between India and United Kingdom and that 35 per cent of the profits arising from the sale of goods to Indian customers in India was attributable to the permanent establishment in India. He submitted that the assessee thereafter has filed SLP before the Honble Supreme Court of India being SLP 1042-1047 of 2012 which was admitted vide order dated 02.08.2013. By making these submissions, the contention of the learned AR for the ITA Nos.1118 /Del/2013, 1119/Del/2013, 1120/Del/2013, 1121/Del/2013, 1122/Del/2013 & 1123/Del/2013 assessee was that the issue at hand which was that the assessee was having a permanent establishment in India and attribution of profits to the PE was

    35 per cent of the profits arising from the sale of goods to Indian customers in India was a highly debatable issue which has travelled up to the Honble Supreme Court, therefore, the levy of penalty under Section 271 (1)(c) of the act is not exigible to the assessee.

    12. On the other hand, the learned DR vehemently argued and supported the orders of the lower authorities.

    13. We have heard the submissions and perused the orders of the lower authorities and materials available on record. In the instant case, penalty under Section 271 (1)(c) of the Act was levied by the AO at Rs. 3,65,45,057/- in assessment year 1997-98, Rs. 3,71,56,555/- in assessment year 1998-99, Rs. 8,34,05,256/- in assessment year 1999-2000, Rs. 7,97,24,456/- in assessment year 2000-01, Rs. 3,41,97,448/- in assessment year 2002-03 & Rs. 2,42,42,280/- in assessment year 2003-04 which was confirmed by the CIT(A). The relevant facts of the case are that in the relevant order of assessment passed under Section 147 of the Act, the AO assessed total income of the assessee at Rs. 18,98,44,454/- in assessment year 1997-98, Rs. 22,11,69,973/- in assessment year 1998-99, Rs. 49,64,59,850/- in assessment year 1999-2000, Rs. 47,45,50,337/- in assessment year 2000-01, Rs. 14,65,60,491/- in assessment year 2002-03 and Rs. 12,36,85,105/- in assessment year 2003-04 on the ground that ITA Nos.1118 /Del/2013, 1119/Del/2013, 1120/Del/2013, 1121/Del/2013, 1122/Del/2013 & 1123/Del/2013 RRIL which was 100 per cent subsidiary of the assessee and through which the assessee sold goods in India and therefore, the said RRIL was PE of the assessee in India and consequently its entire income relatable to those goods sold in India is chargeable to tax in India in the hands of the assessee.

    14. On first appeal before learned CIT(A), the learned CIT(A) reduced the total income by holding that only 35 per cent of the relevant income is assessable to tax in India in the hands of the assessee.

    15. On second appeal by the assessee, the Tribunal upheld the order of the learned CIT(A) thereafter, the assessee filed an appeal before the Honble Delhi High Court. The Delhi High Court admitted the said appeals and framed the following substantial questions of law in all the years under appeal:-

    1. Whether the Income Tax Appellate Tribunal w as correct in holding that the reassessment proceedings under Section 147/148 of the Income Tax Act, 1961 were valid?

    2. Whether the office of Rolls Royce India Limited at New' Delhi constituted a permanent establishment of the assessee under article 5 of the double taxation Avoidance Agreement between India and the United Kingdom?

    3. If the answers to questions No. 1 and 2 are against the assessee, then what would be the appropriate amount of profits attributable to the permanent establishment of the assessee in India?

    4. Whether the findings of the Income Tax Appellate Tribunal with regard to the existence of the permanent establishment of the assessee in India are perverse? ITA Nos.1118 /Del/2013, 1119/Del/2013, 1120/Del/2013, 1121/Del/2013, 1122/Del/2013 & 1123/Del/2013

    16. The Honble High Court vide its judgment dated 30.8.2011 dismissed the appeal of the assessee.

    17. The assessee preferred further appeal before the Honble Supreme Court and the Honble Supreme Court has admitted the SLP of the assessee vide order dated 2.8.2013 passed in SLP Nos. 1042-1047 / 2012. The quantum appeal is thus now pending before Honble Supreme Court.

    18. On the above facts, the argument of the learned Authorized representative of the assessee is that as the above facts shows that the issue is highly debatable and therefore, no penalty under Section 271 (1) (c) is exigible in the instant case.

    19. On the other hand, the learned Departmental Representative supported the orders of the lower authorities.

    20. We find that it is a established position of law that penalty under Section 271 (1)(c) of the Act cannot be imposed in respect of a debatable issue. This view is supported by the decision of the Honble jurisdictional High Court in the case of CIT vs. H.B. Leasing and Finance C.O. Limited (2011) 334 ITR 361 (Delhi) wherein it was held that on a debatable issue, no penalty under Section 271 (1)(c) was leviable.

    21. The Honble Supreme Court in the case of Santosh Hazari vs. Purushottam 251 ITR 84 (SC) held as under:- To be a substantial, the question of law must be debatable, not previously settled by law of the land or a binding precedent that it was not free from difficulty or that it called for a discussion for an alternate view. ITA Nos.1118 /Del/2013, 1119/Del/2013, 1120/Del/2013, 1121/Del/2013, 1122/Del/2013 & 1123/Del/2013

    22. Further, the Ahmedabad Third Member Bench of the Tribunal in the case of Rupam Mercantiles Limited vs. DCIT 91 ITD 237 (Ahd) (TM) held as under: No penalty was exigible under Section 271 (1)(c) once the High Court had held that the issue of addition / disallowance represented a substantial questions of law.

    23. Further the Honble Calcutta High Court in the case of Jiyajeerao Cotton Mills vs. Income Tax Officer, C Ward Companies Distt. I, Calcutta & Others (1981) 130 ITR 710 (Cal) has held as under:- The law is laid down or a provision in a statute is interpreted by the Supreme Court only when there is a debate or doubt on the interpretation of any provision of a statute requiring interpretation by the Supreme Court or when there is a conflict of judicial opinion on a provision of a statute between the different High Courts of India which is required to be resolved and settled by the Supreme Court, yet still that does not obliterate the existence of such debate or doubt or conflict that existed prior to the decision of the Supreme Court setting at rest such debate or doubt or conflict.

    24. In view of the above settled position of law as in the instant case, the issue involved is yet to be resolved by the Honble Supreme Court and as the issue was admitted by the High Court as involving substantial questions of law which is beyond any shadow of doubt that the addition in the instant case was made in respect of an issue which is highly debatable. Therefore, respectfully following the above cited decision, we are of the considered view that a penalty under Section 271 (1)(c) is not exigible in the instant case. We, therefore, set aside the orders of the lower authorities and delete the penalty of Rs. 3,65,45,057/- in assessment year 1997-98, Rs. ITA Nos.1118 /Del/2013, 1119/Del/2013, 1120/Del/2013, 1121/Del/2013, 1122/Del/2013 & 1123/Del/2013 3,71,56,555/- in assessment year 1998-99, Rs. 8,34,05,256/- in assessment year 1999-2000, Rs. 7,97,24,456/- in assessment year 2000-01, Rs. 3,41,97,448/- in assessment year 2002-03 and Rs. 2,42,42,280/- in assessment year 2003-04 levied under Section 271 (1)(c) of the Act. Thus, the ground of appeal of the assessee in all the years under appeal is allowed.

    25. In the result, the appeals of the assessee are allowed. (Order pronounced in the court on Thursday the 15th day of March, 2018 at New Delhi). Sd/- Sd/- (BEENA PILLAI) (N.S. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dt. 15.03.2018 Copy forwarded to:

    1. Appellant

    2. Respondent

    3. CIT

    4. CIT(Appeals)

    5. DR: ITAT ASSISTANT REGISTRAR, ITAT NEW DELHI ITA Nos.1118 /Del/2013, 1119/Del/2013, 1120/Del/2013, 1121/Del/2013, 1122/Del/2013 & 1123/Del/2013 Date

    1. Draft dictated on PS

    2. Draft placed before author 3.2018 PS

    3. Draft proposed & placed before the second member JM/AM

    4. Draft discussed/approved by Second Member. JM/AM

    5. Approved Draft comes to the Sr.PS/PS 3.2018 PS/PS

    6. Kept for pronouncement on PS

    7. File sent to the Bench Clerk 3.2018 PS

    8. Date on which file goes to the AR

    9. Date on which file goes to the Head Clerk.

    10. Date of dispatch of Order.

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    Comments

    Rolls Royce Plc, New Delhi v. DDIT, New Delhi
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