RULINGS
INCOME TAX, NEW DELHI
Decided On: 00.08.2007
Appellants: Mr. Mustaq Ahmed
Vs.
Respondent: Commissioner concerned Director of Income-tax (International Taxation)
Hon’ble Judges:
P.V. Reddi, J. (Chairman) and A. Sinha, Member
Subject: Direct Taxation
Disposition:
Application allowed
ORDER
1. The applicant is an individual who is a resident of Singapore and a non-resident in India. He is the sole proprietor of the business under the name and style of ‘Mustafa Gold Mart’ at Chennai engaged in the purchase, manufacture and sale of gold jewellery. The applicant is also the Managing Director of Mustafas Pte. Limited, having its registered office in Singapore. Apart from the business as above, the applicant is also engaged in the activity of purchasing gold jewellery in India for the purpose of export. He also purchases gold for the purpose of export of the converted gold jewellery. It is claimed that this activity is totally unrelated to the sole proprietory business in jewellery carried on by the applicant in Chennai.
2. The applicant has been submitting returns of his business income derived from local sales and export sales with ADIT(International Taxation), Chennai. The returns for the assessment years 2005-06 and 2006-07 were filed on 30.10.2005 and 31.10.2006 respectively. In the returns, the income included the income derived from purchase and export of gold ornaments. However, the applicant filed revised returns for these two years on 30.3.2007 claiming exemption of the income relating to purchase of gold ornaments for export. Under Explanation (a) and (b) to section 9(1)(i), in the case of non-resident, no income shall be deemed to accrue or arise in India through or from operations which are confined to purchase of gold in India for the purpose of export. In view of this statutory provision, it is submitted that the income arising from the operations confined to purchase of gold ornaments and gold converted into gold ornaments for the purpose of export does not accrue or arise in India and therefore not liable to be included in his total income assessable to tax.
3. The following five questions are framed by the applicant for the purpose of seeking advance ruling:
Whether on the facts and in the circumstances of the case the income derived by the applicant on the purchase in India and export of gold jewellery accrues or arises in India and is txable in India.
Whether on the facts and in the circumstances of the case the income arising to the applicant on the purchase in India of gold for the purpose of manufacturing gold jewellery in India for export and export of the same accrues or arises in India and is taxable in India.
Whether on the facts and in the circumstances of the case the income arising to the applicant on the purchase and export of gold ornaments constitutes income arising through or from the operations confined to purchase of goods in India for the purpose of export and hence does not accrue or arise in India and is consequently not liable to tax in India?
Whether on the facts and in the circumstances of the case the income arising to the applicant on the purchase of gold for the purpose of manufacturing gold jewellery for the purpose of export and export of the same constitutes income arising through or from the operations confined to purchase of goods in India for the purpose of export and hence does not accrue or arise in India and is consequently not liable to tax in India?
Whether on the facts and in the circumstances of the case the income arising on the purchase and export of gold jewellery and the purchase of gold for the purpose of manufacturing gold jewellery for export and export the same by the applicant who is a non-resident would constitute income accruing or arising through or from the operations which are confined to purchase of goods in India for the purpose of export falling within clauses (a) and (b) of Explanation 1 under section 9(1)(i) and whether such income is not taxable in India?
4. The DIT (International Taxation), Chennai has taken the stand that application is liable to rejected in terms of the proviso to section 245R(2) of the Income-tax Act. Section 245R(2) reads below:
Procedure on receipt of application
45R. (1) On receipt of an application, the Authority shall cause a copy thereof to be forwarded to the Commissioner and, if necessary, call upon him to furnish the relevant records:
Provided that where any records have been called for by the Authority in any case, such records shall, as soon as possible, be returned to the Commissioner.
The Authority may, after examining the application and the records called for, by order, either allow or reject the application.
[Provided that the Authority shall not allow the application where the question raised in the application:
is already pending before any income-tax authority or Appellate Tribunal [except in the case of a resident applicant falling in sub-clause (iii) of clause (b) of section 245N] or any court –
involves determination of fair market value of any property;
relates to a transaction or issue which is designed prima facie for the avoidance of income-tax [except in the case of a resident applicant falling in sub-clause (iii) of clause (b) of section 245N] :]
5. It is the contention of the DIT that the questions raised in the application are already pending for adjudication before the assessing authority. The DIT stated in his comments that for the two years, the applicant filed revised returns on 30.3.2007 claiming exemption on a part of income in terms of clause (a) and (b) of Explanation (1) to section 9(1)(i) of the I.T. Act, without giving any reason for claiming the exemption. The DIT further stated that the case has been selected for scrutiny for the year 2005-2006 since the quantum of international transactions requiring determination of arms-length price exceeded Rs. 5 crore.
6. In the course of hearing the following facts have been placed before us by the departmental representative after perusal of the record.
After the applicant filed the original return on 30.10.2005, a notice Under Section 143(2) of Income-tax Act was issued on 5.10.2006. While so, approval was accorded by the CIT on 5.3.2007 for making reference to Transfer Pricing Officer. Accordingly, the matter was referred to TPO as the transactions were between the related entities. Then a revised return was filed on 30.3.2007 claiming exemption. After that, details were called for regarding the purchase of gold from related parties, export invoices, customs declarations, etc.
For the year 2006-07, revised return was filed on 30.3.2007 in which exemption was claimed on Rs.81,12,396/-. Notice Under Section 143(2) was issued on 6th July, 2007.
7. Learned departmental representative submits that as the claim for exemption is on the same ground on which the applicant has sought advance ruling in his favour and as the case of the applicant is already under scrutiny Under Section 143(2), the questions raised are very much pending before the assessing authority. He therefore reiterates the stand taken by DIT as regards the maintainability of the application.
8. We do not think that the embargo laid down in the proviso to section 245R(2) is attracted in the present case. In order to decide whether the question raised in the application is already pending before the Income-tax authority, the crucial point of time to be taken into account is the date on which the application was filed before this Authority. It is on that date, the factual position as regards the pendency of the question has to be decided. If on the date of filing the application, the assessee and the Revenue were at issue as regards the question or raised in the application, the bar under the proviso does operate. Viewed from another angle, the income-tax authority had no means of knowing on the date of filing the application, a question similar to the one raised in the application will come up for consideration before him. In such a situation, it cannot be said that the question was pending before him on the date of filing the application. In Black’s Law Dictionary [Seventh Edition, page 1259] – one of the meanings of the word “question” is : “an issue in controversy; a matter to be determined”. In P.Ramanatha Aiyer’s The Law Lexicon [Edition reprint 2002 – page 1589], inter alia, the following meanings of the ‘question’ are found:
(In practice). A point on which the parties are not agreed….
A question to be decided by a Judge implies some thing in controversy, or which may be the subject of controversy;
In Webster’s New International dictionary and Thesaurus – the meanings given are:
2. a subject of inquiry or debate; a matter to be decided; at point at issue; problem the subject of dispute; controversy.
9. On the facts presented before us by the departmental representative, it is crystal clear that no controversy, no issue or dispute can be said to have arisen either explicitly or by necessary implication on the crucial date of filing the application i.e. 26.3.2007. It is only the claim for exemption made a few days later in the revised return that could have possibly set the department in motion to dispute the claim. Till then, the question did not figure in the mind of the income-tax authority. The question cannot therefore be said to be pending on 26.3.2007.
10. The mere fact that the assessee, by the date of filing of the application, made up his mind to claim the relief is no ground to conclude that the controversy or point at issue between the applicant and the department had arisen on or before the date of filing the application. The notice under section 143(2) which was issued prior to the filing of revised return in respect of the year 2005-06 and the application before this Authority was not for the purpose of probing into this issue or deciding this question. It was done as a matter of routine in accordance with the guidelines of CBDT to take up cases involving international transactions of more than Rs. 5 crores for scrutiny when the arms-length price has to be determined.
11. Construction of the phrase “already pending” occurring in clause (a) of the Proviso to sub-section 2 of Section 245-R of the IT Act came up for consideration before this Authority in Monte Harris v. Commissioner of Income-tax (218 ITR 413). The Authority for Advance Rulings (AAR) presided over by Justice S. Ranganathan interpreted the provision as follows:
The question that arises is whether, in view of the claim for exemption made before the income-tax authorities in the return which is pending consideration by them as on the date of hearing of this application, this Authority is precluded from dealing with the application in view of the mandate contained in the proviso to section 245R(2). At first sight and on a cursory reading of the above proviso, it might appear that the Authority will have to reject the application as the question sought to be raised before the Authority is “already pending” i.e., pending as on the date of the hearing and disposal of the application. But this, on second thoughts, would be seen to be not a tenable view. The date on which the Authority hears the application and the date on which it disposes of application may not be the same and the maintainability of the application cannot be made to depend on the pendency of the issue before the income-tax authorities on varying dates. It would appear more correct and practical to construe the embargo as applicable to cases where, while the issue is already pending before the income-tax authorities, the Appellate Tribunal or any court, the applicant also seeks recourse under section 245Q. Having already availed himself of the remedies available under the Act, the Legislature understandably requires that an applicant should not be encouraged to have recourse to another remedy by way of an application before the Authority.
It was concluded:
The words “already pending” should, therefore, be interpreted to mean “already pending” as on the date of the application” and not with reference to any future date. In the present case, since there was no return or claim before the authorities before the application was filed before this Authority, the application cannot be rejected by invoking clause (a) of the proviso to section 245R(2).
12. It is true that in that matter the original return was filed subsequent to filing the application before the Authority and in that return the claim for exemption was made. This difference in factual situation has no bearing on the ratio of the decision which is to the effect that the date of application is the crucial date. Though in the instant case the original return was filed before the filing of application under section 245Q, no exemption was claimed therein nor the question of exigibility of income tax under the Explanation to section 9(1)(i) was put in issue. It was only in the revised return filed subsequent to the filing of the application that the claim for exemption/exclusion was made, albeit without mentioning the details. As already noted, the notice under section 143(2) in respect of the assessment year 2005-06 was based on the original return. It is not at all related to the issue on the basis of which the claim for relief was made along with the revised return. The legal position clarified in Monte Harris case (supra) will be equally applicable to the present case.
13. The order of this Authority in Rotem Company, In re [reported in 145, Taxman-Tax Reports page 488] also lends support to the view that the date of filing the application is the relevant date for the purpose of determining whether the question raised in the application can be said to be already pending before any income tax Authority etc. The following passage in para 5 is relevant:
Insofar as the third objection of the Commissioner referred to above, namely, pendency of the questions before the assessing officer is concerned, we have held in our order dated 22nd November, 2004 that mere filing of returns by the applicants would not fall within the mischief of clause (i) referred to above. Where, however, a notice is issued under section 143(2) of the Act, within the statutory period, the situation may warrant an enquiry into the identity of questions before the assessing officer and the Authority. In this case admittedly no notice under section 143(2) of the Act is issued to the applicants before the date of filing of these applications before the authority. So we need not delve on this aspect any further.
14. Thus, the AAR Presided over by Justice SSM Quadri, took the view that unless the filing of return was followed up by issuance of notice under section 143(2) (before the date of filing the application), the question cannot be said to be pending before the assessing authority. In the case on hand, as far as the year 2006-07 is concerned, no notice under section 143(2) was issued up to the date of filing the application. In regard to the earlier year i.e. 2005-06, as already seen, the question which is raised in the application did not arise at that stage i.e., at the time of submission of original return. The claim for relief was laid for the first time in the revised return filed subsequent to the filing of application before the AAR. If at all, it is only on that date the subject of controversy or dispute can be said to have emerged. The notice under section 143(2) was issued prior to that date for a different reason, the reason being, the assessing authority wanted to scrutinize the return keeping in view the guidelines relating to determination of arms-length price in international transactions. At that stage, there was no inkling of the claim for exclusion of income in the light of the provision contained in Explanation (1) to section 9(1)(i) of the IT Act.
15. As regards the date of filing application, we would like to clarify that initially, the application for advance ruling was filed on 26.3.2007 in Form No. 34-E (meant for notified residents) instead of Form No. 34-C (meant for non-residents). On pointing this technical lapse, the applicant submitted another application in Form No. 34-C which was received alongwith advocate’s letter dated 14.4.2007 on 23.4.2007. The application initially filed cannot be considered to be non est. The application was substantially in order, but it was in a defective form. This defect was rectified by the applicant within time and the applicable form was sent. Hence, it is reasonable to take the initial date of filing this application by which the jurisdiction of this Authority was invoked as the relevant date for the limited purpose of deciding whether the question was pending on that date. As the claim for exemption was made for the first time on 30.3.2007 along with the revised return, no question or issue can be said to be pending before the assessing officer on 26th March, 2007.
16. There was a faint attempt on the part of the learned D.R. to invoke the bar under clause (iii) of the proviso to section 245R(2) as well. He contends that the questions raised in the application related to a transaction or issue which is designed prima facie for the avoidance of income tax and should not therefore be entertained. This argument is not worthy of serious consideration. No factual foundation has been laid for raising such argument either in the comments of DIT or the arguments advanced by the departmental representative. The mere fact that the exemption is claimed relying on a particular provision of the Income Tax Act cannot be construed to be a design for avoidance of income tax. In order to clamp this bar at the threshold, there must be necessary facts pointing to prima facie inference of a design to avoid tax by illegal or improper means. No facts or circumstances leading to such inference has been placed before us. Hence we overrule this objection of the learned departmental representative.
17. In the light of the foregoing discussion, we are satisfied that the bar under any of the clauses of the proviso to section 245R(2) is not attracted and the application deserves to be allowed for the purpose of pronouncement of advance ruling under Sub-section (4) of section 245R.
18. On going through the questions we found that there was some overlapping. When we drew the attention of the senior Counsel to this, he stated that three questions are sufficient for the purpose of advance ruling and the rest may be treated as deleted. A letter to this effect has also been furnished by the applicant’s counsel. The following are the three questions framed:
Whether on the facts and in the circumstances of the case the income derived by the applicant on the purchase in India and export of gold jewellery accrues or arises in India and is taxable in India?
Whether on the facts and in the circumstances of the case the income arising to the applicant on the purchase in India of gold for the purpose of manufacturing gold jewellery in India for export and export of the same accrues or arises in India and is taxable in India?
Whether on the facts and in the circumstances of the case the income arising on the purchase and export of gold jewellery and the purchase of gold for the purpose of manufacturing gold jewellery for export and export of the same by the applicant who is a non-resident would constitute income accruing or arising through or from the operations which are confined to the purchase of goods in India for the purpose of export falling within Clauses (a) and (b) of Explanation 1 of Section 9(1)(i) and whether such income is taxable in India?
19. In the result the application is allowed under section 245R(2) of the Income Tax Act. The date of hearing will be intimated in due course.