Full Judgment Text
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* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ W.P.(C) 12643/2018 & and CM APPL. 49097/2019
M/s. NESTLE SA ..... Petitioner
Through: Mr. Porus Kaka, Sr. Advocate with
Mr. Prakash Kumar and Mr. Divesh
Chawla, Advocates.
versus
ASSISTANT COMMISSIONER OF INCOME TAX
(INTERNATIONAL TAXATION), CIRCLE-2 (2) (2), NEW DELHI
..... Respondent
Through: Mr. Raghvendra K. Singh, Sr.
Standing Counsel.
CORAM:
JUSTICE S.MURALIDHAR
JUSTICE TALWANT SINGH
O R D E R
% 07.08.2019
Dr. S. Muralidhar, J. :
1. Nestle SA, a company established under the laws of Switzerland and a tax
resident of Switzerland, has filed this petition under Article 226/227 of the
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Constitution seeking the quashing of a notice dated 26 March, 2018 issued
to it by the Assistant Commissioner of Income Tax (International Taxation),
Circle-2 (2) (2), New Delhi (the Respondent) under Section 148 of the
Income Tax Act, 1961 („Act‟) requiring it to file a return of income. The
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petition also challenges an order dated 23 October, 2018 passed by the
Respondent rejecting the Petitioner‟s objections to the said notice.
W.P.(C) 12643/2018 page 1 of 14
2. The Petitioner states that it is the world‟s largest food and beverage
company with annual consolidated revenue of CHF 90 Billion and profits of
CHF 7 Billion. The Petitioner states that it had total retained earnings and
reserves of CHF 88 Billion and 80 Billion for the years ending December
2010 and 2011 respectively.
3. The Petitioner has its subsidiary in India by the name of Nestle India Ltd.
(„Nestle India‟) incorporated under the Companies Act, 1956. During the
Assessment Year („AY‟) 2011-12, the Petitioner‟s receipts of Rs. 158 crores
approximately from India from its subsidiary Nestle India consisted of
dividend and interest on which tax was duly deducted at source in
accordance with the provisions of the Act. The Petitioner states that it has
received approximately Rs. 419 crores from Nestle India as dividend and
interest over the past three years.
4. During AY 2011-12, the Petitioner purchased an additional 8,85,125
shares of Nestle India for Rs.282 crores approximately (CHF 60 million in
value) at market price through a recognised stockbroker, registered with the
Securities and Exchange Board of India (SEBI), and through the National
Stock Exchange and Bombay Stock Exchange after payment of Securities
Transaction Tax. For this purchase through the open market in accordance
with the SEBI (Substantial Acquisition of Shares and Takeover)
Regulations, 1997, the Petitioner obtained approval from the Reserve Bank
of India (RBI). It is stated that the transaction was also in line with the
applicable regulations in India including those pertaining to foreign
investment and foreign exchange. The relevant documents granting such
W.P.(C) 12643/2018 page 2 of 14
approvals and those filed by the authorized bank with the RBI have been
enclosed with the petition.
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5. On 5 April 2018, after the expiry of four years but before the expiry of
six years from the end of relevant AY, the Petitioner received the impugned
notice under Section 148 of the Act stating that the Respondent had reasons
to believe that the Petitioner‟s income chargeable to tax for the said AY had
escaped assessment within the meaning of Section 147 of the Act. The
Respondent stated in the impugned notice that he proposed to
assess/reassess the income of the Petitioner for the said AY and required the
Petitioner to deliver to him within 30 days from the date of notice a return in
the prescribed form for the said AY.
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6. The Petitioner states that it filed a letter with the Respondent on 4 May
2018, requesting him to furnish the reasons recorded for the issuance of
notice under Section 148 of the Act and the required sanction obtained under
Section 151 of the Act. The Petitioner states that „on the basis of goodwill
and cooperation‟ it also enclosed the return of income in its response and
requested that it be treated as a return in response to Section 148 of the Act.
The Petitioner also requested that the procedure laid down by the Supreme
Court in GKN Driveshafts (India) Ltd. v. Income Tax Officer (2003) 259
ITR 19 (SC) should be considered and followed.
7. The Petitioner was furnished with the reasons for reopening of the
assessment in which it was stated that a list of „non-filers‟ had been
generated by the Non-filers Monitoring System („NMS‟) module of
W.P.(C) 12643/2018 page 3 of 14
i-tax.net, in which it was found that the Petitioner had not filed its return
income for AY 2011-12. It was explained that the NMS was implemented as
a pilot project to prioritize action on non-filers with potential tax liabilities.
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A reference was made to the CBDT Instruction No.14 of 2013 dated 23
September, 2013 setting down the Standard Operating Procedure (SOP) that
was required to be adopted in this regard.
8. The reasons stated were that the Petitioner had been identified as a foreign
company in the NMS category and that during Financial Year (FY) 2010-11
relevant to AY 2011-12 it had entered into a share transaction amounting to
Rs.2,79,23,68,985/-. It was stated that „in the absence of details for non-
filing of return of income‟, the source of income of the above investment
could not be substantiated. It was further stated that there was no material on
record to examine such source of income and whether it was offered to tax
and that from the said discussion it was clear that the Petitioner had not
offered the details of „income of Rs.2,79,23,68,985/-.‟ Accordingly, the
Respondent stated that he had reason to believe that income in the above
sum, which was chargeable to tax, escaped assessment by reason of the
failure on part of the Petitioner to fully introduce all material facts.
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9. The Petitioner on 26 July, 2018 through its authorized representative
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submitted its objections to the above notice dated 26 March, 2018. As
regards the non-filing of return of income, it was pointed out that the
Petitioner‟s income from India consisted only of dividend and interest on
which TDS has been deducted in accordance with the Act and/or the Double
Taxation Avoidance Agreement („DTAA‟) between India and Switzerland.
W.P.(C) 12643/2018 page 4 of 14
It was pointed out that the Petitioner, a tax resident of Switzerland (i.e. non-
resident for Indian tax purpose), was specifically exempted from filing of
return under Section 115A (5) of the Act. It was further pointed out that the
CBDT Instruction No.14 of 2013 clearly stated the procedure to be followed
in cases of such non-filing of return. As far as the purchase of shares of
Nestle India was concerned, it is pointed out that shares were of its
subsidiary and were purchased at the extant market price through recognised
stock exchanges. It is pointed out that share purchase was a „capital account‟
transaction and could not be treated as income. The Petitioner pointed out
that the line in the „Reason for Reopening‟ to the effect that the Petitioner
had „no assets located outside India‟ was factually incorrect. It was
submitted that the reasons did not indicate any sound basis for income
escaping taxation and in fact no income had escaped assessment.
10. The above objections were rejected by the Respondent by the impugned
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order dated 23 October 2018. The Respondent observed that the case of the
Petitioner had been selected for scrutiny because there was no material on
record to examine the source of its „income/stock expenditure/stock
investment‟ in the above sum in the Annual Information Report („AIR‟) as
the Petitioner had not filed its return of income for AY 2011-12.
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11. On 27 November, 2018 when this petition was first heard, the
following order was passed:
“1. Issue notice. Mr. Ruchir Bhatia, Standing Counsel for
accepts notice.
2. The applicant/petitioner's grievance is that the impugned re-
W.P.(C) 12643/2018 page 5 of 14
assessment notice is contrary to law and was issued without
application of mind. It points out that as a foreign company it
derives income of dividend and interest income, both of which
have received tax treatment in India appropriately [first as
exempt and second subject to TDS], and it was exempted from
the obligation to file returns under Section 115A of the Income
Tax Act and the relevant departmental instructions. In these
circumstances, "reasons to believe" in support of re-assessment
notice, it is pointed out, do not disclose any tangible material
other than the income derived by the assessee [exempted
income and tax deducted income].
3. Prime facie the Court is of the opinion that the petitioner's
arguments are merited. The respondents are consequently
restrained from passing the final orders in the re-assessment
proceedings during the pendency of the present petition.
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4. List on 20 February, 2019.”
12. Pursuant to the above notice a counter-affidavit has been filed by the
Respondent in which, inter alia , the stand taken is more or less the same as
stated in the reasons for issuance of the notice under Section 147 of the Act.
Apart from standard defences that the Petitioner has an efficacious
alternative remedy and that the Respondent at this stage is to only form a
prima facie view that income has escaped assessment, it is asserted that „as
long as there is a live link between the material which was placed before the
Assessing Officer at the time when reasons for reopening were recorded,
proceedings under Section 147 of the Act would be valid‟.
13. Mr. Porus Kaka, learned Senior Counsel appearing for the Petitioner
submitted that this is a case of non-application of mind by the Respondent to
the undisputed facts that the Petitioner was not required to file any return for
W.P.(C) 12643/2018 page 6 of 14
the AY in question in terms of Section 115A (5) of the Act, as further
clarified in para 5 of the CBDT Instruction No.14 of 2013. A fundamental
error had been committed by treating the investment made by the Petitioner
in its subsidiary as „income.‟ He pointed out that it was a settled position in
law that a share transaction was a „capital account transaction.‟ He referred
to the decision of the Bombay High Court in Vodafone India Services Pvt.
Ltd. v. Union of India (2014) 368 ITR 1 (Bom) holding to the above effect,
which decision has been accepted by the Central Board of Direct Taxes
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(CBDT), which issued an Instruction No. 2 of 2015 dated 29 January, 2015
stating that the said decision must be adhered to by the Field Officers in all
cases.
14. Mr. Kaka further submitted that in the counter-affidavit there is no
denial of the basic facts, including the fact that during the AY in question
the only income earned was through dividend and interest on which TDS
had been deducted and, therefore, there was no question of any escapement
of income whatsoever. The reference to Explanation 2(b) below Section 147
of the Act in the reasons supplied by the Respondent further reflected non-
application of mind, since that provision had no application. It was
Explanation 2 (a) that applied, but then again Section 115A (5) of the Act
was completely overlooked. He pointed out that none of the objections
raised by the Petitioner were in fact dealt with by the Respondent in the
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impugned order dated 23 October 2018.
15. Mr. Raghvendra Singh, Senior Standing Counsel for the Revenue,
submitted that a high value transaction of investment of Rs.2,79,23,68,985/-
W.P.(C) 12643/2018 page 7 of 14
within a short span of 14 days in the shares of the Petitioner‟s subsidiary by
the Petitioner got automatically picked up by the NMS. It was correctly
detected that the Petitioner had not filed any return. He referred to Section
147, Explanation 2(a) where the circumstance of non-filing of return of
income would be deemed to be a case where income chargeable to tax has
escaped assessment. He submitted that the notice was therefore issued
bonafide and based on the undisputed fact of non-filing of return by the
Petitioner.
16. Mr. Singh further submitted that the fact that the Petitioner had filed its
return in response to the impugned notice was an indication that it accepted
that it was obliged to do so in law. He also adverted to the possibility of the
subsidiary of the Petitioner being a permanent establishment (PE) of the
Petitioner and income being attributable on that basis which may have
escaped assessment. He submitted that at this stage no interference was
called for and all defences could be raised by the Petitioner in the
assessment proceedings before the Respondent.
17. The above submissions have been considered. At the outset, it requires
to be noticed that in the counter-affidavit filed by the Respondent there was
no denial of the fact that the Petitioner is a company established under the
laws of Switzerland and that it is a tax resident of Switzerland. It is
undisputed that the Petitioner is entitled to protection under India‟s DTAA
with Switzerland. The averments in para 6 of the petition where the
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Petitioner, enclosing its financials for the years ending 31 December, 2010
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and 31 December, 2011 showing its consolidated revenue of CHF 109
W.P.(C) 12643/2018 page 8 of 14
Billion and 83 Billion respectively have not been disputed by the
Respondent. The averments in para 7 of the petition that during the AY in
question its receipts from its Indian subsidiary was to the tune of Rs.158
crores comprising „only of dividend and interest on which tax is deductible
at source and has been deducted in accordance with the provisions of the
Act‟ has also not been disputed by the Respondent. It is also not disputed
that the Petitioner is specifically exempted from filing of return under
Section 115A (5) of the Act. To be precise, in response to the averments in
paras 6 and 7, it is stated in the counter-affidavit that the contents of the
above two paragraphs are „a matter of fact and hence need no reply.‟
18. Merely because the notice issued to the Petitioner was a system
generated notice since the NMS detected the Petitioner as a non-filer does
not automatically mean that the Petitioner has to be issued a notice under
Section 147 of the Act. Even assuming that at the time notice was issued the
Respondent was perhaps not fully aware of all the relevant facts, once the
Petitioner submitted its objections drawing his attention to the specific legal
position, it was obligatory for the Respondent to have applied his mind to
those points. The order passed by the Respondent rejecting the objections on
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23 October, 2018 shows that there is no reference whatsoever to the
specific objections of the Petitioner. Even a cursory examination of those
objections would have dissuaded the Respondent from persisting with the
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proceedings consequent upon the impugned notice dated 26 March, 2018.
19. In particular, the Respondent failed to notice that under Section 115A (5)
read with Section 115A (1) (a) there was no need for the Petitioner to file a
W.P.(C) 12643/2018 page 9 of 14
return of income under Section 139(1) of the Act. The relevant portions of
the said provisions read as under:
“ 115A. (1) Where the total income of—
(a) a non-resident (not being a company) or of a foreign
company, includes any income by way of—
(i) dividends other than dividends referred to in section 115-O;
or
(ii) interest received from Government or an Indian concern on
monies borrowed or debt incurred by Government or the
Indian concern in foreign currency not being interest of the
nature referred to in sub-clause (iia) or sub-clause (iiaa); or
(iia) interest received from an infrastructure debt fund referred
to in clause (47) of section 10; or
(iiaa) interest of the nature and extent referred to in section
194LC; or
(iiab) interest of the nature and extent referred to in section
194LD; or
(iiac) distributed income being interest referred to in sub-
section (2) of section 194LBA;
(iii) income received in respect of units, purchased in foreign
currency, of a Mutual Fund specified under clause (23D) of
section 10 or of the Unit Trust of India,
the income-tax payable shall be aggregate of—
(A) the amount of income-tax calculated on the amount of
income by way of dividends other than dividends referred to in
section 115-O, if any, included in the total income, at the rate
of twenty per cent;
W.P.(C) 12643/2018 page 10 of 14
(B) the amount of income-tax calculated on the amount of
income by way of interest referred to in sub-clause (ii), if any,
included in the total income, at the rate of twenty per cent;
(BA) the amount of income-tax calculated on the amount of
income by way of interest referred to in sub-clause (iia) or sub-
clause (iiaa) or sub-clause (iiab) or sub-clause (iiac), if any,
included in the total income, at the rate of five per cent;
(C) the amount of income-tax calculated on the income in
respect of units referred to in sub-clause (iii), if any, included
in the total income, at the rate of twenty per cent; and
(D) the amount of income-tax with which he or it would have
been chargeable had his or its total income been reduced by
the amount of income referred to in sub-clause (i), sub-clause
(ii), sub-clause (iia), sub-clause (iiaa), sub-clause (iiab), sub-
clause (iiac) and sub-clause (iii) ;
….
(5) It shall not be necessary for an assessee referred to in sub-
section (1) to furnish under sub-section (1) of section 139 a
return of his or its income if —
(a) his or its total income in respect of which he or it is
assessable under this Act during the previous year consisted
only of income referred to in clause (a) of sub-section (1); and
(b) the tax deductible at source under the provisions of Chapter
XVII-B has been deducted from such income.”
20. The above provisions have to be read together with the CBDT
Instruction No.14 of 2013 which sets down the SOP for cases under the
NMS. Para 5 of the said instruction reads as under:
“If no return is required to be filed in the case (non-resident
etc.), the Assessing Officer should mark "No return is
W.P.(C) 12643/2018 page 11 of 14
required" and mention reason for the same in NMS which
needs to be confirmed by Range head.”
21. Far from actually referring to these specific objections of the Petitioner
the Respondent wrongly adverted to Clause (b) of Explanation 2 when this
was a case of no return having been filed and the case if at all would fall
under Clause (a). Explanations 2(a) and (b) below Section 147 reads as
under:
“Explanation 2. For the purposes of this section, the following
shall also be deemed to be cases where income chargeable to
tax has escaped assessment, namely:-
(a) where no return of income has been furnished by the
assessee although his total income or the total income of any
other person in respect of which he is assessable under this
Act during the previous year exceeded the maximum amount
which is not chargeable to income-tax;
(b) where a return of income has been furnished by the
assessee but no assessment has been made and it is noticed by
the Assessing Officer that the assessee has understated the
income or has claimed excessive loss, deduction, allowance or
relief in the return;”
22. The above deeming fiction is a rebuttable one. It is not that every notice
issued under Section 147 of the Act has to be carried to its logical end of an
assessment. It is to avoid such a consequence which could end up being a
futile exercise that the Supreme Court has devised a procedure in GKN
Driveshafts (India) Ltd. v. Income Tax Officer ( supra ). The procedure
outlined by the Supreme Court reads thus:
“We see no justifiable reason to interfere with the order under
challenge. However, we clarify that when a notice
W.P.(C) 12643/2018 page 12 of 14
under Section 148 of the Income tax Act is issued, the proper
course of action for the noticee is to file return and if he so
desires, to seek reasons for issuing notices. The assessing
officer is bound to furnish reasons within a reasonable time.
On receipt of reasons, the noticee is entitled to file objections
to issuance of notice and the assessing officer is bound to
dispose of the same by passing a speaking order. In the instant
case, as the reasons have been disclosed in these proceedings,
the assessing officer has to dispose of the objections, if filed,
by passing a speaking Order before proceeding with the
assessment in respect of the abovesaid five assessment years.”
23. The above procedure has to be mandatorily followed by the Respondent.
It is the above procedure that required the Petitioner to file a return in order
to be provided with the reason for issuing notice. Therefore, the filing of the
return by the Petitioner could not have been construed as an admission by it
of a legal obligation to file a return. In the Petitioner‟s case, the admitted
facts make it abundantly clear that there was no obligation on the Petitioner
to file a return of income for the AY in question.
24. The principal objection of the Petitioner that its investment in the shares
of its subsidiary cannot be treated as „income‟ is well founded. The decision
of the Bombay High Court in Vodafone India Services Pvt. Ltd. v. Union of
India ( supra ) holding such investment in shares to be a „capital account
transaction‟ not giving rise to income was accepted by the CBDT. Para 2 of
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Instruction No.2 of 2015 dated 29 January, 2015 reads thus:
“2. It is hereby informed that the Board has accepted the
decision of the High Court of Bombay in the above mentioned
Writ Petition. In view of the acceptance of the above
judgment, it is directed that the ratio decidendi of the judgment
must be adhered to by the field officers in all cases where this
W.P.(C) 12643/2018 page 13 of 14
issue is involved. This may also be brought to the notice of the
ITAT, DRPs and CIT (Appeals).”
25. Therefore, the fundamental premise of the Respondent that the above
investment by the Petitioner in the shares of its subsidiary amounted to
„income‟ which had escaped assessment was flawed. The question of such a
transaction forming a live link for reasons to believe that income had
escaped assessment is entirely without basis and is rejected as such.
26. For the aforementioned reasons, this Court sets aside the impugned
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notice dated 26 March, 2018 and the impugned order dated 23 October,
2018. The writ petition is allowed in the above terms, but in the
circumstances, there is no order as to costs. The application is disposed of.
CM APPL. 49098/2019 (exemption)
27. Allowed, subject to all just exceptions.
S. MURALIDHAR, J.
TALWANT SINGH, J.
AUGUST 07, 2019
tr
W.P.(C) 12643/2018 page 14 of 14