Delhi High Court quashed Reassessment made to tax Royalty by invoking Force of Attraction Rule
Oracle System Corporation v. ADIT [Del HC]
W.P. No. 12856 and 12870 of 2009
Date of decision: October 08, 2015
Facts of the case
The assessee is a company incorporated in USA and into the business of supplying and replication of software. Royalty payments had been received by the assessee from its Indian subsidiary. The receipts from software were treated as ‘royalty’ and had been taxed at gross basis as per the DTAA at the rate of 15 per cent.
Later on initiating reassessment, the contention of the Assessing Officer was that, since the assessee had a Permanent Establishment (PE) in India, and the receipts had been treated as ‘royalty’, the income should be attributed to the Permanent Establishment by virtue of force of attraction Rule under Article 7. Therefore, the receipts were to be taxed as royalty under section 115A at the rate of 20 per cent.
Decision of Delhi High Court
The Court while quashing the notices u/s 148 and orders disposing of the objections held that, when the Assessing Officer has accepted the assessee’s contentions that the royalty was to be taxed under Article 12(2)(a)(ii) at the rate of 15 per cent. It has to be presumed that the Assessing Officer’s attention was attracted to the entire article 12 of the DTAA. Article 12 itself carves out an exception under clause (6) thereof. Therefore, it cannot be accepted, as is sought to be made out by the revenue, that the Assessing Officer had not applied his mind to this aspect of the matter.
When a regular assessment is completed in terms of section 143(3), a presumption can be raised that such an order has been passed upon a proper application of mind. What the Assessing Officer was seeking to do by way of reassessment would amount to a clear change of opinion and that was not permissible.