Ernst and Young Emeia Services Limited vs. Revenue [W.P.(C) No. 13687 of 2024]

Background of the Case

The appellant Ernst and Young Emeia Services Limited is a foreign company and a tax resident of United Kingdom. It is engaged in providing common area services, market development support services to various group entities of Ernst and Young Network (EY Network) including Indian entities, which are part of the EY Network. The respondent initially issued notice under Sections 148A(b) of the Income Tax Act, 1961 subsequently passed an order under Section 148A(d) of the Act and a notice issued under Section 148 of the Act initiating reassessment proceedings for assessing the appellant’s income chargeable to tax for Assessment Year 2018-19.

The Appellant, a tax resident of the United Kingdom, claimed that its income for the relevant year was exempt from Indian taxation based on the India-UK Double Taxation Avoidance Agreement (DTAA), as it did not have a Permanent Establishment (PE) in India. The Appellant’s return for AY 2018-19 disclosed income of Rs. 5,14,21,33,981/- and claimed exemption under the provisions of the DTAA, arguing that its receipts did not constitute fees for technical services (FTS) or royalties under the DTAA. The Appellant contested the notices and sought to have them quashed in court.

Arguments by the Appellant

The Appellant challenged the legality of the notice issued under Section 148A(b), asserting that it was issued without any valid reason to believe that the income for AY 2018-19 had escaped assessment. The Appellant argued that the mere fact that it had claimed its income to be exempt from tax did not justify the initiation of reassessment proceedings. Furthermore, the Appellant contended that the information relied upon by the tax authorities, which merely pointed out foreign remittances disclosed by the Appellant in Form 15CA, was insufficient to support the claim that income had escaped assessment. The Appellant maintained that it had duly disclosed its income, and the taxability of the receipts was based on the provisions of the India-UK DTAA, which had already been subject to scrutiny in the AAR’s ruling.

The Appellant also pointed out that the notices did not contain any substantial reasoning to suggest that the income was taxable in India. The appellant emphasized that the remittances received from Indian entities, which were disclosed in Form 15CA, did not alter the nature of the services rendered or the taxability of the receipts.

Respondent’s Response

The Respondent, Revenue  contended that the Appellant’s income should have been offered for taxation as it fell under the categories of royalties or fees for technical services (FTS), which are taxable under the provisions of the Income Tax Act and the India-UK DTAA. The revenue argued that the remittances disclosed in the Appellant’s return for the relevant period should have been treated as taxable, based on the nature of the services rendered by the Appellant to Indian entities. The tax authorities emphasized that the Appellant had failed to comply with the statutory provisions and had not offered the income to tax, which triggered the belief that the income had escaped assessment.

The tax authorities also relied on information obtained from the Insight portal and an order passed under Section 201 for remittances received from a specific Indian entity. The authorities stated that the income in question could either be classified as royalties, fees for technical services, or business income under the India-UK DTAA, all of which would be chargeable to tax in India. They further argued that the Appellant should have offered the income for taxation, and thus, reassessment proceedings were warranted.

Court Findings and Decision

The Delhi High Court found that the notice issued under Section 148A(b) was not supported by sufficient reasoning to initiate reassessment proceedings. The Court noted that the notice simply referred to the Appellant’s claim of exempt income and did not provide any concrete basis for the belief that the income had escaped assessment. The Court emphasized that the mere fact that the Appellant had claimed its income to be exempt did not, by itself, constitute grounds for the tax authorities to initiate reassessment proceedings.

The Court further observed that the information provided by the revenue, particularly regarding the foreign remittances disclosed in Form 15CA, did not substantiate the claim that the Appellant’s income had escaped assessment. The remittances had already been disclosed in the Appellant’s return, and there was no allegation that the information was omitted or concealed. Additionally, the Appellant had submitted relevant agreements and details justifying its claim of exemption under the India-UK DTAA. The Court set aside the notice under Section 148A(b), the order under Section 148A(d), and the notice under Section 148 initiating reassessment proceedings.

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Delhi High Court Quashes Reassessment

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