Facts of the Case

The petitioner, Ernst and Young EMEIA Services Limited, a company incorporated in the United Kingdom and tax resident of the UK, filed a writ petition challenging the notice dated 20.06.2024 issued under Section 148A(b) of the Income-tax Act, 1961, the order dated 29.08.2024 passed under Section 148A(d), and the consequential notice dated 29.08.2024 issued under Section 148 for Assessment Year 2018–19.

The petitioner is engaged in providing common area services and market development support services to entities of the Ernst and Young global network, including Indian member firms. For AY 2018–19, the petitioner filed its return of income declaring total income of ₹5,14,21,33,981 and claimed the same as exempt under the India–UK Double Taxation Avoidance Agreement, asserting that it had no Permanent Establishment in India and that its receipts did not constitute fees for included services or royalty.

The Assessing Officer issued the impugned notice under Section 148A(b) on the basis that the petitioner had received foreign remittances from India and had claimed its income as exempt. The petitioner responded to the notice and furnished agreements and explanations. Thereafter, the Assessing Officer passed an order under Section 148A(d) holding that the income was prima facie taxable on the basis that managerial services could constitute a Permanent Establishment under Clause 2(k) of the India–UK DTAA, and issued notice under Section 148.

Issues Involved

Whether reassessment proceedings can be initiated merely because an assessee has claimed its income as exempt, whether the notice under Section 148A(b) disclosed any information suggesting escapement of income, and whether reassessment can be sustained on grounds not set out in the notice under Section 148A(b).

Petitioner’s Arguments

The petitioner contended that the notice under Section 148A(b) did not disclose any information suggesting escapement of income and merely recorded that the petitioner had claimed exemption under the DTAA. It was argued that claiming exemption does not, by itself, constitute a basis for reassessment.

The petitioner further submitted that the ground relied upon in the order under Section 148A(d), namely the alleged existence of a Permanent Establishment under the India–UK DTAA, was never put to the petitioner in the notice under Section 148A(b), rendering the reassessment proceedings invalid. Reliance was placed on the decision of the Delhi High Court in Banyan Real Estate Fund Mauritius vs. ACIT.

Respondents’ Arguments

The Revenue sought to justify the reassessment proceedings by relying on information available on the Insight portal, including details of remittances reflected in Form 15CA, and contended that the petitioner’s income was chargeable to tax in India. During the hearing, however, the Revenue fairly submitted that the impugned order could be set aside, while reserving liberty to initiate fresh proceedings in accordance with law.

Court Order / Findings

The Delhi High Court held that the notice under Section 148A(b) did not refer to any information suggesting that the petitioner’s income had escaped assessment. The Court observed that the mere fact that income was claimed as exempt does not provide a basis for forming a belief that income has escaped assessment, particularly when the receipts were fully disclosed in the return.

The Court further held that reassessment proceedings cannot be used as a substitute for scrutiny assessment and can be initiated only where there is information suggesting escapement of income. The Court found that the ground relied upon in the order under Section 148A(d), namely the alleged existence of a Permanent Establishment under the India–UK DTAA, was not mentioned in the notice under Section 148A(b).

Relying on Banyan Real Estate Fund Mauritius vs. ACIT, the Court held that reassessment cannot be sustained on reasons or grounds that were not set out in the show cause notice and that supplementation of reasons at a later stage is impermissible. The Court therefore held that the entire reassessment proceedings were vitiated.

Important Clarification

The Court clarified that reassessment under Section 147 cannot be initiated merely because an assessee claims exemption of income. Information suggesting escapement of income must be clearly disclosed in the notice under Section 148A(b), and the Assessing Officer cannot justify reassessment on new grounds introduced for the first time in the order under Section 148A(d).

Final Outcome

The writ petition was allowed. The Delhi High Court set aside the notice dated 20.06.2024 issued under Section 148A(b), the order dated 29.08.2024 passed under Section 148A(d), and the notice dated 29.08.2024 issued under Section 148 for Assessment Year 2018–19. The Court clarified that the Revenue would not be precluded from initiating fresh proceedings, if otherwise permissible in law.

Link to download order - https://www.mytaxexpert.co.in/uploads/1769686183_ERNSTANDYOUNGEMEIASERVICESLIMITEDVsASSISTANTCOMMISSIONEROFINCOMETAXCIRCLEINTERNATIONALTAX122DELHI.pdf

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