2013 (12) TMI 1550 - AT - Income Tax

Rectification of mistake - Income considered to be liable for tax - Held that - Income was considered to be liable for tax at the rate of 15% by the assessee itself in its return of income. No material has been brought on record to show that applicability of rate of 15% was examined by the AO during the course of original assessment proceedings. Even during the course of rectification proceedings, the assessee did not submit any reply to the AO. It is also not the case of the assessee that AO did not give opportunity to explain that as to why 15% rate of tax was justified. In these circumstances, we are of the opinion that there was no change of opinion as has been argued by Ld. AR. The levy rate of tax has to be in accordance with the statutory provisions. If there is less levy, then it is liable for rectification. Accordingly, we hold that AO was not wrong in exercising his right u/s. 154 of the Act.

Issues Involved:
1. Rectification of order under Section 154 of the Income Tax Act.
2. Tax rate applied on interest income.
3. Treatment of interest income related to the permanent establishment in India.
4. Set-off of losses against interest income and technical services fees.
5. Taxability of service tax receipts.
6. Application of tax rate on bank interest.

Detailed Analysis:

1. Rectification of Order under Section 154 of the Income Tax Act:
The appellant challenged the rectification of the assessment order by the Assessing Officer (AO) under Section 154, arguing it was based on a change of opinion. The Tribunal held that there was no "change of opinion" as the AO had not formed any opinion on the tax rate during the original assessment. The Tribunal concluded that the AO was justified in rectifying the order to correct the tax rate applied to the interest income, as it was a mistake apparent from the record.

2. Tax Rate Applied on Interest Income:
The appellant contended that the interest income should be taxed at 15% as per the Double Taxation Avoidance Agreement (DTAA) between India and Japan. The AO, however, taxed the interest income at 40% + surcharge, considering the appellant had a permanent establishment (PE) in India. The Tribunal upheld the AO's decision for interest income from banks, citing a previous ITAT decision in the appellant's case, which ruled that such interest income is directly connected with the PE and hence not eligible for the preferential tax rate.

3. Treatment of Interest Income Related to the Permanent Establishment in India:
The Tribunal differentiated between various components of the interest income:
- Interest from Banks: Taxable at the rate of 40% + surcharge.
- Interest on Income Tax Refund: The Tribunal ruled in favor of the appellant, stating it should be taxed at a lower rate as per the DTAA, following the Special Bench decision in Clough Engineering Ltd.
- Interest on Delayed Payment on Foreign Supply Contract: The Tribunal remanded the issue to the AO for re-adjudication, directing the AO to consider the appellant's claim for a lower tax rate under Section 115(a)(ii) read with Explanation-B.

4. Set-off of Losses Against Interest Income and Technical Services Fees:
The appellant's contention to set off losses from the project office against interest income and fees for technical services was not adjudicated by the CIT(A). The Tribunal remanded this issue to the AO for adjudication on merits after providing the appellant a reasonable opportunity for hearing.

5. Taxability of Service Tax Receipts:
For the assessment year 2009-10, the appellant argued that service tax collected should not be considered as income. The Tribunal agreed, referencing a previous decision in the appellant's case, which held that service tax is a statutory levy collected on behalf of the government and should not be included in the total receipts for determining taxable income.

6. Application of Tax Rate on Bank Interest:
The appellant contested the application of a 42.23% tax rate on bank interest instead of 20% as per Section 115(A)(ii). The Tribunal dismissed this ground, upholding the higher tax rate, consistent with its earlier ruling for the assessment year 2004-05.

Conclusion:
The appeals were partly allowed. The Tribunal upheld the AO's rectification under Section 154, applied the higher tax rate on bank interest, and ruled in favor of the appellant regarding the tax rate on interest from income tax refunds and the exclusion of service tax from taxable income. The issue of interest on delayed payments and set-off of losses was remanded to the AO for re-adjudication.

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