2016 (8) TMI 1311 - AT - Income Tax

Additions on account of service tax - treated to the income of the assessee company - Held that - We find ourselves to be in agreement with the claim of the Ld. A.R that as the amount reduced by the customers on account of service tax liability from the amount of fees/royalty which otherwise but for the said reduction would had been payable to the assessee company had been accepted as such in full and final discharge of the liability of the customers as regards the fees/royalty payable to the assessee company and the assessee company had not retained with itself any right as regards recovery of any such amounts deducted by the customers qua the liability towards service tax as was so cast upon them therefore the aforesaid amount of 1, 71, 13, 337/-(supra) cannot be treated to be the income of the assessee company but as we are persuaded to arrive at such a finding in light of the claim raised by the Ld. A.R for the assessee company on the basis of the aforesaid letter dated 25/07/2016 we therefore restore the issue to the file of the A.O for verifying the aforesaid claim of the assessee company and on finding the same in order delete the addition made in the hands of the assessee company Interest levied u/s 234B - Held that - The levy of interest u/s 234B of the Act would be automatic mandatory and consequential to the framing of regular assessment in the hands of the assessee company but the process of fastening the levy of interest u/s 234B must be preceded by surfacing of the fact that the assessee company is found to be in default as regards the statutory obligation as stood cast upon it with respect to payment of advance tax. Thus now when the issue pertaining to substantive addition had been restored by us to the file of the A.O for making necessary verifications and giving effect to the same as per our directions we therefore also restore the present issue as regards the liability of the assessee company towards interest u/s 234B of the Act to the file of the A.O with the direction that the same be adjudicated in light of our aforesaid observations. Thus the Ground of appeal No. 2 is allowed for statistical purpose

Summary

Issues Involved:
1. Inclusion of service tax deducted by customers in the taxable income of the assessee.
2. Levy of interest under section 234B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Inclusion of Service Tax Deducted by Customers in Taxable Income:

The assessee company, a non-resident entity incorporated under French law, provided hotel-related services globally, including in India. It followed the 'Cash system' of accounting in India, offering its revenues for tax on a receipt basis. The company entered into license agreements with various hotels in India, permitting the use of its trademark and providing advertising, promotional, and reservation services. The revenue from these services was reflected as 'Royalty' and taxed at 10% under the India-France Double Taxation Avoidance Agreement (DTAA).

For the assessment years 2008-09 and 2009-10, the Assessing Officer (AO) included the service tax deducted by the customers from the amounts payable to the assessee in the taxable income. The AO's decision was based on the fact that the royalty income declared by the assessee was less than the amount on which tax had been deducted at source (TDS) by the customers, leading to a discrepancy. The AO added the difference, including the service tax amount, to the assessee's income.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, relying on the cases of DDIT(Intl). Vs. Technichip Offshore Contracting Br. and Chowringhee Sales Bureau (P) Ltd. Vs. CIT, holding that the gross royalty income should be taxed as per the India-France treaty.

The assessee argued that the service tax amount did not accrue to it and was not received, as the customers, under the reverse charge mechanism of section 66A of the Finance Act, 1994, deducted the service tax from the payable fee/royalty. The assessee contended that the amount reduced by the customers for service tax should not be considered part of its income.

The Tribunal agreed with the assessee's contention, noting that the amount reduced for service tax did not accrue as income to the assessee and was never received. The Tribunal distinguished the facts from the case of Chowringhee Sales Bureau (P) Ltd., where the sales tax collected by the auctioneer was not paid to the state exchequer. The Tribunal restored the issue to the AO for verification of the assessee's claim and directed the deletion of the addition if the claim was found to be in order.

2. Levy of Interest Under Section 234B:

The assessee challenged the levy of interest under section 234B, arguing that its entire income was subject to TDS, and hence, it was not liable to pay advance tax. The CIT(A) upheld the AO's decision, stating that the assessee had understated its taxable income and claimed a refund of TDS.

The Tribunal considered the provisions of section 209(1)(d) of the Act, which allows for the reduction of the tax deductible at source from the advance tax liability, irrespective of whether the payer had deducted the tax. The Tribunal referred to various judicial pronouncements supporting the view that an assessee cannot be held liable for advance tax if the payer fails to deduct or short deducts TDS.

The Tribunal acknowledged that the levy of interest under section 234B is automatic, mandatory, and consequential upon the framing of regular assessment. However, it emphasized that the process must be preceded by establishing the assessee's default in paying advance tax. Given that the substantive addition was restored to the AO for verification, the Tribunal also restored the issue of interest under section 234B to the AO for adjudication in light of its observations.

Conclusion:

The Tribunal partly allowed both appeals, directing the AO to verify the assessee's claims regarding the service tax deduction and to reconsider the levy of interest under section 234B based on the findings.