2011 (11) TMI 483 - AT - Income Tax

Marketing contributions - assessee company who is incorporated as tax resident of UK - assessee contested against as it did not relate to AY 2007-08 - Held that - It is required to be seen whether the amount in question was payment received by assessee or payment made by assessee and whether the same related to Assessment Year 2007-08 - in favour of assessee by way of remand Rate of tax applicable to marketing contribution assessed as royalty - rate of 15% as per Article-13 of India UK DTAA applied by AO - Held that - The taxability of income from international transactions has to be considered, both under the domestic law as well as under DTAA because the assessee would be entitled to the benefits of the treaty only if the sum is taxable under the domestic law. In case, the sum is not taxable either under the domestic law or under the DTAA, it cannot be taxed at all. If the amount has been found taxable under both the provisions, the assessee will be entitled to the beneficial rate of tax under the provisions of section 90(2). Since in this case, the marketing contribution has been received in terms of agreement dated 8.11.2005 which is obviously after 1.6.2005, the tax rate of 10% is applicable under the provisions of sub clause (AA) of clause (b) of Section 115A(1) of the domestic law. Value Added Services (VAS) treated as Fees for Technical Services (FTS) - assessee was supplying rough diamonds to Worldwide Sightholders - AO has applied rate of 15% under provisions of Article-13 of India UK Tax Treaty - Held that - The payment for VAS received by the assessee has to be considered partly as royalty under para 3(a) of Article-13 being the payment for various types of information of commercial nature acquired based on experience provided to Sightholders and partly as FTS under para 4(a) being the payment attributable to the services rendered by the KAM or through workshops, etc. which were ancillary and subsidiary to application or enjoyment of the information, or as FTS being payment for marketing consultancy services which were ancillary and subsidiary to the application or enjoyment of Nakshatra Brand or Forevermark. The AO will tax the payments as royalty and FTS accordingly. As the tax rate is the same for taxation of royalty and FTS, attribution of the payment towards royalty and FTS is not necessary. Addition to VAS receipts on account of discrepancies with the four parties which had shown more payments than the receipts declared by the assessee - Held that - Claims of the assessee in relation to the discrepancies need verification with respect to original documents such as invoices etc. as assessee explained such discrepancy due to difference in method of accounting followed by the two parties - Matter restored to file of AO for passing a fresh order after necessary verification. Rate of tax in respect of VAS receipts - Held that - Concessional rate of 10% has to be applied if the agreement had been entered after 1.6.2005. The assessee has not filed the copy of VAS Agreement and has filed only the VAS Service Guide which contained the summary of the agreement. The date of agreement, therefore, requires verification. Rate of tax in relation to royalty income for use of Forevermark - Held that - The issue is identical to the issue raised in Ground No. 4 above regarding tax rate in case of market contribution assessed by AO as royalty. Thus holding the same concessional rate of 10% has to be applied in case of the assessee - in favour of the assessee. Credit for tax withheld on the addition of VAS receipts - Held that - The AO had made certain additions but had not given credit of TDS in relation to those additions & the issue of addition raised has already being set to the file of the AO the TDS is to be decided accordingly. In case in the fresh assessment, it is found that the amount has to be added this year, AO will give credit to TDS in relation to those additions. Interest u/s 234B - shortfall in payment of advance tax - Held that - Additions had been made by AO on account of royalty and FTS which are subject to deduction of tax at source u/s 195 and therefore, the tax deductible in relation to the said income has to be reduced from the tax payable as advance tax even if no tax had been actually deducted. Therefore, while computing advance tax payable for the purpose of computation of interest u/s 234B tax deductible at source in relation to royalty and FTS will have to be reduced. See DIT (International Taxation) v. NGC Network Asia LLC 2009 (1) TMI 174 - BOMBAY HIGH COURT & Jt. DIT v. Booz Allen & Hamilton Inc. 2006 (11) TMI 234 - ITAT BOMBAY-F .

Issues Involved:
1. Legal validity of the assessment proceedings.
2. Treatment of marketing contributions as royalty.
3. Addition of Rs. 1,29,51,000/- on account of marketing contributions.
4. Rate of tax applicable to marketing contributions.
5. Treatment of payment for Value Added Services (VAS) as Fees for Technical Services (FTS).
6. Addition of Rs. 3,65,89,942/- on account of VAS due to discrepancy in relation to four parties.
7. Rate of tax applicable to VAS receipts.
8. Rate of tax in relation to royalty income for use of Forevermark.
9. Credit for tax withheld on the addition of VAS receipts.
10. Charging of interest under section 234B of the Act.
11. Initiation of penalty proceedings under sections 271A and 271B.

Detailed Analysis:

1. Legal Validity of the Assessment Proceedings:
The assessee challenged the legal validity of the assessment proceedings on the ground that the notice issued under section 143(2) was barred by limitation. However, this ground was not pressed during the hearing and was dismissed as not pressed.

2. Treatment of Marketing Contributions as Royalty:
The assessee argued that marketing contributions were reimbursements for expenses and not royalty. The AO and the Dispute Resolution Panel (DRP) treated these contributions as royalty under Explanation 2 to section 9(1)(vi) and Article 13 of the Indo-UK Tax Avoidance Agreement. The Tribunal dismissed the ground as not pressed due to lack of necessary details.

3. Addition of Rs. 1,29,51,000/- on Account of Marketing Contributions:
The AO added Rs. 1,29,51,000/- due to a discrepancy with Dimexon Diamond Ltd. The Tribunal found discrepancies in the invoices and required verification to determine whether the amount was a payment received or made by the assessee and whether it related to the relevant assessment year. The matter was remanded to the AO for fresh verification.

4. Rate of Tax Applicable to Marketing Contributions:
The AO applied a tax rate of 15% under Article 13 of the Indo-UK Tax Treaty. The assessee argued for a 10% rate under domestic law as per section 115A(1). The Tribunal held that the tax rate of 10% was applicable, as the agreement was dated after 1.6.2005, and directed the AO to apply the 10% rate.

5. Treatment of Payment for Value Added Services (VAS) as Fees for Technical Services (FTS):
The AO treated VAS payments as FTS under Explanation 2 to Section 9(1)(vii) and Article 13 of the Indo-UK Tax Treaty. The Tribunal examined the nature of VAS, which included supply planning tools, business sustainability services, and growth services. The Tribunal concluded that VAS payments were partly royalty under para 3(a) of Article 13 and partly FTS under para 4(a) due to the ancillary and subsidiary nature of the services. The AO was directed to tax the payments accordingly.

6. Addition of Rs. 3,65,89,942/- on Account of VAS Due to Discrepancy in Relation to Four Parties:
The AO added Rs. 3,65,89,942/- due to discrepancies with four parties. The assessee explained the discrepancies due to different accounting methods. The Tribunal remanded the issue to the AO for verification of the claims with original documents.

7. Rate of Tax Applicable to VAS Receipts:
The AO applied a 15% tax rate under Article 13 of the Indo-UK Tax Treaty. The assessee argued for a 10% rate under section 115A(1). The Tribunal directed the AO to verify the date of the VAS agreement and apply the appropriate tax rate accordingly.

8. Rate of Tax in Relation to Royalty Income for Use of Forevermark:
The AO applied a 15% tax rate under Article 13 of the Indo-UK Tax Treaty. The assessee argued for a 10% rate under section 115A(1). The Tribunal held that the concessional rate of 10% was applicable and allowed the ground in favor of the assessee.

9. Credit for Tax Withheld on the Addition of VAS Receipts:
The AO did not grant credit for TDS on the added VAS receipts. The Tribunal directed the AO to give credit for TDS if the amounts were added in the fresh assessment.

10. Charging of Interest Under Section 234B of the Act:
The AO charged interest for shortfall in advance tax payment. The Tribunal held that tax deductible at source should be reduced from the advance tax payable, even if not actually deducted, and directed the AO to recompute the interest accordingly.

11. Initiation of Penalty Proceedings Under Sections 271A and 271B:
The assessee did not press these grounds, and they were dismissed as not pressed.

Conclusion:
The appeal was partly allowed, with several issues remanded to the AO for further verification and appropriate action based on the Tribunal's directions. The Tribunal emphasized the need for accurate verification of claims and adherence to applicable tax rates under both domestic law and the Indo-UK Tax Treaty.

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