2012 (11) TMI 809 - AT - Income Tax

Revision Order u/s 263 by DIT DTAA between India and USA DIT has observed that the AO has not examined the Base Agreement and has not examined the exact nature of the services - the AO has taken a possible view that it was not in the nature of Fees for technical or fees for including services provide by assessee with reference to any technical services rendered in relation to any product or software developed Held that - We can safely presume on the basis of Tribunal s findings in favour of one of the party in agreement in this case that finding and view taken by the AO in accepting the assessee s explanation is a better possible view. Following the decision in case of Malabar Industrial Co. Ltd. (2000 (2) TMI 10 - SUPREME COURT) that on one of the two courses permissible by law has been adopted by the AO and it has resulted in loss of the revenue and where two views are possible and the AO has taken one view with which CIT does not agree, it cannot be treated as erroneous or prejudicial to the Revenue, unless the view taken by the AO is unsustainable in law. Appeal decides in favour of assessee

Summary

Issues Involved:
1. Taxability of income earned by ACSC from providing technical manpower to IBM India in the USA.
2. Determination of whether the payments received by ACSC constitute Fees for Technical Services (FTS) or Fees for Included Services (FIS) under Article 12 of the Indo-US DTAA.
3. Validity of the revisionary jurisdiction invoked by the Director of Income Tax (DIT) under Section 263 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Taxability of income earned by ACSC from providing technical manpower to IBM India in the USA:
The assessee, ACSC, a non-resident company incorporated in the USA, filed its return of income for the assessment year 2005-2006 declaring "NIL" income. ACSC had an agreement with IBM USA to provide services, and through ISPL, an Indian affiliate, ACSC provided technical manpower to IBM in the USA. The assessee argued that since the services were performed entirely outside India and payments were received outside India, no part of the income accrued or arose in India. The Assessing Officer (AO) accepted this contention and assessed the income as NIL.

2. Determination of whether the payments received by ACSC constitute Fees for Technical Services (FTS) or Fees for Included Services (FIS) under Article 12 of the Indo-US DTAA:
The AO examined the nature of services and agreements and concluded that the payments received by ACSC were neither FTS under Section 9(i)(vii) of the Income Tax Act nor FIS under Article 12(4)(b) of the Indo-US DTAA. The DIT, however, disagreed, stating that the AO failed to appreciate the nature of services under the agreements and issued a show cause notice under Section 263, suggesting that the payments could constitute FIS.

3. Validity of the revisionary jurisdiction invoked by the DIT under Section 263 of the Income Tax Act, 1961:
The DIT argued that the AO did not properly examine the agreements and the nature of services, rendering the assessment order erroneous and prejudicial to the Revenue's interest. The assessee contended that the AO had indeed examined the relevant agreements and taken a possible view, thus revisionary jurisdiction under Section 263 was not warranted. The ITAT noted that the AO had considered the agreements and submissions, and the view taken was a possible one. The ITAT also referenced a similar case (ISPL) where the ITAT Hyderabad Bench had ruled that the services provided were akin to recruitment services and not technical services, supporting the AO's view.

Conclusion:
The ITAT concluded that the AO had taken a possible view based on the agreements and submissions, and the DIT's invocation of Section 263 was not justified. The ITAT emphasized that when two views are possible, the AO's view, if reasonable, should not be interfered with unless it is unsustainable in law. The ITAT canceled the DIT's order and allowed the assessee's appeal, affirming that the payments received by ACSC did not constitute FTS or FIS and were not taxable in India.