2013 (9) TMI 412 - AT - Income Tax

Non Resident - Rate of Tax 10% or 15% - treaty (DTAA) with UK - Fees for Technical Services - Receipts from supply planning services - Assessee entered into Sightholder Contract 2008-2011 in the name of Supplier of Choice, Sightholder Contract 2008-2011 - Held that - It is both surprising and unfortunate that AO/DRP, who are specially chosen to for making of these specialized assessment involving international transactions, have ignored the basic fact of applying the appropriate SPS Agreement 2008-11 for the AY 2009-10. The fact is that the Revenue Authorities have not examined the issues and not made the additions of this magnitude in the light of the correct contract with Sightholders. It is surprising to notice despite the supply of the relevant contract 2008-2011 to the AO, the relevant assessment order refers to the provisions of the old contract with Sightholders and contents of para 3 of page 4 of the assessment order witness these basis avoidable mistakes. It is for the AO and the DRP to come to the fresh conclusions on a quality of services rendered by the assessee under the new contract and they constitute technical services for qualifying the provisions of Article 13 of the India UK Tax Treaty. Additional Evidence - Assessee filed certain invoices in the form of additional evidences to demonstrate the above facts for the first time before us. As per the assessee, these papers were not asked for by the AO, therefore, they were not filed. We find no reason to disbelief the arguments of the assessee in this regard. In our opinion, considering the provisions of Rule-29 of the ITAT, admitting these papers would help for passing a proper assessment order and will enable Assessing Officers to go into the facts in the right perspective as to whether the grading services include inscription services or not. Accordingly, we set aside the order of the AO and the DRP on this issue and remand the matter to the files of the AO for fresh adjudication after considering the additional evidences and the decisions of the Bombay High Court in the case of Diamond Services International (P) Ltd (supra), wherein it was held that the grading fees paid by the assessee to Gemological Institute of America (GIA) for the activity of certification and grading of diamonds, do not fall within the expression royalty under Article 12 of DTAA - Decided against assessee. Interest u/s 234B - Held that - Assessee being a non resident, the duty is cast on the payer to pay the tax at source and on failure, no interest u/s 234B of the Act is imposed on the payee-assessee. Accordingly, we direct the AO to reduce the relatable interest u/s 234B of the Act - Decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of receipts from Supply Planning Services (SPS) as Fees for Technical Services (FTS) or Royalty.
2. Applicable tax rate for receipts from various services.
3. Taxability of receipts from grading services as Royalty.
4. Taxability of receipts from DTC Accredited Business Services as FTS or Royalty.
5. Levy of interest under sections 234A and 234B of the Income Tax Act.
6. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Taxability of Receipts from Supply Planning Services (SPS) as Fees for Technical Services (FTS) or Royalty:
The assessee argued that the AO erroneously applied the Value Added Services (VAS) agreement (2005-2008) instead of the relevant SPS agreement (2008-2011). The SPS agreement does not include services related to business sustainability and growth services, which were part of the VAS agreement. The AO's reliance on the VAS agreement led to the incorrect classification of SPS receipts as FTS and royalty. The Tribunal found that the AO and DRP failed to examine the nature of SPS services properly and remanded the issue for fresh consideration, instructing the AO to apply the correct agreement and re-evaluate the nature of services rendered.

2. Applicable Tax Rate for Receipts from Various Services:
The assessee contended that the AO applied an incorrect tax rate of 15% instead of the concessional rate of 10% as per the India-UK Tax Treaty. The Tribunal noted that the AO ignored the beneficial tax rate under the treaty and relied on the Tribunal's previous decision for AY 2007-08, which supported the assessee's claim. The Tribunal directed the AO to apply the concessional tax rate of 10% for the relevant receipts, including VAS, grading services, DTC Accredited Business Services, and receipts from Forevermark.

3. Taxability of Receipts from Grading Services as Royalty:
The assessee argued that grading services do not involve the transfer of any commercial experience or intellectual property and should not be classified as royalty. The AO and DRP, however, treated grading services as royalty, considering them as involving the transfer of commercial experience. The Tribunal found that the AO and DRP mixed up grading services with inscription services and failed to distinguish between them. The Tribunal remanded the issue for fresh adjudication, instructing the AO to re-examine the nature of grading services and consider additional evidence provided by the assessee.

4. Taxability of Receipts from DTC Accredited Business Services as FTS or Royalty:
The assessee contended that the services provided under the DTC Accredited Business Programme (DTC-ABP) do not constitute FTS or royalty. The AO and DRP treated these services as an extension of VAS, thus classifying them as FTS and royalty. The Tribunal noted that the AO and DRP failed to analyze the services correctly and remanded the issue for fresh consideration, instructing the AO to re-evaluate the nature of services provided under the DTC-ABP agreement.

5. Levy of Interest under Sections 234A and 234B of the Income Tax Act:
The assessee argued that interest under section 234B should not be charged as the assessee's case is covered by TDS provisions. The Tribunal referred to the jurisdictional High Court's judgment in NGC Network Asia LLC, which supports the assessee's claim that no interest can be imposed on the payee if the payer fails to deduct tax at source. The Tribunal directed the AO to re-compute the interest accordingly, providing relief to the assessee.

6. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act:
The DRP dismissed the assessee's ground against the initiation of penalty proceedings, stating it is not maintainable as it does not relate to variation in income. The Tribunal upheld this view, noting that the ground is merely against the initiation of penalty proceedings and no penalty has been levied. The ground was dismissed.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, remanding several issues for fresh adjudication and providing relief on the applicable tax rate and interest levy. The order was pronounced on 4th September 2013.