2014 (5) TMI 886 - AT - Income Tax

Amount payable to be treated as Royalty u/s 9(1)(vi) of the Act or not Tax liability for receipts from SCB India - retrospective amendment - Held that - The liability or otherwise of the assessee regarding its receipts has to be re-adjudicated in the light of retrospective amendment - The orders passed in the assessee s case by the AO, DRP and ITAT are prior to the amendment in the Statute thus, the matter is remitted back to the AO for re-adjudication Decided in favour of Assessee. Validity of reassessment for earlier years - income escapement assessment - Held that - In view of discussion since all the issues raised on merits for the AY 2008-09 are directed to be re-adjudicated as per law, then the validity of reassessment proceedings for the AY 2006-07 and 2007-08 cannot be upheld. Upholding the validity of reassessment in the present case will tantamount to upholding the validity of the two assessments at a time of the same assessee in respect of same assessment year, which is not permissible in the eyes of law. - Decided partly in favor of assessee.

Summary

Issues Involved:
1. Taxability of payments made by SCB India to the appellant as "Royalty" under Section 9(1)(vi) of the Income Tax Act, 1961.
2. Rate of tax applicable to the income from royalty.
3. Initiation of reassessment proceedings under Section 147 of the Income Tax Act, 1961.
4. Levy of interest under Section 234B of the Income Tax Act, 1961.
5. Calculation of chargeable income as gross receipts versus net receipts.

Detailed Analysis:

1. Taxability of Payments as "Royalty":
The primary issue revolves around whether the payments made by SCB India to the appellant for data processing services provided from Hong Kong qualify as "Royalty" under Section 9(1)(vi) of the Income Tax Act, 1961. The Tribunal noted that prior to August 2005, similar services provided from Singapore were not characterized as "royalty" but as business profits, based on a previous Tribunal order dated May 11, 2011. However, since the services in the current case were provided from Hong Kong, and there is no DTAA between India and Hong Kong, the taxability of these receipts must be examined under the domestic provisions, especially in light of the retrospective amendments to Section 9(1)(vi) by the Finance Act, 2012.

2. Rate of Tax Applicable:
The second issue concerns the rate of tax applicable to the royalty income. The CIT(A) held that the income from royalty is taxable at 10% because the contract between the assessee and Standard Chartered Bank was entered into after June 1, 2005. The appellant contended that the AO and the DRP erred in applying a higher rate of 20% under Section 115A(1)(b)(A) of the Act. The Tribunal decided that this issue needs to be re-examined by the AO in light of the retrospective amendments and the specific contract terms.

3. Initiation of Reassessment Proceedings:
The appellant challenged the initiation of reassessment proceedings under Section 147 of the Income Tax Act, 1961. Since the main issue regarding the taxability of receipts is being re-adjudicated, the Tribunal held that the reassessment proceedings for the same assessment year cannot be upheld. The validity of reassessment would result in two assessments for the same year, which is not permissible.

4. Levy of Interest under Section 234B:
The appellant argued against the levy of interest under Section 234B, stating that the entire income was subject to tax deduction at source, and hence, the question of advance tax does not arise. The Tribunal noted that this issue is consequential to the assessed income and should be re-examined by the AO, allowing the appellant to present objections as per law.

5. Calculation of Chargeable Income:
The appellant contended that the AO erred in adopting gross receipts instead of net receipts (after deducting expenses) as chargeable income. The Tribunal directed the AO to re-adjudicate this issue, considering whether net receipts should be taken into account for calculating the tax liability.

Conclusion:
The Tribunal restored all issues, except those in ITA No.6888/Mum/2011, back to the AO for re-adjudication in light of the retrospective amendments to Section 9(1)(vi). For ITA No.6888/Mum/2011, the reassessment proceedings were invalidated, and other grounds became infructuous due to the decision in the cross-appeals for the same assessment year. The Tribunal directed the AO to re-examine all issues, allowing the appellant to present necessary evidence and materials.