2018 (2) TMI 1996 - AT - Income Tax

Reopening of assessment u/s 147 - different view with regard to the taxability of the management services fees received - HELD THAT - We have noticed that the assessing officer has mentioned in the reasons for reopening that certain agreements have not been considered or not considered properly. But the Ld A.R has demonstrated that the agreement dated 01st April 1998 (referred to in AY 2005-06) relates to the agreement under which the assessee has availed services from VOIPL and paid money to it. Hence the agreement dated 01st April 1998 is not relevant for the issue under consideration i.e. receipt of management service fee from VOIPL. In AY 2007-08 the assessing officer has stated that the agreement was not been explored by the AO in the original assessment proceedings which is nothing but taking a different view on the same matter. AO has attempted to give a reasoning to support his reasons for re-opening we are of the view that the same would not be legally supporting the view of the AO. Hence we are of the view that there is merit in the contentions of the assessee that the assessing officer has reopened the assessments of both the years only on account of change of opinion. There is also merit in the contentions of the assessee that the assessing officer has changed his opinion on the basis of view taken by him while completing the assessment of the assessment year 2009-10. Accordingly we set aside the order passed by Ld CIT(A) on this issue and hold that the reopening of assessments of both the years are not in accordance with the law and accordingly quash the assessment orders passed for both the years under consideration. Since the assessing officer has not issued notices u/s 143(2) of the Act after filing of returns in both the assessment years the assessment orders are liable to be quashed on this ground also. Management service fees received by the assessee as Royalty in AY 2009-10 - AO has reopened the assessments of both the years under consideration after passing of order for AY 2009-10 and accordingly assessed the management service fee received in both the years under consideration as Royalty. The assessment order passed for AY 2009-10 has been challenged by the assessee and when it reached ITAT the Tribunal 2016 (11) TMI 1249 - ITAT MUMBAI has held that the management service fees cannot be assessed as Royalty in terms of Article 12(4) of India Netherlands Treaty. Accordingly on merits of the issue also the addition made by the AO by assessing the management service fee as Royalty is liable to be deleted. Both the appeals of the assessee are allowed

Summary

Issues:
- Reopening of assessment
- Validity of assessment order
- Correctness of assessment of management service fees as 'royalty'

Reopening of Assessment:
The assessee challenged the reopening of the assessment, arguing that the Assessing Officer (AO) did not have any material or reason to believe that there was an escapement of income. The AO reopened the assessments for AY 2005-06 and AY 2007-08 based on a different view taken in AY 2009-10, which the assessee contended was a mere change of opinion. The AR submitted that the AO did not issue a mandatory notice u/s 143(2) after filing the return of income, which rendered the assessment orders improper. The AR also highlighted factual inaccuracies in the reasons for reopening, asserting that the AO's actions were not legally supported. The Tribunal agreed with the assessee, holding that the reopening of assessments in both years was not in accordance with the law and quashed the assessment orders.

Validity of Assessment Order:
The assessee contended that the assessment for AY 2005-06 was reopened after the expiry of four years without any failure on their part to disclose material facts. Citing a decision by the Bombay High Court, the AR argued that the AO was disabled from reopening the assessment under the first proviso to sec. 147. The Tribunal found merit in the assessee's arguments and held that the AO's actions were not justified, quashing the assessment order for AY 2005-06.

Correctness of Assessment of Management Service Fees as 'Royalty':
The AO assessed the management service fees received by the assessee as 'royalty' in AY 2009-10 and subsequently in AY 2005-06 and AY 2007-08. However, the Tribunal noted that in a previous case, it was held that management service fees cannot be treated as royalty under the India-Netherlands Treaty. Following this precedent, the Tribunal concluded that the addition made by the AO assessing the management service fee as 'royalty' should be deleted. Consequently, both appeals by the assessee were allowed.

This detailed analysis of the judgment provides insights into the issues of reopening of assessment, validity of assessment order, and correctness of assessment of management service fees as 'royalty', highlighting the arguments presented by the parties and the Tribunal's reasoning leading to the final decision.