2023 (1) TMI 1325 - AT - Income Tax

Income taxable in India - Taxing of reimbursements treated as royalties and fees for technical services - Taxed at rate of 15 per cent., instead of 10.455 per cent. being the beneficial rate u/s 115A - whether the reimbursement of expenses by the assessee to its UK-associated enterprise is fees for technical services or not, has held that the payment made by the assessee falls within the ambit of royalty under section 9(1)(vii) and article 13(3)? - second round of proceedings - HELD THAT - As the mandate of the AO was to follow the directions of the Tribunal whereby the matter was set aside to the AO for specific adjudication. The scope of set aside was circumscribed to see, whether the payment made for reimbursement falls within the ambit and scope of fees for technical services under article 13(4)(c) which stipulates that fees for technical services means payment of any kind to any person in consultation of rendering of any technical consultancy certificates which make available technical knowledge, experience, skill, know-how or process or development and transfer of a technical plan or design. Now the AO instead of following the direction of the Tribunal has proceeded to treat the payment in the nature of royalty which cannot be sustained at the threshold. CIT (A) though has accepted this fact, but having a co-terminus power with the AO, he has chosen not to decide the issue albeit has set aside the issue to the file of the AO - On this fact alone, the entire assessment order as well as the order of the CIT(A) is unsustainable and deserves to be quashed. In any case as explained, the lotus note which was a kind of facility given to the group of companies with a view to smoothen the day-to-day work increase the overall efficiency level. It has been sated that a Foseco group companies have taken lotus note which is a software purchase from IBM for the use of entire establishment for co-ordinated activity/administration for the benefit of all the facilities too subsidiaries of the assessee-company. The cost of services have been recovered and raised by Foseco group without any markup. Nowhere can it be said there is any kind of make available of any kind of technology or a terms mentioned in article 13(3)(c). Thus, it cannot be treated in the nature or fees for technical services under the Indo-UK Double Taxation Avoidance Agreement. Accordingly, on merits also, the reimbursement of lotus note for fees for technical services is allowed. In so far as other expenses, the same are purely marketing expenses and professional which cannot be again treated as fees for technical services under clause of article 13(3)(c). Accordingly, the additions made by the AO and sustained by CIT (Appeals) is deleted. Appeals filed by the assessee stands allowed.

Issues Involved:
1. Classification of reimbursement of expenses as "royalty" or "fees for technical services."
2. Application of the India-UK Double Taxation Avoidance Agreement (DTAA).
3. Jurisdiction and adherence to the Tribunal's directions by the Assessing Officer (AO).
4. Determination of tax rates under section 115A of the Income-tax Act, 1961.
5. Validity of penalties under section 271(1)(c) of the Income-tax Act.

Detailed Analysis:

1. Classification of Reimbursement of Expenses:
The core issue was whether certain reimbursements, including software user charges (Lotus Notes) and general service charges (GSC), should be classified as "fees for technical services" or "royalty" under the India-UK DTAA. The AO initially classified these reimbursements as fees for technical services under section 9(1)(vii) of the Income-tax Act and article 13 of the DTAA. The Tribunal had previously remanded the case to the AO to verify if the reimbursements qualify as fees for technical services under article 13(4)(c) of the DTAA, which involves the "make available" clause.

2. Application of the India-UK DTAA:
The Tribunal directed the AO to specifically examine whether the reimbursements fall under the "make available" clause of article 13(4)(c) of the DTAA. The AO, however, in the second round, classified the reimbursements as "royalty" under section 9(1)(vii) and article 13(3) of the DTAA, deviating from the Tribunal's directive. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's classification for certain amounts but directed the AO to re-examine the classification of other amounts strictly under article 13(4)(c) of the DTAA.

3. Jurisdiction and Adherence to Tribunal's Directions:
The Tribunal found that the AO exceeded his jurisdiction by classifying the reimbursements as "royalty" instead of adhering to the specific directive to examine them under the "make available" clause of article 13(4)(c) of the DTAA. The CIT(A) acknowledged this deviation but still set aside the issue for re-examination by the AO, which the Tribunal noted was beyond the CIT(A)'s power under the Act.

4. Determination of Tax Rates:
The CIT(A) confirmed the AO's application of a 15% tax rate on reimbursements treated as fees for technical services, instead of the beneficial rate of 10.455% under section 115A of the Income-tax Act. The Tribunal's directive was to follow the DTAA rates, which were not adhered to by the AO.

5. Validity of Penalties:
The AO initiated penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income based on the classification of reimbursements. The Tribunal's decision to quash the AO's order impacts the validity of these penalties.

Conclusion:
The Tribunal quashed the AO's order for not adhering to its specific directions and for exceeding jurisdiction by classifying reimbursements as "royalty." The Tribunal also found that the reimbursements did not qualify as fees for technical services under the "make available" clause of article 13(4)(c) of the DTAA. Consequently, the Tribunal deleted the additions made by the AO and sustained by the CIT(A), and allowed the appeals filed by the assessee.

← Previous Next →