2018 (3) TMI 2036 - AT - Income Tax

Royalty income - principle of mutuality - taxability of ISM contributions received by the assessee - appellant before us is a foreign company, which is a tax resident of U.S.A. - as asserted that there was a complete identity between the contributors to the MHR Fund and the participants in the surplus, i.e. excess of amounts received in the fund over the expenditure incurred for undertaking the ISM activities and ISM contributions, being reimbursement of expenses was not in the nature of income at all. HELD THAT - The action of the CIT(A) in directing the Assessing Officer to apply the order of the Tribunal 2015 (1) TMI 659 - ITAT MUMBAI is justified to the extent it deals with the nature of the payments received by the assessee from the two hotels stated aforesaid. So, however, the point which is sought to be raised is the non-consideration of the defence set-up by the assessee based on the principles of mutuality. The order of the Tribunal (supra) has not addressed that issue and so far as the instant year is concerned, the same was very much raised by the assessee before the lower authorities, which has also remained to be addressed. Considering the entirety of circumstances, we, therefore, deem it fit and proper to affirm the ultimate decision of the CIT(A) to remand the matter back to the file of Assessing Officer, but with directions that apart from considering the order of the Tribunal the Assessing Officer shall also address the issue raised by the assessee of mutuality or any other issue which the assessee may seek to raise in defence of its return of income. AO shall allow the assessee due opportunity of being heard and only thereafter pass an order afresh, as per law.

Summary

Issues:
1. Taxability of amounts received under the International Sales and Marketing Agreement (ISMA) as royalty.
2. Application of the principle of mutuality to determine taxability.
3. Consideration of the nature of payments received by the assessee from hotels.
4. Adjudication on the plea based on the principle of mutuality.
5. Direction to the Assessing Officer to address the issue of mutuality.
6. Remand of the matter back to the Assessing Officer for fresh assessment.

Analysis:

1. The appellant, a foreign company, received payments under ISMA, ISMF, and reimbursement of expenses from hotels. The contention was that these receipts were not taxable in India. The Assessing Officer and CIT(A) held the sums as taxable royalty income. The appellant argued for the application of the principle of mutuality, asserting complete identity between contributors and participants in the surplus.

2. The CIT(A) directed the Assessing Officer to follow a previous Tribunal order, but the issue of mutuality was not addressed in the earlier case. The appellant raised specific grounds on mutuality in the current year. The CITDR relied on previous orders, not contesting the factual matrix presented.

3. The Tribunal considered the rival submissions and justified the CIT(A)'s direction to apply the previous Tribunal order on payment nature. However, the issue of mutuality raised by the appellant remained unaddressed. The Tribunal affirmed remanding the matter to the Assessing Officer to consider the mutuality defense and any other issues raised by the appellant before passing a fresh order.

4. The Tribunal partly allowed the appeal for statistical purposes, emphasizing the need for the Assessing Officer to address the mutuality issue and grant the appellant a fair hearing before making a fresh assessment. The decision was pronounced in open court on 9th March 2018.