2018 (10) TMI 415 - AT - Income Tax

Taxability of income towards fees for technical services earned by the assessee from Indian concerns on gross basis at 20%, being the rate of tax prescribed u/s 115A - Held that - The fact of the matter is that the DTAA, under which such Ruling was rendered, has been substituted as discussed supra. In such circumstances, the prescription of section 245S(2) gets attracted, which requires consideration of the arguments of the assessee in the light of the substituted DTAA along with its Protocol to the facts of the instant case. Such new DTAA and the Protocol have not been considered by the Assessing Officer, who has simply gone by the Ruling rendered by the AAR. As such, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this score is set aside and the matter is remitted to the file of Assessing Officer. We order accordingly and direct him to decide the issue afresh by considering the effect of alterations, introduced in the new DTAA of 1998 along with the Protocol, if any, on the Ruling given by the AAR in the assessee s own case. Discussion of the new DTAA or the Protocol above should not be construed as reflection of our opinion on its applicability or otherwise to the facts of the instant case. The AO should decide its implications independently on merits. The assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. Allocation of expenses - AO found that some of the expenses made by the assessee were not in accordance with the arm s length principle - Held that - It is observed that the assessee booked proportionately more expenses as its share in ECI s expenses. When the Assessing Officer required the assessee to produce final accounts of ECI for the year, the assessee failed to comply with the same and gave figures only for a period of nine months. Other necessary details as called for were also not fully provided. This led to the allocation of expenses on the basis of turnover. It is, but, natural that in the absence of any worthwhile details furnished by the assessee, the Assessing Officer could have no other rational basis to apportion the expenses. The ld. AR submitted that the assessee has got necessary details which can be produced before the authorities below. Taking a holistic view of the matter, we set aside the impugned order on this score and remit the matter to the file of Assessing Officer for deciding this issue afresh as per law

Summary

Issues Involved:
1. Taxability of income towards fees for technical services earned by the assessee from Indian concerns.
2. Allocation of expenses.

Issue-wise Detailed Analysis:

1. Taxability of Income Towards Fees for Technical Services:

The primary issue in this appeal is the taxability of ?12,72,61,294/- towards fees for technical services earned by the assessee from Indian concerns, taxed on a gross basis at 20% as per section 115A of the Income-tax Act, 1961. The assessee, a branch of a Swedish entity, provided technical services to Indian telecom companies. The Assessing Officer (AO) classified these fees as fees for technical services under Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and Sweden. The AO referenced a prior ruling by the Authority for Advance Ruling (AAR) in the assessee's own case, which held that such fees were subject to tax without deductions as per section 44D of the Act. This ruling was binding as per section 245S(1) unless there was a change in law or facts.

The assessee argued that the DTAA between India and Sweden was updated in 1997, introducing a Protocol that included a Most Favoured Nation (MFN) clause. This clause stipulates that if India enters into a more favorable agreement with an OECD member, those terms should apply. The assessee contended that the DTAA with Finland, an OECD member, had a 'make available' clause, which was more beneficial. The Tribunal found that the AO had not considered the updated DTAA and Protocol, which could impact the ruling. Thus, the Tribunal remitted the matter back to the AO to reconsider the taxability in light of the updated DTAA and Protocol.

2. Allocation of Expenses:

The second issue concerns the allocation of General and Administration (G&A) expenses shared between the assessee and its associated enterprise, Ericsson Communication Pvt. Ltd. (ECI). The AO found discrepancies in the allocation ratio, which did not align with the turnover ratio. The AO allocated the assessee's share of expenses at 7%, amounting to ?2.23 crore, and apportioned these expenses against the gross fees earned from foreign sources.

The Tribunal observed that the assessee had not provided full details and final accounts of ECI, leading the AO to allocate expenses based on turnover. The Tribunal noted the assessee's willingness to provide the necessary details and remitted the matter back to the AO for a fresh decision, allowing the assessee an opportunity to present the required information.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, remitting both issues back to the AO for reconsideration. The AO is directed to reassess the taxability of fees for technical services in light of the updated DTAA and Protocol and to re-evaluate the allocation of expenses based on the additional details provided by the assessee. The decision on these issues should be made independently on merits, ensuring a reasonable opportunity for the assessee to be heard.