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2021 (2) TMI 230 - AT - Income TaxRevision u/s 263 - Income taxable in India or not? - assessee is a foreign company incorporated under the laws of Delaware, United States of America (USA) - sum paid to the assessee towards Head Quarter service fee, which was claimed by the assessee to be not chargeable to tax in India because of it not having any Permanent Establishment (PE) in India - CIT opined that the service charges received by the assessee from NWIL were in the nature of Royalty/Fees for included services as per the DTAA - HELD THAT - AO applied his mind to the fact situation obtaining before him and impliedly relying on the assessment order for the immediately preceding assessment year, accepted the assessee s claim for the current year too. We fail to comprehend as to how such an assessment order can be construed as erroneous as well as prejudicial to the interest of Revenue for not having included ₹ 9.14 crore in the total income, when the Department itself accepted the same as not chargeable to tax for the immediately preceding assessment year. CIT took support from the assessment order passed for the assessment year 2014-15, when it was for the first time that the AO disputed non taxability of the amount of Head Quarter service fees and included the same in the total income. Greatly enthused by such an assessment order, the ld. CIT swung into action and initiated revisionary proceedings for the assessment year under consideration overlooking the fact that the assessment order for the A.Y. 2014-15 was passed on 06-02-2017, that is, almost two years after the passing of the assessment order for the year under consideration. When the order for the immediately preceding assessment year passed u/s.143(3) treating the amount of Head Quarter fees as not chargeable to tax was available on record before the AO, in our considered opinion, he was well justified in adopting such a possible view on the non-taxability of the amount for the year under consideration as well An assessment order shall be deemed to be erroneous and prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner, the assessment order is deficient on any one or more of the four counts. The words if, in the opinion of the Principal Commissioner or Commissioner , used in the opening part of the Expl. 2 before referring to four situations as discussed in clauses (a) to (d), do not denote any arbitrary, subjective or unsubstantiated opinion of the CIT. Such an opinion as to the prevalence of one or more of such situations must be objective, logical and tenable in law. If albeit the Pr. CIT or CIT opines about the existence of one of the four clauses, but, on the facts and in the circumstances of the case, the same is non-existent, then the formation of such an opinion cannot be countenanced. To put it differently, the existence of one or more of the four situations discussed in the clauses (a) to (d) is a sine qua non for exercise of the jurisdiction under the Explanation 2. Even though the ld. CIT was rightfully entitled to take recourse to the Explanation 2, but thereafter he needed to bring the case with in any one or more of the four clauses given therein. It is palpable that none of the four clauses of the Explanation 2 applies to the case under consideration. The sequitur is that the revisionary power, even under the enlarged scope of the Explanation 2, was not legally exercisable. Ex consequenti, we set aside the impugned order. The revision in this case has been held to be not valid because the AO took a possible view. We clarify as not having expressed any opinion on the merits of the case as to whether or not the amount of Head Quarter service fees is chargeable to tax in the hands of assessee, which aspect will be considered and determined as and when it comes up for hearing - Decided in favour of assessee.
Issues Involved:
1. Legal tenability of the order passed by the Commissioner of Income-tax under section 263 of the Income-tax Act, 1961. 2. Applicability of Explanation 2 to section 263(1) of the Income-tax Act, 1961. 3. Classification of the service charges received by the assessee under the India-USA Double Taxation Avoidance Agreement (DTAA). Issue-wise Detailed Analysis: 1. Legal Tenability of the Order Passed by the Commissioner of Income-tax under Section 263 of the Income-tax Act, 1961: The appeal challenges the order dated 30-03-2017 issued by the Commissioner of Income-tax (CIT) under section 263 of the Income-tax Act, 1961, concerning the assessment year 2011-12. The CIT opined that the service charges received by the assessee from Nalco Water India Ltd. (NWIL) were in the nature of Royalty/Fees for included services as per the DTAA and should be chargeable to tax. The CIT observed that the Assessing Officer (AO) accepted the receipt of ?9.14 crore as not chargeable to tax without making proper inquiries or verification. Consequently, the CIT set aside the assessment order and directed the AO to conduct a fresh assessment after thorough verification and inquiries. 2. Applicability of Explanation 2 to Section 263(1) of the Income-tax Act, 1961: The CIT relied on Explanation 2 to section 263(1), inserted by the Finance Act, 2015, effective from 01-06-2015, to justify the revision of the assessment order. The assessee contended that this Explanation should apply only to assessment years commencing after its insertion, i.e., from 2017-18 onwards, and not to the assessment year 2011-12. However, the Tribunal held that Explanation 2 is a procedural provision and applies to the revision proceedings irrespective of the assessment year. Therefore, the CIT was justified in invoking Explanation 2 to section 263(1). 3. Classification of the Service Charges Received by the Assessee under the India-USA Double Taxation Avoidance Agreement (DTAA): The assessee, a tax resident of the USA, received ?9.14 crore from NWIL for rendering Head Quarter services and claimed this amount as Business profits under Article 7 of the DTAA, asserting it was not chargeable to tax in India due to the absence of a Permanent Establishment (PE) in India. The CIT, however, treated the amount as Royalty or Fees for Technical Services under section 9(1)(vi)/9(1)(vii) read with Article 12 of the DTAA. The Tribunal examined whether the AO had made proper inquiries and applied his mind before accepting the assessee's claim. It was found that the AO had indeed made inquiries, sought clarifications, and received detailed replies from the assessee. The AO had also relied on the assessment order for the preceding year (2010-11), where a similar claim was accepted. Therefore, the Tribunal concluded that the AO's acceptance of the assessee's claim was a possible view, and the assessment order could not be deemed erroneous and prejudicial to the interest of the revenue. Conclusion: The Tribunal held that the CIT was not justified in revising the assessment order under section 263, as the AO had made proper inquiries, applied his mind, and adopted a legally possible view. Additionally, none of the four clauses of Explanation 2 to section 263(1) applied to the case. Consequently, the Tribunal set aside the CIT's order and allowed the appeal. Final Note: The Tribunal clarified that the revision was held invalid because the AO took a possible view. The Tribunal did not express any opinion on the merits of whether the Head Quarter service fees were chargeable to tax, which would be determined in future proceedings. The appeal was allowed, and the order was pronounced in open court on 05th February 2021.
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