2022 (3) TMI 1012 - AT - Income Tax

Income accrued In India - taxability of payment received from assessee from Standard Chartered Bank India(SCB) - 'Royalty' or 'Fees for Technical Services' under Section 9(l)(vi) and 9(l)(vii) - as held receipts from SCB, India are Royalty/FTS specially after the retrospective amendments section 9 - HELD THAT - As assessee is providing similar services to other clients like Hong Kong Government and other big MNEs and there is nothing special or exclusive about the services which are being rendered to SCB. In view of the entire gamut of facts as discussed above, we are of the opinion that the payment made by SCB to assessee- company does not fall within the realm of fees for technical services as contained in Sec. 9(1)(vii), albeit the assessee has only provided a standard facility for data processing without any human intervention. Accordingly, we hold that the said payment is not taxable in India as fees for technical services in terms of Sec. 9(1)(vii) of the Act. Thus, the issue raised in favour of the assessee.

Issues Involved:

1. Classification of ?40,46,45,646/- as 'Royalty' under Section 9(1)(vi) of the Income-tax Act, 1961.
2. Classification of ?40,46,45,646/- as 'Fees for Technical Services' under Section 9(1)(vii) of the Act.
3. Consideration of 'business connection' issue by the AO, which was not directed by the ITAT.
4. Classification of ?40,46,45,646/- as 'Business Income' under Section 9(1)(i) of the Act.
5. Non-taxability of receipts in India under clause (a) of Explanation 1 to Section 9(1)(i) due to no activities carried out in India.
6. Denial of the benefit of the rate prescribed under Section 115A of the Act.
7. Short credit for taxes paid on regular assessment.
8. Initiation of penalty proceedings under Section 271(1)(c) of the Act.

Issue-wise Detailed Analysis:

1. Classification of ?40,46,45,646/- as 'Royalty' under Section 9(1)(vi):
The ITAT analyzed whether the payments made by Standard Chartered Bank (SCB) India to the assessee constituted 'Royalty' under Section 9(1)(vi). The ITAT concluded that the payments did not fall within the definition of 'Royalty' as there was no transfer of any right in respect of any patent, invention, model, design, secret formula, or process. The data processing services provided by the assessee were considered an outsourcing activity without any technology transfer or application of technology to SCB. The ITAT relied on previous judgments and held that the payments were not taxable as 'Royalty' under the Act.

2. Classification of ?40,46,45,646/- as 'Fees for Technical Services' under Section 9(1)(vii):
The ITAT examined whether the payments could be classified as 'Fees for Technical Services' (FTS). It was determined that the services provided by the assessee were standard facilities without constant human intervention or human endeavor. The data processing was done automatically by computers, and there was no application of mind by the employees of the assessee on the data. The ITAT concluded that the payments did not constitute FTS as defined under Section 9(1)(vii) and were not taxable in India.

3. Consideration of 'business connection' issue by the AO:
The ITAT noted that the Assessing Officer (AO) considered the business connection issue for the first time, which was not a subject matter at the time of appellate proceedings before the ITAT. The ITAT held that the AO's action in considering the business connection issue was beyond the directions provided by the ITAT and was therefore bad in law. The ITAT set aside the AO's order on this ground.

4. Classification of ?40,46,45,646/- as 'Business Income' under Section 9(1)(i):
The ITAT observed that the AO, without prejudice to the Department's stand that the payments were taxable as 'Royalty' or FTS, also held that the payments could be taxed as 'Business Income' under Section 9(1)(i). The ITAT found that this issue was not part of the original proceedings and was not directed for reconsideration by the ITAT. Therefore, the ITAT set aside the AO's order on this ground as well.

5. Non-taxability of receipts in India under clause (a) of Explanation 1 to Section 9(1)(i):
The ITAT did not specifically address this issue as the primary grounds were decided in favor of the assessee, rendering this ground infructuous.

6. Denial of the benefit of the rate prescribed under Section 115A:
The ITAT noted that this issue was linked to the classification of payments as 'Royalty' or FTS. Since the primary grounds were decided in favor of the assessee, the ITAT directed the AO to compute the tax liability as per the applicable provisions, including Section 115A, after giving adequate opportunity to the assessee.

7. Short credit for taxes paid on regular assessment:
The ITAT directed the AO to allow the undisputed and legally correct claim of TDS and to grant the benefit of TDS as claimed by the assessee.

8. Initiation of penalty proceedings under Section 271(1)(c):
The ITAT did not specifically address this issue as the primary grounds were decided in favor of the assessee, rendering this ground infructuous.

Conclusion:
The ITAT allowed the appeal of the assessee for statistical purposes, setting aside the orders of the revenue authorities and directing the AO to re-adjudicate the issues in accordance with the law, consistent with the ITAT's previous orders. The ITAT emphasized the need for adequate and reasonable opportunity for the assessee to present its case.

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