2023 (7) TMI 805 - AT - Income Tax

Revision u/s 263 - fees towards supervisory charges - composite contract or can be segregated - income taxable in India - CIT while examining the scope of the contract including the nature of receipt under different heads formed an opinion that it is a composite contract and this fee under the head supervisory services (i.e. item (e) above), cannot be segregated at the instance of assessee and this aspect was not examined by the AO constructively either in the assessment order or during the assessment proceeding - assessee has been contending that it has received fees towards supervisory charges and since it has not made available technical knowledge about providing of these supervisory charges, therefore, u/a 13 of India-UK Treaty, this receipt will not fall in the ambit of FTS and not taxable - HELD THAT - As clauses if read into clauses starting from the Article 3, then, would reveal that it is a fee for one part from the composite contract and it cannot be segregated. This service was not being provided on a item which can be consider as stand alone item even without availability of this agreement. As far as the first-fold of submission of assessee AO has perused the submission of the assessee, we are of the view that the assessee had made a fatuous attempt to goad the adjudicating authority in a field, where facts are not available. The theory of conditions enumerated in Article 13 of the DTAA between UK and India is totally misplaced. The enquiry at this angle is to be made if it is determinable that services provided by the assessee are stand alone services and not dependent upon the agreement. It is an unnecessary argument raised by the assessee before AO for absolving from tax liability and this effort was not examined by the ld. Assessing Officer elaborately and diligently. If agreement is being perused, then, it would give a meaning that it is a composite agreement and different category of receipts cannot be segregated from it. Therefore, this concept of applicability of Article 13 is not at all applicable in the present case. The facts to that effect are not available precisely. Non-examination of AO with that angle has caused prejudice to the interest of the Revenue. The ld. CIT has rightly set aside this order by exercising powers under section 263. The observations made by us will not impair or injure the case of the Revenue and will not cause any prejudice to the defence/explanation of the assessee on merit. The observations made by us are for the purposes of bringing home our conclusion in support of the order of ld. CIT in this appeal. Therefore, the issue that has been relegated by the ld. CIT for fresh hearing - Appeal filed by the assessee is dismissed.

Summary

Issues Involved:
1. Whether the Commissioner of Income Tax (CIT) erred in taking cognizance under section 263 of the Income Tax Act, 1961 and setting aside the assessment order dated 18.12.2019.
2. Whether the fees received under the head "supervisory services" should be taxed as Fees for Technical Services (FTS) under Article 13 of the India-UK Treaty.

Summary of Judgment:

Issue 1: Cognizance under Section 263
The assessee appealed against the order of the CIT (IT & TP), Kolkata, dated 30th March 2022, which was passed under section 263 of the Income Tax Act, 1961. The CIT had set aside the assessment order dated 18.12.2019, directing a de novo assessment. The CIT formed an opinion that the assessment order was erroneous and prejudicial to the interest of the revenue, necessitating revision under section 263. The Tribunal noted that the CIT issued a notice on 11.01.2022 and, after considering the assessee's submissions, passed the impugned order.

Issue 2: Taxability of Supervisory Services Fees
The assessee entered into an agreement with Brahmaputra Cracker and Polymer Limited (BCPL) for the manufacture and sale of linear polyethylene, providing various services including training and technical assistance. The assessee did not offer the fees received under "supervisory services" for tax, arguing that these did not fall under the concept of FTS as per Article 13 of the India-UK Treaty. The CIT, however, opined that the contract was composite and the fees could not be segregated, thus requiring a fresh assessment.

The Tribunal examined whether the Assessing Officer (AO) had considered the nature of the supervisory services fees. The assessee argued that the AO had reviewed all details and chosen not to tax these receipts, citing various judicial decisions. However, the Tribunal found that the AO had not diligently examined whether the services were standalone and not dependent on the agreement, thus causing prejudice to the revenue.

The Tribunal upheld the CIT's order, stating that the AO's failure to examine the agreement and the nature of the services rendered the assessment order erroneous and prejudicial to the revenue. The Tribunal emphasized that the CIT's action under section 263 was justified, and the issue must be re-examined afresh by the AO.

Conclusion:
The appeal filed by the assessee was dismissed, and the Tribunal supported the CIT's decision to set aside the assessment order and direct a fresh assessment. The observations made were for the purpose of supporting the CIT's order and did not prejudice the assessee's case on merit. The issue was to be examined afresh in accordance with the law.