2023 (8) TMI 912 - AT - Income Tax

Assessment u/s 144C - Royalty receipt - income from distribution of software licenses and providing support services - India-Sweden Tax Treaty - Whether case of the assessee falls under FTS? - assessee submits that the support services provided by it do not make available any technology or technical skills to third party distributors and / or end users. In view of this, the services provided by IAR do not fall within the ambit of FTS under the Article 12 of the India-Sweden Tax Treaty - HELD THAT - Assessee has received certain funds by supplying software through intermediaries in India and the various Companies are listed of the AO. Assessee has received the receipts as categorized by the DRP as per which assessee has received income from sale of software licence, hardware, support services to those parties who are intended to purchase the latest software from IAR and certain freight charges. Which are part and parcel of the total services rendered by the assessee during the current Assessment Year. Without going into merits of the findings of the DRP, we observe that DRP has come to the conclusion on their own analysis that the case of the assessee falls under FTS. We observe that while passing the final Assessment Order AO has not followed the directions of the DRP and passed his own Assessment Order by merely reproducing his analysis in draft Assessment Order. Final Assessment Order passed by the AO is not as per section 144C(13) - AO has filed a note in support of his final Assessment Order in which he has made submissions that the order passed by him is analyzing the various issue which are without prejudice views which Ld. DRP has not rejected. He is of the view that the final Assessment Order passed by him is as per section 144C(13). AO has not followed the directions of the DRP and the directions of the Ld. DRP are very clear and AO has not bothered to atleast classify the income earned by the assessee under the head FTS as per the directions of the Ld. DRP and royalty. He proceeded to complete the final Assessment Order based on his own analysis made by him in draft Assessment Order which is clearly a violation of not following the directions of the higher authorities and also the provisions of section 144C(13). At the time of hearing, DR heavily relied on the decision of the ITAT Bangalore in the case of Yokogawa India Ltd. 2021 (4) TMI 151 - ITAT BANGALORE in which the bench has remitted the issue back to the file of the AO/TPO to redo the assessment by following the directions of the Ld.DRP. AO and Ld. DRP has taken a divergent view and without going into merits of the issues raised, we are inclined to treat the Assessment Order passed by the AO as bad in law and against the directions specified u/s. 144(13) of the Act. Accordingly, we quash the assessment order passed by the AO and grounds raised by the assessee are allowed in this regard.

Summary

Issues Involved:
1. Addition of income from distribution of software licenses and providing support services as royalty.
2. Levy of surcharge and education cess.
3. Interest under section 234B.
4. Interest under section 234D.
5. Interest under section 244A.
6. Penalty Proceedings.

Summary:

1. Addition of income from distribution of software licenses and providing support services as royalty:
The assessee challenged the addition of Rs. 2,88,87,790 as royalty under section 9(1)(vi) of the Income-tax Act and Article 12 of the India-Sweden Tax Treaty. The assessee argued that the income from software licenses, support services, hardware, and freight expenses should not be taxed as royalty. The Assessing Officer, however, held that the receipts were taxable as royalty. The Dispute Resolution Panel (DRP) analyzed the case and concluded that the receipts should be taxed under Fee for Technical Services (FTS) as per section 9(1)(vii) of the Act and Article 12(3)(b) of the India-Sweden DTAA. The DRP also rejected the applicability of the India-Portugal DTAA protocol. The final Assessment Order by the Assessing Officer, which taxed the income as royalty, was found to be in violation of section 144C(13) of the Act as it did not follow the DRP's directions. The Tribunal quashed the assessment order, deeming it bad in law.

2. Levy of surcharge and education cess:
The assessee contested the levy of surcharge and education cess on the tax payable at the rate of 10% as per Article 12(2) of the India-Sweden Tax Treaty. The Tribunal's decision on this issue followed the overall ruling on the primary issue of taxability.

3. Interest under section 234B:
The assessee objected to the levy of interest under section 234B amounting to Rs. 1,84,460. The Tribunal's decision on this issue was consistent with the primary ruling.

4. Interest under section 234D:
The assessee also contested the levy of interest under section 234D. The Tribunal's decision followed the primary ruling.

5. Interest under section 244A:
The assessee argued that the interest under section 244A was not correctly granted. The Tribunal's decision on this issue was in line with the primary ruling.

6. Penalty Proceedings:
The assessee challenged the initiation of penalty proceedings under section 274 read with section 270A of the Act. The Tribunal's decision on this issue was consistent with the primary ruling.

Conclusion:
The Tribunal allowed the appeals filed by the assessee for both A.Y. 2018-19 and A.Y. 2019-20, quashing the assessment orders passed by the Assessing Officer for being in violation of section 144C(13) of the Act. The Tribunal emphasized that the Assessing Officer did not follow the DRP's directions and incorrectly taxed the income as royalty instead of FTS.