2024 (1) TMI 420 - AT - Income Tax

Eligible assessee in terms of section 144C(15) - assess assessee s income u/s 143(3) - requirement to pass a draft assessment order u/s 144C(1) - HELD THAT - As assessee has returned income of Rs. 4,49,20,980/- and the AO has completed the assessment adopting the same income. The variation, if any, is with regard to the taxability of the said income. While the assessee has claimed that the income is not taxable under the provisions of tax treaty, the AO has rejected such claim. Thus, essentially, the AO has not made any variation to the returned income, which is prejudicial to the interest of assessee. In case of Amadoroco Limited vs. ACIT 2023 (3) TMI 211 - ITAT DELHI while faced with a similar situation, has held that in cases, in which no variation in the income or loss returned is proposed by the Assessing Officer, there is no requirement for passing draft assessment order in terms of section 144C (1) of the Act. Same view has been expressed by the coordinate Bench in case of M/s. Worldpart Limited vs. DCIT ( 2022 (12) TMI 921 - ITAT CHENNAI ). No contrary decision has been brought to our notice by learned counsel for the assessee. Finance Act, 2020 has amended the provisions of section 144C (1) of the Act by omitting the words in the income or loss returned w.e.f. 01.04.2020. Thus, by virtue of the aforesaid amendment, any variation, which is prejudicial to the interest of the assessee, can lead to assumption of jurisdiction under section 144C(1) of the Act. However, this is a case relating to a period prior to the aforesaid amendment. Therefore, the amendment, being prospective in nature, would not apply. Thus, respectfully following the decisions of the coordinate Benches, we hold that the Assessing Officer has rightfully proceeded to assess assessee s income under section 143(3) of the Act. Additional grounds are dismissed. Nature of receipt - FIS or business receipts - whether the fees received would amount to fees for included services (FIS) under Article 12 of India-USA Double Taxation Avoidance Agreement (DTAA)? - HELD THAT - FAA himself is of the opinion that the entire skills in no manner be passed on to the client in course of rendering of services. Therefore, what is the extent of skill, knowhow, knowledge etc., which has been made available, has neither been specified nor demarcated. Therefore, the conclusion drawn by learned First Appellate Authority is more in the realm of imagination rather than based on facts. It is fairly well settled, technical knowhow, knowledge, skills etc. can be considered to have been made available when the person acquiring the services is in a position to apply the technology independently. Merely because, the provision of service may require technical input by the person providing the services does not mean that technical know-how, skill etc. are made available to the person receiving such service. In the facts of the present appeal, in our view, the Revenue has failed to establish on record that while rendering services, assessee has made available technical knowledge, know-how, skill etc. to TCG Life Sciences Private Ltd. so as to bring it within the ambit of Article 12(4)(b) of the tax-treaty. That being the factual position emerging on record, we have no hesitation in holding that the fee received by the assessee from TCG Life Sciences Private Ltd. cannot be treated as FIS under Article 12(4)(b) India-USA DTAA. AO is directed accordingly. Assessee appeal is partly allowed.

Summary

Issues Involved:
1. Validity of the assessment order passed without a draft assessment order under section 144C(1) of the Income-tax Act, 1961.
2. Classification of fees received as Fees for Included Services (FIS) under Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA).

Issue 1: Validity of the Assessment Order Without Draft Assessment Order

The assessee contended that the assessment order is void ab initio as it was passed without a draft assessment order under section 144C(1) of the Income-tax Act, 1961. The assessee argued that being an eligible assessee under section 144C(15), the Assessing Officer should have first issued a draft assessment order.

The Tribunal considered the rival submissions and noted that section 144C(1) mandates a draft assessment order if there is any variation in the income returned that is prejudicial to the assessee. The Tribunal observed that the assessee had returned an income of Rs. 4,49,20,980/- and the Assessing Officer completed the assessment adopting the same income. The variation was with regard to the taxability of the said income under the DTAA, not the quantum of income. The Tribunal cited the decisions in M/s. Amadoroco Limited vs. ACIT and M/s. Worldpart Limited vs. DCIT, which held that no draft assessment order is required if there is no variation in the income returned.

The Tribunal concluded that since there was no variation in the returned income, the Assessing Officer was not required to pass a draft assessment order. The additional grounds raised by the assessee were dismissed.

Issue 2: Classification of Fees as Fees for Included Services (FIS)

The main issue was whether the fees of Rs. 4,23,81,848/- received by the assessee for providing marketing support and research services to TCG Life Sciences Pvt. Ltd. should be classified as FIS under Article 12 of the India-USA DTAA. The assessee claimed the fees as business receipts, arguing that the "make available" condition under Article 12(4) was not satisfied.

The Tribunal examined the agreement between the assessee and TCG Life Sciences Pvt. Ltd., noting that the assessee's advisory personnel were to work alongside TCG's employees to improve product quality and marketing. However, the agreement did not indicate that the personnel imparted any training or made available technical know-how, knowledge, or skills to TCG's employees.

The Tribunal observed that both the Assessing Officer and the First Appellate Authority had concluded that the services made available technical know-how, knowledge, and skills, but these conclusions were not backed by substantive evidence. The Tribunal emphasized that for technical know-how, knowledge, or skills to be considered "made available," the recipient must be able to apply the technology independently. The Tribunal found that the Revenue failed to establish that the services rendered by the assessee met this criterion.

Consequently, the Tribunal held that the fees received by the assessee could not be treated as FIS under Article 12(4)(b) of the India-USA DTAA and directed the Assessing Officer to treat the income accordingly.

In conclusion, the appeal was partly allowed, with the assessment order being upheld in terms of its validity but the classification of the fees as FIS being overturned.