2024 (3) TMI 145 - AT - Income Tax

Taxability of receipts on sale of software under the provisions of the Act r.w. applicable DTAA - Denial of relief from taxation on receipts arising from sale of software in the hands of non-resident assessee - assessee-company is incorporated in the United Kingdom and thus a non-resident assessee for the purposes of Indian Taxation - whether the AO was justified in assessing the receipts on sale of software as Royalty Income in the factual matrix merely because the assessee has offered such income as taxable income in its ITR? HELD THAT - Tax can be collected only as provided under the Act. If an assessee, under a mistake, misconception or not being properly instructed is over assessed, the authorities under the Act are required to ensure that only legitimate tax dues are collected. Mere admission on the part of the assessee with respect to an addition/disallowance in its original return or in revised return would not ipso facto bar an assessee from claiming an expense or disputing an addition if it is otherwise permissible under law. It is thus well settled that if a particular income is not taxable under the Act, it cannot be taxed on the basis of estoppel or any other equitable doctrine. Revenue Authorities cannot enforce untenable actions of the assessee against it which led to declaration of income of higher amount incorrectly. It is thus open to assessee to show that it was over assessed under erroneous impression of law or facts even if it is attributable to the mistake of assessee. So viewed, we do see potency in the argument laid on behalf of the assessee that the AO committed error in denying the relief claimed. In our considered view, the action of the AO is in defiance of the judicial precedents on the issue and thus cannot be countenanced. In our view, the assessee can not be prevented from raising a claim that receipts from sale of software wrongly offered as royalty income and not chargeable to Indian Taxation merely because such income was wrongly offered in the ROI and which was not revised. The factual matrix towards the nature and character of sale proceeds qua the underlying evidences however does not appear to have been verified by the AO at any stage of the proceedings. Without any expression of opinion on merits on taxability of such receipts, in our view, it would be in fitness of things to remit the issue back to the file of AO.. It shall be open to the assessee to demonstrate that receipts from various customers in India arises on account of sale of software and does not give rise to any chargeable income in law. Ground No.1 to 4 of the appeal of the assessee is allowed for statistical purposes

Summary

Issues Involved:
1. Validity of DRP directions.
2. Taxability of receipts from the sale of software as 'Royalty Income'.
3. Levying of interest without reference to the section.
4. Restriction of TDS credits.
5. Consideration of refund amount not issued.

Summary:

Validity of DRP Directions:
The assessee challenged the DRP directions and the final assessment order, asserting that the order is contrary to the law laid down by the Hon'ble Supreme Court of India. The DRP directions were deemed perfunctory and failed to give clear directions to the AO, unlawfully retaining amounts collected as tax on transactions not chargeable under the Act.

Taxability of Receipts from Sale of Software:
The core issue was whether the receipts from the sale of software to various customers, including Bharti Airtel, should be taxed as 'Royalty Income'. The assessee, a non-resident entity incorporated in the UK, argued that these receipts should not be taxed as 'Royalty Income' based on the Supreme Court's judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT. The AO and DRP, however, retained the amounts as 'Royalty Income' due to the assessee's initial declaration in the ITR and lack of sufficient evidence to prove otherwise.

The Tribunal observed that the authorities are under an obligation to act according to the law and cannot enforce untenable actions against the assessee. The Tribunal found merit in the assessee's argument that the AO committed an error in denying the relief claimed and that the assessee should not be prevented from correcting the mistake in the ITR. Consequently, the issue was remitted back to the AO for fresh determination, allowing the assessee to demonstrate that the receipts were wrongly reported as 'Royalty Income' and are not chargeable to tax in India.

Levying of Interest Without Reference to Section:
The Tribunal did not provide specific details on this issue but implied that it would be addressed in the fresh assessment by the AO.

Restriction of TDS Credits:
The assessee contended that the AO erred in restricting the TDS credits. This issue is also to be reconsidered by the AO in the fresh assessment.

Consideration of Refund Amount Not Issued:
The assessee claimed that no refund had been issued despite the AO considering an amount as refunded. This matter will be addressed in the fresh assessment by the AO.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to reassess the taxability of the receipts from the sale of software and other related issues in accordance with the law, providing the assessee an opportunity to present relevant evidence.