2018 (3) TMI 791 - AT - Income Tax

Taxability of receipts - Borrowed Service charges/Loaned Service Income - Royalty or Fees for included services - initiation of MAP settlement - DTAA - PE in India - Held that - We hold that the taxability of the receipts was to be determined as per the MAP settlement. Therefore, the afore-said receipts, being Business Profits was covered by Article-7 of the Treaty and was not in the nature of Royalty or Fees for included services. The revenue has nowhere disputed or established that the assessee had PE in India. Therefore, the said receipts were not chargeable to tax in India except Firm Function Service Charges of ₹ 63.02 Crores, which were to be accepted at a mark up of 3% as per MAP settlement of earlier years. Needless to say that the same may suitably be modified by the revenue, if required, on the basis of outcome of MAP settlement for impugned AYs. Reimbursement of Firm Training Charges & Other expenses - Held that - As AR, at the outset, submitted that the issue requires re-appreciation by lower authorities since these expenses were mere reimbursements in nature without any profit element and therefore, the assessee be afforded another opportunity to demonstrate the same. The Ld. DR did not raise any serious objections against the same. Resultantly, the issue stands remitted back to the file of Ld. AO for re-adjudication in the light of submissions made by Ld. AR.

Issues Involved:
1. Non-consideration of detailed evidence by the Dispute Resolution Panel (DRP).
2. Assessment of inter-company payments.
3. Loaned service fee classification and taxability under India-US Double Taxation Avoidance Treaty (DTAA) and the Income Tax Act.
4. Classification of firm function service fees, firm committee charges, knowledge pool charges, and regional corporate finance charges.
5. Estimation of net profit and taxability.
6. Application of prior Competent Authority orders.
7. Taxability of reimbursement of other expenses.
8. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

Non-consideration of Detailed Evidence by DRP:
The assessee contended that the DRP failed to consider the detailed evidence furnished, showing non-application of mind. This issue was raised as a general ground and was not specifically addressed in the final judgment.

Assessment of Inter-company Payments:
The assessee argued that the Assessing Officer (AO) and the DRP erred in assessing various inter-company payments, ignoring detailed documentation and explanations. The tribunal found that the taxability of these receipts should be determined as per the Mutual Agreement Procedure (MAP) settlement, which categorized these receipts as Business Profits under Article-7 of the India-US DTAA. Since the assessee did not have a Permanent Establishment (PE) in India, these receipts were not chargeable to tax in India.

Loaned Service Fee Classification and Taxability:
The AO and DRP concluded that the loaned service fee received was in the nature of 'fees for included services' and hence taxable under Article 12 of the India-US DTAA and Section 9(1)(vii) of the Income Tax Act. The tribunal, however, held that the taxability of these receipts should be determined as per the MAP settlement, which stated that these were Business Profits under Article-7 and not taxable in India due to the absence of a PE.

Classification of Firm Function Service Fees, Firm Committee Charges, Knowledge Pool Charges, and Regional Corporate Finance Charges:
The AO and DRP classified these charges as 'fees for included services' or 'royalty' and taxed them accordingly. The tribunal, following the MAP settlement and earlier tribunal orders, held that these charges were Business Profits under Article-7 of the India-US DTAA and not taxable in India, except for Firm Function Service Charges, which were to be taxed with a mark-up of 3%.

Estimation of Net Profit and Taxability:
The AO estimated the net profit at 35.52% of the total receipts and taxed the same. The tribunal held that the taxability of these receipts should be determined as per the MAP settlement, making this ground infructuous.

Application of Prior Competent Authority Orders:
The assessee argued that the AO and DRP failed to apply the principles from prior Competent Authority orders under Article 27 of the India-US DTAA. The tribunal agreed and held that the taxability of the receipts should be determined as per the MAP settlement, which had already been applied in earlier years.

Taxability of Reimbursement of Other Expenses:
The AO concluded that the reimbursement of other expenses received by the assessee was taxable in India. The tribunal remitted this issue back to the AO for re-adjudication, allowing the assessee another opportunity to demonstrate that these were mere reimbursements without any profit element.

Initiation of Penalty Proceedings:
The AO initiated penalty proceedings under Section 271(1)(c) of the Income Tax Act. The tribunal dismissed this ground as premature.

Conclusion:
The tribunal partly allowed the appeals, directing the AO to follow the MAP settlement terms for determining the taxability of the receipts and remitted the issue of reimbursement of expenses back to the AO for re-adjudication. The initiation of penalty proceedings was dismissed as premature.

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