2018 (10) TMI 1600 - AT - Income Tax

Royalty addition - bringing the service tax element to tax - Held that - The assessee explained by letter dated 15.12.2014 that the difference between ₹ 61,78,57,313/- and ₹ 57,43,37,091/- is the amount of ₹ 4,35,20,223/- which was debited in the accounts of MNYL towards pre paid expenses charged during the year. The confirmation from the MNYL establishes the same. Even at this stage, in all fairness, learned AO should have made enquiries into the figure of ₹ 4,35,20,223/- instead of blindly saying that this new fact that has emerged at that stage was not before the revenue at the scrutiny stage, as such, the fresh reconciliation filed by MNYL u/s 133(6) of the Income-tax Act, 1961 does not prove the contention of the assessee that MNYL paid or credited only the amount of ₹ 57,43,37,091/- excluding the amount of service tax to the assessee as per MNYL books of accounts for the relevant period. This approach of the learned AO does not seem to be correct. There is no reason for the learned AO to disregard the direction of the learned DRP to bring to tax only the royalty amount after excluding the service tax element after due verification of the fact. The confirmation submitted by the MNYL subsequent to the directions of the learned DRP clearly establishes that the royalty amount that was paid during the year was only ₹ 57,43,37,091/- and service tax amount was ₹ 5,91,56,720/-. The debiting of ₹ 4,35,20,223/- by MNYL towards pre paid expenses charged during the year does not necessarily characterize that amount as Royalty and even in that case, the Royalty figure cannot be ₹ 63,34,93,811/- to be taxed in the hands of the assessee. It is a clear case of Royalty amount being ₹ 57,43,37,091/- out of which the tax of ₹ 6,68,77,942/- was deducted at source and balance of ₹ 50,74,59,146/- was paid to the assessee whereas the tax deducted at source viz. ₹ 6,68,77,942/- along with service tax amount of ₹ 5,91,56,720/- was deposited with the Government by the MNYL directly. On the face of this established facts, we find it difficult to sustain the addition of ₹ 5,91,56,720/- treating it as royalty. Bringing the service tax element to income tax cannot be sustained and the learned AO is directed to delete the same - Decided in favour of assessee.

Summary

Issues:
1. Taxability of royalty income received by the assessee from an Indian company.
2. Treatment of service tax component in the royalty income for taxation purposes.
3. Discrepancy in figures provided by the Indian company regarding royalty payments.

Issue 1: Taxability of Royalty Income
The case involved the assessment of royalty income received by the assessee from an Indian company for licensing its trademark. The Assessing Officer (AO) initially proposed to tax the entire amount of royalty received, leading to objections by the assessee before the Dispute Resolution Panel (DRP). The DRP directed the AO to tax only the royalty income exclusive of the service tax element. However, the AO ignored this direction and taxed the entire amount. The Tribunal noted that the revenue's grievance was unfounded as the AO had effectively brought the service tax element to tax along with the royalty income. Consequently, the revenue's appeal was dismissed.

Issue 2: Treatment of Service Tax Component
The assessee contended that the total amount received included both royalty and service tax components, with the service tax being directly deposited by the Indian company with the government. Despite directions from the DRP and the CIT(A) to tax only the royalty income excluding the service tax element, the AO failed to verify the reconciliation of amounts provided by the Indian company. The Tribunal found that the service tax component should not be treated as royalty income for taxation purposes. The AO was directed to delete the service tax component from the taxable income, resulting in the assessee's appeal being allowed.

Issue 3: Discrepancy in Figures Provided by Indian Company
There was a discrepancy in the figures provided by the Indian company regarding royalty payments to the assessee. The AO relied on conflicting figures provided by the company, leading to confusion in determining the correct amount of royalty income. The Tribunal noted that the subsequent confirmation from the Indian company established that the actual royalty amount paid was lower than initially assessed. Despite the discrepancies, the Tribunal held that the correct royalty amount should be considered for taxation purposes, excluding the service tax component. The AO was directed to delete the service tax component from the taxable income, ultimately allowing the assessee's appeal.

In conclusion, the Tribunal dismissed the revenue's appeal and allowed the assessee's appeal, directing the AO to exclude the service tax component from the taxable income. The judgment emphasized the importance of accurately determining the taxable components of royalty income and ensuring compliance with the directions provided by the DRP and the CIT(A) for proper taxation assessment.