2021 (1) TMI 53 - AT - Income Tax

Taxability of amount received as common cost recharge as Royalty and fees for technical services (FTS) - Taxability of Consulting Engineering Services - DRP considering common cost recharge as royalty and Fees for technical services (FTS) as per Article 13 of the India-UK Double Taxation Avoidance Agreement ( DTAA ) - HELD THAT - As relying on assessee s own case for A.Y.2014-15 the amount received by the assessee on account of consulting engineering services were to be treated as business profit and in the absence of assessee s PE in India it could not be brought to tax. Consequently the cost recharge which was considered to be ancillary and incidental to consulting engineering services was also held to be not taxable in the absence of assessee s PE in India. However in the year before us the assessee has already offered the consulting engineering fees to tax which has been accepted by the revenue. Since we have admitted additional ground of appeal on this point the issue of taxability of consulting engineering services would go back to Ld. AO for adjudication. Logically the issue of taxability of cost recharge which has been treated as ancillary and incidental to consulting engineering services would also go back to Ld. AO for re-adjudication in the light of stand taken qua consulting engineering services. Therefore we deem it fit to restore both the grounds to the file of Ld. AO for re-adjudication de-novo after affording reasonable opportunity of hearing to the assessee who in turn is directed to substantiate his claim and demonstrate that the facts in AY 2012-13 and in the year consideration was identical Levy of surcharge and Education Cess on tax calculated at special rates under the DTAA - HELD THAT - The issue in dispute is squarely allowed in favour of the assessee by the Co-ordinate Bench decision of Hyderabad Tribunal in the case of RAK Ceramics UAE vs. DCIT International Taxation (2) 2019 (4) TMI 667 - ITAT HYDERABAD wherein it was categorically held that surcharge and education cess could not be added to connotation tax when the same is calculated as per DTAA. We find that the Hyderabad Tribunal while rendering this judgment had inturn placed reliance on the co-ordinate Bench decision of Kolkata Tribunal in the case of DIC Asia Pacific (Pte) Ltd. vs. Asst. DIT 2012 (6) TMI 686 - ITAT KOLKATA . No contrary decision was cited before us by the ld. DR in this regard and accordingly by respectfully following the aforesaid judicial president the ground No.2 raised by the assessee is allowed.

Summary

Issues Involved:
1. Taxability of amount received as common cost recharge as Royalty and Fees for Technical Services (FTS).
2. Levy of surcharge and Education Cess on tax calculated at special rates under the DTAA.
3. Erroneous levy of consequential interest under section 234B.
4. Taxability of Consulting and Engineering Service.

Detailed Analysis:

1. Taxability of amount received as common cost recharge as Royalty and Fees for Technical Services (FTS):
The assessee, a company registered in the UK and a tax resident of that state, engaged in providing engineering, design, and consultancy services, raised the issue regarding the taxability of common cost recharge as royalty and FTS under Article 13 of the India-UK DTAA. The assessee argued that the cost recharge amounting to ?2,49,71,127/- charged to Buro India did not make available any knowledge, skill, process, know-how, or experience as per the terms of the India-UK DTAA. The assessee contended that these services were managerial and not covered under the definition of FTS. The Tribunal admitted the additional ground raised by the assessee and restored the issue to the file of the AO for fresh adjudication, following the precedent set in the assessee's own case for A.Y.2014-15.

2. Levy of surcharge and Education Cess on tax calculated at special rates under the DTAA:
The assessee challenged the levy of surcharge and education cess on tax calculated as per the rate provided in Article 13 of the India-UK DTAA, arguing that the tax rate cannot exceed 15%. The Tribunal found that the issue was squarely in favor of the assessee, citing the Hyderabad Tribunal's decision in the case of RAK Ceramics UAE vs. DCIT International Taxation (2), Hyderabad, which held that surcharge and education cess could not be added to the connotation of 'tax' when calculated as per DTAA. The Tribunal allowed this ground in favor of the assessee.

3. Erroneous levy of consequential interest under section 234B:
The assessee contested the levy of consequential interest under section 234B amounting to ?3,03,688/-. The Tribunal noted that this issue would be consequential in nature, depending on the outcome of the other issues.

4. Taxability of Consulting and Engineering Service:
The additional ground raised by the assessee concerned the taxability of consulting and engineering service fees amounting to ?96,59,182/- under Article 13 of the India-UK DTAA. The Tribunal admitted this additional ground and restored the issue to the file of the AO for fresh adjudication, following the precedent in the assessee's own case for A.Y.2014-15. The Tribunal directed that both the taxability of consulting and engineering services and the cost recharge, considered ancillary and incidental to these services, be re-adjudicated de novo by the AO.

Conclusion:
The Tribunal partially allowed the appeal for statistical purposes, directing fresh adjudication on the taxability of consulting and engineering services and cost recharge, while ruling in favor of the assessee regarding the levy of surcharge and education cess. The issue of consequential interest under section 234B was noted to be dependent on the final outcomes of the aforementioned issues.