2021 (8) TMI 363 - AT - Income Tax

Income taxable in India - Addition on Account of Royalty and/or FIS - PE in India - DRP confirming the action of the AO in bringing to tax 90% of the receipts as Royalties under the provisions of Article 12(3) of the Double Taxation Avoidance Agreement between India and USA ('DTAA') and thus, liable to tax in India - assessee is an entity incorporated in United States of America (USA) - HELD THAT - As stated by the ld. A.R, and rightly so, in the preceding years i.e A.Y. 2012-13 and A.Y. 2013-14 too the arrangement between the assessee and Wockhardt Hospital Limited was regulated by the terms and conditions of the Master Services Agreement, dated 31.01.2011. In the backdrop of the aforesaid facts, we are of the considered view that the issue as to whether or not the amount received by the assessee from Wockhardt Hospital Limited could be brought to tax in its hands as royalty and/or FIS had been decided by the Tribunal while disposing off the aforementioned appeals in in A.Y. 2012-13 2018 (5) TMI 2077 - ITAT MUMBAI and in A.Y. 2013-14, 2018 (11) TMI 1862 - ITAT MUMBAI wherein held that the consideration received by the assessee pursuant to the Master Services Agreement , dated 31.01.2011 was neither in the nature of royalty nor FTS, but was in the nature of business profits, which in the absence of the assessee s PE in India could not be brought to tax in India. Short credit of TDS - HELD THAT - As the grievance of the assessee would require verification of facts, therefore, in all fairness we herein direct the A.O to verify the factual position and in case the claim of the assessee is found to be in order, then, allow the credit for the deficit amount of TDS to the assessee as per extant law. The Ground of appeal is allowed for statistical purposes. Levy of interest u/s 234B and 234D - HELD THAT - As the levy of interest is mandatory as held by the Hon ble Supreme Court in the case of CIT Vs. Anjum H.M. Ghaswala 2001 (10) TMI 4 - SUPREME COURT therefore, we herein direct the A.O to re-determine the interest liability of the assessee while giving effect to our appellate order. The Ground of appeal is allowed for statistical purposes. Incorrect recovery of interest u/s 244A - HELD THAT - Claim of the assessee that the A.O had erred in recovering interest u/s 244A of the Act require verification of facts, therefore, in all fairness we herein direct the A.O to verify the factual position. In case the claim of the assessee is found to be in order, then, the consequential relief be allowed to the assessee. The Ground of appeal allowed for statistical purposes.

Issues Involved:
1. Non-following of earlier ITAT decisions by DRP.
2. Addition on account of Royalty.
3. Addition on account of Fees for Included Services (FIS).
4. Business profit not taxable in absence of a Permanent Establishment (PE).
5. Invoking Rule 10 of the Income-tax Rules, 1962.
6. Incorrect consideration of total receipts.
7. Short credit of Tax Deducted at Source (TDS).
8. Incorrect levy of interest under sections 234B and 234D.
9. Incorrect recovery of interest under section 244A.
10. Incorrect levy of penalty under section 271(1)(c).

Detailed Analysis:

1. Non-following of earlier ITAT decisions by DRP:
The appellant argued that the DRP did not follow the ITAT's decision in the appellant's own case for earlier years, which was in favor of the appellant. The ITAT noted that the DRP distinguished the agreements of the current year from those of earlier years but found that the issue had already been decided in favor of the appellant for the preceding years under similar agreements. Thus, the ITAT concluded that the DRP should have followed the earlier ITAT decisions.

2. Addition on account of Royalty:
The DRP upheld the AO's decision to treat 90% of the receipts as "Royalties" under Article 12(3) of the India-USA DTAA. However, the ITAT found that similar receipts in earlier years were not considered as royalties but as business profits. The ITAT reiterated its earlier stance, holding that the receipts from Wockhardt Hospital Limited were not royalties but business profits, which are not taxable in India in the absence of a PE.

3. Addition on account of Fees for Included Services (FIS):
The DRP confirmed the AO's action of taxing 10% of the receipts as FIS under Article 12(4)(b) of the DTAA. The ITAT, however, referred to its earlier decisions where it was held that the services rendered did not make available any technical knowledge, experience, skill, know-how, or processes to the payer, and thus, could not be classified as FIS. Consequently, the ITAT held that the receipts were not FIS but business profits.

4. Business profit not taxable in absence of a Permanent Establishment (PE):
The appellant contended that the payments received were business profits and not taxable in India due to the absence of a PE under Article 7 of the DTAA. The ITAT agreed, reiterating its earlier decisions that the appellant did not have a PE in India and thus, the business profits could not be taxed in India.

5. Invoking Rule 10 of the Income-tax Rules, 1962:
The AO invoked Rule 10 to attribute 90% of the receipts as royalties and 10% as FIS. The ITAT found this action inconsistent with its earlier decisions, which did not classify these receipts as royalties or FIS. Thus, the ITAT directed that Rule 10 should not be invoked.

6. Incorrect consideration of total receipts:
The AO considered total taxable receipts as ?1,27,10,460 based on Form 26AS instead of ?64,33,540, which was actually received. The ITAT noted that since it had already held that the receipts were not taxable as royalties or FIS, this issue became academic and did not require further adjudication.

7. Short credit of Tax Deducted at Source (TDS):
The appellant claimed short credit of TDS to the extent of ?5,50,580. The ITAT directed the AO to verify the factual position and allow the credit if the claim was found to be in order.

8. Incorrect levy of interest under sections 234B and 234D:
The appellant contested the levy of interest under sections 234B and 234D. The ITAT held that the interest levy is mandatory as per the Supreme Court's decision in CIT vs. Anjum H.M. Ghaswala and directed the AO to re-determine the interest liability while giving effect to the ITAT's order.

9. Incorrect recovery of interest under section 244A:
The appellant claimed incorrect recovery of interest under section 244A. The ITAT directed the AO to verify the factual position and provide consequential relief if the claim was in order.

10. Incorrect levy of penalty under section 271(1)(c):
The appellant challenged the initiation of penalty proceedings under section 271(1)(c). The ITAT dismissed this ground as premature.

Conclusion:
The ITAT allowed the appeals for both A.Y. 2014-15 and A.Y. 2015-16, holding that the receipts from Wockhardt Hospital Limited were not taxable as royalties or FIS but as business profits, which are not taxable in India in the absence of a PE. The ITAT also directed the AO to verify and rectify the issues related to TDS credit, interest levy, and interest recovery. The ground related to penalty proceedings was dismissed as premature.

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