2023 (3) TMI 353 - AT - Income Tax

Income taxable in India - taxability of testing services as FTS - India-Finland DTAA - HELD THAT - As decided in own case 2019 (6) TMI 777 - ITAT KOLKATA income in question becomes taxable as royalty or fees for technical services, is deemed to arise in the contracting state where the payer is a resident of that contracting state, which is in India, in our case. The income is also taxable in India as the right or property for which the royalty was paid, is used within India and hence, it is deemed to arise in India, i.e. the state in which the right or property is used. The assessee argues that the technical services of testing is performed outside the country, i.e. in Finland and hence cannot be taxed in India in view of the exception curved out to Article 12(5) of the India-Finland DTAA. The exception in question is, when the fees is paid for technical services which are performed within a contracting state, then the income therefrom is deemed to accrue or arise within the state in which the services were performed. In our view, this Clause does not apply as the payment in question was made for the test results which were used within the contracting state, India. It may be true that the process of testing may have been conducted outside India. But the payment in question is not for the process but was for the results of testing which is used in India. The argument of the Ld. D/R that these services were availed in India and hence are taxable in India has to be upheld. In the result, this ground of the assessee is dismissed. Taxability of income earned from sale of designs and drawings - as contended by the assessee that these receipts are not taxable under the provisions of the Act and the India-Finland DTAA - HELD THAT - As decided in own case 2019 (6) TMI 777 - ITAT KOLKATA findings of the Hon'ble DRP was that the transactions is in the nature of FTS that (i)the assessee had access to a wide range of technologies for the purpose of setting up/construction of the plants, (ii) it was developed after research and after necessary modification and thereafter (iii) these designs and drawings were sold to Indian customers who used the same for internal business purpose of setting up of their plants. These findings were reversed and the ground of appeal of the assessee was allowed. Computation of tax liability - AO computing the tax liability at the rate of 40% plus surcharge and cess instead of 10% as per the tax rate available under India-Finland DTAA in the tax computation sheet annexed to the final assessment order - HELD THAT - We hold that surcharge and education cess cannot be levied in respect of tax liability of the assessee computed under DTAA. Accordingly, ground taken in this respect is allowed. Short credit of TDS - HELD THAT - As we find it proper to remit this matter to the file of the Ld. AO to allow the credit as claimed after due verification of documents relating to TDS claimed by the assessee. Due credit of TDS may be allowed by the Ld. AO based on the verification of documents and records. Accordingly, this ground of appeal is allowed for statistical purposes.

Summary

Issues Involved:
1. Taxability of income earned from testing and other services.
2. Taxability of income from the supply of design and drawings.
3. Initiation of penalty under Section 270A of the Act.
4. Initiation of penalty under Sections 271A and 271B of the Act.
5. Computation of tax liability at the correct rate under the India-Finland DTAA and granting appropriate TDS credit.

Detailed Analysis:

1. Taxability of Income Earned from Testing and Other Services:
The primary issue was whether the income earned from testing and other services rendered in Finland but used by customers in India is taxable under Article 12 of the India-Finland DTAA. The appellant argued that since the services were performed entirely in Finland, the income should not be taxable in India. However, the tribunal upheld the AO's decision, stating that the income is taxable in India because the results of the testing services were used in India. This aligns with the earlier decision of the ITAT Kolkata in the assessee's own case for AY 2015-16, where it was held that the payment for test results used in India is taxable in India, despite the services being performed outside India.

2. Taxability of Income from Supply of Design and Drawings:
The second issue pertained to whether the income from the sale of design and drawings should be treated as fees for technical services (FTS) or as business income. The tribunal referred to the earlier decision in the assessee's own case for AY 2015-16, where it was determined that the sale of designs and drawings constitutes business income and not FTS or royalty. Since the work relating to designs and drawings was undertaken outside India, and the sale and receipt of consideration also occurred outside India, the income was not taxable in India due to the absence of a Permanent Establishment (PE) in India.

3. Initiation of Penalty under Section 270A of the Act:
The tribunal did not provide a detailed discussion on the initiation of penalty under Section 270A, indicating that the issue was consequential in nature and did not require specific adjudication.

4. Initiation of Penalty under Sections 271A and 271B of the Act:
Similar to the penalty under Section 270A, the tribunal noted that the initiation of penalties under Sections 271A and 271B was consequential and did not necessitate a separate decision.

5. Computation of Tax Liability at the Correct Rate under the India-Finland DTAA and Granting Appropriate TDS Credit:
For AY 2019-20, the appellant contended that the AO incorrectly computed the tax liability at 40% plus surcharge and cess instead of the 10% rate specified under the India-Finland DTAA. The tribunal directed the AO to recompute the tax liability at the treaty rate of 10% on a gross basis. Additionally, the tribunal addressed the issue of short credit of TDS, remanding the matter back to the AO for verification and appropriate credit of TDS as claimed by the appellant.

Conclusion:
The tribunal's decision was a mix of affirming and overturning the AO's findings. The income from testing services was held taxable in India due to its usage in India, while the income from the sale of designs and drawings was deemed business income and not taxable in India in the absence of a PE. The tribunal also directed the AO to apply the correct tax rate under the DTAA and verify the TDS claims. The penalty issues were deemed consequential and did not require specific adjudication.