2024 (7) TMI 654 - AT - Income Tax

Reopening of assessment - Royalty receipts - taxation in the contracting state - assessee merely acted as conduit for royalty payments - The assessee did not make any value addition or performed any services to get a marked-up price, therefore, the treaty benefit would not be available to the assessee Whether appellant is not the 'beneficial owner' of the royalty received as per Article 12 of the Indo-Cyprus DTAA? - assessee computed tax of 15% on its royalty income based on DTAA instead of 25% as prescribed under Income Tax Act - AO noted that the assessee simply acted as an intermediary instead of RPPL who was ultimate beneficiary of such licensing agreement. The equity share capital and share premium invested by RPPL was nothing but royalty payment HELD THAT - The case has been reopened in view of the findings rendered in earlier year. The same, in our considered view, was good reason enough to reopen the case of the assessee. The reasons recorded by Ld. AO to reopen the case have been placed - During assessment proceedings, a view was formed that the assessee was only created to be a conduit entity for royalty payments and to inflate royalty expenses of RPPL. Therefore, it was not eligible for the benefit of DTAA. The assessee, in return of income, offered the income @15% instead of 25% in terms of Sec.115A of the act. On the basis of these facts, Ld. AO formed a belief that the assessee was granted excess relief in the form of lower rate of tax as per Explanation 2(b) of Sec.147 of the Act. The reopening has been done after taking due approval of appropriate authority. In our considered opinion, aforesaid reasons constitute sufficient material to reopen the case of the assessee. The corresponding grounds stand dismissed. What will be the rate on which income returned by the assessee is to be taxed ? - While the assessee has claimed taxation @ 15% under India Cyprus DTAA, Ld. AO has declined the said treaty protection on the ground that the assessee was not beneficial owner of the royalty income and accordingly, brought the income to tax @ 25% instead. There is, quite clearly, no variation in the quantum of income. AO could have issued the draft assessment order - As w.e.f. 01-04-2020, Ld. AO is quite empowered to issue draft assessment order even in cases where Ld. AO proposes to make any variation which is prejudicial to the interest of the assessee. The application of higher rate of tax is certainly prejudicial to the assessee and the same, in fact, is the grievance of the assessee. We also find that case was reopened and notice has been issued on 20- 03-2020. AO has passed draft assessment order on 29-09-2021 which is after the aforesaid amendment has taken place. Therefore, no jurisdictional error could be found as urged by Ld. AR. The corresponding grounds stand dismissed. Case of the assessee that it was not acting as conduit between German entity and RPPL - We find that all the substantial submissions and arguments, on merits, have been made before us for the first time. For the same, the assessee has filed additional grounds of appeal also. These grounds were not taken up before lower authorities and there is no adjudication on these points - restore the matter back to the file of Ld. AO for re-adjudication on merits with a direction to the assessee to substantiate its case. The Ld. AO may re-examine the grounds on merits viz. whether the assessee could be considered as beneficial owner of the royalty in its own right as well as alternative argument that the rate as specified in India-Germany DTAA was lower than the offered rate. All the issues, on merits, are kept open.

Issues Involved:
1. Validity of reopening the assessment under Section 147.
2. Determination of the 'beneficial owner' of the royalty income under Article 12 of the Indo-Cyprus DTAA.
3. Responsibility for tax deduction at source by the resident holding company.
4. Applicability of the tax rate under Article 12 of the India-Germany DTAA.
5. Taxation of royalty income if the appellant is not the 'beneficial owner.'
6. Levy of interest under Section 234B.
7. Validity of invoking provisions of Section 144C without variation in returned income.
8. Application of amended provisions of Section 144C for the relevant assessment years.

Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147:
The assessee argued that the reopening of the assessment under Section 147 was bad in law. However, the Tribunal found that the reopening was based on findings from the previous assessment year, which constituted sufficient material. The reasons for reopening were recorded, and the appropriate authority's approval was obtained. Thus, the Tribunal dismissed the corresponding grounds, affirming the validity of the reopening.

2. Determination of the 'Beneficial Owner' of the Royalty Income:
The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) concluded that the assessee was not the beneficial owner of the royalty income, acting merely as an intermediary for RPPL. The AO noted that almost all income received by the assessee was transferred to Vensys Energy AG, Germany, and the assessee bore no business risks or performed any functions. The structure was deemed to have no business purpose, and the place of effective management was found to be in India. Consequently, the assessee was taxed at 25% under the Income Tax Act, denying the DTAA benefits.

3. Responsibility for Tax Deduction at Source:
The assessee contended that if it were considered the beneficial owner, the resident holding company should be responsible for tax deduction at source. However, this argument was not adjudicated in detail as the primary contention was the determination of the beneficial owner.

4. Applicability of the Tax Rate under Article 12 of the India-Germany DTAA:
The assessee alternatively argued that if considered a conduit, the royalty income should be taxed at 10% under the India-Germany DTAA. This argument was noted but not adjudicated by the lower authorities, leading the Tribunal to remand the issue back to the AO for re-examination.

5. Taxation of Royalty Income if the Appellant is not the 'Beneficial Owner':
The assessee argued that if it were not the beneficial owner, the royalty should not be taxed in its hands. This issue was part of the broader determination of the beneficial ownership and was remanded to the AO for re-adjudication.

6. Levy of Interest under Section 234B:
The Commissioner of Income-Tax (Appeals) confirmed the levy of interest under Section 234B amounting to Rs. 4,42,46,000/-. This issue was not separately adjudicated by the Tribunal.

7. Validity of Invoking Provisions of Section 144C without Variation in Returned Income:
The assessee argued that the final assessment order was time-barred as there was no variation in the returned income. The Tribunal noted that the dispute was about the applicable tax rate, not the quantum of income. The amendment in the Finance Bill, 2020, allowed the issuance of draft assessment orders even without variation in income, effective from 01-04-2020. Thus, the Tribunal found no jurisdictional error, dismissing the corresponding grounds.

8. Application of Amended Provisions of Section 144C for Relevant Assessment Years:
The Tribunal observed that the AO issued the draft assessment order after the amendment took effect, empowering the AO to issue such orders. Therefore, the Tribunal found no error in applying the amended provisions.

Conclusion:
The Tribunal remanded the matter back to the AO for re-adjudication on merits, directing the assessee to substantiate its case regarding beneficial ownership and the applicable tax rate under the India-Germany DTAA. The appeals were allowed for statistical purposes.

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