2025 (4) TMI 601 - AT - Income Tax

Rejection of claim made by the Assessee for the first time before the DRP - HELD THAT - Assessee can raise additional claims before the appellate authorities including the DRP even though the Assessee had not made any claim in the return of income or before the Assessing Officer. Therefore the claim made by the Assessee for the first time before the DRP cannot be rejected on the ground that such claim was not made before the AO. Dividend distribution tax - As perused the order of the Special Bench of Mumbai Tribunal in Total Oil India (P) Ltd. 2023 (4) TMI 988 - ITAT MUMBAI (SB) wherein it has been held that the DTAA does not get triggered when a domestic company pays Dividend Distribution Tax (DDT) u/s 115-O of the Act. Levy of interest u/s 234A 234B of the Act which are consequential in nature.

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

1. Whether the final assessment order was valid given the alleged non-compliance with the directions of the Dispute Resolution Panel (DRP) and lack of consideration for the submissions by the Assessee.

2. The existence and implications of a Service Permanent Establishment (PE) in India under Article 5 of the India-UK Double Taxation Avoidance Agreement (DTAA), including the related allocation of profits.

3. The connection between royalty income and the alleged Service PE, specifically whether the royalty is effectively connected to the PE and the appropriate tax treatment under the DTAA.

4. The applicability of the Dividend Distribution Tax (DDT) rate under the DTAA and whether the DRP erred in not allowing a claim related to DDT.

5. The correctness of levying interest under sections 234A and 234B of the Income Tax Act, 1961.

6. The initiation of penalty proceedings under section 270A of the Act.

ISSUE-WISE DETAILED ANALYSIS

1. Validity of the Final Assessment Order

The Assessee contended that the final assessment order was invalid as it did not adhere to the DRP's directions and failed to consider the Assessee's submissions. The Tribunal did not provide detailed reasoning on this issue as the primary focus was on the withdrawal of specific grounds related to the Service PE and royalty issues.

2. Service Permanent Establishment (PE) in India

The Assessee initially challenged the existence of a Service PE in India under Article 5 of the India-UK DTAA. However, the Assessee later requested the withdrawal of these grounds (grounds 2 to 7) as the issues were settled under the Mutual Agreement Procedure (MAP) between the competent authorities of India and the UK. The Tribunal dismissed these grounds as withdrawn.

3. Connection of Royalty Income to Service PE

The Assessee argued that the royalty income was not effectively connected to the alleged Service PE in India. The Tribunal did not delve into this issue in detail due to the withdrawal of related grounds following the MAP settlement.

4. Dividend Distribution Tax (DDT) Rate under DTAA

The Assessee claimed that the DDT rate should be limited to 10% under Article 11 of the DTAA, rather than the 20.35% charged under section 115O of the Income Tax Act. The Tribunal referenced the Special Bench decision in DCIT Vs. Total Oil India (P) Ltd., which held that the DTAA does not apply to DDT paid by a domestic company. Therefore, the Tribunal dismissed the Assessee's ground regarding the DDT rate.

5. Levy of Interest under Sections 234A and 234B

The Assessee challenged the levy of interest under sections 234A and 234B. The Tribunal deemed these issues as consequential and restored them to the Assessing Officer for appropriate determination.

6. Initiation of Penalty Proceedings under Section 270A

The Assessee contested the initiation of penalty proceedings under section 270A, arguing it was premature. The Tribunal agreed that the issue was not ripe for adjudication at this stage and did not address it further.

SIGNIFICANT HOLDINGS

The Tribunal's significant holdings include:

- The withdrawal of grounds related to the Service PE and royalty issues due to settlement under the MAP, resulting in the dismissal of these grounds.

- The affirmation of the Special Bench decision that the DTAA does not apply to DDT, leading to the dismissal of the Assessee's ground regarding the DDT rate.

- The restoration of issues related to the levy of interest under sections 234A and 234B to the Assessing Officer for further consideration.

- The acknowledgment that the initiation of penalty proceedings under section 270A was premature and did not require adjudication at this time.

In conclusion, the Tribunal partly allowed the Assessee's appeal, primarily due to the withdrawal of several grounds following the MAP settlement and the application of precedents regarding the DDT issue.

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