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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI B. R. BASKARAN, AM & MS. KAVITHA RAJAGOPAL, JM
This appeal has been filed by the assessee, challenging the order of the Director of Income Tax (International Taxation), Mumbai (DIT(IT) for short) passed u/s. 263 of the Income Tax Act, 1961 (‘the Act'), pertaining to the Assessment Year (‘A.Y.’ for short)
1999-2000.
The assessee has challenged the jurisdiction of DIT(IT) in invoking section 263 of the Act, which was alleged to by merely on the basis of the view taken by the Assessing Officer (A.O. for short), while passing the assessment order for A.Y. 2000-01 and thereby directing the A.O. to tax receipt from distribution fees @ of 30% of the gross the ld. CIT(A) dated 23.02.2004.
The brief facts are that the assessee is a foreign company incorporated under the laws of England and is a tax resident of United Kingdom and the assessee is in the World Wide business of providing global news and financial information products. The assessee filed its return of income dated 10.02.2000, declaring total income at Rs.89,59,130/-. The assessee’s case was selected for scrutiny and the assessment order dated 22.03.2002 was passed by the Assessing Officer (A.O. for short) u/s. 143(3) of the Act, determining the total income at Rs.42,74,49,375/- by making the various additions/disallowances. The ld. DIT invoked the provision of section 263 and set aside the assessment order dated 22.03.2002 on the ground that the assessment order passed by the A.O. is erroneous insofar as it is prejudicial to the interest of the Revenue. The ld. DIT has held the same for the reason that the A.O. has erroneously applied the ‘royalty income’ under Article 12(3) of the Tax Treaty between India and UK @ 15% on the gross receipts/receivable by the assessee from Reuters India Ltd. (herein referred as ‘RIL’) instead of 30% of the gross amount.
Aggrieved by the said order, the assessee is in appeal before us, challenging the order of the ld. DIT.
It is observed that the assessee company has received fees/revenues from ‘RIL’ during the impugned year, which are in the nature of license fees, distribution fees and product distribution fees as per the license agreement, distribution agreement and Product accessing the processed data situated at London, New York and Singapore. The A.O. has held that the receipts from distribution fees would also be in the nature of royalty as per the clauses of the agreement and without prejudice to the said fact, the A.O. held that the assessee company has a Permanent Establishment (PE for short) in India as per Article 5 of the Double Taxation Avoidance Agreement (DTAA for short) between India and UK.
The A.O. determined the assessee’s income by taxing the royalty at 15% as per DTAA between India and UK. The DIT had invoked the provision of section 263 for the reason that the A.O. had erroneously charged 15% instead of 30% during the 263 proceeding.
The ld. DIT had relied upon the assessment order for A.Y. 2000-01, wherein the A.O. held that the receipts of the assessee are royalty income and that the assessee had a PE in India which is a service PE and dependent agency PE as per Article 5 of DTAA. The A.O. also observed that as the assessee had PE in India, the assessee’s income is liable to be computed as per the provision of section 44AD of the Act which facilitates the computation of income and the limitation for claim of expenditure. The A.O. had taxed the assessee’s income @ 30% on gross receipts by placing reliance on the decision of Hon’ble AAR in the case of Ericsson Telephone Corporation vs. CIT [1997[ 224 ITR 203 (AAR) while passing the assessment order for A.Y. 2000-01. Relying on the assessment order for A.Y. 2000-01 the DIT held that as the facts in A.Ys. 1999-2000 and 2000-01 are identical, the assessee’s income for the impugned year should also be taxed @ 30% on the gross instead of 15%. The assessee had submitted that the impugned income was in the nature of business income and not royalty and the same is not taxable in India for the reason that the assessee does not have a PE in India. The assessee further gross amount and had also stated that the decision relied upon the decision of the Hon’ble AAR is applicable only to a particular case and not in the assessee’s case. The ld. DIT had controverted the assessee’s submission by stating that the assessment order dated 22.03.2002 has already held the receipt as ‘royalty’, which is taxable in the hands of the assessee and that the A.O. has also held that the assessee has a PE in India and the impugned receipts pertains to the PE. The moot question before the ld. DIT was the rate of tax that was applicable for the present case and whether while computing the profits of a PE, expenses should be allowed in accordance with the DTAA as per the decision of the Hon’ble AAR in the case of Ericsson Telephone Corporation vs. CIT (supra). The ld. DIT relied on the said decision which has stated that the fees for technical services should be treated as ‘business profit’ and has to be computed as per the provisions of Indian I.T.
Act, 1961 and has also stated that for the computation of the income by way of royalties, special provision of section 44D is applicable. The ld. DIT stated that section 115A provides for Special Relief in respect of various companies where the fees for technical services are received vide an agreement entered into after 31.03.1976, the amount of tax chargeable in respect of fees for technical services will be only 30% and not 55% if the conditions laid down are fulfilled. The ld. DIT relied on the said provision and contended that even otherwise the assessee was eligible to 30% on the gross amount received. The ld. DIT also held that the decision in the case of Ericsson Telephone Corporation vs. CIT (supra) by Hon’ble AAR was binding on the assessee on identical facts. The ld. DIT invoked the jurisdiction u/s. 263 and set aside the assessment order and directed the A.O. to tax the assessee’s income @ 30% of the gross amount.
The ld. AR for the assessee contended that the impugned income is not in the nature of ‘Royalty’ but only business income of the assessee. The ld. AR brought our attention to the order of Ld. CIT(A) dated 23.02.2004 for the impugned year in which it was held that ‘distribution fee’ payment cannot be taxed as ‘Royalty’ and are only ‘business profit’. The Ld. AR also stated that the same view was taken even in A.Y. 1998-99 by Ld. CIT(A). The Ld. AR further contended that the Ld. CIT(A) has held 30% to be on the higher side and had directed the AO to calculate the impugned income @ 18%. The Ld. AR stated that the order of CIT(A) was passed much before the Sec. 263 order of Ld. DIT. The Ld. AR also brought our attention to the fact that show-cause notice for sec. 263 proceeding was issued on 15.03.2004 and the order u/s. 263 was passed on 29.03.2004 without giving ample time for the assessee to present its case. The Ld. AR relied on the decision of the Co-ordinate Bench in Dy.CIT Vs. Boston Consultant Group Pvt. Ltd. (2006) 280 ITR (AT), (Mum.) which had dealt with similar issue. The ld. DR on the other hand controverted the contention of the Ld. AR and stated that the assessee was taxed @ 30% in its own case for AY 2000-01. The Ld. DR further stated that the Ld. CIT(A) for the impugned year has held that the assessee has a PE in India and hence special provision of sec. 44AD and sec. 115A was applicable to assessee’s case. The Ld. DR relied on the decision of Hon’ble AAR in Ericssion Telephone Corporation (Supra) in which 30% on gross amount was taxed. The Ld. DR relied on the decision of DIT.
We have heard the rival submission and perused the material on record, the only question that arose was whether the DIT was justified in invoking sec. 263 for the reason decision of AO in AY 2000-01 who infact has relied on the decision of Hon’ble AAR in Ericssion Telephone Corporation (Supra). It is trite to extract the provision of sec. 263 for ease of reference here-in-under:
"263. (1) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner] or] Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the "[Assessing] Officer [or the Transfer Pricing Officer, as the case may be,] is erroneous" in so far as it is "prejudicial to the interests of the revenues, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, "pass such order thereon as the circumstances of the case justify, including- (i) an order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment; or (ii) an order modifying the order under section 92CA; or (iii) an order cancelling the order under section 92CA and directing a fresh order under the said section].
[Explanation 2 – For the purpose of this section, it is hereby declared that an order passed by the Assessing Officer [or the Transfer Pricing Officer, as the case may be,] shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal [Chief Commissioner or Chief Commissioner or Principal] Commissioner or Commissioner, (a) the order is passed without making inquiries or verification which should have been made: (b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119: or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.]
It is pertinent to point out the Explanation-2(d) to the said provision clarifies that any order which is passed without considering the decision of the Jurisdictional High Court or Hon’ble Supreme Court would be erroneous in so far as it is prejudiced to the interest of the Revenue. The present case in hand relates to the decision of Hon’ble AAR here-in-under for ready reference:
“245S. (1) The advance ruling pronounced by the Authority under section 245R shall be binding only- (a) on the applicant who had sought it; (b) in respect of the transaction in relation to which the ruling had been sought; and (c) on the [Principal Commissioner or] Commissioner, and the income-tax authorities subordinate to him, in respect of the applicant and the said transaction. (2) The advance ruling referred to in sub-section (1) shall be binding as aforesaid unless there is a change in law or facts on the basis of which the advance ruling has been pronounced. (3) Nothing contained in this section shall apply to any advance ruling pronounced under section 245R on or after such date as the Central Government may, by notification in the Official Gazette, appoint.”
This provision specifies that the ruling of AAR is binding in nature only to the applicant and his jurisdictional Principal Commissioner and their sub-ordinates. The ld. DIT has invoked jurisdiction u/s. 263 only on the basis of the assessment order passed in assessee’s case for AY 2000-01 which has relied on the decision of Hon’ble AAR in Ericssion Telephone Corporation (Supra) which justified taxing @ 30%.
From the above observation it is evident that the Ld. DIT’s order passed u/s 263 on the basis that it is erroneous since the AO has not taxed @ 30% is not justified in our view. It is quite clear that the AO in his assessment order had made sufficient inquiry into the impugned transaction and has held the same to be ‘Royalty’ in nature and has taxed the same @ 15%, substantiates the fact that the AO has taken a plausible view and has arrived at the said decision. There is no question views possible and that the AO has considered one view does not make the assessment order erroneous. Even otherwise the assessee’s case has been decided by the Ld. CIT(A) who has held 18% to be the taxable rate for the impugned year.
From the above observation, we are of the considered view that the assessment order is not erroneous in so far as it is prejudicial to the interest of the Revenue and thereby hold that there is no justification on the part of the Ld. DIT to invoke the provision of section 263 of the I.T. Act for the present case.
In the result, appeal filed by assessee is allowed.
Order pronounced in the open court on 13.01.2023.
Sd/- Sd/- (B.R. Baskaran) (Kavitha Rajagopal) Accountant Member Judicial Member Mumbai; Dated : 13.01.2023 Roshani, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT - concerned 5. DR, ITAT, Mumbai 6. Guard File BY ORDER,