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Facts
The revenue filed appeals against the CIT(A)'s order deleting the addition of royalty income from software sales made to an Indian company. The AO had treated the payment as royalty income taxable in India for AYs 2015-16 to 2017-18. The assessee is a Swedish company.
Held
The Tribunal held that the revenue's appeals did not fall within the exceptions provided in the circular for appeals below the monetary limit. The appeals arose from assessment orders under Section 143(3) and not from proceedings related to TDS/TCS as per the circular's exceptions. Therefore, the appeals were dismissed on the ground of tax effect and lack of new material on merits.
Key Issues
Whether the appeals filed by the revenue are admissible considering the monetary limits and exceptions outlined in the CBDT circulars, and if the CIT(A)'s deletion of royalty income addition is justified.
Sections Cited
143(3), 40(a)(i), 40(a)(ia), 201, 201(1A), 271C, 195, 144C(3), 147, 148
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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA, JM &
Appellant /Assessee by : None Revenue / Respondent by : Shri Krishna Kumar, Sr. DR Date of Hearing : 18.03.2025 Date of Pronouncement : 21.03.2025 O R D E R Per Bench: These appeals by the revenue are against the common order of the Commissioner of Income Tax (Appeals) – 57, Mumbai (in Short "CIT(A)") dated 31.07.2024 for assessment year (AY) 2015-16 to 2017-18.
The assessee is a company established under the laws of Sweden, operating within the health care market, focusing on the production of hardware and disposable products in the critical area. During the year consideration, the assessee has sold software and up gradation software to Maquet Medical India Private Limited (‘Maquet India’). The assessee received payment from Maquet India towards the same. The AO treated the payment received by the assessee as Royalty and accordingly added the same as income of the assessee taxable in India for all the AYs under consideration i.e. AY 2015-16 to AY 2017-18 as tabulated below - AY Amounted added as Royalty taxable in India – Rs. 2015-16 1,92,06,247 2016-17 4,74,98,440 2017-18 3,14,24,860
On further appeal the CIT(A) deleted the addition by placing reliance on the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. v.CIT [2021] 125 taxmann.com 42 (SC). The revenue is in appeal against the order of CIT(A).
None appeared for the assessee and we heard the DR. Considering the fact the tax on the above addition is below the monetary limit for filing the appeal by the revenue as per Circular No.9/2024 dated 17.09.2024, a query was raised by the bench. The ld DR in this regard submitted that impugned issue would fall within the exception under para 3.1 (l) (ii) of the circular No.5/2024 dated 15.03.2024 and hence the appeal has been preferred by the revenue. The extract of the relevant clauses in the circular is as extracted below – “3.1 Monetary limits given in paragraph 4 with regard to filing appeal/SL.P shall be applicable to all cases including those relating to TDS/TCS under the Act with the following exceptions where the decision to appeal/file SLP
shall be taken on merits, without regard to the tax effect and the monetary limits:-
1.
In respect of litigation arising out of disputes related to TDS/TCS matters in both domestic and International taxation charges:- i. Where dispute relates to the determination of the nature of transaction such that the liability to deduct TDS/TCS thereon or otherwise is under question, or ii. Appeals of International taxation charges where the dispute relates to the applicability of the provisions of a Double Taxation Avoidance Agreement or otherwise m. Any other case or class of cases where in the opinion of the Board it is necessary to contest in the Interest of justice or revenue and specified so by a circular issued by Board in this regard.”
5. From the perusal of above it is clear that for the purpose of applicability of the above exception, the appeal should first arise out of the dispute relating to TDS/TCS matters before going into the applicability of clause (ii). In this regard it is relevant to take note of the following observations of the Hon'ble Bombay High Court in the case of CIT vs V M Salgoaonkar and Brothers (P) Ltd. [(2024) 169 taxmann.com 597 (Bombay)]
“31. In any event, in our opinion the Revenue's case does not fall in the exception carved out in para 3.1(l) of the Circular dated 15.03.2024 for the following reasons. According to us, Clause 3.1 (1) excludes appeals arising out of proceedings taken against a deductor for failure to deduct tax at source and recovery of the tax from the payer that was omitted to be deducted. If there is an obligation to deduct tax at source on a payer in terms of the provisions contained in Chapter XVII-B of the Act and the payer fails to discharge such obligation, it is liable for several consequences. The first and the foremost being that it could be treated as a Respondent in default for failing to deduct taxes and, accordingly, the tax which ought to have been deducted could be recovered from it by passing an order under section 201. Consequently, there would be a levy of interest in terms of section 201(1A) as well as a levy of penalty under section 271C, if such failure was without reasonable cause. The amount of tax that could have been recovered from the payer would be equivalent to the amount that he would have had to deduct. Another collateral consequence that would flow is that the payer would suffer a disallowance of the expenditure that he had claimed as a deduction having regard to the provisions of section 40(a)(i) or section 40(a)(ia). In such circumstances for the assessment years that one is concerned with in the present appeals, the consequence would be that the expense that was claimed as a deduction on which tax was not deducted would be disallowed.
The present appeals raise one of the question as to whether the respondent is entitled to a deduction of the expenses incurred by it by way of making a payment to Marriott International Inc. because it had not deducted at source under section 195 on such payment. In our opinion, this issue would not fall within the scope and ambit of clause (1). This is brought out by the manner in which the tax effect has to be determined. The appeals arising from regular assessments where an expense is disallowed or a claim for an allowance is disallowed or an amount is sought to be assessed as income is dealt with in para 5.1. In these circumstances, the tax effect is calculated by taking the difference of tax on the total income assessed and the tax would have been chargeable had such total income been reduced by the amount of income in respect of the issues against which the appeal is intended to be filed. The following example relied upon by the learned Senior Advocate for the assessee appealed to us. Learned Senior Advocate submitted that for example, say in the case of an assessee, it incurred an expenditure of Rs.20/- which it claims as a deduction and returns a total income of Rs.100/-. If the expenditure so claimed is disallowed, by invoking section 40(a) (i) for a failure to deduct tax at source, then, the assessee would be assessed on an income of Rs.120/-. If the prevalent rate of tax is 30%, the tax effect would be calculated by applying the rate of 30% on Rs.120/- i.e. Rs.36 and subtracting from it the tax on the total income returned of Rs.100/- i.e. Rs.30/- and, accordingly, the amount of Rs.6/- would be determined to be the tax effect. On the other hand, in the case of a litigation pertaining to TDS, suppose on the aforesaid payment of Rs.20/- tax at the rate of 15% would have to be deducted, then, in terms of clause 5.4 of the 15.03.2024 circular the tax effect would be calculated at Rs.3/-. We find force in the submissions of the learned Senior Advocate that this is indicative of the fact that what is covered by para 3.1.(l) are cases springing out of a litigation from orders passed under section 201, 201(1A) etc. In the present appeals, the original order which was passed arises from an assessment framed under section 143(3) and, therefore, the exclusion contemplated in para 3.1.1 would not apply and, accordingly, the appeals must be dismissed as withdrawn.” (emphasis supplied)
The ratio laid down in the above case by the Hon'ble High Court is that for an appeal to fall within the exception under clause 3.1(l), then the same should emanate from the orders passed under section 201, 201(1A) etc. In assessee's case the appeal is arising out of the order passed under section 143(3) r.w.s 144C(3) and therefore in our considered view the ratio laid down would be applicable to the present case. Accordingly the revenue's appeals for AY 2015-16 to 2017-18 are to be dismissed on the ground that the tax effect on these appeals is below the monetary as per circular 9/2024 dated 17.09.2024.
Even on merits, the revenue during the course of hearing did not bring any new material on record to controvert the findings of CIT(A) and to contend that the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd (supra). is not applicable to the facts in assessee's case. Therefore on that count also we see no reason to interfere with the decision of the CIT(A).