2013 (8) TMI 1013 - AT - Income Tax

Tribunal upholds Waterfront Royalty as rent subject to TDS. Interest levied. AO to verify tax payment.

The Tribunal upheld the treatment of Waterfront Royalty as rent subject to TDS under Section 194-I and confirmed the levy of interest at 1.5% per month ... TDS u/s 194I or 194J - royalty payment - Held that:- We have perused the definition of royalty as given in Explanation 2 to clause (vi) of section 9(1) and find that the scope of royalty is limited to consideration paid for transfer of certain rights in respect of, e.g., patent, invention, model, design, secret formula or process or trade mark or similar property, etc. The impugned sum paid by the assessee does not fall under any of the clauses of Explanation 2 to clause (vi) of sub-section (1) of section 9. As stated earlier, the ld. Authorised Representative for the assessee also could not establish as to how the impugned payments made by the assessee fell under Explanation 2 to clause (vi) of sub-section (1) of section 194J. In this view of the matter, it is held that there was no basis with the assessee for deducting tax at source u/s 194J. The ld. CIT(A) has rightly held that the assessee was required to deduct tax at source u/s 194I. Non/short-deduction of tax at source u/s 194I - Held that:- The assessee shall not be treated as assessee in default in case the AO is satisfied, after due verification, that the conditions stipulated by the first proviso to sub-section (1) of section 201 have been fulfilled by the assessee but in that situation also the assessee shall be liable to pay interest u/s 201(1A) at the prescribed rate from the date on which such tax was deductible u/s 194I to the date of furnishing of return of income by the payee. All grounds of appeal taken by the assessee in both appeals, except Ground No.1.1 taken by the assessee in both the appeals, and the issues raised in the appeals filed by the Revenue thus stand restored to the file of the AO for passing a fresh order as per directions earlier given by us. Issues Involved:1. Treatment of Waterfront Royalty as Rent and applicability of TDS under Section 194-I.2. Levy of interest under Section 201(1A) at the rate of 1.5% for the period from 1 July 2010 to 25 March 2011.3. Levy of interest under Section 201(1A) from the 1st day of the Assessment Year till the date of passing of the order under Section 201(1).4. Verification of whether the payee, Gujarat Maritime Board (GMB), paid all taxes and if the assessee can be treated as 'assessee in default' under Section 201.Detailed Analysis:1. Treatment of Waterfront Royalty as Rent and applicability of TDS under Section 194-I:The primary issue was whether the payment of Rs. 19,382,533 to Gujarat Maritime Board (GMB) by the assessee should be treated as rent and thus subject to Tax Deduction at Source (TDS) under Section 194-I of the Income-tax Act, 1961. The Assessing Officer (AO) and the CIT(A) concluded that the payments made by the assessee to GMB were in the nature of rent as defined in Section 194-I. The payments were made under a Concession Agreement for the use of waterfront, which was considered akin to rent for the use of land or building. The Tribunal upheld the view that the payments were indeed rent, as the definition of rent under Section 194-I is broad and includes payments for the use of land or buildings under any agreement. Consequently, the assessee was required to deduct tax at source under Section 194-I and not under Section 194J.2. Levy of interest under Section 201(1A) at the rate of 1.5% for the period from 1 July 2010 to 25 March 2011:The assessee contested the levy of interest at 1.5% per month under Section 201(1A) for the period from 1 July 2010 to 25 March 2011, arguing that the applicable interest rate should be 1% per month. The CIT(A) found that the AO had correctly applied the interest rate as per the amended provisions of the Finance Act, 2010, which mandated a 1.5% interest rate from 1 July 2010. The Tribunal upheld this finding, dismissing the assessee's appeal on this ground.3. Levy of interest under Section 201(1A) from the 1st day of the Assessment Year till the date of passing of the order under Section 201(1):The assessee argued against the levy of interest from the 1st day of the Assessment Year till the date of passing of the order under Section 201(1), contending that interest should be charged only until the date of filing the return of income by GMB. The Tribunal noted that the AO had levied interest correctly as per the provisions of the law. The Tribunal also referenced the Supreme Court's ruling in CIT vs. Gujarat Maritime Board, which held that GMB's income was exempt under Section 11, thus there was no loss to revenue. However, the Tribunal directed the AO to verify the assessee's claim regarding the payment of taxes by GMB and take appropriate action.4. Verification of whether the payee, Gujarat Maritime Board (GMB), paid all taxes and if the assessee can be treated as 'assessee in default' under Section 201:The Tribunal addressed whether the assessee could be treated as 'assessee in default' under Section 201 if GMB had already paid the taxes. The Tribunal referenced Circular No. 4/2002, which exempts certain entities from TDS requirements if their income is unconditionally exempt under Section 10 and they are not required to file returns under Section 139. The Tribunal noted that GMB's income was not unconditionally exempt under Section 10, and the Board was required to file returns. The Tribunal directed the AO to verify if the conditions stipulated under the first proviso to Section 201(1) were met, which would exempt the assessee from being treated as in default. The Tribunal emphasized that the assessee should not be treated as in default if the AO, after verification, was satisfied that GMB had filed its returns and paid the taxes due.Conclusion:The Tribunal upheld the treatment of Waterfront Royalty as rent subject to TDS under Section 194-I and confirmed the levy of interest at 1.5% per month from 1 July 2010 to 25 March 2011. The Tribunal directed the AO to verify the payment of taxes by GMB and determine if the assessee could be exempted from being treated as in default under Section 201. The appeals filed by the assessee were partly allowed, and the appeals by the Revenue were allowed for statistical purposes.