High Court overturns Tribunal's order for lack of natural justice, remands case for fresh adjudication. Payments not 'royalty'

The High Court found that the Tribunal's order violated principles of natural justice by not providing the appellant with the material on which the order was based. The Court remanded the case for fresh adjudication. Regarding the classification of payments as 'royalty,' the Tribunal's orders under Sections 201(1) and 201(1A) were held to be barred by limitation and were quashed. The AO's orders were deemed void ab initio, and the appeals were allowed, leading to the quashing of the orders under Sections 201(1) and 201(1A).

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Issues Involved:
1. Violation of principles of natural justice.
2. Classification of payments as 'royalty' under the Income-tax Act.
3. Limitation period for passing orders under Section 201(1) and 201(1A) of the Income-tax Act.

Detailed Analysis:

1. Violation of Principles of Natural Justice:
The Hon'ble High Court of Karnataka observed that the Tribunal's order was violative of the principles of natural justice and fair play. The material on which the order was based was not furnished to the appellant, denying them an opportunity to rebut fresh evidence. The High Court emphasized that the details of the material were not reflected in the Tribunal's order, necessitating a remand for fresh adjudication in accordance with the law.

2. Classification of Payments as 'Royalty':
The assessee, a wholly-owned subsidiary of Google International LLC, US, engaged in providing IT and ITeS to its group companies, entered into a Google Adword Program Distribution Agreement with Google Ireland Ltd. (GIL). The assessee argued that it was merely a reseller of advertising space and had no access or control over the infrastructure or process involved in rendering the Adword Program. Consequently, the sums paid were not chargeable to tax under the Double Taxation Avoidance Agreement (DTAA). However, the Assessing Officer (AO) issued a notice under Section 201(1) of the Income-tax Act, treating the distribution fees payable to GIL as 'royalty' and proceeded with withholding tax deduction under Section 195.

3. Limitation Period for Passing Orders under Section 201(1) and 201(1A):
The preliminary issue of whether the orders under Sections 201(1) and 201(1A) were barred by limitation was raised. The notice issued for AYs 2007-08 and 2008-09 was beyond the time limit specified in sub-section (3) of Section 201, i.e., beyond four years from the end of the financial year in which payment was made or credit was given. The Tribunal, referencing the case of Mphasis Ltd. v. DDIT (IT), held that orders passed beyond the four-year period were barred by limitation and thus quashed.

Tribunal's Findings:
The Tribunal found that the show cause notice to initiate proceedings under Section 201(1) was issued on 20.11.2012, beyond the four-year limitation period. Citing the decision in Mphasis Ltd., the Tribunal held that the orders under Sections 201(1) and 201(1A) were barred by limitation and quashed them. The Tribunal also noted that since the order under Section 201(1) was void ab initio, the levy of interest under Section 201(1A) became infructuous.

Conclusion:
The appeals were allowed, and the orders of the AO under Sections 201(1) and 201(1A) were quashed on the grounds of being barred by limitation. The other grounds on merits were rendered infructuous and did not require separate adjudication.

Pronouncement:
The judgment was pronounced in the open court on the 10th day of August, 2022.

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