2018 (6) TMI 965 - AT - Income Tax

Tribunal rules no tax on FTS income under India-UK treaty, penalty and interest dismissed

M/s. Inspectorate International Ltd. Versus ACIT, Circle-2 (1) (1), Delhi

M/s. Inspectorate International Ltd. Versus ACIT, Circle-2 (1) (1), Delhi - [2018] 65 ITR (Trib) 333 (ITAT [Del]) Issues Involved:1. Taxability of Rs. 18,772,897 received by the assessee from Indian customers as Fees for Technical Services (FTS) under the India-UK Double Taxation Avoidance Agreement (DTAA).2. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act, 1961.3. Levy of interest under Sections 234B and 234C of the Income Tax Act, 1961.4. Confirmation of penalty imposed under Section 271(1)(c) for the Assessment Year 2010-11.Issue-wise Detailed Analysis:1. Taxability of Rs. 18,772,897 as Fees for Technical Services (FTS):The core issue was whether the amount of Rs. 18,772,897 received by the assessee from its Indian customers is chargeable to tax as FTS under the India-UK DTAA. The assessee, a UK resident company, provided inspection and testing services to Indian customers, primarily conducted outside India. The Assessing Officer (AO) contended that these services qualify as FTS under Article 13 of the DTAA, asserting that the services 'make available' technical knowledge, enabling the Indian customers to utilize this knowledge independently in the future.The Dispute Resolution Panel (DRP) upheld the AO's view, emphasizing that the services rendered equipped the recipients to carry on the business model independently, thus falling within the scope of 'make available' technical knowledge under the DTAA.The Tribunal, however, disagreed, noting that the services provided did not 'make available' technical knowledge, experience, skill, know-how, or processes to the Indian entities. The Tribunal highlighted that the services were provided in the ordinary course of business without transferring the capability to perform these services independently. Consequently, the Tribunal ruled that the amount received by the assessee is not chargeable to tax in India under Article 13(4)(c) of the DTAA, allowing grounds 1 to 3 of the appeal.2. Initiation of Penalty Proceedings under Section 271(1)(c):The AO initiated penalty proceedings under Section 271(1)(c) for alleged concealment of income or furnishing inaccurate particulars of income. Given the Tribunal's decision that the amount received is not chargeable to tax in India, the initiation of penalty proceedings became academic. Thus, this ground was not adjudicated and was dismissed.3. Levy of Interest under Sections 234B and 234C:The levy of interest under Sections 234B and 234C was also rendered academic due to the primary issue's resolution in favor of the assessee. Therefore, this ground was not adjudicated and was dismissed.4. Confirmation of Penalty Imposed under Section 271(1)(c) for AY 2010-11:For AY 2010-11, the AO had levied a penalty of Rs. 1,715,113 under Section 271(1)(c), contending that the assessee furnished inaccurate particulars by not offering the receipts as FTS. The CIT(A) confirmed the penalty, stating that the assessee had concealed particulars of income by not filing copies of agreements with clients.The Tribunal, however, observed that the nature of services provided in AY 2010-11 was similar to those in AY 2014-15. It reiterated that the services did not 'make available' technical knowledge under Article 13(4)(c) of the DTAA. The Tribunal referred to the Supreme Court's decision in CIT vs. Reliance Petro Products Ltd, which held that making a claim that is not accepted does not amount to furnishing inaccurate particulars. Consequently, the Tribunal directed the AO to delete the penalty, allowing the appeal for AY 2010-11.Conclusion:The Tribunal concluded that the Rs. 18,772,897 received by the assessee was not chargeable to tax in India under the DTAA. The initiation of penalty proceedings and levy of interest were rendered academic and dismissed. The penalty imposed for AY 2010-11 was deleted, as the Tribunal found no concealment of income or furnishing of inaccurate particulars by the assessee.