2020 (12) TMI 74 - AT - Income Tax

Tax Tribunal Rules FTS Income Taxable on Receipt Basis for Non-Residents under DTAA

The Tribunal held that Fees for Technical Services (FTS) income should be taxed on a receipt basis for non-residents under the Double Taxation Avoidance ... Income accrued in India - Royalty receipt - Fees for Technical Services on accrual basis - A.O. noticed that the assessee has not offered the same as income - assessee is a company incorporated and operating in Germany - India has entered into a Double Taxation Avoidance Treaty with Federal Germany Republic - HELD THAT:- As settled proposition of law that the DTAA provisions shall override the Income tax provisions unless the provisions of Income tax Act is beneficial to the assessee. There is merit in the submissions of the assessee that the FTS is taxable only in the year of receipt as per the provisions of DTAA. Accordingly, we are of the view that the tax authorities are not justified in assessing the impugned income on accrual basis. Accordingly, we set aside the order passed by Ld. CIT(A) and direct the A.O. to delete the impugned addition. A.R submission that the impugned income has been offered to tax in the year relevant to the assessment year 2015-16 but no material was placed either before the A.O. or before us to substantiate the above said submission. In fact, the AO has specifically mentioned in the assessment order that the assessee has not proved its submissions - Since the Ld. A.R. also could not also exactly pinpoint with evidence that the impugned income was offered to tax in assessment year 2015-16, he agreed that this fact may be verified by the assessing officer. Accordingly, we restore this issue to the file of A.O. for limited purpose of satisfying himself that the impugned amount has been offered to tax by the assessee in A.Y. 2015-16 or in any other assessment year - Appeal filed by the assessee is treated as allowed. Issues:1. Taxability of Fees for Technical Services on accrual basis.Analysis:The appeal challenged the order related to the assessment year 2014-15, focusing on the addition of an amount as Fees for Technical Services (FTS) on accrual basis. The assessing officer proposed to assess the amount as income of the assessee based on Form No. 3CEB, where it was revealed that the assessee received a sum towards testing and inspection charges. The assessee contended that they did not receive the amount during the relevant year. The AO, however, relied on sec. 9(1)(vii) of the Income Tax Act and the decision in Standard Triumph Motor Company Ltd. Vs. CIT (1993) to assess the amount as income, as the credit entry in the books of the Indian company was considered receipt by the assessee.The appellant argued that under the Double Taxation Avoidance Treaty (DTAA) with Federal Germany Republic, FTS income should be taxed on a 'receipt basis,' not accrual basis. They highlighted that the assessee follows the cash system of accounting and provided returns of income filed for other years to support their claim. The appellant cited case laws like DCIT Vs. UHDE GMBH (1996) and M/s. Siemens Aktiengesellschaft case to strengthen their argument. The Tribunal noted that DTAA provisions prevail over Income tax provisions unless the latter is more beneficial to the assessee. Article 12 of DTAA addresses taxability of Royalties and FTS, allowing taxation in the state where they arise and are paid.Referring to the UHDE GMBH case, the Tribunal emphasized that income like FTS should be taxed on a receipt basis for non-residents, as per the DTAA. The decision in M/s. Siemens Aktiengesellschaft case further supported taxing royalties and FTS on a receipt basis. Consequently, the Tribunal held that the tax authorities were not justified in assessing the FTS income on an accrual basis and directed the deletion of the addition made by the AO. However, the Tribunal also directed the AO to verify if the impugned income was offered for taxation in the relevant assessment year, as claimed by the appellant.In conclusion, the Tribunal allowed the appeal, setting aside the CIT(A)'s order and directing the AO to delete the addition of FTS income. The issue of whether the impugned amount was offered for taxation in the subsequent year was referred back to the AO for verification.