2022 (2) TMI 769 - AT - Income Tax

Tribunal rules for assessee on tax rate, remits reimbursement issue for verification

GRI Renewable Industries S.L., (Formerly Known as Gonvarri Eolica S.L., Versus ACIT (IT), Circle-1, Pune

The Tribunal partly allowed the appeal, ruling in favor of the assessee on the application of the 10% tax rate under the DTAA read with the Portuguese ... Income accrued India - applying the tax rate as per section 115A OR tax rate as per the DTAA between India and Spain read with the Protocol thereof - HELD THAT:- It is a settled legal position that a piece of legislation which imposes a new obligation or attaches a new disability is considered prospective unless the legislative intent is clearly to give it a retrospective effect. We are confronted with a circular, much less an amendment to the enactment, which attaches a new disability of a separate notification for importing the benefits of an Agreement with the second State into the treaty with first State. Obviously, such a Circular cannot operate retrospectively to the transactions taking place in any period anterior to its issuance. In view of the foregoing discussion, we are satisfied that the requirement of a separate notification for implementing the MFN clause, as per the recent CBDT circular dt. 03-02-2022, cannot be invoked for the year under consideration, which is much prior to the CBDT circular of the year 2022. DTAA between India and Spain, having the Protocol containing the MFN clause as its integral part, was duly notified on 21-04-1995, after having entered into force on 12-01- 1995. On such notification of the DTAA, the Protocol containing the MFN clause triggering the importing of any other DTAA fulfilling the requisite requirements, including the Portuguese DTAA, got automatically notified pro tanto, in terms of section 90(1) of the Act leaving no room for any separate notification for the importation. The sequitur is that that the authorities below were not justified in denying the benefit of the straight rate of tax at 10% as per the DTAA read with Portuguese DTAA and also additionally charging Surcharge and Education cess. Income from royalty or fees for technical services, which the assessee claimed to have received as reimbursement and hence not includible in its gross revenue for taxability - HELD THAT:- Primarily, we find that the basic details about the nature of expenses etc. are not forthcoming. It is not known as to whether such expenses claimed to be reimbursed were in furtherance of the rendering of ‘fees for technical services’ or de hors the same. The assessee has not placed on record invoices raised to the Indian parties towards ‘fees for technical services/royalties’ to demonstrate if such amounts claimed as reimbursement were part of ‘royalties/fees for technical services’. Even the claim of reimbursement without any mark-up has not been properly established before the Tribunal. In the absence of such relevant details, it is difficult to conclude as to whether the amount claimed as reimbursement should form part of total revenue base for applying concessional rate of tax. We accentuate that there is an inherent difference between the scheme of taxation of an item of income por una parte u/s 115A of the Act or under the concerned Article of the DTAA and por otra parte under the normal provisions of the Act or the Articles of the DTAA providing for taxation at normal rate. In all cases of taxation of revenue or gross basis, a fundamental question which needs to be asked is whether a particular cost has contributed to the earning of the revenue. If the answer is in affirmative, then its corresponding receipt needs to be included in the revenue for applying the concessional rate of tax irrespective of the nomenclature given to the parties as reimbursement or revenue. Thus in all cases of concessional taxation on gross receipt or revenue basis, splitting of total receipt into reimbursement or revenue, remains neutral to its chargeability. Both such cases, invariably warrant inclusion of the receipt in the revenue base for taxation so long as the receipt is relatable to costs incurred contributing to the earning of the revenue. An assessee cannot be permitted to opt for concessional rate of taxation on gross receipt basis and then claim that some part of the receipts should be left out by describing it as reimbursement. It is patently an absurd proposition. Thus we set aside the impugned order on this score and remit the matter to the file of the AO for deciding the point on the touchstone of the discussion made supra. Needless to say, the assessee will be allowed a reasonable opportunity of hearing. TDS credit - claim of the assessee is that the AO did not grant benefit of the TDS - HELD THAT:- AO is directed to verify the facts and allow necessary TDS credit as per law. Issues Involved:1. Application of tax rate as per Section 115A of the Income-tax Act versus the tax rate as per the DTAA between India and Spain.2. Taxability of Rs. 35,67,719 as income from royalty or fees for technical services.3. Short TDS credit of Rs. 47,68,155.4. Levy of interest.Issue-Wise Detailed Analysis:1. Application of Tax Rate as per Section 115A of the Income-tax Act versus the Tax Rate as per the DTAA between India and Spain:The core issue is whether the tax rate should be applied as per Section 115A of the Income-tax Act, 1961, or as per the DTAA between India and Spain. The assessee, a foreign company incorporated in Spain, received income categorized as 'fees for technical services' and 'royalties' and claimed taxation at a 10% rate under the DTAA with Portugal, invoking the Most Favoured Nation (MFN) clause in the Protocol to the DTAA between India and Spain. The Assessing Officer (AO) contested this, arguing that the MFN clause from the Portuguese DTAA was not notified, thereby applying a 10% tax rate plus applicable Surcharge and Education Cess under Section 115A. The Tribunal held that the Protocol, being an integral part of the DTAA, was automatically notified along with the Agreement, negating the need for a separate notification. The Tribunal concluded that the authorities were not justified in denying the benefit of the 10% tax rate as per the DTAA read with the Portuguese DTAA.2. Taxability of Rs. 35,67,719 as Income from Royalty or Fees for Technical Services:The assessee claimed that Rs. 35,67,719 received was a reimbursement of expenses and not includible in gross revenue for tax purposes. The AO included this amount in 'fees for technical services/royalties' due to lack of evidence from the assessee. The Tribunal noted that the assessee failed to provide necessary details to substantiate the reimbursement claim. It emphasized that under Section 115A, gross receipts are taxed at a concessional rate, and any cost contributing to revenue must be included in the revenue base for taxation. The Tribunal remitted the matter back to the AO to decide based on detailed evidence and provided the assessee an opportunity for a hearing.3. Short TDS Credit of Rs. 47,68,155:The assessee claimed that the AO did not grant the benefit of TDS credit amounting to Rs. 47,68,155. The Tribunal directed the AO to verify the facts and allow the necessary TDS credit as per law.4. Levy of Interest:The issue of levy of interest was deemed consequential and was disposed of accordingly by the Tribunal.Conclusion:The appeal was partly allowed. The Tribunal ruled in favor of the assessee regarding the application of the 10% tax rate under the DTAA read with the Portuguese DTAA, remitted the issue of reimbursement back to the AO for further verification, directed the AO to verify and grant TDS credit, and disposed of the interest levy issue as consequential. The order was pronounced in the Open Court on 15th February 2022.