Recharacterising brand-licence receipts as royalty vs business income under India-UK DTAA; s.144C draft order quashed, remanded.

The dominant issue was whether the AO could invoke s.144C where there was no variation from the returned income, the AO having merely recharacterized receipts offered as royalty as business income. Interpreting s.144C, the Tribunal held that absence of any income variation negated draft-order jurisdiction; the AO's assumption of jurisdiction was erroneous, rendering the final assessment orders time-barred and void ab initio, and they were quashed. On characterization of consideration for use of brand under the India-UK DTAA, the Tribunal admitted a supplementary licence agreement as additional evidence since it went to the root of the transaction, and remitted the matter to the AO for fresh determination after due opportunity, allowing the appeals for statistical purposes.

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Issues Involved:
1. Constitution of dependent agent PE and taxability of royalty income under Article 7 of India-UK DTAA.
2. Delay in filing appeals.
3. Barred by limitation and void ab initio assessment orders.
4. Passing of draft assessment order without variation in income returned.
5. Admission of additional evidences.
6. Existence of Permanent Establishment (PE) and taxability of business income.

Detailed Analysis:

1. Constitution of Dependent Agent PE and Taxability of Royalty Income:
The central grievance in the appeals relates to the alleged constitution of a dependent agent Permanent Establishment (PE) and the taxability of royalty income under Article 7 of the India-UK Double Taxation Avoidance Agreement (DTAA). The Assessing Officer (AO) recharacterized the royalty income as business income, leading to the dispute.

2. Delay in Filing Appeals:
In ITA Nos. 2609/DEL/2020, 654/DEL/2020, and 869/DEL/2020, there were delays of 145, 21, and 46 days respectively in filing the appeals. The Tribunal condoned these delays, finding that the assessee was prevented by reasonable and sufficient cause from filing the appeals on time and noting no strong objections from the Department's Representative (DR).

3. Barred by Limitation and Void Ab Initio Assessment Orders:
The assessee raised an additional ground asserting that the impugned orders were barred by limitation and void ab initio. The Tribunal admitted this ground, referencing the Supreme Court's ratio in National Thermal Power Corporation 229 ITR 383, which allows the Tribunal to consider questions of law arising from the facts on record.

4. Passing of Draft Assessment Order Without Variation in Income Returned:
The Tribunal found that the AO wrongly assumed jurisdiction under Section 144C of the Income Tax Act, as there was no variation in the income returned by the assessee. The AO had only recharacterized the income without altering the total income. This view was supported by decisions from various benches, including the Mumbai Bench in Mousmi SA Investment LLC and IPF India Property Cyprus [No. 1], which clarified that a draft assessment order is not required if there is no variation in the returned income.

5. Admission of Additional Evidences:
The DR objected to the additional evidences furnished by the assessee, arguing they should have been submitted via a separate paper book. However, the Tribunal found this contention factually incorrect, as the additional evidences were filed as per rules and noted in the order sheet. The Tribunal admitted these additional evidences, finding them relevant for deciding the issue of PE existence.

6. Existence of Permanent Establishment (PE) and Taxability of Business Income:
For the assessment year 2005-06, the AO had treated the assessee's agent in India as a dependent agent PE, taxing the royalty income as business income. The Tribunal admitted additional evidence, a supplementary trade mark license agreement dated April 04, 2013, which was made effective from August 09, 2002. This agreement was deemed to change the nature of the transaction significantly. The Tribunal restored the matter to the AO for fresh consideration, directing the AO to evaluate the new agreement and decide the issue afresh.

Conclusion:
The appeals were allowed, with the Tribunal quashing the assessment orders for being barred by limitation and void ab initio. The Tribunal also directed the AO to reconsider the PE and business income issues in light of the new evidence provided. The order was pronounced in the open court on September 20, 2022.

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