2022 (9) TMI 1236 - AT - Income Tax

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 ... Assessment u/s 144C - AO passed a draft assessment order - constitution of dependent agent PE and taxability of royalty income under Article 7 of India – UK DTAA - Whether there was no variation in income returned by the appellant and, therefore the impugned order passed by the AO is void ab initio and, therefore, is liable to be quashed? - HELD THAT:- We find that the Assessing Officer has only recharacterized the income which was shown as royalty income by the assessee and was taxed as ‘business income’ by the Assessing Officer without there being any variation in income returned by the assessee. In our understanding of the provisions of section 144C of the Act mentioned hereinabove, we are of the considered view that the Assessing Officer wrongly assumed jurisdiction u/s 144C of the Act when there is no variation in the income returned by the assessee. See IPF INDIA PROPERTY CYPRUS (NO. 1) LTD. [2020 (2) TMI 1500 - ITAT MUMBAI] We hold that the AO wrongly assumed jurisdiction u/s 144C of the Act, and therefore, the final assessment order framed in Assessment Years 2007-08 and 2010-11 to 2015-16 are barred by limitation and accordingly, the impugned assessment orders are liable to be quashed as void ab initio. This additional ground is, accordingly, allowed. Determination of income - consideration for use of brand [ie for ‘Royalties’] in India as liable td tax Tat 40% as Business Income under Article 7 instead of being liable to tax as ‘Royalties’[at 15%] under Article 13 of DTAA between UK and India - assessee moved an application u/r 29 of the ITAT Rules requesting for admission of additional evidences - HELD THAT:- It is true that the entire assessment has been based on the reading of the trade mark license agreement dated August 08, 2002. It is equally true that supplementary trade mark licence agreement dated April 04, 2013 changes the color of the entire transaction. Such an agreement which goes to the root of the matter cannot be brushed aside lightly. Therefore, in the interest of justice and fair play and as contended by the ld. DR, we deem it fit to restore the entire quarrel to the file of the Assessing Officer. AO is directed to consider the agreement dated April 04, 2013 and decide the issue afresh after giving reasonable and adequate opportunity of being heard to the assessee. Thus, ITA is allowed for statistical purposes. 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.