2023 (11) TMI 1388 - AT - Income Tax

Remand for fresh hearing to reconsider royalty and SAP maintenance payments, TDS under Section 195 and DTAA interplay

ITAT HYDERABAD - AT remanded the appeal to the file of CIT(A), holding that the assessee was not given sufficient opportunity and that CIT(A) must ... Disallowance u/s 40(a)(ia) - Expenditure incurred towards the payments of Royalty and SAP maintenance expenditure by the assessee and the impact of non- deduction of TDS on such income HELD THAT:- We feel it appropriate to remand back the matter to the file of ld. CIT(A) as sufficient opportunity was not granted by the ld. CIT(A), with a direction to consider all the submissions made by the assessee and shall also consider the inter-play of DTAA and the domestic laws vis-à-vis the account treatment given by the assessee for the expenditure incurred towards the payments of Royalty and SAP maintenance expenditure by the assessee and the impact of non- deduction of TDS on such income. CIT(A) is expected to apply his mind and also consider the binding decisions of the Tribunal and Hon’ble High Courts / Hon’ble Supreme Court on this issue and accordingly, decide the issue. With these directions, the appeal of assessee is remanded back to the file of CIT(A) with a direction to pass a fresh speaking order after giving due opportunity of hearing to the assessee, in accordance with law. ISSUES PRESENTED AND CONSIDERED 1. Whether the order of the Commissioner of Income Tax (Appeals) passed ex parte for failure to comply with notices was proper where the assessee asserts non-consideration of material submissions, including treaty (DTAA) claims. 2. Whether the taxability and the requirement to deduct tax at source in respect of royalty and software maintenance payments (SAP) are governed by the domestic accrual-based accounting position or by the DTAA provision that taxes on receipt basis, and consequent applicability of section 40(a)(ia) disallowance for non-deduction of TDS. 3. Whether the matter requires remand for fresh adjudication by the appellate authority to consider interplay of DTAA and domestic law, the assessee's account treatment, and relevant binding judicial decisions. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of ex parte appellate order and adequacy of opportunity Legal framework: Principles of natural justice and statutory scheme governing appellate proceedings require that an assessee be afforded a reasonable opportunity of hearing before adverse orders are passed. The appellate authority must consider the submissions and material produced by the assessee. Precedent Treatment: The Court directed the lower authority to apply binding decisions of the Tribunal and higher courts, thereby treating such precedent as authoritative and to be considered on remand. Interpretation and reasoning: The Tribunal noted that the Commissioner of Income Tax (Appeals) recorded that notices of hearing were issued and marked 'Uncompiled by the appellant / assessee' and proceeded to dismiss the appeals. The assessee contended that material submissions, including treaty-based contentions, were not considered. Given competing assertions and the importance of the issues, the Tribunal concluded that sufficient opportunity was not granted and that the appellate authority should apply its mind afresh to the submissions. Ratio vs. Obiter: Ratio - where an ex parte appellate order is premised on asserted non-compliance with hearing notices but material and substantive treaty and legal contentions remain to be considered, the proper course is remand to afford an opportunity and to consider those contentions. Obiter - none separately identified. Conclusions: The Tribunal remanded the appeals for fresh hearing and directed the appellate authority to consider all submissions and evidence, giving the assessee an opportunity to file documents and to be heard. The remand formed the operative relief (appeals allowed for statistical purposes). Issue 2 - Applicability of DTAA (receipt basis) versus domestic accrual accounting and disallowance under section 40(a)(ia) Legal framework: Tax liability and withholding obligations depend on (a) whether income is taxable in India under domestic law or under a DTAA; (b) the timing and basis of recognition for tax deduction and withholding (accrual vs receipt); and (c) statutory consequences for failure to deduct tax at source, notably section 40(a)(ia) which permits disallowance of expenditure where tax is not deducted/paid as required. Precedent Treatment: The Tribunal instructed the appellate authority to consider binding decisions of the Tribunal and higher courts regarding the interplay between DTAAs and domestic law and the treatment of withholding obligations vis-à-vis accounting basis; those authorities were to be applied on remand (followed as binding guidance to be considered). Interpretation and reasoning: The assessing officer disallowed royalty and SAP maintenance expenses under section 40(a)(ia) on the premise that tax was not deducted on accrual; Revenue argued that DTAA's receipt-based taxation would only apply if the assessee prepared accounts on a receipt basis. The Tribunal observed that the question requires factual and legal appraisal of the assessee's accounting treatment (accrual vs receipt), the terms of the DTAA, and authoritative judicial pronouncements on whether withholding obligations accrue on accrual or receipt and how this interacts with section 40(a)(ia). Because these matters were not fully considered by the appellate authority, the Tribunal remanded the matter for detailed examination. Ratio vs. Obiter: Ratio - where the applicability of DTAA treatment and the correctness of invoking section 40(a)(ia) depend on the assessee's account treatment and on binding judicial decisions, the appellate authority must examine evidence and legal authorities before sustaining disallowance. Obiter - the Tribunal noted Revenue's concession that it had no objection to remand given the ex parte nature of appellate orders; this is ancillary. Conclusions: The Tribunal directed the appellate authority to examine (a) the accounting basis adopted by the assessee for royalty and software maintenance payments; (b) the relevant DTAA provisions and whether taxation on receipt applies; (c) the statutory scope of section 40(a)(ia) in light of the above and binding case law; and (d) whether TDS was required and, if not deducted, whether disallowance is warranted. The matter was remitted for fresh adjudication with liberty to the assessee to file evidence. Issue 3 - Remand procedure, scope and consequences Legal framework: Appellate tribunals may remit matters for fresh consideration where material questions of fact or law require adjudication by the lower authority after affording parties opportunity to be heard; remand directions may specify issues to be considered and require application of binding precedents. Precedent Treatment: The Tribunal expressly required the lower authority to consider binding decisions of the Tribunal and higher courts, signaling that precedent should be followed and applied where relevant. Interpretation and reasoning: Given the appellate authority's ex parte disposal and the complex legal interplay (DTAA vs domestic law; withholding obligations; section 40(a)(ia)), the Tribunal concluded that remand was the appropriate remedy to ensure adjudication on merits. The Tribunal imposed procedural directions: the lower authority must give a fresh opportunity of hearing, allow filing and consideration of documents/evidence, apply its mind, and consider binding decisions. Ratio vs. Obiter: Ratio - remand is appropriate where the appellate proceedings were ex parte and substantive treaty and statutory issues remain undecided; remand must include consideration of evidence and binding precedents. Obiter - the Tribunal's allowance 'for statistical purposes' records its administrative disposal while leaving substantive adjudication to the lower authority. Conclusions: The appeals were allowed for statistical purposes and remitted to the appellate authority with directions to pass a fresh speaking order after hearing the assessee, considering evidence, accounting treatment, DTAA interplay, the applicability of section 40(a)(ia), and binding judicial decisions. The Tribunal's order relieves the immediate appellate adjudication but mandates substantive reconsideration on remand.