2024 (11) TMI 886 - AT - Income Tax

AO exceeded jurisdiction by reclassifying royalty income as FTS during limited remand proceedings under section 9(1)(vi)

The ITAT Bangalore held that the AO exceeded jurisdiction by reclassifying income as FTS instead of royalty during remand proceedings. The Tribunal had ... Chargeability of income earned under the Act / DTAA - Royalty or FTS receipts - Payment receipts for online education of MBA course - jurisdiction of AO by reclassifying the income as FTS instead of 'royalty' - HELD THAT:- On careful reading of the Order of the Tribunal it is observed that it was also limited to examine the chargeability of income earned under the Act / DTAA as “royalty”. The remand to the AO was also limited to examine and follow the judgment of the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd [2021 (3) TMI 138 - SUPREME COURT] - Tribunal did not remand to the AO to examine the applicability of definition of FTS as per the Act / DTAA in respect of the income of the assessee. Only subsequent to the remand proceedings by the Tribunal, it dawns upon the AO after examining the services agreement to tax the same as FTS under section 9(1)(vii) of the Act instead of “royalty” under section 9(1)(vi) of the Act. The AO after examining the agreement ideally ought to have filed a MA before the Tribunal seeking for an ‘open remand’ so that the receipt could have been either taxed under “FTS” or under “royalty”. On perusal of the above Order of the Tribunal, it is clearly discernible that it is not an open remand but only a limited remand to examine the receipt whether it can be taxed in light of the judgment of Engineering Analysis Centre of Excellence (P.) Ltd., (supra) and other judicial pronouncements relied on by the assessee. AO cannot go beyond the directions given in the remand order and look into the matters which was not subject matter of appeal before the Tribunal. This proposition was affirmed by the Hon’ble Allahabad High Court in the case of S. P. Kochhar [1982 (5) TMI 3 - ALLAHABAD HIGH COURT] wherein the scope of remand by the Tribunal was explained as when the Tribunal allows the appeal and sets aside the assessment and remands the case for making a fresh assessment, the power of the ITO is confined to such subject-matter only. He cannot take up the questions which were not the subject-matter of appeal before the Tribunal. The Tribunal in the case of Bhagwandas associates [2007 (9) TMI 333 - ITAT PUNE-B] had held that Revenue has no scope for improving an already assessed income either by way of enhancement or in pretext of rectification while giving effect of an appellate Order. The Tribunal held that the statute does not provide such a wide unlimited and unending power to the AO. Thus, AO has clearly exceeded his jurisdiction by taxing the income of the assessee as FTS which was not the subject matter of appeal before the Tribunal nor has the Tribunal given an open remand to the AO (in light of the master services agreement being produced before it for the first time). On perusal of the entire Order of the Tribunal, it is clear that the examination is limited to taxability of the receipts only in light of the judgment of Engineering Analysis Centre of Excellence (P.) Ltd., Vs. CIT (supra) and other judicial pronouncements relied on by the assessee which deals with the taxability of the receipt as “royalty” under section 9(1)(vi) of the Act. Thus, the impugned addition is deleted on technical grounds. Issues Involved:1. Whether the income received by the assessee from Aditya Birla Management Corporation Pvt. Ltd. (ABMC) should be classified as 'royalty' or 'fees for technical services' (FTS) under the Income Tax Act and the India-Malaysia Double Taxation Avoidance Agreement (DTAA).2. Whether the Assessing Officer (AO) exceeded his jurisdiction by reclassifying the income as FTS instead of 'royalty' following the remand order by the Tribunal.3. Whether the principles of natural justice were violated during the assessment process.Issue-wise Detailed Analysis:1. Classification of Income as 'Royalty' or 'Fees for Technical Services':The primary issue was whether the income earned by the assessee from providing online education courses to ABMC employees should be classified as 'royalty' or 'fees for technical services' (FTS). Initially, the AO classified the income as 'royalty' under section 9(1)(vi) of the Income Tax Act, which was confirmed by the Dispute Resolution Panel (DRP). The assessee argued that under the India-Malaysia DTAA, the payments did not qualify as 'royalty' because the Indian customer did not have the right to use the copyright in the database. The Tribunal, in its earlier order, remanded the issue back to the AO to re-examine the classification in light of the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT, which clarified that payments for the use of software do not constitute 'royalty' if they do not involve the transfer of copyright.2. Jurisdiction of the Assessing Officer:The Tribunal's remand was limited to examining whether the income could be taxed as 'royalty' under the Act/DTAA. However, the AO, upon remand, reclassified the income as FTS under section 9(1)(vii) of the Act. The Tribunal found that the AO exceeded his jurisdiction by reclassifying the income as FTS, as this was not the subject matter of the original appeal nor was it included in the Tribunal's remand directions. The Tribunal emphasized that the AO should have confined his examination to the issue of 'royalty' as per the Tribunal's specific directions and the Supreme Court's judgment, rather than expanding the scope to include FTS.3. Principles of Natural Justice:The assessee contended that the AO failed to consider its submissions adequately and erroneously claimed that no response was submitted by the assessee. The Tribunal noted that the AO's actions contradicted the directions issued by the Tribunal and the Supreme Court's decision, thus violating the principles of natural justice. The Tribunal highlighted that the AO should have adhered to the limited remand scope and not ventured into new grounds without proper authority or direction.Conclusion:The Tribunal concluded that the AO had clearly exceeded his jurisdiction by assessing the income as FTS, which was not the subject matter of the appeal or the Tribunal's remand directions. Consequently, the Tribunal deleted the impugned addition on technical grounds, leaving the merits of the case open and unadjudicated. The appeal filed by the assessee was partly allowed, emphasizing the importance of adhering to remand directions and respecting the principles of natural justice.