2025 (3) TMI 591 - AT - Income Tax

Reopening under s.148 and assessment u/s143(3) r/w s.147 quashed; UK film incentive and s.40(a)(i) disallowance deleted

ITAT, Mumbai - AT quashed the notice dated 31/03/2019 issued u/s 148 and the assessment order u/s 143(3) r/w s.147, finding the AO's reopening unjustified ... Validity of Reopening of assessment u/s 147 - addition made on account of incentive received from UK without properly appreciating the facts of the case that the UK Film Tax Relief is available to Film Production companies(FPC’s) only - HELD THAT:- AO in his reasons for reopening has also alleged that an amount has been paid to Mr. Shahrukh Khan but the said income is not shown in his books. However, no such addition was made in the assessment order as the said observation of the AO lacked merit. Thus, this further shows the blind approach adopted by the AO while re-opening the instant case. Thus, we hold that in the facts and circumstances of the present case, the initiation of reassessment proceedings by the Assessing Officer can’t be sustained. Accordingly, we quash the notice dated 31/03/2019, issued u/s 148 of the Act as well as the Assessment Order passed u/s 143(3) read with Section 147 of the Act. Addition on account of incentive received from UK without properly appreciating the facts of the case that the UK Film Tax Relief is available to Film Production companies - As seen that the assessee company is entitled to receive Rs. 130 crores irrespective of success or failure of the film. Further as per business statement provided by EMIL, it is seen that the credit of tax as alleged by the AO has been received and accounted for EMIL while arriving at Net Realisation figure. Therefore, in our opinion CIT(A) has rightly deleted the addition as the same receipt cannot be added again in the hands of assessee company. TDS u/s 195 - Disallowance u/s 40(a)(i) - assessee company has reimbursed expenses to one Winford Production Ltd (UK based company) - AO held that since the Rights and Title of the movie vest with the assessee company, such payment partakes the character of fees for technical services subject to tax - CIT(A) deleted the disallowance by concluding that no TDS obligation would arise in respect of reimbursement of expense - HELD THAT:- It also cannot be said that the services have been 'made available' to the assessee to be taxable in India. Reference in this regard reliance was made before us to the judgement of IDS Software Solutions (India (P) Ltd. [2009 (1) TMI 363 - ITAT BANGALORE-A] In this case of an employee of U.S. Company was seconded to the Indian Company under secondment agreement to provide managerial services in the business of the Indian Company. The seconded employee was reportable and responsible to the Indian Company and was required to devote the whole of his time, attention and skills to the duties required by the secondment agreement. The Indian company had the right to approve or reject the employee and if necessary to request the US Company to replace the employee if such employee is found not qualified to meet the requirements of the seconded arrangements. The seconded employee was required to act and serve as 'officers', authorized signatories, nominees and in other lawful capacity on behalf of the Indian company etc. Thus in the absence of make available technical knowledge, expertise, skill, know-how or process etc. it cannot be held that the payment is FTS as per article 13(4) of Indo UK DTAA. Merely providing the services such as arrangement of shooting locations, obtaining necessary permits/ licenses, arranging for customs clearance, make up cost and local commuting, food & lodging, hire of local artist would not constitute make available of the services of any technical or consultancy in nature. Thus in view the decision of De Beers India Minerals (P.) Ltd. [2012 (5) TMI 191 - KARNATAKA HIGH COURT] we hold that the said payment in question does not fall under the term fee for technical services as per provisions of Indo-UK DTAA. Having held that the payment in question is not fees for technical services the same has to be examined in the light of relevant provisions of the Act and DTAA. Even, under the Income Tax Act, if the payment is only reimbursement of expenses the same cannot be regarded as income in the hand of the payee/recipient. In view of the above discussions, we do not find any error or illegality in the impugned order of CIT (A). Decided against revenue. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:Whether the reopening of the assessment under Section 147 of the Income Tax Act, 1961, was valid, particularly given the absence of new tangible material and the alleged lack of application of mind by the Principal Commissioner of Income Tax (Pr. CIT) when granting approval under Section 151.Whether the addition of Rs. 15,42,42,246/- on account of incentives received from the UK was justified.Whether the disallowance of Rs. 61,69,68,987/- under Section 40(a)(ia) of the Act, concerning payments to a UK-based company, was appropriate, considering the nature of the payments as fees for technical services.ISSUE-WISE DETAILED ANALYSISReopening of Assessment under Section 147Relevant legal framework and precedents: The reopening of assessments is governed by Section 147 of the Income Tax Act, which requires a belief that income has escaped assessment. The proviso to Section 147 necessitates a failure on the part of the assessee to disclose fully and truly all material facts for reopening after four years. The Supreme Court's decision in CIT v. Kelvinator of India Ltd. established that reopening based on a mere change of opinion is not permissible.Court's interpretation and reasoning: The Tribunal found that the Assessing Officer (AO) revisited the same materials available during the original assessment, indicating no new tangible material. The AO's reasons were based on a change of opinion, which is not permissible for reopening beyond four years.Key evidence and findings: The AO's reasons for reopening began with 'On going through the case record of the assessee,' suggesting reliance on existing records without new information. The Tribunal noted the absence of any failure by the assessee to disclose material facts.Application of law to facts: The Tribunal concluded that the reopening was invalid as it was based on a change of opinion without new tangible material, violating the principles established in Kelvinator.Treatment of competing arguments: The revenue argued that the AO had a reasonable belief of income escaping assessment. However, the Tribunal found this belief unfounded due to the lack of new material.Conclusions: The Tribunal quashed the notice under Section 148 and the subsequent assessment order, reinstating the original assessment order.Addition of Rs. 15,42,42,246/- on Account of UK IncentivesRelevant legal framework and precedents: The issue involved the interpretation of the tax treatment of incentives received from the UK Film Tax Relief, typically available to Film Production Companies (FPCs).Court's interpretation and reasoning: The Tribunal noted that the incentives were accounted for by Eros International Media Ltd (EIML) and not the assessee company, as per the agreement between the parties.Key evidence and findings: The agreement between the assessee and EIML specified that EIML would receive the tax credit incentive, which was included in the total receipts considered by EIML.Application of law to facts: The Tribunal found that since EIML accounted for the incentive, no further addition could be made in the hands of the assessee company.Treatment of competing arguments: The revenue contended that the assessee should have offered the incentive to tax. However, the Tribunal upheld the CIT(A)'s deletion of the addition, aligning with the agreement terms.Conclusions: The Tribunal upheld the CIT(A)'s decision to delete the addition, as the incentive was not the assessee's income.Disallowance of Rs. 61,69,68,987/- under Section 40(a)(ia)Relevant legal framework and precedents: Section 40(a)(ia) deals with disallowance of expenses where tax is not deducted at source. The nature of the payments as fees for technical services was evaluated under the Indo-UK DTAA.Court's interpretation and reasoning: The Tribunal found that the payments were reimbursements for expenses incurred by Winford Production Ltd, not fees for technical services.Key evidence and findings: The agreement with Winford Production Ltd detailed the nature of expenses, including shooting locations and permits, which were reimbursed at cost.Application of law to facts: The Tribunal determined that the payments did not constitute fees for technical services as defined in the Indo-UK DTAA, as they did not make available technical knowledge.Treatment of competing arguments: The revenue argued that the payments were fees for technical services. The Tribunal disagreed, citing the absence of a technical knowledge transfer.Conclusions: The Tribunal upheld the CIT(A)'s deletion of the disallowance, as the payments were reimbursements and not taxable as fees for technical services.SIGNIFICANT HOLDINGSReopening of Assessment: 'The scope to reopen the completed assessment u/s 143(3) within the ambit of the proviso to section 147, the conditions and limitation provided therein has to be satisfied whether there was any failure on the part of the assessee to disclose fully and truly all material facts or not.'UK Incentives Addition: 'In our opinion CIT(A) has rightly deleted the addition as the same receipt cannot be added again in the hands of assessee company.'Disallowance under Section 40(a)(ia): 'The present case is a case of part reimbursement of expenses and therefore there is no income element present in part reimbursement.'Core Principles: The judgment reinforces that reopening of assessments requires new tangible material and cannot be based on a change of opinion. Additionally, reimbursements without income elements are not subject to tax withholding under Section 40(a)(ia).Final Determinations: The Tribunal dismissed the revenue's appeal and allowed the assessee's cross-objection, reinstating the original assessment order.