2025 (8) TMI 1112 - HC - Income Tax

No penalty under s.270A where genuine dispute over payments as FTS or FIS under s.9(1)(vii)/Article 12 12

Pr. Commissioner of Income Tax (International Taxation) Bangalore, The Joint Commissioner of Income Tax International Taxation, Circle 1 (2) Bangalore Versus M/s. IBM Corporation C/O. IBM India Pvt. Ltd.

Assessee received payments from an Indian company for IT support and reimbursement of seconded employees' salaries; HC noted the receipts could be ... Income deemed to accrue or arise in India - Assessee had received a sum from a company incorporated in India towards IT support services, including recovery of salary expenses of the employees that were seconded to India - receipts are chargeable to tax as 'fee for technical services' [FTS] under Section 9 (1)(vii) of the Act OR ‘fees for included services’ [FIS], under Article 12 of the India - US DTAA - Assessee contended that the reimbursement of salary expenses and payment towards IT support services do not come under the FTS - HELD THAT:- Given the possible view, the Assessee had to avoid further litigation, opted for the Vivad Se Vishwas Scheme and had settled the issue regarding the levy of tax. Penalty u/s 270-A - The present appeal relates to the imposition of penalty by the AO. Tribunal and the learned ITAT had examined the nature of the disputes and had further noted that the decision of this Court (Jurisdictional High Court) in Flipkart Internet (P). Limited [2022 (6) TMI 1251 - KARNATAKA HIGH COURT] had favoured the Assessee. Further, in proceedings relating to withholding of tax at source in case of IBM India, the stand that the payments were not chargeable to tax had been accepted. ITAT had held that given the nature of the disputes, clearly, two views are possible. Thus, the penalty u/s 270-A of the Act could not be levied, as the question involved was a vexed one. The Assessee had laboured under the legitimate bona fide belief that the payments received were not taxable under the Act. We find no infirmity in the said order and no substantial question of law exists for consideration by this court. ISSUES PRESENTED AND CONSIDERED 1. Whether receipts from an Indian entity for IT support services and reimbursement of salary expenses of seconded employees constitute 'fees for technical services' under Section 9(1)(vii) of the Act or 'fees for included services' under Article 12 of the India-US DTAA. 2. Whether the narrower definition of 'fees for included services' in the DTAA controls over the Explanation 2 definition of 'fee for technical services' in the Act for the purpose of assessing taxability of the receipts. 3. Whether, in view of divergent judicial authorities and the existence of two possible views on taxability, penalty under Section 270A of the Act can be levied for the additions made in respect of such receipts. 4. Whether settlement of the dispute under a statutory dispute resolution scheme and acceptance of the non-taxable character of payments in related withholding proceedings are relevant to the assessment of bona fide belief and applicability of penalty. 5. (Procedural) Whether the delay in filing the appeal should be condoned. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of receipts as FTS under the Act or FIS under the DTAA Legal framework: Section 9(1)(vii) of the Act taxes income by way of 'fee for technical services' as defined in Explanation 2. Article 12 of the India-US DTAA defines 'fees for included services' (FIS) with a narrower scope. Under Article 13 (generally) and the general principle of DTAA application, expressions in a tax treaty control characterization for treaty relief where treaty applies. Precedent treatment: Multiple judicial decisions have addressed whether reimbursements and support-service receipts fall within the FTS/FIS concept. A majority of tribunal and High Court decisions cited by the Tribunal favour non-taxability as FTS/FIS; however, at least one High Court decision (in facts involving secondment) found absorption of knowledge and treated similar receipts as taxable, indicating courts are not unanimous. Interpretation and reasoning: The Court recognises that the DTAA definition of FIS is 'considerably narrower' than Explanation 2 to Section 9(1)(vii) and affirms the settled principle that DTAA definitions are not controlled by domestic statutory definitions. The Tribunal recorded and relied on a tabulation of authorities showing differing outcomes; the Court accepts that on the given facts the issue is debatable and that accepted authorities (including the jurisdictional High Court decision cited favorably to the taxpayer) support the non-taxable character of such receipts. Ratio vs. Obiter: The Court's treatment that the DTAA definition is narrower and controls for treaty application is ratio. The recitation of various authorities and their outcomes functions as reasoned support for the finding that two views exist and is ratio to the extent it underpins the penalty conclusion; broader doctrinal comments about knowledge absorption are descriptive of existing precedent and operate as explanatory ratio for why contrary views exist. Conclusion: The receipts could reasonably be regarded as outside the scope of taxable FIS/FTS under governing treaty and precedent; the issue is one where two plausible legal views exist on the facts presented. Issue 2 - Primacy of DTAA definition over domestic Explanation 2 Legal framework: Under domestic law and principles of treaty interpretation, where a DTAA applies the treaty's definitions and allocations govern taxability between Contracting States, and domestic definitions do not displace DTAA meanings for treaty questions. Precedent treatment: The Tribunal and the Court note settled law that expressions in the DTAA are not controlled by domestic statutory definitions; this position aligns with the authorities cited in the record. Interpretation and reasoning: The Court reiterates that the narrower DTAA definition must be applied in determining treaty-based taxability, thereby narrowing the ambit of taxable receipts as compared to the broader domestic Explanation 2. Ratio vs. Obiter: This exposition is ratio, foundational to the Court's acceptance that the taxpayer's interpretation is not insubstantial. Conclusion: The DTAA definition governs for treaty questions and yields a narrower scope of taxable receipts than Explanation 2 to Section 9(1)(vii); therefore, a claim that receipts are not taxable under the DTAA is tenable. Issue 3 - Applicability of penalty under Section 270A where reasonable two views exist Legal framework: Section 270A penalises under-reporting of income unless the taxpayer can show good and sufficient cause or a bona fide belief that the tax position was tenable; levying penalty requires proof that the position was not bona fide or was frivolous/without reasonable basis. Precedent treatment: The Tribunal relied upon earlier decisions (including the jurisdictional High Court decision favourable to the taxpayer) and a body of tribunal/court decisions favouring non-taxability to assess whether a bona fide belief existed. The record also includes at least one High Court decision to the contrary, demonstrating judicial divergence. Interpretation and reasoning: The Tribunal examined the nature of the dispute, the conflicting authorities, the settled principle that two viewpoints existed, and factual indicia (settlement under a dispute-resolution scheme and acceptance in withholding proceedings). On that basis, the Tribunal concluded the taxpayer laboured under a legitimate bona fide belief and hence penalty could not be levied. The Court finds no infirmity in this conclusion, observing that where the question is vexed and reasonable arguments exist on both sides, penal consequences under Section 270A are inappropriate. Ratio vs. Obiter: The articulation that penalty cannot be levied when the tax position is supported by conflicting judicial authority and a bona fide belief is ratio and dispositive for the penalty issue in the appeal. Conclusion: Penalty under Section 270A was not exigible because the question involved a bona fide, debatable legal position with conflicting authoritative guidance; therefore the Tribunal correctly set aside the penalty. Issue 4 - Relevance of settlement under a statutory scheme and related withholding acceptance Legal framework: Evidence of settlement under a statutory dispute-resolution scheme and acceptance of a tax position in related withholding proceedings are relevant to the assessment of bona fide belief, reasonableness of the taxpayer's stance, and mitigation of punitive measures. Precedent treatment: The Tribunal took into account the taxpayer's election to settle under the statutory scheme and that withholding proceedings accepted non-taxability, treating these as factors supporting the taxpayer's bona fide belief. The Court endorses this approach. Interpretation and reasoning: The Court reasons that the taxpayer's choice to avoid further litigation via statutory settlement, combined with corroborative administrative acceptance in the withholding context, reinforces that the taxpayer did not act mala fide or without reasonable cause when taking the contested position. Ratio vs. Obiter: The use of these facts to support absence of penalty is ratio in relation to the penalty issue; observations about settlement policy and administrative acceptance are supportive and not mere obiter. Conclusion: Settlement under the statutory scheme and acceptance in withholding proceedings are relevant and weighty factors that corroborate a bona fide belief and justify denial of penalty. Issue 5 - Condonation of delay in filing the appeal Legal framework: Courts have power to condone delays in filing appeals upon satisfaction of sufficient cause for delay. Precedent treatment: The Court allowed the delay application without detailed contest in the record, treating the request as satisfactorily supported. Interpretation and reasoning: The Court exercised discretion to condone delay in filing the appeal as permitted by law and as justified by the application before it. Ratio vs. Obiter: The condonation order is interlocutory and procedural; allowance of delay in the particular facts is ratio for this procedural disposition but does not lay down broader principles. Conclusion: Delay in filing the appeal was condoned on the material presented; the substantive appeal was dismissed for lack of any substantial question of law arising against the Tribunal's penalty-related conclusion.