2022 (7) TMI 1589 - AT - Income Tax

Stay of demand - as contended that the assessee should be directed to deposit at least 20% of the tax demand to avail the benefit of stay of remaining demand - HELD THAT - Mitigating circumstances exists in the present case to grant partial stay of the outstanding demand. At the same time we are equally alive to the concern raised by the Revenue. On weighing the totality of circumstances we are of the view that interest of the Revenue can be balanced by an additional payment of Rs. 5 crore. The aforesaid amount shall be paid by the assessee on or before the end of August 2022 and proof of payment thereon shall be produced before the Assessing Officer. Subject to aforesaid we entertain the stay application and exercise our statutory discretion in favour of the assessee for stay of recovery of balance outstanding demand for a period of six months or till the disposal of the appeal of the assessee by the Tribunal whichever is earlier. The Registry is directed to fix the assessee s appeal for out of turn hearing on 1st October 2022. The parties will file all requisite documents and material well in advance for an expeditious disposal of the appeal. Stay application of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Appellate Tribunal (AT) in this stay application pertain to the taxability and classification of certain payments made by the assessee for the Assessment Year 2015-16, specifically:

• Whether the payments made for international freight logistic services constitute Fee for Technical Services (FTS) or Fee for Included Services (FIS) under Article 12(5) of the Double Taxation Avoidance Agreement (DTAA) and Section 9(1)(vii) of the Income Tax Act, thereby justifying additions to the returned income.
• Whether the global account management charges paid by the assessee amount to FTS under Explanation 2 to Section 9(1)(vii) of the Act and Article 12(4) of the DTAA, due to the alleged provision of technical knowledge, experience, skill, or know-how.
• Whether the reimbursement of lease line charges constitutes royalty payments taxable under the Act and DTAA, particularly in light of the Finance Act, 2012 amendment and relevant judicial precedents such as the Madras High Court decision in Verizon Communication Singapore Pvt. Ltd.
• Whether the assessee is entitled to a stay of demand on the outstanding tax and interest amounting to approximately Rs. 93.51 crore, considering the prima facie case and balance of convenience.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Taxability of International Freight Logistic Services as FTS/FIS

Relevant legal framework and precedents: The Assessing Officer (AO) classified payments for international freight logistic services as technical services taxable under Article 12(5) of the DTAA and Section 9(1)(vii) of the Income Tax Act. The assessee relied on earlier Tribunal decisions in its own case for preceding assessment years where similar additions were disallowed, establishing a precedent favoring the assessee.

Court's interpretation and reasoning: The Tribunal noted the assessee's contention that the services rendered were not technical in nature but related to logistics and freight forwarding, which generally do not qualify as FTS under the law. The Tribunal recognized the existence of a prima facie case in favor of the assessee, given the prior favorable decisions.

Key evidence and findings: The assessee's return declared income excluding these additions; prior Tribunal rulings in similar factual matrices supported the assessee's stance. The AO's contrary view was based on the technical nature of services as per the DTAA provisions.

Application of law to facts: The Tribunal found that the issue required detailed factual examination but, on the face of the record and prior rulings, the assessee had a strong prima facie case that the freight logistic services did not amount to FTS.

Treatment of competing arguments: The Revenue emphasized the technical nature of services and the need for fact-specific inquiry, cautioning against blanket stay. The Tribunal balanced this by noting the assessee's prior success and prima facie merit.

Conclusions: The Tribunal accepted the assessee's contention of a prima facie case on this issue, supporting partial stay of demand.

Issue 2: Taxability of Global Account Management Charges as FTS

Relevant legal framework and precedents: The AO treated global account management remuneration as FTS under Explanation 2 to Section 9(1)(vii) and Article 12(4) of the DTAA, on the basis that technical knowledge, experience, skill, or know-how was made available to the payer. The assessee cited earlier Tribunal decisions in its own case where such charges were held not to be taxable as FTS.

Court's interpretation and reasoning: The Tribunal acknowledged the assessee's argument that these charges were for management services rather than technical services, and that the prior decisions favored the assessee's position. The Tribunal considered the prima facie merit of the assessee's claim.

Key evidence and findings: The assessee's submissions and prior rulings formed the basis of the Tribunal's view. The AO's reliance on the technical nature of services was noted but not accepted for the purpose of stay.

Application of law to facts: The Tribunal held that the issue was not free from doubt and warranted detailed examination, thus supporting the assessee's contention of a prima facie case.

Treatment of competing arguments: The Revenue stressed the need for fact-specific scrutiny and cautioned against granting stay without full adjudication. The Tribunal balanced this with the assessee's prior favorable rulings.

Conclusions: The Tribunal found sufficient prima facie merit in the assessee's plea on this issue to grant stay.

Issue 3: Taxability of Lease Line Charges as Royalty

Relevant legal framework and precedents: The AO classified lease line charges as royalty payments taxable under the Income Tax Act and DTAA, relying on the Finance Act, 2012 amendment and the Madras High Court decision in Verizon Communication Singapore Pvt. Ltd. The assessee contended that the issue was covered in its favor by earlier Tribunal decisions.

Court's interpretation and reasoning: The Tribunal recognized the conflicting judicial views and acknowledged the assessee's reliance on prior favorable decisions. The Tribunal noted that the question involved complex legal and factual issues requiring detailed adjudication.

Key evidence and findings: The assessee's prior rulings and submissions were weighed against the AO's reliance on statutory amendment and judicial precedent.

Application of law to facts: The Tribunal found that the assessee had a prima facie case on this issue, justifying stay of demand pending final adjudication.

Treatment of competing arguments: The Revenue's reliance on statutory amendment and High Court decision was noted, but the Tribunal emphasized the need for thorough examination and recognized the assessee's prior success.

Conclusions: The Tribunal accepted the assessee's prima facie case and allowed stay on this issue.

Issue 4: Grant of Stay of Demand

Relevant legal framework: The Tribunal considered the proviso to Section 254(2A) of the Income Tax Act, which governs the grant of stay of demand during appellate proceedings, emphasizing the need for a prima facie case, balance of convenience, and financial position of the assessee.

Court's interpretation and reasoning: The Tribunal balanced the assessee's prima facie case on merits and mitigating circumstances against the Revenue's concern for safeguarding revenue interests. It held that a partial stay was warranted, subject to conditions to protect the Revenue's interest.

Key evidence and findings: The assessee's financial capacity, prior rulings, and the nature of disputed additions were considered. The Revenue's insistence on deposit of 20% of demand was weighed against the assessee's submissions.

Application of law to facts: The Tribunal ordered the assessee to deposit Rs. 5 crore by end of August 2022 as a condition for stay, balancing the interests of both parties.

Treatment of competing arguments: The Tribunal rejected the Revenue's demand for 20% deposit but required a substantial deposit to balance interests. It also imposed conditions on cooperation and expeditious disposal of appeal.

Conclusions: Stay of recovery of the balance demand was granted for six months or till disposal of appeal, whichever earlier, subject to deposit and compliance conditions.

3. SIGNIFICANT HOLDINGS

"On careful consideration of the rival submissions as well as material aspects of the case which are relevant to ascertain the balance of convenience, such as prima facie case of assessee on merits as argued, the financial position etc., we are of the view that mitigating circumstances exists in the present case to grant partial stay of the outstanding demand."

"On weighing the totality of circumstances, we are of the view that interest of the Revenue can be balanced by an additional payment of Rs. 5 crore."

"Subject to aforesaid, we entertain the stay application and exercise our statutory discretion in favour of the assessee for stay of recovery of balance outstanding demand for a period of six months or till the disposal of the appeal of the assessee by the Tribunal whichever is earlier."

Core principles established include:

• The existence of a prima facie case based on prior favorable rulings can justify grant of stay of demand even in complex technical tax disputes involving interpretation of DTAA and Income Tax Act provisions.
• The balancing of interests between revenue protection and assessee's rights requires consideration of financial capacity and imposition of reasonable deposit conditions.
• Stay of demand is not automatic and is subject to compliance with conditions including cooperation for expeditious disposal of appeal and deposit of a substantial amount to safeguard revenue.

Final determinations:

• The additions relating to international freight logistic services, global account management charges, and lease line charges were prima facie held to be contestable issues favoring the assessee.
• The assessee was granted partial stay of demand subject to deposit of Rs. 5 crore and compliance with procedural directions.
• The stay was granted for six months or till disposal of the appeal, whichever is earlier, with directions for out of turn hearing and strict adherence to timelines.