2023 (9) TMI 1689 - AT - Income Tax

Taxability of amount received for Consulting and Engineering services as Fees for technical services (FTS) - India-UK DTAA - HELD THAT - As 2019 (4) TMI 605 - ITAT MUMBAI amount received towards consulting engineering services to be not in the nature of fees for technical services as discussed above we hold that the amount received towards cost recharge cannot be brought to tax in India in the absence of PE. Therefore the additions made by the AO are hereby deleted. DRP not considering the claim made for the first time before the DRP - assessee received income towards interest on Income Tax refund which was offered to tax at 40% 3% cess in return of income - We find that the ground raised by the assessee before DRP is legal in nature and no fresh evidence is required to be adduced for its adjudication. We deem it appropriate to restore ground No. 3 of appeal to Assessing Officer for adjudication,

Summary

The core legal questions considered in this appeal are:

1. Whether the amounts received by the assessee for consulting and engineering services qualify as Fees for Technical Services (FTS) under Article 13 of the India-UK Double Taxation Avoidance Agreement (DTAA), thereby attracting tax in India.

2. Whether the common cost recharge amounts received by the assessee constitute Royalty and/or Fees for Technical Services under Article 13 of the India-UK DTAA and are taxable in India.

3. Whether the interest income received by the assessee on income tax refunds is taxable at the concessional rate of 15% under Article 12 of the India-UK DTAA, as claimed by the assessee, or at the higher domestic tax rate.

4. Whether the levy of consequential interest under Sections 234B and 234C of the Income Tax Act, 1961, is justified.

Issue 1 and Issue 2: Taxability of Consulting and Engineering Services Fee and Common Cost Recharge as FTS/Royalty

The legal framework governing these issues is Article 13 of the India-UK DTAA, which defines Fees for Technical Services (FTS) and Royalty, and Section 9(1)(vi) of the Income Tax Act, which deals with income deemed to accrue or arise in India by way of royalty or fees for technical services. The Tribunal's earlier decisions in the assessee's own case for Assessment Year (AY) 2012-13 and subsequent years form significant precedents.

The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) held that the amounts received for consulting and engineering services (Rs. 21,25,145) and common cost recharge (Rs. 4,72,39,386) were taxable as FTS and Royalty under the DTAA. The assessee contested this classification, relying on the Tribunal's decision for AY 2012-13, where it was held that the amounts did not constitute FTS because the Department failed to establish that the assessee made available technical knowledge, experience, skill, know-how, or processes to the service recipient. The Tribunal had concluded that such receipts should be treated as business profits, which are not taxable in India in the absence of a Permanent Establishment (PE).

The Tribunal's reasoning emphasized that the Department did not demonstrate that the consulting engineering services involved the transfer of technical knowledge or skill as contemplated under Article 13(4)(c) of the India-UK DTAA. Consequently, the receipts were not FTS. Further, since the common cost recharge was ancillary and incidental to the consulting engineering services, it could not be treated separately as FTS or Royalty.

The Department's reliance on DRP directions for AY 2015-16 was noted, but the Tribunal observed that the DRP had ignored the binding precedent set by the Tribunal's decision for AY 2012-13. The Tribunal also noted that for AY 2015-16, the issue was restored to the AO for fresh consideration, and for AY 2019-20 and AY 2020-21, the Tribunal deleted similar additions following the 2012-13 decision.

Applying the legal principles and consistent precedents, the Tribunal held that the amounts received for consulting and engineering services and common cost recharge do not constitute FTS or Royalty and are not taxable in India in the absence of a PE. The additions made by the AO were therefore deleted.

Issue 3: Taxability of Interest Income at Concessional DTAA Rate

The assessee received Rs. 2,79,046 as interest on income tax refund, which was offered to tax at the domestic rate of 40% plus cess. The assessee claimed for the first time before the DRP that as a UK tax resident, it was entitled to the concessional tax rate of 15% under Article 12 of the India-UK DTAA on such interest income.

The DRP rejected this claim on the ground that it was not made in the original or revised return of income, relying on the Supreme Court decision in Goetze (India) Ltd. vs. CIT, which bars raising new grounds before the DRP that were not raised in the return or assessment proceedings.

The assessee sought restoration of this issue to the AO for adjudication, citing the decision of the Hon'ble Jurisdictional High Court in Director of Income Tax vs. Credit Agricole Indosuez Ltd., which allows consideration of DTAA benefits even if claimed for the first time before the appellate authorities, provided the facts are not in dispute and no fresh evidence is required.

The Tribunal observed that the issue raised is purely legal and no fresh evidence is necessary. Accordingly, it restored the issue to the AO to consider the claim afresh after affording the assessee a reasonable opportunity of hearing. This approach balances the procedural requirements with the assessee's right to claim treaty benefits.

Issue 4: Levy of Interest under Sections 234B and 234C

The assessee challenged the levy of interest under Sections 234B and 234C of the Income Tax Act. These provisions impose interest for default in payment of advance tax and deferment of advance tax installments, respectively.

The Tribunal noted that the levy of interest under these sections is consequential and mandatory once a tax liability arises and is not discretionary. Therefore, the challenge to the interest levy was rejected and the ground dismissed.

Significant Holdings

On the taxability of consulting and engineering services and common cost recharge, the Tribunal held:

"In any case of the matter, the Department has failed to establish on record that through development and supply of technical designs / drawings / plans the assessee has made available technical knowledge, experience, skill, knowhow or processes to the service recipient so as to bring the amount received within the meaning of fees for technical services under Article-13(4)(c) of the India-UK Tax Treaty. Therefore, in our considered opinion, the amount received by the assessee has to be treated as business profit and in the absence of a PE in India, it cannot be brought to tax in India."

Further, regarding the common cost recharge:

"Since, we have held the amount received towards consulting engineering services to be not in the nature of fees for technical services, the reasoning of the departmental authorities with regard to cost recharge would also fail, since, they have treated it as ancillary and incidental to consulting engineering services... we hold that the amount received towards cost recharge cannot be brought to tax in India in the absence of PE."

On the interest income issue, the Tribunal emphasized the legal nature of the claim and stated:

"We find that the ground raised by the assessee before DRP is legal in nature and no fresh evidence is required to be adduced for its adjudication. We deem it appropriate to restore ground No. 3 of appeal to Assessing Officer for adjudication, after affording reasonable opportunity of hearing /making submissions to the assessee, in accordance with law."

On the levy of interest under Sections 234B and 234C, the Tribunal held that such levy is consequential and mandatory, leading to dismissal of the challenge.

In conclusion, the Tribunal allowed the appeal on Grounds 1 and 2 by deleting the additions related to FTS and Royalty, allowed Ground 3 for statistical purposes by restoring it to the AO for fresh adjudication, and dismissed Ground 4 concerning interest levy under Sections 234B and 234C.