CASE LAW

2016-TII-202-ITAT-MUM-INTL

MERIDIEN SA Vs DDIT: MUMBAI ITAT (Dated: August 26, 2016)

Income Tax - Sections 143(3), 144C, 234B and Article 13 of India-France DTAA.

Keywords - AE - accrual system - FTS - license fees - PE - royalty - reverse charge mechanism - variance as per books & income subjected to TDS.

Whether the amount reduced by Indian Customers under 'reverse charge mechanism' from royalty or fees payable to a foreign assessee, which is neither earned nor accrued to the assessee, cannot partake the character of 'Income' in the hands of such foreign company - NO: ITAT

Whether, even if it is known that the levy of interest u/s 234B is automatic, mandatory and consequential to the framing of regular assessment order, the process of levying interest u/s 234B must be preceded by the fact that assessee is found to be in default as regards the discharge of statutory dues of advance tax - YES: ITAT

A) The assessee is engaged in the business of providing hotel related services to hotels across the world. It had consistently followed 'Cash system' of accountancy in India, and pursuant thereto had been offering its revenues to tax on receipt basis. The assessee during the subject year, had entered into license agreements with various hotels in India, as per the terms of which, the use of its Trade mark, "LE MERIDIEN", was permitted to the hotels, as well as provided advertising and promotional services, reservation services to the respective hotels. The assessee pursuant to the aforesaid services so rendered by it, earned licenses fees, which were reflected as 'Royalty' and offered for tax at the rate of 10% in terms of Article 13. Subsequently the e-return was filed declaring total income at Rs.18,86,36,050/-. The same was taken up for scrutiny, wherein the AO taking cognizance of the fact that as against the amount of royalty of Rs. 24,82,77,879/- on which tax had been deducted at source by the customers, as revealed by the TDS certificates for the year under consideration, the assessee in its return had only accounted for royalty amount of Rs.18,86,36,050/-, therefore called upon the assessee to put forth an explanation as regards the short/deficit amount of royalty of Rs. 5,96,41,829/-, which was reconciled by the assessee company. The AO however, made an addition of the aforesaid variance of Rs. 5,96,41,829/- to the returned income and assessed the income u/s. 143(3) r.w.s. 144C(3) at Rs. 24,82,77,880/-. On appeal, the CIT(A) directed the AO to tax the amount of royalty as per the gross amount credited in account of the assessee company by the customers in their 'books of accounts', irrespective of whether amount was actually paid or not, while for as regards the variance of Rs. 1,71,13,377/-, it had held that as the gross royalty income of the assessee was to be subjected to tax as per the rate provided in the India-France treaty.

B) The assessee had also challenged the order, whereby the CIT(A) upheld the interest levied by the A.O u/s 234B, on the ground that as the entire income of the assessee was subject to deduction of tax at source, therefore the latter was not liable to pay any advance tax, and thus no liability towards interest u/s 234B could be fastened upon it.

Having heard the matter, the Tribunal held that,

Gross royalty income

+ this Tribunal is persuaded to agree with the contention of the AR that in light of the facts involved in the case of the present assessee company, the amount of Rs. 1,71,13,377/- reduced by the customers on account of service tax liability from the amount of fees/royalty, which otherwise but for the said reduction would had been payable to the assessee company, and remitting of only the balance amount by the customers in full and final discharge of their liability as regards the fees/royalty payable to the assessee company, which had been accepted, agreed upon and acknowledged by the assessee company, as such, coupled with the fact that the assessee company had not retained with itself any right as regards recovery of any such amounts deducted by the customers qua the liability towards service tax as was so cast upon them, therefore in light of the aforesaid facts as they so remain, cannot be treated as the income of the assessee company. In this regard it would be relevant and pertinent to point out that as neither any part of the aforesaid amount so reduced by the customers from the amount of fees/royalty which otherwise would had been payable to the assessee company, had at any point of time accrued as income to the assessee company, nor was the same ever received by the latter, as a result whereof it can safely and inescapably be concluded that no part of the said amount did ever partake the color and character as that of 'Income' in the hands of the assessee company, pursuant whereto we are of the considered view that the authorities below had erred in including the said amount as income in the hands of the assessee company. We though find ourselves to be in agreement with the claim of the A.R that as the amount of Rs. 1,71,13,377/- reduced by the customers on account of service tax liability from the amount of fees/royalty, which otherwise but for the said reduction would had been payable to the assessee company, had been accepted as such in full and final discharge of the liability of the customers as regards the fees/royalty payable to the assessee company, and the assessee company had not retained with itself any right as regards recovery of any such amounts deducted by the customers qua the liability towards service tax as was so cast upon them, therefore the aforesaid amount of Rs. 1,71,13,337/- cannot be treated to be the income of the assessee company, but as we are persuaded to arrive at such a finding in light of the claim raised by the A.R for the assessee company on the basis of the aforesaid letter dated 25/07/2016 placed before us, we therefore restore the issue to the file of the A.O for verifying the aforesaid claim of the assessee company, and on finding the same in order, delete the addition of Rs. 1,71,13,337/- made in the hands of the assessee company. In this regard it is further directed that the AO in the course of verifying the aforesaid claim of the assessee, shall afford an opportunity of being heard to the assessee;

Interest u/s 234B

+ the issue that where an assessee is found to be in default as regards the statutory obligation cast upon him with respect to payment of advance tax, the levy of interest u/s 234B of the 'Act' will be automatic, mandatory and consequential, is no more res integra after the judgment of SC in the case of : Anjum M.H. Ghaswala. Thus in light of the aforesaid settled position of law, we are of the view that though the levy of interest u/s 234B would be automatic, mandatory and consequential to the framing of regular assessment in the hands of the assessee company, but the process of fastening the levy of interest u/s 234B must be preceded by surfacing of the fact that the assessee company is found to be in default as regards the statutory obligation as stood cast upon it with respect to payment of advance tax. Thus now when the issue pertaining to substantive addition had been restored by us to the file of the A.O for making necessary verifications and giving effect to the same as per our directions, we therefore also restore the present issue as regards the liability of the assessee company towards interest u/s 234B to the file of the A.O, with the direction that the same be adjudicated in light of our aforesaid observations. As the facts and circumstances in the other appeal of the assessee company for A.Y. 2009-10, marked as ITA No. 6605/Mum/2012, is pari materia to those in A.Y. 2008-09, our decision therein shall apply mutatis mutandis in the said appeal also.

Assessee's appeal partly allowed