2016-TII-50-HC-MUM-INTL

DIT Vs KONINKLIJKE DSM NV: BOMBAY HIGH COURT (Dated: September 07, 2016)

Income tax - Sections 143(3) & 271(1)(c) - India-Netherlands DTAA - Article 12.

Keywords: CICT Services - FTS - bona fide claim - penalty.

Whether when two authorities have held that the CICT charges received by the non-resident from its Indian AEs are not taxable in India as per the provisions of the DTAA, and the issue was clearly a debatable one, even then penalty u/s 271(1)(c) is warranted - NO: HC

Whether the fact that the assessee was granted refund by the Revenue for the TDS deducted by the AEs on payments remitted, it goes to prove that the assessee had a bona fide belief that its income was not chargeable to tax in India - YES: HC

The assessee is a tax resident of Netherlands. It has its AEs operating in India and received income from them. This income was in respect of Corporate Services and CICT Charges (cost incurred on share of email, network and internet charges). However the Assessee being of the view that such income was not chargeable to tax, in its return of income filed electronically for A.Y. 2006-07 declared total income at nil. The AO, on examination of the DTAA, held that the fees received in respect of CICT Services and for Corporate Services from its affiliated companies was infact in the nature of fees for technical services. This, on the basis of Article 12 of the DTAA between India and Netherlands, was chargeable to tax in India. Consequently, the Income of Rs.2.34 crores received from its Indian affiliates was brought to tax.

The AO, thereafter, served notice upon the Assessee to show cause why penalty under Section 271(1)(c) of the Act should not be imposed. The Assessee while responding pointed out that all the relevant facts and details with regard to the nature of receipt on account of CICT Service and Corporate Services along with the basis of its non taxability was mentioned in the notes to its Accounts. The above amount of Rs. 2.34 crores on the above two counts was not offered to tax on the basis of its interpretation of the DTAA and judicial decisions. This led to a bonafide belief that the receipt of amounts from its affiliated companies was not chargeable to tax.

On appeal, the CIT(A) noted that identical services were being rendered by the Respondent to its Indian affiliated companies from the Assessment Year 2002-03 onwards and in the earlier returns also the receipt from the affiliated companies were not shown as income. On the contrary, the tax, which was deducted at source by the affiliated companies while making payments to the assessee, was refunded by the Revenue. It was further noted that for several assessment years before the filing of returns by Corporates in electronic form was made mandatory in the subject Assessment Year, the notes to accounts filed along with the returns of income completely disclosed not only the facts of receipt of amounts from affiliated companies but the nature of the receipts. The filing of return in Electronic media did not provide for filing notes to Accounts along with the Return. Thus the non-offering of Income to tax was bonafide. This was based upon past practice and grant of refund of the tax deducted by the affiliated companies on the payments made to it. Moreover the entire basis of holding that the amount received from affiliated companies was not chargeable to tax was the interpretation placed upon the DTAA by the Assessee. The CIT(A) held that there was no concealing of particulars of income or furnishing inaccurate particulars of Income. Accordingly, the penalty was deleted. The Tribunal upheld the finding of the Commissioner of Income Tax (Appeals).

On appeal, the HC held that,

+ the two authorities have concurrently come to a finding of fact that the conduct of the Assessee was bonafide and its claim that amount received from its affiliated companies on account of CICT and Corporate Services is not taxable was based on an interpretation of DTAA. It is a settled position of law that where the issue is debatable then mere making of a claim on the basis of a particular interpretation would not lead to an imposition of penalty;

+ bearing in mind that for the earlier assessment years the Assessee had claimed and been granted refund of taxes deducted at source by the affiliated companies in respect of the payment received by it for Corporate Services and CICT Services would also establish that the claim made by the Assessee that the income received is not chargeable to tax was a bonafide claim. On facts there is a concurrent finding of there being no concealment of income or furnishing an inaccurate claim of income;

+ in view of the above concurrent finding of fact by CIT(A) and the Tribunal the proposed question does not give rise to any substantial question of law.

Revenue's appeal dismissed