IBM World Trade Corporation, Bangalore V. AddlDIT, Bangalore

ITA 1676/BANG/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 89873 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 3 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-04-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 31-03-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 26-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K GANESH RAO CIT III
• Keywords: Transfer pricing; Rectification of order; Double taxation relief; International transaction; Rule of consistency; Advance ruling
• Section: 92C; 143(3); 234B; 90; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH C BEFORE SHRI N.V. VASUDEVAN , JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T (T.P) . A. NO. 1676 /BANG/201 2 (ASSESSMENT YEAR : 200 8 - 0 9 ) M/S. IBM WORLD TRADE CORPORATION, C/O BMR & A SSOCIATES LLP, LEVEL 3, PRESTIGE NEBULA - 1, 8 - 12, CUBBON ROAD, BANGALORE. VS. THE ADDL. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION), RANGE 1, BANGALORE. APPELLANT RESPONDENT. APPELLANT BY : SHRI SHARATH RAO, C.A. RESPONDENT BY : SHRI A.K. GANESH R AO, CIT - III (D.R) DATE OF H EARING : 31.3.2015. DATE OF P RONOUNCEMENT : 17.4. 201 5 . O R D E R PER SHRI JASON P. BO AZ, A.M. : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE FINAL ORDER OF ASSESSMENT FOR ASSESSMENT YEAR 2008 - 09 PASSED UNDER SECTION 143(3) RWS 144C OF THE INCOME TAX ACT, 1961 (HEREIN AFTER REFERRED TO AS 'THE ACT') VIDE ORDER DT.26.10.2012 I N PURSUANCE TO AND IN CONSONANCE WITH THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL, BANGALORE ( DRP ) PASSED UNDER SECTION 144C(5) RWS 144C(8) OF THE ACT VIDE ORDER DT.17.9.2012. 2. THE FACTS OF THE CASE, BRIEFLY, ARE AS UNDER : - 2.1 THE ASSESSEE, A FOREIGN COMPANY IN THE BUSINESS OF DEVELOPMENT AND SALE OF SOFTWARE FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2008 - 09 ON 30.9.2008 DECLARING INCOME OF RS.261,01,44,850. THE CASE WAS SELECTED FOR SCRUTINY. THE ASSESSING OFFICER ON 2 IT (T.P) A NO. 1676 /BANG/ 2012 IBM WORLD TRADE CORPN. OBSERVING THAT T HE INTERNATIONAL TRANSACTIONS REPORTED BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES (AE) WERE IN EXCESS OF RS.15 CRORES , MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) UNDER SECTION 92CA OF THE ACT FOR DETERMINATION OF THE ARM S LENGTH PRICE ( ALP ) OF THESE TRANSACTIONS. THE TPO VIDE ORDER UNDER SECTION 92CA OF THE ACT DT.31.10.2011 HELD THAT NO ADJUSTMENT IS REQUIRED UNDER SECTION 92CA RWS 92C OF THE ACT TO THE ALP IN RESPECT OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WIT H ITS AES IN THE YEAR UNDER CONSIDERATION. 2.2 THE B IFURCATION OF INCOME DECLARED AND THE TAX LIABILITY THEREON AS PER THE PROVISIONS OF THE INCOME TAX ACT, 1961 AND THE DTAA BETWEEN INDIA AND USA AND THE TAXES AS ADMITTED AND SUBMITTED BY THE ASSESSEE ENTERED HEREUNDER : - ITEM AMOUNT RECEIVED IN RS. TAX LIABILITY AS PER IT ACT INCLUDE SURCHARGE AND EDUCATION CHARGE TAX RATE AS PER DTAA AND AS PER THE AGREEMENT ENTERED INTO ON THE SPECIFIC DATE TAX LIABILITY AS PER DTAA TAX RATE APPLIED BY ASSESSEE TAX LIABILITY CALCULATED AND ADMITTED BY ASSESSEE. ROYALTY ESW 1128992226 238386666 15% 169348804 15% 169348804 SERVICE ROYALTY 618065489 65252264 15% 92709823 10.55% 65252264 SALE OF SOFTWARE 323318205 34134319 15% 48497731 10.55% 34134319 FEE FOR TECHNI CAL SERVICES 539769128 56986126 15% 80965369 10.55% 56986126 TOTAL 261,01,44,848 39,47,59,375 39,15,21,727 32,57,21,513 THE ASSESSING OFFICER COMPLETED THE DRAFT ORDER OF ASSESSMENT UNDER SECTION 143(3) RWS 144C OF THE ACT VIDE ORDER DT.20.12.20 11 WHEREIN THE INCOME OF THE ASSESSEE WAS 3 IT (T.P) A NO. 1676 /BANG/ 2012 IBM WORLD TRADE CORPN. DETERMINED AT RS.261,01,44,848 AS RETURNED BY THE ASSESSEE. IN THE DRAFT ORDER OF ASSESSMENT, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE IS OFFERING THE ROYALTY INCOME TO TAX BOTH UNDER SECTION 115A OF THE A CT AS ALSO AS PER ARTICLE 12 OF THE INDIA - USA DTAA. THE ASSESSING OFFICER DID NOT ACCEPT THE TAX DETERMINED BY THE ASSESSEE @ 10.455 % BASED ON AGREEMENTS ENTERED INTO ON OR AFTER 1.6.2005, BUT DETERMINED THE TAX PAYABLE @ 15% FOR ALL AGREEMENTS ENTERED INTO BY THE ASSESSEE DURING THE RELEVANT PERIOD. THIS LED TO THE RAISING OF TAX DEMAND OF RS.23,04,02,060; WHICH WAS INCLUSIVE OF INTEREST CHARGED UNDER SECTION 234B OF THE ACT. 3. AGGRIEVED BY THE DRAFT ORDER OF ASSESSMENT FOR ASSESSMENT YEAR 2008 - 09 D T.20.12.2011, THE ASSESSEE FILED ITS OBJECTIONS THERETO BEFORE THE DRP, BANGALORE. THE DRP ISSUED ITS DIRECTIONS THEREON UNDER SECTION 144C(5) RWS 144C(8) OF THE ACT VIDE ORDER DT.17.9.2012 REJECTING THE ASSESSEE'S OBJECTIONS. CONSEQUENT THERETO, THE AS SESSING OFFICER PASSED THE IMPUGNED ORDER OF ASSESSMENT UNDER SECTION 143(3) RWS 144C OF THE ACT VIDE ORDER DT.26.10.2012 IN PURSUANCE TO AND IN CONFORMITY WITH THE DIRECTIONS ISSUED BY THE DRP. 4. AGGRIEVED BY THE FINAL ORDER OF ASSESSMENT FOR ASSESSM ENT YEAR 2008 - 09 PASSED UNDER SECTION 143(3) RWS 144C OF THE ACT VIDE ORDER DT.26.10.2012, THE ASSESSEE HAS PREFERRED THIS APPEAL BEFORE THIS TRIBUNAL RAISING THE FOLLOWING GROUNDS : - 1. THE LD. A.O. HAS ERRED IN PASSING AN ORDER WHICH IS BAD IN LAW AND ON FACTS, AND RAISING A DEMAND OF RS.583,904,443 ON THE APPELLANT. APPLICATION OF BLANKET RATE OF TAX. 2. THE LEARNED A.O. AND THE DISPUTE RESOLUTION PANEL ( DRP ) HAVE ERRED IN LAW AND ON FACTS IN APPLYING A BLANKET RATE OF 15 PERCENT ON THE TOTAL INCOME RETURNED BY THE APPELLANT DISREGARDING THE FACT THAT OF THE TOTAL INCOME REPORTED BY THE APPELLANT, 4 IT (T.P) A NO. 1676 /BANG/ 2012 IBM WORLD TRADE CORPN. AN AMOUNT OFRS.1,481,152,822 WAS LIABLE TO TAX AT THE RATE OF 10.5575 PERCENT AS PER THE PROVISIONS OF SECTION 115A OF THE ACT. 3. THE LEARNED A.O. AND THE DRP HAVE ERRED IN LAW AND ON FACTS IN INTERPRETING THE PROVISIONS OF SECTION 90 AND SECTION 115A OF THE ACT, AND THE CORRESPONDING PROVISIONS OF THE RELEVANT AGREEMENT FOR AVOIDANCE OF DOUBLE TAXATION (DTAA). 4. THE LEARNED A.O. AND THE DRP HAVE ERRED IN LAW AND ON FACTS IN HOLDING THAT THE RELIEF UNDER SECTION 90 OF THE ACT IS SPECIFIC TO EACH ASSESSMENT YEAR AND NOT TO EACH SEGMENT OF SOURCE OF INCOME. 5. THE LEARNED A.O. AND THE DRP HAVE ERRED IN LAW AND ON FACTS IN HOLDING THAT THE APPELLANT CAN EITH ER TAKE THE BENEFIT OF THE DTAA OR THE ACT AND CANNOT SPLIT THE INCOME INTO SEGMENTS FOR AVAILING BOTH BENEFITS. 6. THE LEARNED A.O. AND THE DRP HAVE ERRED IN LAW AND ON FACTS IN DISREGARDING THE CIRCULAR ISSUED BY THE CBDT (CIRCULAR 728 DATED OCTOBER 30 , 1995) WHICH ALLOWS AN ASSESSEE TO TAKE INTO ACCOUNT THE LOWER RATES PRESCRIBED BY THE APPLICABLE DTA OR THE ACT. 7. THE LEARNED A.O. AND THE DRP HAVE ERRED IN LAW AND ON FACTS IN DISREGARDING THE DECISIONS ON WHICH RELIANCE WAS PLACED BY THE APPELLANT. 8. THE LEARNED A.O. AND DRP HAVE NOT FOLLOWED THE PRINCIPLES OF JUDICIAL DISCIPLINE BY NOT FOLLOWING THE JUDGMENT OF THE BANGALORE BENCH OF THE APPELLATE TRIBUNAL IN THE CASE OF APPELLANT, FOR A.Y. 2007 - 08, ON THE SAME ISSUE. LEVY OF INTEREST UNDER SEC TION 234B OF THE ACT. 9. THE LEARNED A.O. AND THE DRP HAVE ERRED IN LAW AND ON FACTS IN HOLDING THAT THE APPELLANT IS REQUIRED TO PAY ADVANCE TAX UNDER SECTION 209 OF THE ACT. 10. THE LEARNED A.O. AND THE DRP HAVE ERRED IN LAW AND ON FACTS IN NOT APPRE CIATING THE FACT THAT THE ENTIRE INCOME RECEIVED BY IBM WTC WAS LIABLE TO BE SUBJECTED TO WITHHOLDING TAX PROVISIONS OF THE ACT AND ACCORDINGLY, THERE WAS NO REQUIREMENT FOR THE APPELLANT TO PAY ADVANCE TAX. 11. THE LEARNED A.O. AND THE DRP HAVE ERRED I N LAW AND ON FACTS IN LEVYING INTEREST UNDER SECTION 234B AND SECTION 234C OF THE ACT WITHOUT ANY CAUSE. 12. THE LEARNED A.O. AND THE DRP HAVE ERRED ON FACTS IN HOLDING A VIEW THAT THE APPELLANT HAS FAILED TO PAY ADVANCE TAX UNDER THE ACT DISREGARDING THE VARIOUS DECISIONS ON WHICH RELIANCE WAS PLACED UPON BY THE APPELLANT, INCLUDING THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. UWE JAROSCH (SLP 27193/2010 AND 2918/2011). 13. THE LEARNED A.O. AND THE DRP HAVE ERRED IN LAW AND ON FACTS IN DISREGARDING THE ORDERS PASSED BY THE HON'BLE ITAT IN THE APPELLANT S OWN CASE FOR THE ASSESSMENT YEAR 2003 - 04, ASSESSMENT YEAR 2004 - 05, ASSESSMENT YEAR 2005 - 06, ASSESSMENT YEAR 2006 - 07 AND ASSESSMENT YEAR 2007 - 08. OTHERS 14. THE LEARNED ASSESSING OFFI CER HAS ERRED IN LAW AND ON FACTS IN PROVIDING CREDIT FOR TDS FOR AN AMOUNT OF RS.5,583,041 AS AGAINST THE AMOUNT OF RS.298,606,708 CLAIMED BY THE APPELLANT. 5 IT (T.P) A NO. 1676 /BANG/ 2012 IBM WORLD TRADE CORPN. 15. THE LEARNED ASSESSING OFFICER HAS ERRED IN LAW AND ON FACTS IN INITIATING PENALTY PROCEEDINGS ON THE APPELLANT. 5. THE GROUND AT S.NO.1 BEING GENERAL IN NATURE, NO ADJUDICATION IS CALLED FOR THEREON. 6. APPLICATION OF BLANKET RATE OF TAX. 6.1 THE GROUNDS OF APPEAL AT S.NOS.2 TO 8 ARE RAISED IN RESPECT OF THE CORRECTNES S OR OTHERWISE OF THE APPLICATION OF THE BLANKET RATE OF TAX AS PER THE DTAA ON THE ENTIRE INCOME FOR THE RELEVANT PERIOD. AT THE OUTSET, THE LEARNED AUTHORISED REPRESENTATIVE SUPPORTED THE PROPOSITIONS SET OUT IN THE GROUNDS RAISED AT S.NOS. 2 TO 8 (SUPR A). THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT THE IDENTICAL ISSUE OF THE APPLICATION OF RATES OF TAX ON ROYALTY WAS UP FOR CONSIDERATION BEFORE A CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2007 - 08 AND THAT IN ITS ORDER IN ITA NO.759/BANG/2011 DT.13.4.2012, THE BENCH HELD THAT THE COMPUTATION OF TAX BY THE ASSESSEE IN RESPECT OF ROYALTY INCOME IS TO BE ACCEPTED. THE LEARNED AUTHORISED REPRESENTATIVE PRAYED THAT IN VIEW OF THIS FINDING OF THE CO - ORDINATE BEN CH, THE ASSESSEE'S APPEAL ON THE ISSUE OF APPLICATION OF TAXES IN RESPECT OF ROYALTY INCOME OUGHT TO BE ACCEPTED. 6.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND PRAYED THAT THEIR FINDINGS BE UP HELD AND THE ASSESSEE'S APPEAL BE DISMISSED. 6.3.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUDING THE JUDICIAL PRONOUNCEMENT CITED AND PLACED RELIANCE ON BY THE ASSESSEE. WE FIND THAT, AS SUB MITTED BY THE ASSESSEE, THE IDENTICAL ISSUE OF THE 6 IT (T.P) A NO. 1676 /BANG/ 2012 IBM WORLD TRADE CORPN. QUESTION OF APPLICATION OF TAX RATES ON ROYALTY INCOME WAS BEFORE THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2007 - 08. IN ITS ORDER IN ITA NO.759/BANG/2011 DT.13. 4.2012, THE CO - ORDINATE BENCH AT PARAS 7.1 TO 7.10 THEREOF HELD THE COMPUTATION OF TAX RATES ON ROYALTY INCOME AS SUBMITTED BY THE ASSESSEE IS TO BE ACCEPTED; AND THIS FINDING IS EXTRACTED HEREUNDER : - 7.1 WE HAVE CAREFULLY PERUSED AND GIVEN DUE CONSI DERATION TO THE DETAILED ARGUMENTS MADE AND WRITTEN SUBMISSIONS FILED BY BOTH THE LEARNED AUTHORISED REPRESENTATIVE AND THE LEARNED DEPARTMENTAL REPRESENTATIVE. IT IS A SETTLED POSITION THAT AS PER SECTION 90(2), THE PROVISIONS OF THE ACT OR THE PROVISION S OF THE TREATY , WHICHEVER IS BENEFICIAL, APPLY TO THE ASSESSEE. EVEN THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS AGREED THAT IN VIEW OF SECTION 90(2), THE PROVISION OF THE TAX TREATY OVERRIDE THE PROVISIONS OF THE ACT EXCEPT TO THE EXTENT THE LATTER ARE MORE BENEFICIAL TO THE ASSESSEE. THE QUESTION FOR CONSIDERATION IS AT WHAT STAGE THE PROVISIONS OF THE ACT AND THE TREATY SHOULD BE EXAMINED TO ASCERTAIN THE BENEFICIAL NATURE OF THE PROVISIONS. IN THE INSTANT CASE, THE ASSESSEE HAS COMPARED THE PROVISION S OF THE ACT AND THE TREATY IN RESPECT OF INCOME ARRIVING FROM ROYALTY ON THE BASIS OF AGREEMENTS ENTERED INTO BEFORE 1.6.2005 AND THEREAFTER 1.6.2005. REVENUE, ON THE OTHER HAND, HAS COMPARED THE PROVISIONS OF THE ACT AND TREATY ON AN AGGREGATE BASIS DIS REGARDING THE FUTURE OF AGREEMENTS HAVING BEEN ENTERED INTO BEFORE 1.6.2005 AND AFTER 1.6.2005. THE ASSESSEE S ARGUMENT IS THAT THE PROVISIONS OF THE ACT AND TREATY ARE TO BE COMPARED IN RESPECT OF EACH SOURCE OF INCOME WHEREAS REVENUE IS OF THE VIEW THAT THE SAID COMPARISON IS TO BE MADE AT THE AGGREGATE LEVEL. 7.2 IN THE INSTANT CASE, THERE IS, NO DISPUTE THAT THE ASSESSEE HAS ENTERED INTO MARKETING ROYALTY AGREEMENT WITH IBM INDIA PVT. LTD. ON 1.6.2005 (PAGE 51 OF THE PAPER BOOK). AGREEMENTS HAVE ALS O BEEN ENTERED INTO WITH OTHER PARTIES, FOR EXAMPLE INFOSYS TECHNOLOGIES LTD. ON 27.12.2006 (PAGE 61 OF PAPER BOOK) AND CENTRE FOR DEVELOPMENT OF ADVANCED COMPUTING ON 28.9.2006 (PAGE 70 OF PAPER BOOK). THERE IS ANOTHER AGREEMENT I.E. IBM SOFTWARE REMARKE T AGREEMENT BETWEEN THE ASSESSEE AND I BM INDIA PVT LTD DT.1.10.200 4 I.E. BEFORE 1.6.2005 (PAGE 114 OF PAPER BOOK). 7.3 AS PER THE PROVISIONS OF SECTION 115A(1)(B), THE RATE OF TAX ON ROYALTY PAYMENTS IN CONNECTION WITH THE AGREEMENTS ENTERED INTO BEFORE 1.6.2005 IS20% AND THE TAX RATES FOR AGREEMENTS ENTERED INTO ON OR AFTER 1.6.2005 IS 10%. THESE TAX RATES HAVE BEEN PRESCRIBED SEPARATELY UNDER SUB - CLAUSE (A) AND SUB - CLAUSE (B). THEREFORE, DEPENDING ON THE NATURE OF RECEIPT VIZ. ROYALTY OR FEES FOR TEC HNICAL SERVICES AND THE DATE OF THE AGREEMENT I.E. BEFORE 1.6.2005 OR ON OR AFTER 1.6.2005, THE FOREIGN COMPANY HAS TO COMPUTE THE TAX SEPARATELY UNDER EACH OF THE SUB - CLAUSES (A), (AA), (B), (BB) AND (C) OF SECTIONS 115A(1)(B). EACH OF THESE SUB - CLAUSES ARE MUTUALLY EXCLUSIVE AND INDEPENDENT OF EACH OTHER AND CREATE OR PROVIDE FOR A CHARGE OF INCOME TAX UNDER SECTION 4 OF THE ACT. A FOREIGN COMPANY HAS TO, THEREFORE, COMPUTE TAX ON ITS INCOME UNDER EACH OF THE ABOVE SUB - CLAUSE SEPARATELY AND THE TAX SO C OMPUTED HAS TO BE AGGREGATED AS PER THE 7 IT (T.P) A NO. 1676 /BANG/ 2012 IBM WORLD TRADE CORPN. MANDATE OF SECTION 115A(1)(B) WHICH PROVIDES THAT THE INCOME TAX PAYABLE SHALL BE THE AGGREGATE OF. 7.4 THE ABOVE EXPRESSION WHICH PROVIDES FOR THE AGGREGATION OF TAX COMPUTED UNDER EACH OF THE SUB - CLAUSES (A), (A A), (B), (BB) AND (C) INDICATE THAT THE CHARGE OF TAX PROVIDED UNDER THE ABOVE SUB - CLAUSES ARE SEPARATE AND INDEPENDENT. THE ARGUMENTS OF THE LEARNED AUTHORISED REPRESENTATIVE SUPPORT A PROPOSITION THAT THE COMPUTATION OF TAX UNDER SECTION 115A IN RESPECT OF ROYALTY INCOME BASED ON THE DATE OF AGREEMENTS IS SEPARATE AND INDEPENDENT. WE ARE INCLINED TO ACCEPT THE ARGUMENT OF THE LEARNED AUTHORISED REPRESENTATIVE THAT ROYALTY INCOME IN RESPEC T OF THE AGREEMENT ENTERED INTO BEFORE 1.6.2005 ARE FROM ONE SOUR CE AND ROYALTY INCOME IN RESPECT OF AGREEMENTS ENTERED INTO ON OR AFTER 1.6.2005 ARE FROM A DIFFERENT SOURCE . THE CONTRACTS OR AGREEMENTS BEING THE SOURCE OF INCOME HAVE BEEN ENTERED INTO ON DIFFERENT DATES AND THE STATUTE RECOGNIZ ES SUCH TIME DIFFERE NTIATION AND PROVIDES SEPARATE TAX RATES FOR EACH SUCH STREAM. THE LEARNED CIT(A) WAS, THEREFORE, NOT CORRECT IN COMPARING THE TAX ON ROYALTY INCOME AS PER THE ACT AND AS PER THE TREATY ON AN AGGREGATE BASIS. IN VIEW OF THE ABOVE, WE ARE OF THE CONSIDERE D OPINION THAT THE TAXABILITY OF ROYALTY UNDER SUB - CLAUSES (A), (A), (B), (BB) AND (C) OF SECTION 115A(1)(B) ARE SEPARATE AND INDEPENDENT. 7.5 AS PER THE PROVISIONS OF SECTION 90(2) OF THE ACT OR THE PROVISIONS OF THE TREATY, WHICHEVER IS BENEFICIAL, APP LIES TO THE ASSESSEE. IT IS SETTLED LAW THAT THE PROVISIONS OF A TREATY WOULD OVERRIDE THE PROVISIONS OF THE INCOME TAX ACT, 1961 AND THIS VIEW HAS BEEN HELD IN THE FOLLOWING CASES AND CIRCULARS. - UNION OF INDIA VS. AZADI BACHAO ANDOLAN (2003) 263 IT R 706 (SC) - CIT VS. VISAKHAPATNAM PORT TRUST (1983) 144 ITR 146 (AP) - CIT VS. R.M. MUTHAIAH (1993) 202 ITR 508 (KAR) - CBDT CIRCULAR NO.333 DT.2.4.1982 137 ITR (ST.) 1. - ADVANCE RULING P.NO.13, (1997) 228 ITR 487 (AAR). IN THE INSTANT CASE, AS PER THE ACT THE TAX ON ROYALTY INCOME IN RESPECT OF AGREEMENTS ENTERED INTO BEFORE 1.6.2005 IS 20% AND THE RATE OF TAX IN RESPECT OF AGREEMENTS ENTERED INTO ON OR AFTER 1.6.2005 IS 10%. AS PER ARTICLE 12 OF THE INDIA - USA DTAA TREATY, ROYALTY INCOME IS CHARG EABLE TO TAX @ 15%. WE HAVE HELD THAT THE PROVISIONS OF SECTION 115A, CONCERNING THE TAXABILITY OF ROYALTY INCOME ARE SEPARATE AND INDEPENDENT AND THEREFORE, CONSEQUENTLY, THE ASSESSEE IS JUSTIFIED IN COMPARING THE RATE OF 10% AND 20% (AS PER SECTION 115A) SEPARATELY AND INDEPENDENTLY WITH THE RATE OF 15% (AS PER ARTICLE 12 OF THE INDIA - USA DTAA TREATY). BETWEEN THE RATE OF 20% AS PER SECTION 115A AND 15% RATE AS PER ARTICLE 12 OF THE TREATY, THE ASSESSEE COMPUTED TAX @ 15% BEING THE RATE BENEFICIAL TO IT. SIMILARLY BETWEEN 10% TAX RATE AS PER SECTION 115A AND 15% TAX RATE AS PER ARTICLE 12 OF THE TREATY, THE ASSESSEE HAS COMPUTED TAX @ 10% WHICH IS BENEFICIAL TO IT. THE ASSESSEE, IN OUR VIEW, IS JUSTIFIED IN COMPUTING THE TAX AT A RATE BENEFICIAL TO IT W HICH IS IN ACCORDANCE WITH THE PROVISIONS OF SECTION 90(2) OF THE ACT WHEREIN THE EXPRESSION TO THE EXTENT REINFORCES THE PRINCIPLE THAT THE PROVISIONS OF THE ACT OR TREATY WHICHEVER IS BENEFICIAL IS APPLICABLE TO THE ASSESSEE. 7.6 THE LEARNED CIT(A) AN D THE LEARNED D.R. HAVE BOTH PLACED RELIANCE ON THE DECISIONS IN THE CASE OF DRESDNER BANK AG CASE (SUPRA) AND PATNI COMPUTER SYSTEMS LTD (SUPRA) IN SUPPORT OF THE CONCLUSION THAT THE DETERMINATION OF TAX BY THE ASSESSEE IS NOT CORRECT. IN THE CASE OF DR ESDNER BANK AG CASE (SUPRA) , THE ASSESSEE WAS A NON - RESIDENT BANKING 8 IT (T.P) A NO. 1676 /BANG/ 2012 IBM WORLD TRADE CORPN. COMPANY INCORPORATED IN GERMANY AND OPERATING IN INDIA THROUGH ITS BRANCH OFFICE IN MUMBAI. THE ISSUES BEFORE THE TRIBUNAL WERE WITH REGARD TO (I) COMPUTATION OF INCOME CHARGEABLE TO TAX IN INDIA UNDER REGULAR PROVISIONS AND (II) THE APPLICABILITY OF SECTION 115A TO A FOREIGN COMPANY. IN RESPECT OF THE FIRST ISSUE, IT WAS SUBMITTED THAT THE ASSESSEE DOES NOT WANT TO INVOKE THE TREATY PROVISIONS AND THE MATTER IS TO BE ADJUDICATED BASED O N THE PROVISIONS OF THE ACT. THE TRIBUNAL ACCORDINGLY DECIDED THE ISSUE OF TAXABILITY OF INCOME UNDER THE PROVISIONS OF THE ACT. IN RESPECT OF THE SECOND ISSUE, THE ASSESSEE SUBMITTED THAT THE PROVISIONS OF SECTION 115JA DO NOT APPLY TO A FOREIGN COMPANY . THE TRIBUNAL DID NOT ACCEPT THIS CONTENTION. THE ASSESSEE THEN SUBMITTED THAT ASSUMING THE PROVISIONS OF SECTION 115JA WERE APPLICABLE, IT IS NOT LIABLE FOR MAT UNDER THE TREATY. THE TRIBUNAL FOUND THAT THE ASSESSEE SOUGHT TO AVAIL THE BENEFIT OF THE T REATY SELECTIVELY IN RESPECT OF TAXABILITY OF BOOK PROFIT U/S. 115JA AND HELD THAT ONCE THE ASSESSEE EXERCISES AN OPTION TO BE TAXED UNDER THE PROVISIONS OF THE ACT, TREATY PROVISIONS CANNOT BE INVOKED. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL WERE AS FO LLOWS : EITHER AN ASSESSEE IS TO BE ASSESSED TO TAX ON THE BASIS OF THE PROVISIONS OF THE TAX TREATY OR NOT. IN OUR CONSIDERED VIEW, THE ASSESSMENT OF INCOME CANNOT BE SPLIT INTO SEVERAL SEGMENTS AND THEN THE APPLICABILITY OF TREATY PROVISIONS, VIS - - VI S TAX LAW PROVISIONS, CANNOT BE SEPARATELY CONSIDERED FOR EACH SE G MENT. LIABILITY FOR MAT UNDER SECTION 115JA IS AN INTEGRAL PART OF ASSESSEE S ASSESSMENT OF INCOME, AND, ONCE THE ASSESSEE CHOOSES TO BE ASSESSED AS PER PROVISIONS OF THE ACT, IN PREFERENC E OVER THE PROVISIONS OF THE TAX TREATY , IT CANNOT BE OPEN TO THE ASSESSEE TO SEEK TREAT Y PROTECTION IN RESPECT OF ONE OF THE ASPECTS OF THE ASSESSMENT IF THE INCOME I.E. A PPLICABILITY OF MAT UNDER SECTION 115JA. IN THE ABOVE DECISION, WHILE THE ASSESSEE ACCEPTED THE APPLICABILITY OF THE PROVISION OF THE ACT IN RESPECT OF CHARGE OF INCOME TAX AND COMPUTATION OF TOTAL INCOME, WHEN IT CAME TO THE RATE OF TAX, THE ASSESSEE SUBMITTED THAT THE TREATY PROVISIONS SHOULD BE MADE APPLICABLE THEREBY SEEKING A SELEC TIVE TREATY BENEFIT. IN THE INSTANT CASE ON HAND, THE ASSESSEE HAS NOT INVOKED OR APPLIED THE PROVISIONS OF THE TREATY SELECTIVELY. THE ASSESSEE HAS COMPUTED THE TAX ON ROYALTY INCOME ARISING FROM TWO DIFFERENT CONTRACTS FALLING UNDER TWO DIFFERENT LIMBS OF SECTION 115A(1)(B) AT TWO RATES : (I) AT THE RATE PRESCRIBED UNDER THE TREATY AND (II) AT THE RATE PRESCRIBED UNDER THE I.T. ACT. THE ASSESSEE HAS INVOKED THE BENEFIT OF THE TREATY ONLY IN RESPECT OF ROYALTY INCOME ARISING FROM THE AGREEMENTS ENTERED INTO ON OR BEFORE 1.6.2005. IN RESPECT OF AGREEMENTS ENTERED INTO ON OR AFTER 1.6.2005, THE ASSESSEE HAS OFFERED ROYALTY INCOME @ 10% AS PER THE PROVISION OF SECTION 115JA. THE CONCERNED CONTRACTS ARE DIFFERENT; THE SOURCE OF INCOME IS DIFFERENT AND TH E PROVISIONS UNDER WHICH ROYALTY INCOME IS TAXABLE IS DIFFERENT AND THE ASSESSEE WAS THEREFORE JUSTIFIED IN OFFERING THE ROYALTY INCOME ARISING UNDER TWO DIFFERENT CONTRACTS AT TWO RATES ONE UNDER THE I.T. ACT AND ONE UNDER THE TREATY. IN THE INSTANT CA SE, IT IS NOT ONE OF SELECTIVE TREATY BENEFIT AS THE CASE BEFORE THE MUMBAI TRIBUNAL IN THE ABOVE REFERRED CASE. THE ABOVE DECISION IS THEREFORE, DISTINGUISHABLE FROM THE INSTANT CASE OF THE ASSESSEE. 9 IT (T.P) A NO. 1676 /BANG/ 2012 IBM WORLD TRADE CORPN. 7.7 IN THE CASE OF PATNI COMPUTER SYSTEMS LTD (SUPRA) , REVENUE ARGUED THAT THE LOSSES OF A FOREIGN BRANCH CANNOT BE SET OFF IN COMPUTING THE INCOME OF THE ASSESSEE BY VIRTUE OF ARTICLE 7 OF THE DTAA BETWEEN INDIA AND JAPAN. THE TRIBUNAL HELD THAT THE PROVISIONS OF THE TREATY CANNOT BE THRUST UPON THE ASSESS EE AND THE ASSESSEE BE DENIED THE INCOME TAX ACT BEING APPLICABLE IN ITS CASE. THE FACTS OF THE CASE AND THE RATIO OF THE DECISION, IN OUR CONSIDERED OPINION, HAS NO SIMILARITY TO THE INSTANT CASE OF THE ASSESSEE. IN THE REFERRED CASE, THE ISSUE PERTAIN ED TO SET OFF OF LOSSES OF FOREIGN BRANCH. IN THE YEAR OF LOSS, THE ASSESSEE SUBMITTED THAT THE PROVISIONS OF THE ACT WOULD PREVAIL AND AS A RESULT THE LOSS OF THE FOREIGN BRANCH HAS TO BE SET OFF IN COMPUTING THE TAXABLE INCOME IN INDIA. IN THE YEAR OF PROFIT, RELYING ON ARTICLE 7 OF THE INDIA JAPAN DTAA TREATY, THE ASSESSEE SUBMITTED THAT THE PROFITS OF THE FOREIGN BRANCH WOULD SUFFER TAX ONLY IN THAT COUNTRY AND NOT IN INDIA. THE DEPARTMENT OBJECTED TO THIS SELECTIVE TREATY APPLICATION FOR DIFFERENT YEARS. THE TRIBUNAL HELD THAT EACH YEAR IS DIFFERENT AND HENCE THE ASSESSEE IS ENTITLED TO SUCH APPLICABILITY OF THE ACT FOR ONE YEAR AND TREATY BENEFITS FOR A DIFFERENT YEAR. IN THE INSTANT CASE, THE ISSUE IN QUESTION IS NOT WITH REGARD TO TAXABILITY OF ROYALTY INCOME AT DIFFERENT RATES UNDER THE TREATY AND THE ACT. THE ABOVE DECISION IS NOT SIMILAR OR APPLICABLE TO THE FACTS OF THE CASE ON HAND AND IS DISTINGUISHABLE BOTH ON FACTS AND IN LAW. 7.8 THERE IS MERIT IN THE CONTENTION OF THE LEARNED A.R. ON THE ASPECT OF PRINCIPLE OF CONSISTENCY ALSO. IN THE INSTANT CASE, IT IS SEEN THAT THE ASSESSING OFFICER HAS ACCEPTED THE COMPUTATION OF TAX BASED ON DIFFERENT RATES IN THE ASSESSMENT ORDERS PASSED U/S. 143(3) FOR ASST. YEAR 2006 - 07 WHEREAS THE VERY SAM E OFFICER HAS CONCLUDED DIFFERENTLY IN RESPECT OF THE SAME FACTS AND SAME ISSUE IN THE ORDER OF ASSESSMENT PASSED U/S.143(3) FOR A.Y. 2007 - 08. THIS, IN OUR OPINION, IT IS CONTRARY TO THE RULE OF CONSISTENCY AS LAID DOWN BY THE HON BLE APEX COURT IN THE C ASE OF RADHASOAMI SATSUNG VS. CIT (193 ITR 321) WHEREIN IT HAS HELD AS UNDER : WE ARE AWARE OF THE FACT THAT, STRICTLY SPEAKING, RES JUDICATA DOES NOT APPLY TO INCOME TAX PROCEEDINGS. AGAIN, EACH ASSESSMENT YEAR BEING A UNIT, WHAT IS DECIDED IN ONE YE AR MAY NOT APPLY IN THE FOLLOWING YEAR BUT WHERE A FUNDAMENTAL ASPECT PERMEATING THROUGH THE DIFFERENT ASSESSMENT YEARS HAS BEEN FOUND AS A FACT ONE WAY OR THE OTHER AND PARTIES HAVE ALLOWED THAT POSITION TO BE SUSTAINED BY NOT CHALLENGING THE ORDER, IT WO ULD NOT BE AT ALL APPROPRIATE TO ALLOW THE POSITION TO BE CHANGED IN A SUBSEQUENT YEAR. 7.9 THE HON BLE KARNATAKA HIGH COURT IN CIT VS. SRIDEV ENTERPRISES (192 ITR 165) OBSERVED THAT - REGARDING THE PAST YEARS, THE ASSESSEE S CLAIMS FOR DEDUCTION WERE ALLOWED IN RESPECT OF THE SUMS ADVANCED DURING THOSE YEARS; THIS COULD BE ONLY ON THE ASSUMPTION THAT THOSE ADVANCES WERE NOT OUT OF BORROWED FUNDS OF THE ASSESSEE. THIS FINDING DURING THE PREVIOUS YEARS IS THE VERY BASIS OF THE DEDUCTIONS PERMITTED D URING THE PAST YEARS, WHETHER A SPECIFIC FINDING WAS RECORDED OR NOT. A DEPARTURE FROM THAT FINDING IN RESPECT OF THE SAID AMOUNTS ADVANCED DURING THE PREVIOUS YEAR 10 IT (T.P) A NO. 1676 /BANG/ 2012 IBM WORLD TRADE CORPN. WOULD RESULT IN A CONTRADICTORY FINDING; IT WILL NOT BE EQUITABLE TO PERMIT THE REVENUE TO TAKE A DIFFERENT STAND NOW IN RESPECT OF THE AMOUNTS WHICH WERE THE SUBJECT MATTER OF PREVIOUS YEARS ASSESSMENTS; CONSISTENCY AND DEFINITENESS OF APPROACH BY THE REVENUE IS NECESSARY IN THE MATTER OF RECOGNIZING THE NATURE OF AN ACCOUNT MAINTAINED BY TH E ASSESSEE SO THAT THE BASIS OF A CONCLUDED ASSESSMENT WOULD NOT BE IGNORED WITHOUT ACTUALLY REOPENING THE ASSESSMENT. 7.10 EVEN IF THE ISSUE IN THE INSTANT CASE IS CAPABLE OF TWO INTERPRETATIONS, THE HON BLE APEX COURT IN THE CASE OF CIT VS. VEGETAB LE PRODUCTS LTD. (1973) 88 ITR 192 HAS HELD THAT WHERE A PROVISION IN THE TAXING STATUTE IS CAPABLE OF TWO REASONABLE INTERPRETATIONS, THE VIEW FAVOURABLE TO THE ASSESSEE IS TO BE PREFERRED. IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE, AS DISCUSSED ABOVE, WE ARE OF THE CONSIDERED OPINION THAT THE COMPUTATION OF TAX BY THE ASSESSEE IN RESPECT OF ROYALTY INCOME IS TO BE ACCEPTED. IN THIS VIEW OF THE MATTER, THE GROUNDS OF APPEAL RAISED AT S.NOS.2,3,4 AND 5 ARE ACCORDINGLY ALLOWED. 6.3.2 FOLLOW ING THE DIRECTIONS OF THIS CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2007 - 08 IN ITA NO.759/BANG/2011 DT.13.4.2012 , ON IDENTICAL FACTS AND ISSUES , WE HOLD AND DIRECT THAT THE COMPUTATION OF TAX SUBMITTED BY THE ASSES SEE IN RESPECT OF ROYALTY INCOME IS TO BE ACCEPTED. IN THIS VIEW OF THE MATTER, THE GROUNDS OF APPEAL RAISED AT S.NOS.2 TO 8 ARE ACCORDINGLY ALLOWED. 7. LEVY OF INTEREST U/S.234B OF THE ACT. 7.1 IN THE GROUNDS RAISED AT S.NOS.9 TO 13 , THE ASSESSEE C HALLENGE THE ACTION OF THE AUTHORITIES BELOW IN CHARGING IT INTEREST UNDER SECTION 234B OF THE ACT, DENYING ITSELF LIABLE TO SUCH CHARGE. THE LEARNED AUTHORISED REPRESENTATIVE RELIED ON THE ORDERS OF VARIOUS CO - ORDINATE BENCHES OF THIS TRIBUNAL IN THE ASS ESSEE'S OWN CASE FOR THE EARLIER ASSESSMENT YEARS 2003 - 04 TO 2007 - 08 WHEREIN IT WAS HELD THAT THE ASSESSEE IS NOT LIABLE TO BE CHARGED INTEREST UNDER SECTION 234B OF THE ACT. 11 IT (T.P) A NO. 1676 /BANG/ 2012 IBM WORLD TRADE CORPN. 7.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED ON THE IMPUGNE D ORDERS OF THE AUTHORITIES BELOW AND PRAYED THAT THE CHARGING OF INTEREST UNDER SECTION 234B OF THE ACT IN THE CASE ON HAND BE UPHELD. 7.3.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUDING TH E JUDICIAL PRONOUNCEMENTS CITED AND PLACED RELIANCE UPON. WE FIND THAT THIS ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2007 - 08 IN ITA NO.759/BANG /2011 DT.13.4.2012, WHEREIN FOLLOWING THE EARLIER DECISION OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEARS 2003 - 04 TO 2006 - 07 IN ITA NOS.998 TO 1000/BANG/2009 AND ITA NOS.39/BANG/2010 DT.13.10.2011, IT WAS HELD THAT THE ASSESSEE WAS NOT LI ABLE TO BE CHARGED INTEREST UNDER SECTION 234B OF THE ACT. THE OPERATIVE PORTION AT PARA 8 THEREOF IS EXTRACTED HEREUNDER : - 8. THE GROUNDS OF APPEAL RAISED AT S.NOS.6 & 7 DEAL WITH THE CHARGING OF INTEREST U/S.234B OF THE ACT. THIS ISSUE STANDS COVE RED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THIS TRIBUNAL IN THE ASSESSEE S OWN CASE FOR THE A.Y. 2003 - 04 TO 2006 - 07 VIDE ORDERS IN ITA NOS.998, 999 & 1000/BANG/2009 AND ITA NO.39/BANG/ DT. 13.10.2011. THE ASSESSEE HAS ALSO FURNISHED A COPY OF THE DE CISION IN THE CASE OF TEXAS INSTRUMENTS INCORPORATED VS. DY. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) (2011) 47 SOT 482 (BANGALORE) TRIBUNAL 482 (BANGALORE) IN SUPPORT OF ITS PROPOSITION THAT A FOREIGN COMPANY IS NOT LIABLE FOR INTERNET U/S. 234B. THE LEARNED CIT(A) HAS SOUGHT TO DISTINGUISH THE ABOVE DECISIONS ON THE GROUND THAT THE RATE OF TAX FOR PAYMENT OF ADVANCE TAX AND TDS BEING DIFFERENT, THEIR RATIO IS NOT APPLICABLE. WE HAVE HELD THAT THE COMPUTATION OF TAX BY THE ASSESSEE AT THE RATES S PECIFIED IN THE TREATY AND SECTION 115A IS CORRECT. HENCE, THE REASONS GIVEN BY THE CIT(A) IN CONFIRMING THE CHARGING OF INTEREST U/S.234B ARE NOT CORRECT AND WOULD NOT SURVIVE. IN ANY CASE, WE DO NOT FIND ANY JUSTIFIABLE REASON TO DEVIATE FROM THE CO - OR DINATE BENCH DECISIONS IN THE ASSESSEE S OWN CASE ON SIMILAR FACTS AND ISSUES FOR EARLIER YEARS. THE ASSESSEE IS, THEREFORE, NOT LIABLE TO BE CHARGED INTEREST U/S. 234B OF THE ACT. GROUNDS OF APPEAL RAISED AT S.NOS.6 AND 7 ARE ACCORDINGLY ALLOWED. 12 IT (T.P) A NO. 1676 /BANG/ 2012 IBM WORLD TRADE CORPN. 7. 3.2 FOLLOWING THE ABOVE CITED DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2007 - 08 , WITH WHICH WE DO NOT FIND ANY REASON TO DIFFER AS IT WAS ON SIMILAR FACTS AND ISSUES, WE HOLD THAT THE ASSESSEE IS NOT LIABLE TO BE CHARGED INTEREST UNDER SECTION 234B OF THE ACT. CONSEQUENTLY, THE GROUNDS RAISED AT S.NOS.9 TO 13 OF THE ASSESSEE'S APPEAL ARE ALLOWED. 8. GROUND NO.14 : IN THE COURSE OF APPELLATE PROCEEDINGS BEFORE US, THE LEARNED AUTHORISED REPR ESENTATIVE SUBMITTED THAT, THIS GROUND, RAISED IN RESPECT OF NON - GRANT OF CREDIT CLAIMED FOR TDS TO THE EXTENT OF RS.29,86,06,708, IS NOT BEING PRESSED SINCE THE ASSESSING OFFICER HAS ALLOWED CREDIT FOR THE SAME AS PER RECTIFICATION ORDER UNDER SECTION 154 OF THE ACT DT.17.12.2013 FOR ASSESSMENT YEAR 2008 - 09. IN VIEW OF THIS GROUND NOT BEING PRESSED IN THIS APPEAL, IT IS RENDERED INFRUCTUOUS AND IS ACCORDINGLY DISMISSED. 9. GROUND NO.15 : IN THIS GROUND, THE ASSESSEE CHALLENGES THE ACTION OF THE AUTHORI TIES BELOW IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT BY ISSUE OF NOTICE UNDER SECTION 274 RWS 271 OF THE ACT DT.26.10.2012. WE FIND THAT SINCE NO PENALTY THEREUNDER HAS BEEN LEVIED ON THE ASSESSEE IN THE IMPUGNED ORDER OF ASSESS MENT FOR ASSESSMENT YEAR 2008 - 09, NO CAUSE OF GRIEVANCE ARISES THEREFROM IN RESPECT OF THE 13 IT (T.P) A NO. 1676 /BANG/ 2012 IBM WORLD TRADE CORPN. ASSESSEE, REQUIRING OUR ADJUDICATION. IN THIS FACTUAL MATRIX, THIS GROUND RAISED BY THE ASSESSEE IS NOT MAINTAINABLE AND WE THEREFORE DISMISS THE SAME A S INFRUCTUOUS. 10. IN THE RESULT, THE ASSESSEE'S APPEAL FOR ASSESSMENT YEAR 2008 - 09 IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH APRIL, 201 5 . SD/ - (N.V.VASU DEVAN) JUDICIAL MEMBER SD/ - (JASON P BOAZ) ACCOUNTANT MEMBER *REDDY GP COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, - C BENCH. 6. GUARD FILE. (TRUE COPY) BY ORDER ASST. REGISTRAR, ITAT, BANGALORE