Kraft Foods Group Brands LLC Vs ACIT (ITAT Mumbai)
ITAT Mumbai held that receipts taxable under Fees for Technical/ Included Services (FTS/FIS) as assessee failed to prove that it is actual reimbursement as there is no basis of allocation or actual cost incurred for affiliates.
Facts- Vide the present appeal, the appellant has mainly contested against taxability of receipts of INR 7,18,00,340/- as Fees for Technical/ Included Services (FTS/FIS) under the Income Tax Act and Double Taxation Avoidance Agreement between India and The United States of America (DTAA).
Appellant contented that receipts are reimbursement of cost allocation arrangements without any mark-up and hence such reimbursement can neither be taxed under the Income Tax Act nor under the DTAA.
Conclusion- Held that the first hurdle is to prove that these are actual reimbursement and the claim of the exemption under Income Tax or Treaty comes next. The assessee has miserably failed in proving the same and the fact is that they have claimed the cost on adhoc basis without proper allocation as per support service agreement. It is also fact on record that the assessee has provided services to its affiliates in India partly claims them as chargeable to tax and balance not chargeable without any basis. The collection of charges shows that it collected on gross basis or on certain basis without adopting proper method of accounting as agreed in the agreement. When there is no basis of allocation or actual cost incurred for affiliates, it shows that the claim of the assessee is gross and there is no document to support this claim.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1.This appeal is filed by the assessee against final Assessment Order and directions of the Dispute Resolution Panel of Learned Commissioner of Income Tax (DRP-1), Mumbai-2 [hereinafter in short “Ld. DRP”] dated 07.06.2022 for the A.Y.2019-20 passed u/s. 144C(5) of Income-tax Act, 1961 (in short “Act”).
2. Aggrieved with the final Assessment Order passed by the Assessing Officer, assessee has filed the appeal before us raising following grounds in its appeal: –
“General Objection
1. erred in assessing total income of the Appellant at INR 11,74,88,824 as against INR 3,63,32,800 as per the Return of Income (ROI);
Final assessment order barred by limitation
2.erred in not appreciating that the time limit prescribed under section 153 is the outer time limit for passing the final assessment order and hence, the final assessment order dated 29 July 2022 is time barred and liable to be quashed,
Notice under section 143(2) is without jurisdiction and bad in law
3. erred in carrying out assessment proceedings initiated by National e-Assessment Centre (now known as National Faceless Assessment Centre) by issuance of notice under section 143(2) of the Act which was without jurisdiction and accordingly, the assessment be treated as bad in law and be quashed,
Addition of Tax Deducted at Source (TDS) of INR 10,260 on royalty income and TDS of INR 93.45.429 on support service income
4. erred in adding TDS of INR 10,260 to the returned royalty income of INR 96,715 on the ground that net royalty income was offered to tax (ie., gross income less TDS);
5. erred in adding TDS of INR 93,45,429 to the returned support service income of INR 3,62,36,081 on the ground that net support service income was offered to tax (ie, gross income less TDS):
6. erred in making the above additions on the basis of initial incorrect submission filed by the Appellant which was subsequently withdrawn during assessment proceedings along with supporting evidence as reflected in Form 26AS:
7. should have appreciated that addition of INR 10,250 representing TDS on royalty income and INR 93,45,429 representing TDS support service income would lead to double taxation as same is already considered in the returned income,
Taxability of receipts of INR 7,18,00,340 as Fees for Technical/ Included Services (‘FTS/FIS’) under the Income Tax Act, 1961 (the Act) and Double Taxation Avoidance Agreement between India and The United States of America (“DTAA”)
8. erred in making an addition of alleged receipt of INR 7,18,00,340 as FTS under section 9(1)(vii) ofthe Act and Article 12 of the DTAA:
9. erred in making addition of alleged receipts of INR 7,18,00,340 without appreciating that the aforesaid amount is towards allocation of cost wherein no services have been made available to the Indian group entity ie., HIPL thereby not being taxable as per Article 12 of DTAA:
10. erred in ignoring that such receipts are reimbursement of cost allocation arrangements without any mark-up and hence such reimbursements can neither be taxed under the Act nor under the DTAA:
11. should have appreciated that the receipts under consideration represent managerial services’ and ought to have held that in the absence of ‘managerial services’ under Article 12 of India-USA DTAA, said receipts cannot be taxable as per provisions of DTAA
12. without prejudice to the above, erred in not appreciating that the receipts in dispute is of INR5,18,61,854 as against INR 7,18,00,340 alleged by the AO
Levy of interest under section 234B
13. erred in levying interest under section 234B of the Income Tax Act, 1961 of INR 13,89,600 initiation of penalty proceedings under section 270A of the Act
14 erred in wanting to initiate penalty proceedings under section 270A of the Act without appreciating that the Appellant has not under-reported income”
3. At the outset, Ld. AR of the assessee submitted that Ground No. 1 is general and Ground Nos. 2 and 3 are not pressed, accordingly, these three grounds are dismissed as such.
4. With regard to Ground Nos. 4 to 7 Ld. AR of the assessee brought to our notice relevant facts, the assessee offered to tax revenue of ₹.3,63,32,796/- received from Heinz India Pvt. Ltd., [Heinz India, now known as Zydus Wellness Products Limited’]. The Heinz India has deducted TDS of ₹.93,55,689/- and accordingly, assessee has claimed credit of the same which resulted in refund of ₹.55,01,510/-. Ld. AR of the assessee submitted that in one of the submissions dated 15.09.2021 the assessee inadvertently submitted before the Assessing Officer that the assessee has declared the net amount as their gross income [i.e., net amount of ₹.3,63,32,796/-] while filing return of income and requested the Assessing Officer to consider the gross amount of ₹.4,56,88,485/-, thereby requesting to consider the differential amount of ₹.93,55,689/- while computing the total income. However, subsequently vide submission dated 20.09.2021 the assessee has withdrawn the above submissions and submitted that ₹.3,63,32,796/- is the gross amount not the net amount as declared in the return of However, the Assessing Officer rejected the same and proceeded to make the additions as per the earlier submissions made by the assessee.
5. Aggrieved, assessee filed objection before Ld. DRP and after considering the submissions of the assessee, Ld. DRP gave its findings by directing the Assessing Officer to verify Form 26AS and bring to tax correct amount of income on receipts in question of gross basis. In case it is proper, the proposed addition may be deleted.
6. AR of the assessee submitted that even after the clear direction of Ld. DRP, the Assessing Officer proceeded to sustain the addition with the observation that Form 26AS captures the transactions on which TDS was deducted. In the present case, an amount of ₹.10,260/- as royalty income and ₹.93,45,429/- as support services income has not been offered to income which has not suffered TDS and therefore it does not appear in Form 26AS. Accordingly, he sustained the additions made in the draft Assessment Order.
7. Ld. AR submitted that the Assessing Officer has violated the directions of the Ld. DRP and further, he brought to our notice Form 26AS and submitted that the gross income and the TDS income offered by the assessee in its return of income are matching. Hence there is no concealment of income.
8. On the other hand, Ld. DR submitted that assessee may have to get the certificate from Payee to substantiate its claim. He supported the findings of the assessing officer.
9. Considered the rival submissions and material placed on record, we observe from the record submitted before us that the income declared by the assessee in its return of income and the gross income declared in Form 26AS are matching. With the information submitted in return of income and also TDS deducted and credit availed by the assessee are also matching with the Form 26AS. This issue was considered by the Ld. DRP and remitted this issue back to the file of the Assessing Officer to verify the claim of the assessee against the information contained in Form 26AS. However, Assessing Officer has verified and confirmed that the informations are matching with the Form However, he proceeded to confirm the addition by observing that the differential amount was not offered to income by the assessee without bringing on record the reasons to reach such conclusion. It clearly shows that Assessing Officer has not followed the direction of the Ld. DRP and has not clearly brought on record his findings contradicting to the submissions made by the assessee. In absence of such reasons we are inclined to delete the additions proposed by the Assessing Officer. From the action of the Assessing Officer it clearly shows that Assessing Officer has no inclination to follow the directions of the Ld.DRP and went on sustaining his own findings and moreover he has not brought on record any material to demonstrate how the assessee has concealed the additional revenue and also it is a factual matter, the AO has to bring on record the mismatch in the revenue declared by the assessee and information contained in the form 26AS or any other material in support of his findings. With the above observations we are inclined to allow the grounds raised by the assessee and direct the AO to delete the proposed additions.
10. With regard to Ground Nos. 8 to 12 the relevant facts are, assessee is a company incorporated in USA and a tax resident of USA having its registered office at Pittsburg, Pennsylvania, USA. It does not have any branch office or employees in India. The control and management of assessee’s affairs are situated entirely in USA. Therefore, assessee is a non-resident of India for direct tax purposes. Accordingly, it claimed DTAA benefit between India and USA and filed tax residency certificate issued by the USA Tax Authorities. During the year, assessee offered to tax revenue of ₹.3,63,32,796/- received from Heinz India Private Limited (“Heinz India” Now known as Zydus Wellness Products Limited) and also taken credit of TDS of ₹.93,55,689/-.
11. Assessing Officer observed that assessee had offered royalty income and income from support services and also received ₹.7,18,00,340/- by observing that assessee has received ₹.11,74,88,824/- from Heinz India as under: –
