Can a tax officer exercise its power beyond statutory limitations?

Recently, the Income Tax Appellate Tribunal, Bangalore bench (‘ITAT’) passed on order dated October 8, 2024 restricting tax officer (‘AO’) to exercise its power within the statutory limits of an on-going tax matter, directing AO to start fresh assessment proceedings in case of specific addition in the matter under litigation post an already pronounced matter by ITAT. Details of ITAT order is as under:

Assessee is a company having tax residency in Malaysia and engaged in the business of providing online education course. For AY 2014-15, assessee had provided online education services to an Indian company. TDS at 20% (being TDS under section 9(1)(vi) of the Act) was deducted from the fees charged by assessee. During such period, assessee filed nil return of income, and claimed refund of TDS.

The AO passed order holding that the aforesaid receipts by assessee is income in the nature of “royalty” which is chargeable to tax in India, which was also confirmed by Dispute Resolution Panel (DRP).

Aggrieved by the same, assessee filed appeal before the ITAT.

Reference was made to the definition of royalties contained in Article 12 of the DTAAs and it was noted that, ‘it is clear that there is no obligation on the persons mentioned in section 195 of the Income-tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income-tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases’.

ITAT stated that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India. As a result of this, the persons referred to in section 195 of the Income-tax Act were not liable to deduct any TDS under section 195 of the Income-tax Act.

ITAT remitted the issue in dispute to the file of the AO for deciding the comparability of these transactions in the light of the jusgement of the Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Private Limited (supra).

Based on above pronouncement of ITAT, AO issued another letter proposing to tax the receipts as fees for technical services. The assessee raised objection against such proposal of AO, and submitted justification that receipts cannot be brought to tax as FTS on the ground that payment made by the Indian company for online education services is neither managerial / technical or consultancy in nature. AO rejected objection of assessee, which was also confirmed by DRP.

Aggrieved by such order of AO and DRP, assessee further filed an appeal to ITAT challenging the order passed by AO in conformity with DRP.

Against the order of AO, assessee placed reliance on various case laws as under:

1. Judgment of the Hon’ble Delhi High Court in the case of LI & Fung India (P.) Ltd., Vs. ACIT (2017) 298 CTR 427 (Del). It was submitted that Hon’ble Apex Court had dismissed the SLP filed by the Revenue arising out of the aforesaid judgment of the Hon’ble Delhi High Court reported in (2018) 95 taxmann.com 110 (SC).
2. Order of the Pune Bench of the ITAT in the case of Bhagwandas associates Vs. ITO reported in (2009) 119 ITD 1 (Pune) wherein it was held that the AO has to confine his examination only to the points on which remand has been made and not to the other issues

Based on the examination of the matter by ITAT, it observed as under:

1. The AO while passing the original order, treated income as “royalty” under the Act / DTAA. The DRP in its directions (in the original proceedings) confirmed the view of the AO.
2. The argument before the ITAT by the assessee and the Revenue were limited to
   1. applicability of definition of “royalty” under the Act / DTAA in respect of income earned by the assessee and
   2. to examine the chargeability of income earned under the Act / DTAA as “royalty” and
   3. to examine and follow the judgment of the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd., Vs. CIT (supra).
3. The ITAT did not remand to the AO to examine the applicability of definition of FTS as per the Act / DTAA in respect of the income of the assessee. 
4. It further stated that only subsequent to the remand proceedings by the ITAT, it dawns upon the AO after examining the services agreement to tax the same as FTS under section 9(1)(vii) of the Act instead of “royalty” under section 9(1)(vi) of the Act. The AO after examining the agreement ideally ought to have filed a MA before the ITAT seeking for an ‘open remand’ so that the receipt could have been either taxed under “FTS” or under “royalty”.
5. On perusal of the above Order of the ITAT, it is clearly discernible that it is not an open remand but only a limited remand to examine the receipt whether it can be taxed in light of the judgment of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd., Vs. CIT (supra) and other judicial pronouncements relied on by the assessee.

ITAT stated that in such circumstances, AO cannot go beyond the directions given in the remand order and look into the matters which was not subject matter of appeal before the ITAT. ITAT referred to various judicial pronouncement as under:

1. Hon’ble Allahabad High Court in the case of S. P. Kochhar Vs. ITO reported in (1983) 145 ITR 255 (All.) explained the scope of remand by the ITAT as follows:

“When the remand is made by the ITAT, the position is different. The powers of the ITAT are confined to the subject-matter of appeal as constituted by the original grounds of appeal and such additional grounds as may be raised by the leave of the ITAT. Thus, when the ITAT allows the appeal and sets aside the assessment and remands the case for making a fresh assessment, the power of the ITO is confined to such subject-matter only. He cannot take up the questions which were not the subject-matter of appeal before the ITAT. This will be so even though no specific direction has been given by the ITAT. If a specific direction is given, then there is no scope whatsoever for the ITO to travel beyond those directions or restrictions.”

2. Hon’ble Dehi High Court in the case of LI & Fung India (P.) Ltd., Vs. ACIT (supra) had upheld the aforesaid proposition by observing as follows:

“Firstly, when there is a remand on the basis of a specific finding (in this case, the untenability of shifting of the OP/TC to FOB) the TPO could not have travelled beyond it, given that there was no controversy ever about the inclusion of any comparable. Concededly there was no controversy about the appropriateness of inclusion of any comparable for the ALP determination purpose. Nor was there any finding or direction on that score. In the given circumstances, the Revenue could not have seized upon the direction to determine it “afresh” as the basis for going into the merits of inclusion of such comparables. Secondly and more fundamentally, the issue of comparables’ inclusion is not one that goes to define jurisdiction itself There is authority for the proposition that invocation of jurisdiction is itself in issue, notwithstanding that being not subject to remand.”

3. The Hon’ble Supreme Court has dismissed the SLP filed by the Revenue arising out of the aforesaid judgment of the Hon’ble Delhi High Court in the case of ACIT Vs. LI & Fung India (P.) Ltd., Vs. ACIT (supra).
4. The ITAT in the case of Bhagwandas associates Vs. ITO (supra) had held that Revenue has no scope for improving an already assessed income either by way of enhancement or in pretext of rectification while giving effect of an appellate Order. The ITAT held that the statute does not provide such a wide unlimited and unending power to the AO. The relevant finding of the Pune Bench of the ITAT reads as follows:

‘7.1. We have carefully as well as consciously examined this question having far reaching effect and at the outset, we may like to place in plain words that the A.O do not have that vast jurisdiction. Rather, the A.O has a very limited jurisdiction while giving effect of an appellate order. At this juncture, we may also like to clarify ourselves that there are generally two types of directions of the appellate authority; first, specific relief pertaining to a specific addition, and, second; direction of denovo assessment afresh by setting aside an assessment order in its entirety. In a situation, falling under second category, since the direction is denovo assessment, on account of set aside of an order in totality, the A.O has to complete the assessment afresh as prescribed under law. Naturally, consequence is that the A.O has got jurisdiction of fresh assessment as if framing it a-knew, hence the jurisdiction lies with the A.O. at par with the fresh assessment. Again, we want to make ourselves clear that if a rider is provided by the appellate authority, then the A.O is judicially duty bound to refrain himself not to exceed his jurisdiction and to re-frame the assessment within the prescribed limits following the rider.’

Based on the above judicial pronouncements, ITAT stated that the AO has clearly exceeded his jurisdiction by taxing the income of the assessee as FTS which was not the subject matter of appeal before the ITAT nor has the ITAT given an open remand to the AO (in light of the master services agreement being produced before it for the first time). On perusal of the entire Order of the ITAT, it is clear that the examination is limited to taxability of the receipts only in light of the judgment of the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd., Vs. CIT (supra) and other judicial pronouncements relied on by the assessee which deals with the taxability of the receipt as “royalty” under section 9(1)(vi) of the Act.

In light of the aforesaid reasoning and the judicial pronouncements cited (supra), the impugned addition was deleted on technical grounds. Since we have decided the issue in favour of the assessee on technical ground, the grounds / issues on merits are left open and are not adjudicated. It is ordered accordingly.

For the detailed discussion on the above case law, please feel free to contact devadhaantu@devadhaantu.in