ITAT Cancels Penalty Arising from Royalty and FTS Characterisation Dispute

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) deleted a penalty of Rs.184.57 crore imposed under Section 270A of the Income-tax Act on Atos Information Technology HK Ltd., holding that a mere difference in the tax treatment of disclosed receipts cannot amount to under-reporting or misreporting of income.

The assessee, a Hong Kong-based company engaged in providing electronic data processing services through its Hong Kong data centre, had filed its return for AY 2021-22 declaring interest income from income-tax refund. It also received subcontracting receipts of Rs.85.63 crore from Eviden India Pvt. Ltd. in relation to a Standard Chartered Bank project. The assessee disclosed these receipts in its return and specifically claimed that they were not taxable in India either as Royalty or Fees for Technical Services (FTS) under the Income-tax Act or the India–Hong Kong DTAA.

During assessment proceedings, the Assessing Officer disagreed with the claim and treated the receipts as taxable Royalty/FTS. Based on this addition, penalty proceedings under Section 270A were initiated and a penalty order was subsequently passed. However, in the quantum appeal, the Tribunal had already held that the receipts were not taxable in India and directed deletion of the addition. Relying on that decision, the CIT(A) deleted the penalty.

The Revenue argued before the Tribunal that penalty proceedings are independent of quantum proceedings and that the deletion of the addition had not attained finality since the department proposed to challenge the quantum order before the Bombay High Court.

The Tribunal rejected the Revenue’s contentions. It noted that there was no allegation that the assessee had concealed any receipt or withheld any material fact. On the contrary, the entire amount received from Eviden India Pvt. Ltd. was disclosed in the computation of income along with a specific explanatory note claiming non-taxability. The dispute arose solely because the Assessing Officer adopted a different view regarding the characterisation and taxability of the receipts.

The Bench observed that none of the situations constituting “misreporting of income” under Section 270A(9) were present in the case. It emphasized that rejection of a legal claim or a different interpretation of tax law by the Assessing Officer cannot automatically trigger penalty proceedings where all primary facts have been fully disclosed.

Holding that the case involved only a bona fide legal dispute regarding taxability and not any concealment, under-reporting or misreporting of income, the Tribunal upheld the CIT(A)’s order deleting the penalty. Since the Revenue’s appeal failed, the assessee’s cross-objection challenging the validity of the penalty notice was dismissed as infructuous.

To Read Full Order, Download PDF Given Below.