2009 (12) TMI 586 - AT - Income Tax

Foreign company payments deemed royalty; DTAA relief possible. Revenue appeal allowed, assessee appeal dismissed.

The Tribunal held that the payments made to the foreign companies constituted royalty under the Special Bench decision. However, the issue was remitted ... DTAA - Addition - Scrutiny - Revision - TDS - Royalty or fees for technical service - A look at the SB decision clearly brings out that, this was not the clinching reason for it to hold that the assessee there, was hiring a 'process' by taking up a transponder in a satellite, bringing the payment made thereon, within the ambit of the term 'royalty' as defined in sec.9(1)(vi) of the Act - Assessee did not bring on record anything to show that M/s. Menon Ltd. was just passing on the money to the owner of satellite Ekran - Since the payment is considered as 'royalty', the other limbs of the argument, whether it was technical services, or whether a PE was necessary, whether such receipts would be taxable in the hands of the recipient under Indian Income-tax Act becomes irrelevant The rigour of sec.40(a)(i) of the Act would not apply to it since in view of the DTA with the concerned countries, non-resident Indian cannot be worse off from a resident tax payer in relation to a transaction entered by the latter with anybody in India - Before ruling that assessee can take advantage of such articles in relevant DTTs it is necessary to see whether application thereof can be made use of by the assessee after considering all related articles in such treaties as also the meaning of 'royalty' as per the DTTs - Since these aspects have never been examined by the lower authorities - Held that - the payment were royalty in nature - matter remanded back to AO to examine that it was saved from the rigour of sec.40(a)(i) on account of relevant articles in the respective DTTs. Issues Involved:1. Deletion of addition made under section 40(a)(i) of the Income-tax Act, 1961.2. Classification of transponder hire charges as royalty.3. Tax deduction at source (TDS) obligations under section 195.4. Application of Double Taxation Avoidance Agreements (DTAA) with the USA and the UK.5. Discrimination under Article 26 of the DTAA.Detailed Analysis:1. Deletion of Addition under Section 40(a)(i):The Revenue contended that the CIT(A) erred in deleting the addition of Rs. 20,62,32,621/- made under section 40(a)(i) of the Income-tax Act, 1961. The Assessing Officer had disallowed the transponder hire charges paid by the assessee to two foreign companies, M/s Menon Ltd., U.K., and M/s Rimsat, U.S.A., due to non-deduction of tax at source.2. Classification of Transponder Hire Charges as Royalty:The Assessing Officer classified the transponder hire charges as royalty, invoking Explanation 2 to section 9(1)(vi) of the Act. The CIT(A) disagreed, relying on a prior Tribunal decision in the case of Raj Television Networks Ltd., which held that such payments did not constitute royalty or fees for technical services. However, the Revenue argued that the Special Bench decision in New Skies Satellite & Others vs. ACIT established that payments for the use of a process, such as satellite transponders, fall within the definition of royalty.3. TDS Obligations under Section 195:The assessee argued that the payments were not subject to TDS as the recipients were non-residents with no income accruing or received in India. The Assessing Officer countered that the services were utilized in India, making the payments taxable under Indian law. The Tribunal noted that the Special Bench decision in New Skies Satellite clarified that payments for the use of a process, even if the process is not secret, constitute royalty, thus requiring TDS under section 195.4. Application of DTAA with the USA and the UK:The assessee contended that the DTAA provisions with the USA and the UK should apply, which would neutralize the rigour of section 40(a)(i). The Tribunal acknowledged that Article 26 of the DTAA with the USA and the UK prohibits discrimination against non-residents. The Tribunal referred to prior decisions, such as Millennium Infocom Technologies Ltd. and Herbalife International India Pvt. Ltd., which supported the view that DTAA provisions could override domestic tax laws if more beneficial to the assessee.5. Discrimination under Article 26 of the DTAA:The Tribunal agreed that section 40(a)(i), as it stood before its amendment, was discriminatory as it applied only to non-residents. Article 26(3) of the Indo-US DTAA and Article 26(4) of the Indo-UK DTAA prevent such discrimination, ensuring that payments to non-residents are deductible under the same conditions as payments to residents.Conclusion:The Tribunal held that the payments made to M/s Menon Ltd., U.K., and M/s Rimsat, U.S.A., constituted royalty under the Special Bench decision in New Skies Satellite. However, the Tribunal remitted the issue back to the Assessing Officer to examine the applicability of DTAA provisions, which could potentially save the assessee from the rigour of section 40(a)(i). The appeal of the Revenue was allowed for statistical purposes, and the assessee's appeal was dismissed as not pressed.