2011 (12) TMI 195 - AT - Income Tax

Tribunal rules royalty not taxable in India under Income Tax Act or DTAA

The Tribunal dismissed the Revenue's appeal, upholding the CIT (A)'s decision that the royalty received by the assessee is not taxable in India under the ... Royalty for exclusive rights of distribution of Cinematographic films – India-USA Treaty assessee is a non-resident company having no PE in India – agreement with Warner Bros Pictures (India) Pvt. Ltd(WBPIPL) for grant of rights – WBPIPL deducted tax at source – assessee claimed refund of the same - Held that:- There is no dispute that the assessee has entered into agreement with WBPIPL outside India and the amounts were also received outside India. Further, Definition of royalty u/s 9(1)(vi) Explanation 2 to (v) excludes the payment received with reference to sale, distribution and exhibition of cinematographic films. Moreover, provisions of India -USA treaty notify that the term royalty used in the Article 12 does not include payment of any gain received as consideration for the use of any copyright or literary, artistic or scientific work including cinematographic films or work on films, tape or other means of production for use in connection with Radio or T.V. broadcasting. In view of this specific provisions, the amount received by the assessee cannot be considered as royalty. In this case, assessee has a business connection in India but does not have any P.E. in India. Since the Indian company who obtained the rights is acting independently, Agency PE provisions are not applicable to the assessee company. Thus, the incomes arising outside Indian Territories cannot be brought to tax – Decided against the Revenue Issues Involved:1. Taxability of royalty received by the assessee from WBPIPL under the Income Tax Act and the India-USA DTAA.2. Existence of Permanent Establishment (PE) in India.3. Application of general provisions under Section 9(1)(i) versus specific provisions under Section 9(1)(vi).Issue-wise Detailed Analysis:1. Taxability of Royalty under the Income Tax Act and DTAA:The Revenue argued that the royalty received by the assessee from WBPIPL is taxable in India under Explanation 2(v) to Section 9(1)(vi) of the Income Tax Act. The assessee contended that the royalty is not taxable in India, relying on several judgments and the India-USA Tax Treaty. The CIT (A) held that the royalty is not taxable under the Act or the DTAA, as the consideration for the sale, distribution, or exhibition of cinematographic films is excluded from the definition of royalty under Explanation 2(v) of Section 9(1)(vi). This was supported by the fact that the agreement between the assessee and WBPIPL was for the distribution rights of films, and not for broadcasting on radio or TV. The Tribunal upheld this view, stating that the royalty received cannot be considered as royalty under the Indian Income Tax Act or the DTAA, as it falls outside the purview of the definition provided in both.2. Existence of Permanent Establishment (PE) in India:The Revenue filed additional grounds claiming that the CIT (A) erred in holding that the appellant does not have a PE in India. The CIT (A) found that the assessee does not have a PE in India, as the agreement and payment were made outside India, and the Indian company (WBPIPL) acted independently. The Tribunal agreed, stating that even if there is a business connection, the income can only be taxed to the extent of activities attributed to a PE. Since the assessee does not have a PE in India, the income arising outside Indian territories cannot be taxed as business income in India. The Tribunal referenced the decision in Ishikawajma-Harima Heavy Industries Ltd. v. DIT, which held that incomes arising to a non-resident cannot be taxed as business income in India without a PE.3. Application of General Provisions under Section 9(1)(i) versus Specific Provisions under Section 9(1)(vi):The CIT (A) held that the royalty, not being covered by its definition under the Act, is taxable under the general provision of clause (i) of Section 9(1). The assessee argued that when a specific provision deals with a specific type of income, it excludes the general provision. The Tribunal noted that Clause (vi) of Section 9(1) deals specifically with royalty, whereas Clause (i) is a general provision. It referenced decisions from the Gujarat and Madras High Courts, which held that specific provisions exclude general provisions. The Tribunal agreed with the assessee, stating that the specific exclusion under Section 9(1)(vi) should apply, and the income should not be taxed under the general provision of Section 9(1)(i).Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT (A)'s decision that the royalty received by the assessee is not taxable in India under the Income Tax Act or the DTAA. The Tribunal also dismissed the cross-objection filed by the assessee, considering it academic and not requiring specific adjudication. The judgment emphasized the application of specific provisions over general provisions and the importance of the existence of a PE for taxing business income of non-residents in India.