2014 (11) TMI 432 - AT - Income Tax

Tribunal remands taxability decision on royalty under Indo-USA Tax Treaty

The Tribunal set aside the CIT(A)'s decision and remanded the matter to the Assessing Officer for a fresh examination regarding the taxability of the ... Royalty - Fees for included services - Interpretation of Indo US Double Taxation Avoidance Agreement - Make available test - Reimbursement with mark up (cost plus) treatment - Permanent establishmentRoyalty - Fees for included services - Interpretation of Indo US Double Taxation Avoidance Agreement - Make available test - Reimbursement with mark up (cost plus) treatment - Whether the consideration received by the non resident assessee from its Indian group companies is taxable in India as 'royalty' and/or 'fees for included services', and whether earlier orders correctly adjudicated that question - HELD THAT: - The Tribunal found that the assessing officer and the CIT(A) failed to examine the impugned receipts in the correct perspective of the Indo US DTAA and the established legal tests (including the make available principle) applicable to distinguish 'royalty' from 'fees for included services'. The authorities had reached inconsistent and confused conclusions across years-treating the entire receipt as 'royalty' in one year, and apportioning it equally between 'royalty' and 'fees for included services' in others-without properly addressing the treaty definitions, relevant case law and the contractual and factual matrix (notably that payments were structured as reimbursements with a cost plus 10% mark up and that no mark up was charged on third party expenses). Given these deficiencies and the absence of a considered DTAA based application of law to the facts, the Tribunal concluded that the matter required fresh adjudication by the assessing officer, with directions to consider the assessee's submissions, relevant authorities and to decide in accordance with law. [Paras 6, 8, 9]Orders of the CIT(A) are set aside and the matter is restored to the file of the assessing officer for fresh examination of the taxability of the receipts under the Indo US DTAA, having regard to the submissions and relevant case law.Final Conclusion: The Tribunal set aside the appellate orders for AYs 2004 05, 2005 06 and 2007 08 and remitted the issue to the assessing officer for fresh consideration and decision in accordance with the Indo US DTAA and relevant authorities; appeals treated as allowed for statistical purposes. Issues Involved:1. Taxability of the consideration received by the assessee as 'royalty' and 'Fee for included services'.2. Interpretation of the Indo-USA Tax Treaty in the context of the received consideration.3. Examination of the applicability of various case laws and provisions of the Income Tax Act, 1961, and the Copyright Act, 1957.Detailed Analysis:1. Taxability of the Consideration as 'Royalty' and 'Fee for Included Services':The primary issue in the appeals is whether the consideration received by the assessee, which includes a reimbursement of expenses with a 10% markup, is taxable in India as 'royalty' or 'Fee for included services'. The assessee, a tax resident of the USA, entered into a General Service Agreement (GSA) with Indian entities to provide various services, and received payments calculated at cost plus a 10% markup.The Assessing Officer (AO) initially treated the entire consideration as 'royalty' under section 9(1)(vi) of the Income Tax Act, 1961, and Article 12 of the DTAA between India and the USA for the assessment year 2004-05. For the subsequent years, the AO apportioned the consideration equally between 'royalty' and 'Fee for included services'.The CIT(A) upheld the AO's view for the assessment years 2005-06 and 2006-07 and modified the order for 2004-05 to assess the consideration equally as 'royalty' and 'Fee for included services'.2. Interpretation of the Indo-USA Tax Treaty:The assessee argued that the amounts received do not constitute 'royalty' or 'Fee for included services' under Article 12 of the Indo-USA Tax Treaty. The assessee claimed that the services provided did not involve the use of any copyright, patent, or technical know-how that would qualify as 'royalty'. Furthermore, the services did not 'make available' any technical knowledge, experience, skill, or process to the Indian entities, which is a requirement for being classified as 'Fee for included services'.The AO and CIT(A) referred to various provisions of the Income Tax Act, the Copyright Act, and case laws to justify their stance. However, they failed to conclusively determine whether the payments fell under 'royalty' or 'Fee for included services' as per the DTAA.3. Examination of Case Laws and Provisions:The AO relied on decisions such as CIT Vs. Travel Corporation of India Ltd (209 ITR 555) and P.No.30 of 1999, In re (238 ITR 296) to classify the payments as 'royalty'. The CIT(A) also cited the Delhi High Court decision in DR Hutarew & Partner (I) Pvt Ltd. vs. ITO Ward-10(4), New Delhi (ITA NO. 2797/De1/2004) to support the classification of the payments as 'royalty' and 'Fee for included services'.The assessee countered with arguments and case laws such as DDIT v/s. Preroy A.G. (39 SOT 187), DCIT v/s. Hyderabad Industries Ltd. (24 SOT 98), and Cushman & Wakefield(S) Pte. Ltd. (305 ITR 179) to assert that the payments did not qualify as 'royalty' or 'Fee for included services'.Conclusion and Order:The Tribunal noted that the tax authorities did not properly examine the issue in the context of the Indo-USA Tax Treaty and relevant case laws. Consequently, the Tribunal set aside the orders of the CIT(A) and remanded the matter back to the AO for a fresh examination. The AO was directed to consider the assessee's submissions, relevant case laws, and make a decision in accordance with the law.The appeals filed by the assessee were allowed for statistical purposes, and the order was pronounced in the open court on 8th August, 2014.