2015 (4) TMI 670 - AT - Income Tax

Tax treatment of subscription revenues: ITAT upholds CIT(A)'s decision, only 10% taxable. Section 234B interest not chargeable for non-resident.

The ITAT upheld the CIT(A)'s decision regarding the taxability of subscription revenues, ruling that only 10% should be treated as taxable business ... Taxability of advertisement revenue & subscription revenue - Tax Treaty between India and USA - Article 27 of Treaty relating to Mutual Agreement Procedure (‘MAP') - rate of tax @10% or 20% - Interest u/s 234B where entire income is subject to TDS u/s 195 - Held that:- The issue has been decided in favour of the assessee by the CIT(A) for AY 2004-05 wherein it was observed that, the Appellant has a PE in India, both Advertisement and Subscription revenues constitute business income of the Appellant in India and that 10% of the Advertisement and Subscription revenues be treated as taxable income of the appellant in India CIT(A) was right in granting relief for the assessee and in holding that to ensure the consistency of assessment over the years, by following the basis of taxability of the advertisement and subscription revenue constitute business income of the assessee in India and 10% of the advertisement and subscription revenue itself to be treated as taxable income of the assessee in India. - Decided against the revenue. Interest u/s 234B - Following the decision of Jurisdictional High Court of Delhi in the case of Jacabs Civil Incorporated [2010 (8) TMI 37 - DELHI HIGH COURT] and the decision of ITAT “C” Bench Delhi in the case of G.E. Energy Parts Inc. [2014 (7) TMI 683 - ITAT DELHI], we are inclined to hold that the CIT(A) was right in holding that the interest u/s 234B of the Act is not leviable in the case of the assessee being nonresident when its entire income is subject to TDS u/s 195 of the Act. Hence, we are unable to see any valid reason to interfere with the conclusion of the CIT(A) on this issue and we uphold the same. Accordingly, ground no. 2 in both the appeals of the revenue being devoid of merits is also dismissed. - Decided against the revenue. Issues Involved:1. Taxability of Subscription Revenues as Business Income vs. Royalty.2. Chargeability of Interest under Section 234B.Issue-wise Detailed Analysis:Ground No. 1: Taxability of Subscription RevenuesThe primary issue was whether the subscription revenues should be taxed as business income or as royalty. The Assessing Officer (AO) categorized the entire subscription revenues as royalty under clause (v) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act and Article 12(3)(a) of the Indo-US Double Taxation Avoidance Treaty, taxing it at 20% of the gross basis. However, the Commissioner of Income Tax (Appeals) [CIT(A)] held that only 10% of the subscription revenues should be taxable as business income, following the Mutual Agreement Procedure (MAP) resolution applicable to a group entity for earlier assessment years (AYs).The CIT(A) based this decision on the precedent set by the MAP resolution for AY 2000-01 and AY 2001-02, where it was agreed that 10% of distribution and advertisement revenues earned by the group entity should be taxable in India. This approach was consistently applied in subsequent years, including AY 2007-08, where the Dispute Resolution Panel (DRP) upheld the same taxability. The CIT(A) emphasized the need for consistency in assessment and ruled that 10% of the advertisement and subscription revenues should be treated as taxable income in India.The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, noting that the CIT(A)'s approach was consistent with past assessments and the provisions of the Act. The ITAT found no perversity or infirmity in the CIT(A)'s order and dismissed the revenue's appeal on this ground.Ground No. 2: Chargeability of Interest under Section 234BThe second issue concerned the chargeability of interest under Section 234B of the Income Tax Act. The AO had levied interest under this section, but the CIT(A) held that interest under Section 234B was not chargeable, relying on the decision of the Delhi High Court in the case of Jacob Civil Incorporated. The CIT(A) noted that the assessee, being a non-resident whose income was subject to tax deduction at source (TDS) under Section 195, was not required to pay advance tax, and thus, interest under Section 234B was not applicable.The ITAT supported the CIT(A)'s conclusion, referencing the Delhi High Court's decision in Jacob Civil Incorporated and other relevant case law, including the ITAT's own decision in ADIT vs. G.E. Energy Parts Inc. The ITAT agreed that the CIT(A) correctly applied the law by holding that interest under Section 234B was not leviable when the non-resident's entire income was subject to TDS under Section 195. Consequently, the revenue's appeal on this ground was also dismissed.Cross Objections by the Assessee:The assessee had filed cross objections to support the CIT(A)'s order. However, since the revenue's appeals were dismissed, the assessee did not press these objections, and they were dismissed as not pressed.Conclusion:The ITAT dismissed both the revenue's appeals and the assessee's cross objections, upholding the CIT(A)'s decisions on both grounds. The order was pronounced in the open court on 25.03.2015.