2013 (12) TMI 1737 - AT - Income Tax

Tax Tribunal: Royalty not taxable in India under DTAA with Singapore

The Tribunal held that the income, even if construed as Royalty, does not arise in India under Article 12(7) of the DTAA between India and Singapore ... Royalties deemed to arise in a Contracting State under Article 12(7) of the Indo Singapore DTAA - Economic link between liability for payment and permanent establishment - Source state of royalties determined by residence of the payer - Article 24 of the Indo Singapore DTAA - applicability where income is not taxable in IndiaRoyalties deemed to arise in a Contracting State under Article 12(7) of the Indo Singapore DTAA - Economic link between liability for payment and permanent establishment - Royalty payments did not arise in India under Article 12(7) of the Indo Singapore DTAA. - HELD THAT: - The Tribunal followed its earlier decision in the assessee's own case and applied Article 12(7) of the Indo Singapore DTAA together with the relevant OECD commentary. Under the first limb of Article 12(7), royalties are sourced in the State of which the payer is resident. The second limb requires, where the payer is a non resident with a PE in the source State, that the liability to pay be incurred in connection with and borne by that PE. There was no factual nexus or economic link between the alleged PE in India and the liability for the payments; the economic burden and acquisition of the broadcasting rights were linked to the head office in Singapore and not to the Indian PE. In absence of the liability being incurred in connection with, and borne by, the PE in India, the payments cannot be said to arise in India within the meaning of Article 12(7). Applying these principles, the ground raised by the Revenue was dismissed. [Paras 6, 7]Ground dismissed; the royalty did not arise in India under Article 12(7).Article 24 of the Indo Singapore DTAA - applicability where income is not taxable in India - Source state of royalties determined by residence of the payer - Article 24 of the DTAA is not applicable to deny treaty benefits in the facts of this case. - HELD THAT: - Relying on the Tribunal's earlier findings, the income (even if characterized as royalty) did not arise in India because the payer was resident in Singapore and the state of source is the residence of the payer. The Treaty distinguishes between income being 'exempt from tax' and income being 'not taxable'; since the income did not arise in India there was no question of it being exempt from Indian tax and Article 24 therefore did not operate to deny treaty benefits. Additionally, documents showed the amount was subject to tax in Singapore under domestic laws, reinforcing that Article 24 did not apply. [Paras 8]Ground dismissed; Article 24 does not apply and the assessee is entitled to treaty benefits.Final Conclusion: The Revenue's appeal and the assessee's cross objection are dismissed; treaty treatment upheld for the assessment year in question. Issues involved: The judgment involves the interpretation of Article 24 of the Double Taxation Avoidance Agreement (DTAA) between India and Singapore, the determination of whether a payment constitutes Royalty under the DTAA, and whether the Royalty has arisen in India as per the provisions of Article 12(7) of the DTAA.Interpretation of Article 24 of DTAA:The Tribunal held that the income, even if construed as Royalty, does not arise in India under Article 12(7) because the payer is a resident of Singapore. Referring to the OECD Commentary on Article 11, it was emphasized that the state of source of royalties is the state where the payer is a resident. The Tribunal also noted that the amount paid was subject to tax in Singapore under its domestic laws, leading to the conclusion that Article 24 of the DTAA does not apply. The Tribunal dismissed the Revenue's appeal on this ground based on the decision of a co-ordinate Bench.Nature of Payment as Royalty under DTAA:The Tribunal did not find it necessary to decide whether the payment in question was in the nature of Royalty under the DTAA, as it had already determined that the Royalty did not arise in India as per the provisions of Article 12(7) of the Treaty. This decision was in line with a previous decision of the Tribunal, and accordingly, the appeal filed by the Revenue was dismissed.Royalty Arising in India u/s Article 12(7) of DTAA:The Tribunal analyzed the relevant provisions of Article 12(7) of the Indo-Singapore DTAA and referred to a previous decision regarding the necessity of an economic link between the payment of royalties and the Permanent Establishment (PE) in India. It was concluded that since there was no economic link between the payment of royalties and the Indian PE, the Royalty did not arise in India as per the Treaty provisions. The Tribunal dismissed the Revenue's appeal on this ground, following the decision in the assessee's own case.Separate Judgment by Judges:The judgment was delivered by Shri N.K. Billaiya, AM, and Shri B.R. Mittal, JM. The issues of interpretation of the DTAA, nature of payment as Royalty, and the Royalty arising in India u/s Article 12(7) of the DTAA were comprehensively addressed and decided in favor of the assessee based on previous Tribunal decisions and legal interpretations.