2016 (10) TMI 1372 - AT - Income Tax

Tribunal Rules Royalty Income Not Taxable in India: Key Exclusions Explained

The Tribunal ruled in favor of the assessee, determining that the royalty income received from Warner Bros Picture India Ltd is not taxable in India. The ... Income deemed to accrue or arise in India - ‘royalty’ received from the Indian entity - existence of PE in India - Income taxable in India either under the Income Tax Act or under India-USA DTAA - AO did not accept the claim of the assessee and assessed the royalty @ 15% under India-USA DTAA - HELD THAT:- The very issue of existence of PE in India has been considered by the Hon’ble ITAT. The income of the assessee company does not qualify for the definition of Royalty in term of income tax Act 1961. The AO himself has accepted in the assessment order that the income of the assessee cannot be taxed as Royalty. Once the income of the assessee company does not qualify under the definition of Royalty, the income has to be held as business income. The business income cannot be taxed in the absence of PE in India. We have seen that the Hon’ble ITAT has categorically held that the WBPIPL is not the PE of the assessee company. Thus, respectfully following the decision of the Hon’ble ITAT in the assessee’s own case [2011 (12) TMI 195 - ITAT MUMBAI] we are of the view that the income of the assessee is not taxable in India and we direct the AO to delete the addition proposed on this account - Decided in favour of assessee. Issues Involved:1. Taxability of royalty received by the assessee from Warner Bros Picture India Ltd.2. Applicability of Explanation 2(v) to section 9(1)(vi) of the Income Tax Act, 1961.3. Relationship between sections 5(2) and 9 of the Income Tax Act.4. Existence of a Permanent Establishment (PE) in India.5. Classification of royalty as business profit and its taxability in India.Detailed Analysis:1. Taxability of Royalty Received by the Assessee:The primary issue concerns whether the royalty received by the assessee from Warner Bros Picture India Ltd (WBPIL) for the distribution and exhibition of films in India is taxable. The Department contends that this income is taxable under Indian law, while the assessee argues that it is not taxable due to the provisions excluding such income from the definition of 'royalty' under section 9(1)(vi) of the Income Tax Act, 1961.2. Applicability of Explanation 2(v) to Section 9(1)(vi):The Department argues that the royalty income should be taxable under section 9(1)(vi) without considering Explanation 2(v), which excludes consideration for the sale, distribution, or exhibition of cinematographic films from the purview of royalty. The assessee maintains that the income is not taxable as it falls within this exclusion.3. Relationship Between Sections 5(2) and 9:The Department asserts that even if the income is not taxable under section 9(1)(vi), it should still be taxable under the substantive provisions of section 5(2), which deals with the scope of total income. The assessee contends that section 9 provides a specific exclusion that should take precedence.4. Existence of a Permanent Establishment (PE) in India:The Department claims that the assessee has a Dependent Agent Permanent Establishment (DAPE) in India through WBPIL, which would make the income taxable as business profits. The assessee disputes this, arguing that WBPIL operates independently and does not constitute a PE.5. Classification of Royalty as Business Profit:The Department argues that the royalty should be taxed as business profit, especially since the Indian entity allegedly acts as a DAPE. The assessee counters that the income is not taxable as business profit due to the absence of a PE in India.Judgment Summary:Taxability and Applicability of Explanation 2(v):The Tribunal upheld the assessee's position, affirming that the royalty income received from WBPIL is not taxable in India. This conclusion is based on the exclusion provided in Explanation 2(v) to section 9(1)(vi), which categorically excludes consideration for the sale, distribution, or exhibition of cinematographic films from the definition of 'royalty.'Relationship Between Sections 5(2) and 9:The Tribunal did not find merit in the Department's argument that section 5(2) should override the specific exclusion in section 9(1)(vi). It maintained that the income is not taxable under the Income Tax Act due to the specific provisions excluding such income.Existence of a Permanent Establishment (PE):The Tribunal referred to its earlier decisions in the assessee's own case for previous assessment years (2006-07 to 2009-10), consistently holding that WBPIL does not constitute a PE of the assessee in India. Therefore, the income cannot be taxed as business profits in the absence of a PE.Classification of Royalty as Business Profit:Given the absence of a PE, the Tribunal concluded that the royalty income cannot be taxed as business profits. The Tribunal followed the judicial precedence established in previous years, reaffirming that the income is not taxable under the domestic law or the DTAA.Conclusion:The Tribunal dismissed the Department's appeal, affirming that the royalty income received by the assessee from WBPIL is not taxable in India. Consequently, the cross-objections raised by the assessee were deemed academic and dismissed as infructuous. The decision was pronounced in the open court on 27th October 2016.