2022 (5) TMI 1589 - AT - Income Tax

Tribunal Rules Rs. 5.82 Crore Not 'Royalty' Under India-UK Tax Treaty; No Permanent Establishment in India Found.

Inmarsat Global Limited Versus Deputy Commissioner of Income Tax (IT) -2 (2) (1) Mumbai

The Tribunal allowed the appeal, directing the deletion of the impugned addition of Rs. 5,82,70,600, and upheld the appellant's contentions on all major ... Income taxable in India - royalty receipts - India-UK DTAA - HELD THAT:- Hon’ble Tribunal in assessee’s own case in [2020 (10) TMI 1188 - ITAT MUMBAI] Since the facts and circumstances in this year remain the same as in the past years, which has been considered by the Tribunal, we find no reason to distract from the earlier decision of the Tribunal. Pertinently, it is also not the case of the Revenue that there is any change in the nature of the income being earned by the assessee from TCL than that considered by the Tribunal in its order (supra). Therefore, following the precedent in assessee’s own case for Assessment Years 2000- 01 to 2005- 06, the stand of the assessee has to be approved as receipts from TCL are in the nature of “business profits” covered by Article 7 of the India-UK DTAA and, in the absence of any PE in India, the same are not taxable in India. Decided in favour of assessee. Issues Involved:1. Determination of the total income.2. Classification of amounts received as 'Royalty' under the India-UK Tax Treaty.3. Adherence to previous Tribunal decisions.4. Impact of unilateral amendment on 'royalty' definition in the India-UK Tax Treaty.5. Computation of profitability on an ad-hoc basis.6. Existence of a Permanent Establishment (PE) in India.7. Penalty proceedings.Issue-wise Detailed Analysis:1. Determination of the Total Income:The appellant challenged the determination of its total income at Rs. 5,82,70,600 instead of “Nil” as declared in the return. The Tribunal found that the lower authorities erred in this determination, as the issue was covered by previous Tribunal decisions in favor of the appellant for earlier assessment years.2. Classification of Amounts Received as 'Royalty':The appellant contended that the amounts received from Tata Communications Limited (TCL) should not be classified as 'Royalty' under Article 13(3)(a) of the India-UK Tax Treaty. The Tribunal noted that this issue was covered by earlier decisions, where it was concluded that such receipts were not to be treated as royalty. The Tribunal cited its previous orders, emphasizing that the nature of services and receipts remained unchanged and thus should not be classified as 'Royalty'.3. Adherence to Previous Tribunal Decisions:The appellant argued that the lower authorities did not follow the Tribunal's decisions in the appellant's own case for previous years. The Tribunal reiterated that the issue of classifying receipts as 'Royalty' was settled in earlier years, and there was no change in the nature of income or services provided by the appellant. Therefore, the Tribunal upheld the appellant's stance based on judicial precedence.4. Impact of Unilateral Amendment on 'Royalty' Definition:The appellant contested the lower authorities' reliance on a unilateral amendment to the term 'process' under the Income Tax Act, which was imported into the definition of 'Royalty' under the India-UK Tax Treaty. The Tribunal referred to previous decisions which clarified that unilateral amendments to domestic law could not alter the definitions agreed upon in a bilateral tax treaty. Thus, the Tribunal ruled in favor of the appellant.5. Computation of Profitability on an Ad-hoc Basis:The appellant challenged the ad-hoc computation of profitability at 30% of gross receipts from TCL by applying Rule 10 of the Income-tax Rules, 1962. The Tribunal found that this issue was also covered by previous decisions, which did not support such an ad-hoc application. Therefore, the Tribunal directed the deletion of the impugned addition.6. Existence of a Permanent Establishment (PE) in India:The appellant argued that neither the Liaison Office (LO) nor the Land Earth Station (LES) constituted a PE in India. The Tribunal reviewed the facts and previous decisions, concluding that the LO was engaged only in liaison activities as per RBI approval, and the LES was owned and operated by TCL, not the appellant. Therefore, the Tribunal held that the appellant did not have a PE in India during the relevant year.7. Penalty Proceedings:The appellant raised a grievance regarding the initiation of penalty proceedings. The Tribunal noted that this issue was academic and premature at this stage, and thus did not require adjudication.Conclusion:The Tribunal allowed the appeal, directing the deletion of the impugned addition of Rs. 5,82,70,600, and upheld the appellant's contentions on all major issues, including the classification of receipts, computation of profitability, and the existence of a PE in India.