2023 (5) TMI 1457 - AT - Income Tax

Payments from specified UK payors not royalties under Article 13 DTAA, not taxable under section 9(1)(vi)

Factiva Limited Versus Assistant Commissioner of Income Tax, 2 (3) (1), Mumbai

ITAT, Mumbai allowed the appeal, holding that payments received from specified foreign payors were not royalties under Article 13 of the India-UK DTAA and ... Treating the payment received as royalty u/s 9(1)(vi) - India-UK DTAA - Taxability of income in India - HELD THAT:- Revenue has not brought on record any contrary material so as to distinguish the aforesaid decision by the Tribunal in assessee’s own case in AY 2015-16 [2022 (6) TMI 342 - ITAT MUMBAI] The Tribunal in AY 2016-17 and 2017-18 in assessee’s own case following the decision of Co-ordinate Bench for AY 2015-16 has taken a similar view. Thus, in the facts of the instant case and the consistent view taken by the Tribunal in identical set of facts in assessee’s own case, we hold that the payment received by the assessee from DJCIPL, KPMG, IQVIA Limited and Deloitte are not in the nature of royalty as defined under Article 13 of India-UK DTAA or taxable u/s 9(1)(vi) of the Act. The addition made by the AO is directed to be deleted, for parity of reasons. The ground no. 1 of appeal is thus allowed. Findings of AO in holding DJCIPL as agency PE of the assessee - We follow the order of Co-ordinate Bench and hold that DJCIPL is not an agency PE of the assessee in India. Similar view has been taken by the Tribunal in assessee’s case for AY 2016-17 and 2017-18. The ground no. 2 of appeal is thus, allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the amounts received for distribution and access to collated news and business-information databases constitute 'royalty' under Section 9(1)(vi) of the Act read with Article 13 of the India-UK DTAA, or are business profits not taxable in India absent a Permanent Establishment (PE) under Article 7/Article 5 of the DTAA. 2. Whether the distributor operating in India could be treated as an 'agency PE' of the non-resident service provider, bringing receipts within India's taxing jurisdiction under Article 5. 3. If the distributor is not an agency PE, whether the receipts nonetheless qualify as taxable business profits in India under Article 7 of the DTAA. 4. Whether initiation of penalty proceedings under Section 270A read with Section 274 of the Act at the assessment stage is maintainable or premature. ISSUE-WISE DETAILED ANALYSIS - Nature of Payment: 'Royalty' v. Business Profits Legal framework: Article 13 of the India-UK DTAA and Section 9(1)(vi) of the Act define 'royalty' in relation to payments for the use of, or the right to use, copyrights of literary, artistic or scientific works; Article 7 governs taxation of business profits subject to presence of a PE under Article 5. Precedent treatment: The Tribunal in the assessee's earlier assessment years and decisions in related group-company matters were considered and followed; Revenue produced no material to distinguish those prior findings. Interpretation and reasoning: The Court examined the substance of the service - collection of publicly available news and information, collation into a searchable database and provision of access to subscribers - and concluded that the payments were for access to a compiled information service, not for the use or acquisition of copyright in literary, artistic or scientific works. The Court relied on factual parity with prior Tribunal findings that similar arrangements do not fall within Article 13's definition of 'royalty.' Ratio vs. Obiter: Ratio - payments for provision of an information database and distribution rights, where underlying content is public-domain and the arrangement does not convey a right to use copyrighted works, do not constitute 'royalty' under Article 13/Section 9(1)(vi). The reliance on earlier coordinate-bench conclusions is treated as binding on the facts before the Court; ancillary references to authority are explanatory. Conclusion: The addition treating the receipts as 'royalty' is deleted; the receipts are not chargeable as royalty under Article 13 or Section 9(1)(vi). ISSUE-WISE DETAILED ANALYSIS - Agency Permanent Establishment (Article 5) Legal framework: Article 5 of the DTAA defines Permanent Establishment, including agency PE where an agent habitually concludes contracts or habitually exercises authority to conclude contracts in the source state on behalf of the non-resident. Precedent treatment: The Tribunal's prior decisions in the assessee's own earlier years, and consistent decisions in related group cases, were applied; Revenue failed to adduce contrary evidence to distinguish those findings. Interpretation and reasoning: The Assessing Officer's conclusion that the distributor in India constituted an agency PE was unsupported by evidentiary material; no factual basis was established to show habitual authority to conclude contracts or that substantive rights were parted with such that the distributor acted as the non-resident's agent meeting Article 5 tests. The Tribunal emphasized the absence of material proving agency attributes and noted contractual and operational arrangements insulated the distributor from constituting an agency PE. Ratio vs. Obiter: Ratio - absent concrete factual evidence demonstrating that the local entity habitually concluded contracts or exercised binding authority on behalf of the non-resident, it cannot be characterized as an agency PE under Article 5. Observations by the AO lacking evidentiary support are not sufficient. Conclusion: The distributor is not an agency PE of the non-resident; the AO's PE finding is set aside for lack of proof. ISSUE-WISE DETAILED ANALYSIS - Consequence for Taxation as Business Profits (Article 7) Legal framework: Article 7 taxes business profits attributable to a PE in the source state; absent a PE, business profits are not taxable in the source state under the DTAA. Precedent treatment: Tribunal's findings in earlier assessment years that identical facts did not establish a PE were followed, controlling the consequences under Article 7. Interpretation and reasoning: Because the Court found no agency PE (see cross-reference to PE analysis), the question of treating the receipts as taxable business profits in India under Article 7 became moot; the receipts therefore remain outside India's taxing ambit under Article 7 for lack of PE. Ratio vs. Obiter: Ratio - determination that receipts do not constitute royalty and that no PE exists is dispositive of taxability under Article 7; any contrary contention is rendered infructuous on these findings. Conclusion: No taxation of the receipts as business profits in India under Article 7, owing to absence of PE; the related ground challenging classification as business profits is dismissed as consequential/infructuous. ISSUE-WISE DETAILED ANALYSIS - Penalty Proceedings under Section 270A read with Section 274 Legal framework: Sections 270A and 274 govern imposition and initiation of penalty proceedings for misreporting/false statements; procedural timeliness and stage of challenge are relevant to adjudication of penalties. Precedent treatment: The Court applied procedural principles regarding the propriety of adjudicating penalty challenges at the assessment appeal stage. Interpretation and reasoning: The Court considered challenge to the initiation of penalty proceedings premature at the present appellate stage; substantive penalty proceedings are to be adjudicated through the statutory penalty process rather than disposed of within the income-tax assessment appeal where initiation alone is contested. Ratio vs. Obiter: Ratio - challenge to mere initiation of penalty proceedings is premature on appeal against assessment; such challenges must await appropriate penalty adjudication stages. Observations on merits of penalty were not undertaken and are obiter. Conclusion: The ground challenging initiation of penalty proceedings is dismissed as premature; no decision on penalty merits was rendered. OVERALL CONCLUSION On parity of facts with earlier Tribunal findings and in absence of contrary material, the Court held (i) payments for access/distribution of compiled public-domain news/information are not 'royalty' under Article 13/Section 9(1)(vi); (ii) the local distributor does not constitute an agency PE under Article 5; (iii) consequential taxation under Article 7 is not attracted; and (iv) challenge to initiation of penalty proceedings is premature. The appeal is partly allowed on those grounds.