Singapore company's loyalty programme and marketing fees not royalty under India-Singapore tax treaty

ITAT Delhi held that receipts under Loyalty Programme, Reservation Fee and Marketing Fee by a Singapore incorporated company cannot be classified as royalty under the India-Singapore DTAA. The tribunal followed its earlier decision in assessee's own case for AY 2015-16, directing deletion of additions made by AO and DRP. Additionally, ITAT directed AO to apply correct tax rates as per DTAA provisions instead of domestic rates inclusive of surcharge and education cess in the final assessment order.

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Issues:
Taxability of receipts for Loyalty Programme, Reservation Fee, and Marketing Fee as royalty income under the Income Tax Act and India-Singapore Double Taxation Avoidance Agreement (DTAA); Charging of interest under section 234A and 234B of the Act; Initiation of penalty proceedings under section 270A of the Act.

Analysis:

Issue 1: Taxability of receipts for Loyalty Programme, Reservation Fee, and Marketing Fee as royalty income
The case involved the taxability of an amount of INR 33,11,70,181/- as royalty income under the Income Tax Act and the India-Singapore DTAA. The assessee contended that the receipts for Loyalty Programme, Reservation Fee, and Marketing Fee were not in the nature of royalty or Fee for Technical Services (FTS). However, the Assessing Officer treated these receipts as royalty income based on the argument that services rendered by the assessee were ancillary to the use of brand names, falling within the scope of royalty. The Dispute Resolution Panel (DRP) upheld the Assessing Officer's view. The Tribunal, considering a similar decision in the assessee's favor for AY 2015-16, held that the disputed amount did not qualify as royalty income and directed the deletion of the addition.

Issue 2: Charging of interest under section 234A and 234B of the Act
The Assessing Officer had charged interest under sections 234A and 234B of the Income Tax Act. However, following the Tribunal's decision to delete the addition related to royalty income, the interest calculation needed to be recalculated in accordance with the revised tax liability.

Issue 3: Initiation of penalty proceedings under section 270A of the Act
The Assessing Officer had initiated penalty proceedings under section 270A of the Income Tax Act. Since the Tribunal's decision on the taxability issue resulted in the deletion of the addition, the penalty issue became academic and was not adjudicated upon.

The Tribunal allowed the appeal of the assessee regarding the taxability of receipts and directed the recalculation of interest under sections 234A and 234B. The issue of penalty proceedings was not addressed due to the decision on the taxability issue. In another related appeal, certain grounds were dismissed, and decisions made in the first appeal were applied mutatis-mutandis. The Tribunal also directed the correct computation of tax liability and verification of TDS claims. Interest calculations were to be revised accordingly. Penalty proceedings were not adjudicated due to the decision on the taxability issue.

In conclusion, the Tribunal allowed one appeal and partly allowed another for statistical purposes, providing detailed reasoning and directions on each issue raised in the appeals.

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