2024 (9) TMI 1442 - AT - Income Tax

Royalty income from non-resident OEMs cannot be taxed under section 9(1)(vi)(c) when based on reversed assessment orders

M/s Qualcom Incorporated San Diego Ernst & Young LLP Versus The Dy. C.I.T, Circle 3 (1) (1), International Taxation, New Delhi

ITAT Delhi allowed the assessee's appeal regarding royalty income received from non-resident OEMs reporting sales from India. The tribunal held that ... Accrual of income in India - treatment by the assessee of the Royalty Income received from non-resident OEMs, who have reported their sales from India - Taxability u/s 9(1)(vi)(c) and Article 12(7) of India-US DTAA - HELD THAT:- Respectfully following the decision of the co-ordinate bench [2023 (6) TMI 966 - ITAT DELHI] that ‘when the entire edifice of the present additions made by the Assessing Officer is based on the assessment order passed for the assessment year 2012-13, which now stands reversed by the Tribunal in our view, the addition made by the AO are not sustainable’, this grievance is allowed in favour of the assessee and against the Revenue. Accordingly, we direct the Assessing Officer to delete the additions made u/s 9(1)(vi)(c). Assessee appeal allowed. Issues Involved:1. Validity of assessment initiated under section 148.2. Prior approval under section 151.3. Taxability of royalty income under section 9(1)(vi)(c) and Article 12(7) of India-US DTAA.4. Application of Article 12(7)(b) of India-US DTAA.5. Principles of natural justice.6. Reliance on past assessment orders and technical opinions.7. Judicial discipline and consistency.8. Taxability of royalty income from Indian end-users.9. Application of section 115A and tax rate.10. Levy of interest under sections 234B and 234C.11. Initiation of penalty proceedings under section 270A.Detailed Analysis:1. Validity of Assessment Initiated Under Section 148:The assessee contended that the assessment was initiated and completed without the requisite information as per explanation 1 to section 148, rendering the assessment void ab initio. However, this issue was not argued by the assessee's counsel and was therefore dismissed.2. Prior Approval Under Section 151:The assessee argued that the notice under section 148 and the subsequent order under section 148A were issued without obtaining prior approval from the competent authority as specified under section 151. Like the first issue, this was not argued and subsequently dismissed.3. Taxability of Royalty Income Under Section 9(1)(vi)(c) and Article 12(7) of India-US DTAA:The core issue involved the taxability of royalty income received from non-resident OEMs. The assessee claimed this income was non-taxable as the OEMs had no manufacturing in India. The Tribunal found that the issue was covered in favor of the assessee by a previous decision, which held that royalty received from OEMs located outside India is not taxable in India. The Tribunal noted that the Assessing Officer had not provided any new material to demonstrate that the OEMs had PEs in India.4. Application of Article 12(7)(b) of India-US DTAA:The assessee argued that the provisions of Article 12(7)(b) of the India-US tax treaty were incorrectly applied by the AO. The Tribunal agreed with the assessee, citing previous orders where it was held that as long as the patents were used in manufacturing outside India, the royalty income could not be taxed in India.5. Principles of Natural Justice:The assessee contended that the assessment was conducted in haste without giving appropriate time to provide information, violating the principles of natural justice. The Tribunal did not separately address this issue, implying it was covered under the broader findings related to the taxability of royalty income.6. Reliance on Past Assessment Orders and Technical Opinions:The AO relied on past assessment orders and technical opinions from earlier years without independently reviewing the facts for the current year. The Tribunal found that the AO had done 'precious little' to establish the accrual of royalty income in India and had unduly relied on past assessments and technical reports, which were not relevant for the current year.7. Judicial Discipline and Consistency:The assessee argued that the AO and DRP violated principles of judicial discipline by not following the ITAT's decisions in the assessee's own case for previous years. The Tribunal agreed, noting that the factual matrix remained unchanged from earlier years where the royalty income was held to be non-taxable.8. Taxability of Royalty Income from Indian End-Users:The AO concluded that the royalty income was taxable as the patent technology was used by end-users in India. The Tribunal found this reasoning unsustainable, reiterating that the income could not be taxed if the patents were used in manufacturing outside India.9. Application of Section 115A and Tax Rate:The AO taxed the royalty income at a higher rate of 40%, rejecting the applicability of section 115A and Article 12 of the India-US tax treaty. The Tribunal did not separately address this issue, as it was resolved under the broader finding that the royalty income was not taxable.10. Levy of Interest Under Sections 234B and 234C:The interest levied under sections 234B and 234C was deemed consequential and required no separate adjudication.11. Initiation of Penalty Proceedings Under Section 270A:The initiation of penalty proceedings under section 270A was also deemed consequential and required no separate adjudication.Conclusion:The Tribunal allowed the appeal partly, directing the AO to delete the additions made under section 9(1)(vi)(c). The order was pronounced on 29.08.2024.