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2020 (11) TMI 1049 - AT - Income Tax


Issues:
- Interpretation of royalty income under the Income Tax Act and the India-US tax treaty.
- Taxability of payments received by the assessee from the sale of products in India.
- Application of Permanent Establishment concept for tax liability.
- Liability for interest under Section 234B for default in tax deduction at source.

Interpretation of Royalty Income:
The case involved appeals against orders framed under the Income Tax Act for three assessment years. The assessee, a subsidiary of Microsoft Corporation, earned royalties from a licensee for the exclusive rights to manufacture and distribute Microsoft products. The Assessing Officer held that the payments received were taxable as royalties under the India-US tax treaty. However, the Tribunal referred to previous decisions where it was established that the payments were for the purchase of copyrighted articles and not royalty income. Citing the decision of the jurisdictional High Court, the Tribunal concluded that there was no transfer of copyright rights, and the payments represented the purchase price of an article, not royalty income. As a result, the Tribunal held in favor of the assessee.

Taxability of Payments Received:
The Assessing Officer believed that the assessee received exclusive rights to Microsoft products in exchange for stocks, making the payments taxable as royalties under the tax treaty. However, the Tribunal, relying on previous decisions and the High Court's judgment, determined that the payments were for copyrighted articles and not royalty income. Consequently, the Tribunal ruled in favor of the assessee, stating that there was no need for further verification by the Assessing Officer.

Permanent Establishment and Tax Liability:
The Tribunal considered the issue of Permanent Establishment and tax liability. Due to the finding that there was no royalty income involved and the absence of Permanent Establishment, the business income of the assessee was deemed not taxable in India. The Tribunal, in line with the High Court's decision, ruled in favor of the assessee for all assessment years.

Liability for Interest under Section 234B:
Regarding the liability for interest under Section 234B for default in tax deduction at source, the Tribunal referred to a High Court decision stating that if the payer failed to deduct tax at source, the non-resident payee was not liable to pay interest under Section 234B. Given the absence of royalty income and Permanent Establishment, the Tribunal held in favor of the assessee, concluding that no interest was payable under Section 234B.

In conclusion, the Tribunal allowed all appeals of the assessee, emphasizing the absence of royalty income, the non-taxability of business income in India, and the exemption from interest under Section 234B due to the failure to deduct tax at source by the payer.

 

 

 

 

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