2013 (11) TMI 1607 - AT - Income Tax

Receipts being in the nature of reimbursement of expenses - royalty - chargeability to tax - Held that -Following the findings of the Tribunal in A.Y. 2004-05, the view taken by the AO about the treatment of this amount as royalty under Article-12 has been set aside as also in line with the findings of the Tribunal in A.Y. 2004-05 , we have held that this amount is also not reimbursement of expenses. The natural corollary which follows in the present circumstances is that the taxability of this amount is required to be determined in terms of Article-7 as has been held by the Tribunal in A.Y. 2004-05. It would be pertinent to mention here clearly that in A.Y. 2004-05, the break-up of the sum was available under clauses 3.1, 3.2 and 3.3 which has been mentioned by us elsewhere was not made available to us. Therefore, the total impugned receipts are liable to be considered in terms of Article-7. We, accordingly set aside the impugned order and remit the matter to the file of the AO for considering the facts in the light of Article-7 of the DTAA.

Summary

Issues:
1. Taxability of payment received under International Sales and Marketing Agreement (ISMA) as reimbursement of expenses or royalty.
2. Interpretation of Double Taxation Avoidance Agreement (DTAA) between India and Netherlands regarding taxation of international marketing fees.
3. Determination of taxability of receipts as reimbursement of expenses or royalty under clauses 3.1, 3.2, and 3.3 of the agreement.

Issue 1 - Taxability of Payment under ISMA:
The appellant contested the tax treatment of the payment received under ISMA, arguing it was reimbursement for international advertising and promotion expenses, not royalty. The Assessing Officer (AO) disagreed, asserting the payment was for the use of the brand 'Marriott' and thus taxable as royalty. The AO found a business connection between the appellant and the payer, leading to the conclusion of royalty payment. The Commissioner of Income Tax (Appeals) upheld the AO's decision, considering the payment as royalty. However, the Tribunal in a previous case involving similar issues ruled that payments for international marketing activities cannot be categorized as royalties. Consequently, the Tribunal set aside the lower authorities' decision and remitted the matter to the AO for reconsideration based on Article-7 of the DTAA.

Issue 2 - Interpretation of DTAA for Taxation of International Marketing Fees:
The appellant relied on the DTAA between India and Netherlands to argue against the taxability of international marketing fees. The AO treated the payment as royalty under Article 12(4) of the DTAA. However, the Tribunal, following precedents, held that the payment for international marketing activities did not qualify as royalties under the DTAA. The Tribunal emphasized that the nature of the payment was crucial in determining tax liability, and in this case, it did not fall under the ambit of royalty as defined in the agreement.

Issue 3 - Taxability of Receipts under Clauses 3.1, 3.2, and 3.3:
The Tribunal examined the breakdown of receipts under different clauses of the agreement to determine tax liability. While the appellant failed to provide a detailed breakdown, the Tribunal referenced a previous case where payments under clauses 3.2 and 3.3 were considered reimbursement of expenses, not royalties. The Tribunal emphasized the importance of distinguishing between reimbursement and royalty payments for tax purposes. As the appellant did not demonstrate that the payments were solely reimbursement of expenses, the Tribunal set aside the previous decision and directed the AO to reassess the taxability of the receipts under Article-7 of the DTAA.

In conclusion, the Tribunal allowed the appeal for statistical purposes, emphasizing the need for a thorough assessment of the nature of payments under the ISMA and the application of relevant provisions of the DTAA to determine tax liability accurately.