1996 (5) TMI 428 - AAR - Income Tax

Summary

Issues Involved:
1. Taxability of royalty paid outside India.
2. Application of Section 9(1)(vi) of the IT Act, 1961.
3. Interpretation of the Double Taxation Avoidance Agreement (DTAA) between India and the USA.
4. Consideration of statutory provisions versus DTAA provisions.
5. Validity of the agreement between parties.

Detailed Analysis:

1. Taxability of Royalty Paid Outside India:
The primary issue is whether the royalty amounting to US $5,295,756 paid by 'C' to 'B' for granting the licence and right to 'IC' to use the trade-mark in India is liable to Indian tax. The judgment concludes that the royalty is indeed liable to Indian tax.

2. Application of Section 9(1)(vi) of the IT Act, 1961:
Section 9(1)(vi) of the IT Act specifies that income by way of royalty payable by a non-resident is deemed to accrue or arise in India if it is payable in respect of any right, property, or information used or services utilized for the purposes of a business or profession carried on by such person in India or for earning any income from any source in India. The judgment states: "The applicant's case is bound to fail even on the language of cl. (c) of s. 9(1)(vi). The applicant's contention misses the second part of that clause which deems royalty to accrue or arise in India where it is payable in respect of the right, property or information used for the purposes of making or earning any income from any source in India." Therefore, the royalty paid by 'C' to 'B' is deemed to accrue or arise in India.

3. Interpretation of the Double Taxation Avoidance Agreement (DTAA) between India and the USA:
Article 12(7)(b) of the DTAA between India and the USA states that royalties shall be deemed to arise in a Contracting State where the royalties relate to the use of, or the right to use, the right or property in one of the Contracting States. The judgment notes: "The second interpretation is in line with the language of s. 9(1)(vi) of the IT Act. The concept of demand accrual or arisal of royalties under s. 9 is that it is related to the residence of the person paying the royalties or, irrespective of such residence, the place where the right to use the property in question is exercised." Thus, the royalties are deemed to arise in India.

4. Consideration of Statutory Provisions versus DTAA Provisions:
The judgment emphasizes that where the statutory provisions are clear, they should be applied unless the DTAA provides a more beneficial provision to the assessee. It states: "Where the terms of the agreement are absolutely clear, no doubt, they will prevail and even if there is a contrary provision in the statute the assessee can opt for the beneficial provision in the agreement. But where there is an ambiguity as in the present case in the provisions of the treaty and the terms of the treaty are susceptible to both interpretations, the interpretation which is harmonious with the provisions of the statute should be adopted."

5. Validity of the Agreement between Parties:
The Department argued that the agreement between 'B' and 'C' is void as 'B' has furnished no consideration to 'C' for the royalty received. The judgment rejects this argument, stating: "There are recitals in the agreement which show that 'C' is anxious to come into the Indian market with like products and wants to take over the mantle of the 'IC' as a step-in aid to introduce its own brands in the Indian market." Therefore, it cannot be said that 'C' had nothing to gain from the agreement.

Conclusion:
The Authority for Advance Rulings concluded that the royalty paid by 'C' to 'B' is liable to Indian tax. The judgment states: "For the reasons discussed above, the Authority is of opinion that the answer to the question raised should be in the affirmative." Thus, the royalty amounting to US $5,295,756 is taxable in India.