2012 (5) TMI 175 - AT - Income Tax

DTAA with USA - withholding tax (TDS) - Affiliate Agreement - sharing of fee - Distance learning courses - information through website situated outside India - permanent establishment or business connection - held that - nature of payment made to eCornell is not royalty as the payment is not for the use or the right to use any copyright or literary work. The fact that it is not for artistic, scientific work, work on film, tape, radio, television, broadcasting etc. does not arise. It is also not for use or right to use patent, trademark, design, plan, secret formula or process etc. - It is purely and simply a case of pooling of resources by way of an Affiliate Agreement wherein the respective roles and responsibilities have been assigned and the arrangement being of the nature of pooling of resources where fee sharing of the two parties have been set out this is not a case where any payment is being made to eCornell by the assessee for any kind of service as it is purely a case of apportioning of fees attributable to eCornell as per the Affiliate Agreement being remitted to eCornell and the portion of the fees collected for providing enrolment infrastructure in order to access the study material by the students is retained by the assessee as its share. As such on facts the present case does not partake the nature of royalty as contemplated under Clause 3(a) of Article 12 of the Indo-US DTAA. It is again and again the same principle which has been applied namely that the intention of the parties can be gathered only from the agreement which has to be read as a whole. The said issue is not in dispute. On a careful consideration of the Affiliate Agreement along with Exhibits, we are of the view that the remittances made to eCornell (TILS) do not fall in the category of Royalty as considered in Clause 3(a) of Article 12 of the Indo-US DTAA. - Decided in favor of assessee.

Issues Involved:
1. Classification of payments as Royalty under Article 12 of the Indo-US DTAA.
2. Determination of whether the payments were for the use of trademarks, service marks, logos, and other corporate indices.
3. Consideration of whether the payments were for advertising purposes and thus not subject to Royalty.
4. Evaluation of the rights granted under the agreement and whether they constitute Royalty.
5. Determination of whether the payments should be classified as business profits under Article 7 of the DTAA and thus not taxable in India without a permanent establishment.

Detailed Analysis:

Issue 1: Classification of Payments as Royalty under Article 12 of the Indo-US DTAA
The primary issue was whether the payments made to Tower Innovative Learning Solutions Inc. USA (TILS), doing business as eCornell, constituted Royalty under Article 12 of the Indo-US DTAA. The Assessing Officer and the CIT(A) both concluded that the payments were Royalty, as defined under Article 12(3)(a) of the DTAA. They based their decision on the agreement between TILS and Hughes Escorts Communication Ltd. (HECL), which granted HECL a limited, non-exclusive, non-transferable, non-sub-licensable right to market, promote, and provide ancillary services for eCornell's courses in India.

Issue 2: Determination of Whether the Payments Were for the Use of Trademarks, Service Marks, Logos, and Other Corporate Indices
The CIT(A) and the Assessing Officer held that the payments were in the nature of Royalty because HECL was granted the right to use eCornell's trademarks, service marks, logos, and other corporate indices for advertising and promoting the courses. This was seen as a consideration for the use of intellectual property, thus falling under the definition of Royalty in Article 12 of the DTAA.

Issue 3: Consideration of Whether the Payments Were for Advertising Purposes and Thus Not Subject to Royalty
The assessee argued that the use of eCornell's marks was merely incidental to advertising for soliciting student registrations, which primarily benefited eCornell. Therefore, no consideration was deemed to have been paid for the use of trademarks, logos, etc. The CIT(A) rejected this argument, stating that the agreement did not mention that these rights were granted free of charge.

Issue 4: Evaluation of the Rights Granted Under the Agreement and Whether They Constitute Royalty
The agreement between TILS and HECL was scrutinized to determine if it involved the transfer of any right to use copyrighted material. The assessee contended that the payments were not for the use of any copyright of literary, artistic, or scientific work. Instead, HECL was providing ancillary services like infrastructure, broadband access, and registration assistance. The Tribunal found that the agreement did not transfer any rights to HECL; instead, it was a case of pooling resources and sharing fees, which does not constitute Royalty under Article 12(3)(a) of the DTAA.

Issue 5: Determination of Whether the Payments Should Be Classified as Business Profits Under Article 7 of the DTAA and Thus Not Taxable in India Without a Permanent Establishment
The assessee argued that the payments should be considered business profits under Article 7 of the DTAA, which are not taxable in India in the absence of a permanent establishment. The Tribunal agreed, noting that the nature of the agreement was more akin to a business arrangement for sharing resources and fees rather than a transfer of intellectual property rights.

Conclusion:
The Tribunal concluded that the payments made to eCornell were not in the nature of Royalty as defined under Article 12(3)(a) of the Indo-US DTAA. Instead, they were business profits under Article 7, which are not taxable in India without a permanent establishment. The appeal filed by the assessee was allowed, overturning the decisions of the CIT(A) and the Assessing Officer.

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