2012 (12) TMI 665 - AT - Income Tax

Indo-USA DTAA - payment received from ERAPL(USA) for providing assistance in client coordination titrated as Royalty under Article 12 - Held that - As seen that the ERAPL serves certain multinational clients in India who have principal offices located outside India and the appellant has agreed to serve EARPL to help to act as coordinating agency as required by such multinational clients. For this purpose, the ERAPL has to pay to the appellant certain amount of annual billings. For the communication channel between ERAPL and its clients the client coordination fees paid to the appellant cannot be termed as Royalty because it is not a consideration for the use of right or to use any of the specified terms mentioned in the definition of Royalty under Article 12 of Indo US DTAA. Since the appellant admittedly does not have a permanent establishment India, the question of taxability of the impugned amount in India would not arise in the absence PE, as provided for in Article 7 of DTAA. In view of these facts, this ground of appeal is decided in favour of the appellant. Lower rate of tax - fees for included services(FIS) - CIT(A)directing to tax @10% instead of @15% - Held that - As per the Article 12(2)(b) the rate of 10% is applicable in the case of royalty referred to in sub-paragraph of 3(b) and fees for included services as defined under this article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under Para 3(b) of Article. Since the amounts are not royalty being considered either 3(a) or 3(b), the rate of 10% on FIS is not correct. There is nothing on record that indicates that rate specified under Sub-Article (2)(b) is applicable and not (2)(a)(ii). Therefore, upholding the Revenue ground direct the AO to tax the above amounts confirmed by CIT(A) as FIS at 15% of the rate - in favour of revenue.

Summary

Issues:
1. Taxability of payment received for client coordination as Royalty under India-USA Treaty.
2. Tax rate applicability for creative fees and data base cost under the Indo-USA DTAA.

Issue 1 - Taxability of client coordination payment as Royalty:
The case involved a Revenue appeal against the CIT (A) orders regarding the taxability of payments received for client coordination as Royalty under the India-USA Treaty. The appellant, a company incorporated in the USA, provided coordination services to a local entity in India and received consideration for the same. The AO considered the payments as Royalty taxed at 15%, while the CIT (A) held that the client coordination fees were business profits and not taxable due to the absence of Permanent Establishment (PE) in India. The Tribunal agreed with the CIT (A) findings, emphasizing that the coordination services did not involve the use of specific terms mentioned in the Royalty definition. The Tribunal dismissed Ground No.1 of the appeal, supporting the CIT (A) decision.

Issue 2 - Tax rate applicability for creative fees and data base cost:
Regarding the tax rate for creative fees and data base cost under the Indo-USA DTAA, the AO taxed the entire amount at 15% as Royalty. However, the CIT (A) held that only two amounts were considered as fees for included services and directed the tax at 10%. The appellant contested for the lower rate of tax at 15% under Article 12 of the DTAA. The Tribunal reviewed Article 12 of the DTAA and concluded that since the amounts were not considered as Royalty, the correct tax rate should be 15% for fees for included services. Consequently, Ground No.2 of the appeal was allowed, and the AO was directed to tax the amounts confirmed by the CIT (A) as fees for included services at 15%.

In conclusion, the Revenue appeal was partly allowed, with the Tribunal upholding the tax treatment of client coordination fees as business profits and adjusting the tax rate for creative fees and data base cost under the DTAA.