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2014 (5) TMI 48 - AT - Income TaxTaxability of Royalty under the Act - Royalty received treated as business income u/s 5(2) and 19(1)(i) of the Act DTAA between India and USA - Whether the amount is taxable under the Indian Income Tax Act in India if not as royalty, but as business income Held that - The amount received by the assessee cannot be considered as royalty as was done by the Assessing Officer while invoking the Article 12(2) of the DT for taxing the amounts the decision in assessee s own case for the previous assessment year has been followed, the assessee does not have any permanent establishment in India - Since the Indian company who obtained the rights is acting independently, Agency PE provisions are not applicable to the assessee company - incomes arising to a Non-Resident cannot be taxed as business income in India, without a PE - As the assessee does not have any permanent establishment in India, the incomes arising outside Indian Territories cannot be brought to tax - income arising to the assessee cannot be taxed as royalty within the meaning of Income Tax Act or DTAA and it also cannot be taxed in the hands of the assessee as business income as assessee does not have any Permanent Establishment in India Decided in favour of Assessee.
Issues:
1. Tax treatment of royalty income received by the appellant from Warner Bros. Pictures (India) Pvt. Ltd. 2. Determination of Permanent Establishment (PE) status of Warner Bros. Pictures (India) Pvt. Ltd. 3. Taxability of royalty income in India. 4. Profit attribution to the alleged Dependent Agency Permanent Establishment (DAPE) in India. Issue 1: Tax Treatment of Royalty Income: The appeal concerned the tax treatment of royalty income received by the appellant from Warner Bros. Pictures (India) Pvt. Ltd. The appellant contested the assessment order treating the royalty as business income under the Income Tax Act, 1961. The appellant cited previous judgments where similar claims were accepted by the ITAT, Mumbai, for assessment years 2006-07 and 2007-08. The Tribunal analyzed the nature of the income, considering definitions under the Income Tax Act and Double Taxation Avoidance Agreement (DTAA) between India and the USA. It was concluded that the income could not be considered as royalty or business income due to the absence of Permanent Establishment in India. Issue 2: Determination of PE Status: The Assessing Officer erred in holding Warner Bros. Pictures (India) Pvt. Ltd as the Dependent Agency Permanent Establishment (DAPE) of the appellant. This decision was based on directions from the Dispute Resolution Panel, disregarding previous findings by the ITAT, Mumbai, for assessment years 2006-07 and 2007-08. The Tribunal examined the business connection in India and the absence of a Permanent Establishment, concluding that the DAPE status did not apply to the appellant. Issue 3: Taxability of Royalty Income in India: The Assessing Officer deemed the royalty income received from Warner Bros. Pictures (India) Pvt. Ltd as taxable in India, following directions from the Dispute Resolution Panel. Despite Transfer Pricing Officer acceptance of arm's length royalty payments, the income was assessed as taxable. The Tribunal reviewed the evidence presented, highlighting the appellant's worldwide operating loss from film distribution, and concluded that the profits attributed to the alleged DAPE in India were inaccurately determined. Issue 4: Profit Attribution to Alleged DAPE: The Assessing Officer calculated 65% of profits attributable to the alleged DAPE in India, amounting to Rs 2,16,25,721, based on directions from the Dispute Resolution Panel. The Tribunal considered the evidence provided during the assessment, revealing the appellant's operating loss from film distribution. The Tribunal found the profit attribution to be erroneous, emphasizing that the income accruing outside Indian Territories cannot be taxed without a Permanent Establishment. The Tribunal dismissed the Revenue Appeal, aligning with previous decisions and concluding that the income could not be taxed in India. In conclusion, the ITAT, Mumbai, allowed the appeal filed by the appellant, emphasizing that the royalty income could not be taxed as royalty or business income in India due to the absence of a Permanent Establishment. The Tribunal's decision was based on detailed analysis of legal provisions, previous judgments, and the specific circumstances of the case.
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