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2014 (11) TMI 432 - AT - Income TaxConsideration received in nature of reimbursement expenses along with mark up @ 10% - royalty and Fee for included services in equal proportion Held that - The expressions Royalty and Fees for included services have been given distinct meaning in the Indo US treaty - the tax authorities were not able to come to a conclusion as to whether the consideration received by the assessee company would fall within the meaning of Royalty or Fees for included services , even though there are plethora of case laws explaining both the terms - the tax authorities have not examined the issue in proper perspective, i.e., the matter has not been examined in the context of Indo-US treaty by considering the meaning of various terms used therein - the meaning to be ascribed to various terms used in the treaty has been the bone of contention in various case laws and we notice that the tax authorities have not considered the applicable case laws the matter requires fresh examination at the end of the AO the order of the CIT(A) is set aside and the matter is remitted back to the AO for fresh adjudication Decided in favour of assessee.
Issues Involved:
1. Taxability of the consideration received by the assessee as "royalty" and "Fee for included services". 2. Interpretation of the Indo-USA Tax Treaty in the context of the received consideration. 3. Examination of the applicability of various case laws and provisions of the Income Tax Act, 1961, and the Copyright Act, 1957. Detailed Analysis: 1. Taxability of the Consideration as "Royalty" and "Fee for Included Services": The primary issue in the appeals is whether the consideration received by the assessee, which includes a reimbursement of expenses with a 10% markup, is taxable in India as "royalty" or "Fee for included services". The assessee, a tax resident of the USA, entered into a General Service Agreement (GSA) with Indian entities to provide various services, and received payments calculated at cost plus a 10% markup. The Assessing Officer (AO) initially treated the entire consideration as "royalty" under section 9(1)(vi) of the Income Tax Act, 1961, and Article 12 of the DTAA between India and the USA for the assessment year 2004-05. For the subsequent years, the AO apportioned the consideration equally between "royalty" and "Fee for included services". The CIT(A) upheld the AO's view for the assessment years 2005-06 and 2006-07 and modified the order for 2004-05 to assess the consideration equally as "royalty" and "Fee for included services". 2. Interpretation of the Indo-USA Tax Treaty: The assessee argued that the amounts received do not constitute "royalty" or "Fee for included services" under Article 12 of the Indo-USA Tax Treaty. The assessee claimed that the services provided did not involve the use of any copyright, patent, or technical know-how that would qualify as "royalty". Furthermore, the services did not "make available" any technical knowledge, experience, skill, or process to the Indian entities, which is a requirement for being classified as "Fee for included services". The AO and CIT(A) referred to various provisions of the Income Tax Act, the Copyright Act, and case laws to justify their stance. However, they failed to conclusively determine whether the payments fell under "royalty" or "Fee for included services" as per the DTAA. 3. Examination of Case Laws and Provisions: The AO relied on decisions such as CIT Vs. Travel Corporation of India Ltd (209 ITR 555) and P.No.30 of 1999, In re (238 ITR 296) to classify the payments as "royalty". The CIT(A) also cited the Delhi High Court decision in DR Hutarew & Partner (I) Pvt Ltd. vs. ITO Ward-10(4), New Delhi (ITA NO. 2797/De1/2004) to support the classification of the payments as "royalty" and "Fee for included services". The assessee countered with arguments and case laws such as DDIT v/s. Preroy A.G. (39 SOT 187), DCIT v/s. Hyderabad Industries Ltd. (24 SOT 98), and Cushman & Wakefield(S) Pte. Ltd. (305 ITR 179) to assert that the payments did not qualify as "royalty" or "Fee for included services". Conclusion and Order: The Tribunal noted that the tax authorities did not properly examine the issue in the context of the Indo-USA Tax Treaty and relevant case laws. Consequently, the Tribunal set aside the orders of the CIT(A) and remanded the matter back to the AO for a fresh examination. The AO was directed to consider the assessee's submissions, relevant case laws, and make a decision in accordance with the law. The appeals filed by the assessee were allowed for statistical purposes, and the order was pronounced in the open court on 8th August, 2014.
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