2019 (12) TMI 1523 - AAR - Income Tax

Income received or deemed to be received in India - Business Income OR Royalties OR Fees for technical services - proof of business connections in India - payment pertains to business proposed to be carried out outside India - liability of withholding tax on premium payments - proposed payments by the applicant to VIVO for the grant of exclusive right to offer ring back tone Services to VIVO's customers in Brazil would be considered to be received or deemed to be received in India - applicant submits that the taxability of the amount of premium paid by the applicant to VIVO is required to be examined under the provisions of the Income-tax Act, 1961 and the provisions of the applicable Double Taxation Avoidance Agreements (DTAA Tax Treaty ), whichever is more beneficial - HELD THAT - Applicant received information and contents from VIVO, and thereupon value added products were developed by the applicant. The above replies of the applicant and flow chart submitted by the learned authorised representative confirms in unequivocal terms that the software and content development and customisation of services and testing of products were to be carried out by the applicant in India. Applying the logic of CIT v. Havells India Ltd. 2012 (5) TMI 449 - DELHI HIGH COURT to our facts we conclude that the source of premium payment is based in India as all value-added activities are located in India. The case of the applicant does not fall under the second limb of exclusion under section 9(1)(vi)(b). Thus, under the Income-tax Act, the payments are taxable as royalty in the hands of VIVO under the deeming provisions of section 9. The applicant has kept a database, nurtured by commercial experience, relating to its mobile services which was being made available to the applicant and this valuable right has been shared with the applicant on exclusive basis and this is clearly in the nature of commercial information and experience which is shared with the applicant and the consideration paid is thus covered under article 12(3) of the treaty. Since we have held that the payments are in the nature of royalty, we are not commenting on the pleas raised by either side for inclusion/exclusion of premium payment as fee for technical services. Suffice it to say that in relation to premium payments no services were rendered by VIVO in India or in Brazil and thus the captioned payment cannot be treated as fees for technical services. Ruling (a) and (b). The payment of ₹ 12.70 million by the applicant to VIVO for the grant of exclusive right to offer ring back tone services to VIVO's customers in Brazil is income deemed to accrue or arise in India in terms of section 9(1)(vi)(b) as royalties. (c) The amount payable by the applicant is taxable in India under the provisions of the India-Brazil tax treaty as royalties.

Summary

Issues Involved:
1. Whether the payment of ?12.70 million by the applicant to VIVO is considered to be received or deemed to be received in India.
2. Whether the payment would be considered to accrue or arise in India as business income, royalties, or fees for technical services.
3. Taxability of the amount under the India-Brazil Tax Treaty as business profits, royalties, or fees for technical services.

Detailed Analysis:

1. Received or Deemed to be Received in India:
The applicant argued that the premium paid to VIVO does not fall under the purview of income received or deemed to be received in India as the payment was made outside India, and VIVO does not carry on any business activities in India. The Authority for Advance Rulings (AAR) concluded that no income has accrued or arisen in India for VIVO, thus section 5 of the Income-tax Act is not applicable here.

2. Accrual or Arising in India:
The applicant contended that payments to VIVO should not be considered to accrue or arise in India as VIVO does not have a business connection or permanent establishment in India. The Department argued that the payment is chargeable under section 5(2)(b) and section 9(1)(vi) of the Income-tax Act, 1961, as it pertains to royalties for imparting information concerning technical, commercial, industrial, or scientific knowledge, experience, or skill.

AAR's Decision:
- The AAR held that the payment of ?12.70 million is covered under Explanation 2(iv) and Explanation 5 of section 9(1)(vi) of the Income-tax Act, 1961, as it involves imparting commercial knowledge and experience.
- The payment is considered royalty and is not covered under the exclusion clauses of section 9(1)(vi)(b) since the business activities and income-earning activities are located in India.
- The source of the income is in India, as all value-added activities related to the ring back tone services are carried out in India.

3. Taxability under India-Brazil Tax Treaty:
The applicant argued that the payment does not fall under the definition of royalties or fees for technical services under the India-Brazil tax treaty and should not be taxable in India. The Department contended that the payment qualifies as royalties under Article 12 of the India-Brazil Tax Treaty.

AAR's Decision:
- The AAR concluded that the payment falls under Article 12(3) of the India-Brazil Tax Treaty as it pertains to consideration for information concerning industrial, commercial, or scientific experience.
- The payment is taxable in India under the provisions of the India-Brazil tax treaty as royalties.

Conclusion:
(a) and (b) The payment of ?12.70 million by the applicant to VIVO for the exclusive right to offer ring back tone services to VIVO's customers in Brazil is income deemed to accrue or arise in India in terms of section 9(1)(vi)(b) as royalties.
(c) The amount payable by the applicant is taxable in India under the provisions of the India-Brazil tax treaty as royalties.