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2017 (1) TMI 1786 - AT - Income TaxIncome accrued or deemed to accrue in India - consideration received by the Appellant for the use of the SAP system is subject to tax as royalty under the Income Tax Act at the rate of 20 percent on a gross basis - assessee a tax resident of Malaysia is engaged in the business of marketing distribution and sale of household products fabrics and personal care - DR submitted payment received by the assessee from CPI is in the nature of royalty as defined both in section 9(1)(vi) of the Act and Article 13(5) of DTAA with Malaysia - HELD THAT - Undisputedly meaning of royalty as provided under Explanation 2 to section 9(1)(vi) initially did not include equipment royalty. Only by way of an amendment brought to Explanation 2 to section 9(1)(vi) by Finance Act 2001 clause (iva) providing for equipment royalty was inserted with effect from 1st April 2002. Thus till assessment year 2001 02 section 9(1)(vi) did not provide for equipment royalty. Therefore since equipment royalty was not coming within the meaning of royalty as provided under section 9(1)(vi) r/w Explanation 2 amount received could not have been brought to tax under the Act at least till assessment year 2001 02 considering the provisions of section 90(2) of the Act. Whether the payment made by CPI to CPM towards user of the system can be brought into tax in India under Article 13(5)(b) of India Malaysia DTAA (Old)? - Admittedly in the facts of the present case also it has not been established by the Department that CPI while accessing the SAP system exercises any control and possession thereof. Hence the amount paid cannot be treated as royalty . More so when the facts on record suggests that the CPI has been granted a limited access to the SAP system by establishing a communication line at its own cost for use of data available in the SAP system. In the present case there is nothing to suggest that the CPI has obtained the right to use of any of such things as mentioned in clause (iii) for which it has paid the amount to CPM. On the contrary it is very much evident that the payment made by CPI is for the purpose of accessing the SAP system hosted by CPM at its facilities for exchange of information / data. As far as the reliance upon Explanation 6 to section 9(1)(vi) in our considered opinion it will have no bearing on the issue at hand as the expansion of scope of process in Explanation 6 would not apply to the assessee as it does not relate to payment made towards transmission by satellite. What is meant by the aforesaid Explanation is live transmission of programs such as channel feed and not SAP which is used for input of data and generation of reports. Therefore in our considered opinion the payment received by the assessee from CPI towards use of SAP system can neither be treated as equipment royalty nor process royalty either under the provisions of the Act or the relevant DTAA . Since we have held that the consideration received by the assessee from CPI towards use of SAP system is not royalty in terms of Indo Malaysian treaty it will be a business profit under Article 7 of the treaty. Therefore in terms of Article 7 unless the enterprise of a contracting State has a P.E. in the other contracting State the business profit cannot be brought to tax in the other contracting State. That being the case the consideration received by the assessee from CPI towards use of SAP system is not taxable in India. Ground no.1 is allowed. - Decided against revenue. Department bringing to tax the consideration received towards service rendered by treating it as fees for technical services - HELD THAT - Though section 9(1)(vii) of the Act treats income by way of fees for technical services to be taxable in India however there is no such expression under the India Malaysia treaty (old). Therefore the amount received towards service charges has to be treated as business profit of the assessee under Article 7 of the DTAA. Admittedly as the assessee has no P.E. in India the amount cannot be brought to tax in India. Though it is the stand of the department that in view of Article 3(2) of the treaty definition of FTS provided u/s 9(1)(vii) of the Act would also apply to the treaty however we are unable to accept it. In our view some expression is used in the treaty but not defined whereas a definition of such expression is provided in the Act in that event in terms of Art.3(2) of the treaty the provisions of the Act will apply. As far as observations of the learned Commissioner (Appeals) that the assessee cannot switch its option to be taxed either under the Act or DTAA in respect of different sources of income on reading the provisions of section 90(2) of the Act we do not find any such restriction imposed therein. As per the plain reading of section 90(2) the provisions of the Act shall apply to the extent they are more beneficial to the assessee. In other words if the provision of DTAA qua a particular item of income is more beneficial to the assessee the same has to apply. Ground no.2 is allowed. Levy of interest under section 234B and 234D - HELD THAT - There is no dispute to the fact that the assessee is non resident company. Therefore in terms of section 195 of the Act liability is on the payer to deduct tax while making payments to the assessee. If the payer has failed to deduct tax at source the assessee cannot be held liable for non payment of advance tax and consequently levy of interest under section 234B - Thus we hold that in the peculiar circumstances of the case interest under section 234B is not chargeable. We find that the issue has been decided in Clough Engineering Ltd. 2011 (2) TMI 1603 - ITAT DELHI by holding that interest under section 234D is to be charged after excluding the interest granted under section 244A. In view of the aforesaid we direct the Assessing Officer to charge interest under section 234D only on the principal amount and not on the interest granted under section 244A. Consequently grounds no.5 and 6 are allowed.
Issues Involved:
1. Taxability of consideration received for the use of SAP system as royalty. 2. Taxability of consideration received for services as fees for technical services. 3. Option to be taxed under the Income Tax Act or Double Tax Avoidance Agreement (DTAA). 4. Nature of payments received as reimbursement of expenses. 5. Levy of interest under sections 234B and 234D of the Income Tax Act. Issue-wise Detailed Analysis: 1. Taxability of Consideration Received for the Use of SAP System as Royalty: The assessee, a tax resident of Malaysia, received payments from Colgate Palmolive India Ltd. (CPI) for the use of the SAP system. The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] held that this consideration was taxable as royalty under the Income Tax Act, 1961, and the DTAA between India and Malaysia. The Tribunal, however, found that the SAP system was hosted outside India, and the assessee merely provided access to CPI without transferring any rights or control over the system. The Tribunal concluded that the payments could not be treated as royalty under both the Act and the DTAA, as the assessee did not transfer any copyright or equipment for use. 2. Taxability of Consideration Received for Services as Fees for Technical Services: The AO and CIT(A) considered the payments received for services rendered to CPI as fees for technical services (FTS) under the Income Tax Act. The Tribunal noted that the India-Malaysia DTAA did not have a provision for FTS. Therefore, the payments should be treated as business profits under Article 7 of the DTAA. Since the assessee did not have a Permanent Establishment (P.E.) in India, the payments could not be taxed in India. 3. Option to Be Taxed Under the Income Tax Act or DTAA: The assessee argued for the option to be taxed under either the Income Tax Act or the DTAA, whichever was more beneficial. The Tribunal upheld this view, stating that the assessee could choose the more beneficial provisions of the DTAA, which in this case meant that the payments received could not be taxed as royalty or FTS. 4. Nature of Payments Received as Reimbursement of Expenses: The CIT(A) rejected the assessee's claim that the payments were merely reimbursements of expenses. The Tribunal agreed with the CIT(A), observing that the agreement specified charges for a seven-year period, indicating that the payments were not simple reimbursements but consideration for services and access to the SAP system. 5. Levy of Interest Under Sections 234B and 234D of the Income Tax Act: The Tribunal held that interest under section 234B was not chargeable as the assessee, being a non-resident, was subject to tax deduction at source under section 195. The Tribunal also directed that interest under section 234D should be charged only on the principal refund amount and not on the interest granted under section 244A. Conclusion: The Tribunal allowed the appeals of the assessee partly, concluding that the payments received for the use of the SAP system and services rendered were not taxable in India under the Income Tax Act or the DTAA. The Tribunal also provided relief concerning the levy of interest under sections 234B and 234D. The Department's appeal was dismissed.
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