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2022 (3) TMI 1509 - AT - Income TaxIncome deemed to accrue or arise in India - royalty receipt - subscription fee received by the assessee from Indian customer for providing access to the database - India-Malaysia DTAA - PE in India - assessee submitted that subscription fees received by the assessee are in the nature of business income - HELD THAT - Payments towards all kind of information would not be in the nature of Royalty. To determine the exact nature of the payment, the type of information passed on, needs to be verified. A perusal of Article 12(3) shows that, it brings within the ambit of the definition of 'Royalty', payment made for use of, or the right to use any copyright of a literary, artistic, or scientific work. In our understanding Article 12(3) covers only those payments that allow a payer to use/acquire a right to use copyright in literary, artistic or scientific work are covered within the definition of 'Royalty'. Hon ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt.Ltd. 2021 (3) TMI 138 - SUPREME COURT has analysed the provisions of Income tax Act vis-a-vis provisions of DTAA. AR produced the Master Service Agreement dated 01/04/2013 between EduNxt Global SDN BHD and Aditya Birla Management Corporation Ltd., we observe that this agreement has not been filed before the authorities below. The DRP categorically observed that except for the invoice, assessee did not produce any other relevant information. In the interest of justice it is appropriate to remit the issue in dispute to the file of the Ld.AO for deciding the comparability of these transactions in the light of the judgment of the Hon ble Supreme Court in Engineering Analysis Centre of Excellence Private Limited (supra) and the decisions relied by the Ld.AR reproduced herein above. Accordingly, the issue in dispute is remitted to the Ld.AO for fresh decision with the above directions. Appeal of the assessee is partly allowed for statistical purposes.
Issues Involved:
1. Legality of the assessment order and directions of the DRP. 2. Treatment of income from distance education under the Income Tax Act, 1961. 3. Classification of income as royalty under section 9(1)(vi) of the Income Tax Act, 1961. 4. Obligation of the payer to deduct tax at source. 5. Treatment of income from distance education under the India-Malaysia DTAA. 6. Classification of income as royalty under Article 12 of the DTAA. 7. Determination of business profits under Article 7 of the DTAA and the absence of a PE in India. Detailed Analysis: 1. Legality of the Assessment Order and Directions of the DRP: The assessee challenged the legality of the assessment order and the directions of the DRP, arguing that they were prejudicial and liable to be quashed. The Tribunal did not specifically address this issue separately but focused on the substantive issues regarding the classification and treatment of income. 2. Treatment of Income from Distance Education under the Income Tax Act, 1961: The assessee argued that the income earned from providing online education courses should not be classified as royalty under section 9(1)(vi) of the Income Tax Act, 1961. The revenue authorities, however, held that the income constituted royalty because it involved the use or right to use a copyright or literary work. 3. Classification of Income as Royalty under Section 9(1)(vi) of the Income Tax Act, 1961: The DRP and the AO concluded that the income earned by the assessee was in the nature of royalty under section 9(1)(vi) of the Act. They reasoned that the payments were for the use of the Edunxt platform, which provided access to course content, tutorials, and webinars, falling within the scope of 'literary work'. 4. Obligation of the Payer to Deduct Tax at Source: The assessee contended that the payer was not obliged to deduct tax at source because the income was not chargeable to tax in India. The Tribunal noted that the determination of whether the payments constituted royalty was crucial in deciding the obligation to deduct tax at source. 5. Treatment of Income from Distance Education under the India-Malaysia DTAA: The assessee argued that the subscription fees received should be classified as business income under the India-Malaysia DTAA and not as royalty. The Tribunal examined whether the payments fell within the definition of royalty under Article 12 of the DTAA. 6. Classification of Income as Royalty under Article 12 of the DTAA: The Tribunal analyzed Article 12(3) of the DTAA, which defines royalty as payments for the use of or the right to use any copyright of literary, artistic, or scientific work. The Tribunal referred to the Supreme Court's judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT, which clarified that payments for the use of software do not constitute royalty if they do not involve the transfer of copyright. 7. Determination of Business Profits under Article 7 of the DTAA and the Absence of a PE in India: The assessee claimed that the income should be treated as business profits under Article 7 of the DTAA and, in the absence of a Permanent Establishment (PE) in India, should not be taxable. The Tribunal noted that the nature of the payments needed to be verified to determine if they constituted business profits or royalty. Conclusion: The Tribunal remitted the issue to the AO for a fresh decision, directing the AO to consider the nature of the payments in light of the Supreme Court's judgment and the agreements between the parties. The Tribunal emphasized the need to verify the type of information passed on and whether it constituted the use of copyright. The appeal was partly allowed for statistical purposes. Order Pronounced: The order was pronounced in the open court on 30th March, 2022.
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