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2022 (5) TMI 1603 - AT - Income TaxIncome taxable in India - royalty receipts as assessee has used the process - existence of PE - HELD THAT - In the present facts of the case the agreement between assessee and J P Coats is clear of the fact that there is no transfer of any intellectual property, or any exclusive right has been granted to the assessee for using such intellectual property. Rather, the payment is made by the assessee to J P Coats, based on the agreement between BT to J P Coats. The assessee has made the payment based on coast allocation towards the band width services provided by J P Coats as per agreement between BT to J P Coats. Therefore in our opinion, the payment made by assessee to J P Coats cannot fall within the ambit of Royalty under section 9(1)(vi) by virtue of Explanation 2. By insertion of Explanation 5 6, meaning of word 'Process' has been widened. As per these explanations, the word 'Process' need not be secret , and situs of control possession of right, property or information has been rendered to be irrelevant. However, in our opinion, all these changes in the Act, do not affect the definition of Royalty as per DTAA. As per Explanation 5 6, the word 'process' includes and shall be deemed to included, transmission by satellite (including uplinking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. However, the Explanation does not do away with the requirement of successful exclusivity of the right in respect of such process being with the person claiming 'royalty' for granting its usage to a third party. In present facts of the case, the J P Coats has neither leased nor has given on hire any network to the assessee. Instead the assessee reimbursed the cost incurred by J P Coats towards the bandwidth charges provided by BT to all the Coats group companies world wide.Therefore it cannot be said that the assessee has 'used' the network belonging to J P coats. On perusal of the agreement, between assessee and J P Coats we note that, the assessee do not have any ownership or rights in respect of such process , and hence in our view the payment in question cannot be considered as royalty . J P Coats is rendering telecommunications services to all its Group concerns, with the aid of BT. Similar issue came up before Hon ble Delhi Tribunal in case of Bharti Airtel vs.ITO (TDS) 2016 (3) TMI 680 - ITAT DELHI The issue considered therein was in respect of payment towards call interconnectivity charged for call transmission on foreign network. The Tribunal therein, on applying ratios pronounced in the above referred decisions, held it not as Royalty . Therefore in our opinion, the Payments made by the assessee in lieu of services provides by J P Coats cannot fall within the ambit of Royalty under section 9(1)(vi) Explanation 5 6. Whether the services rendered could be treated as Royalty under Article 13(2) of the DTAA between India and UK? - We note that, it is the same transaction that, was analysed by this Tribunal in case of the Payee(J P Coats) 2022 (2) TMI 313 - ITAT BANGALORE wherein it has been held that, it would not amount to be Royalty as per Article 13 of India UK DTAA. We are therefore respectfully following the above view, hold that the payment made by the assessee to the J P Coats(Payee), cannot be held to be as Royalty under Article 13 of India UK DTAA. Whether payment made could be FTS? - We note that the revenue is doubting, if the payment made could be FTS, however took the view of the payments to be FTS by relying on various decisions which are a subject matter of royalty. Thus the revenue has actually not made out a case for taxing the payments by the assessee as FTS. The plea of the Assessee was in terms of paragraph 4(c) of Article 13 of DTAA, that payments of any kind in consideration for rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) would be regarded as fees for technical services' if it 'makes available' technical knowledge, experience, skill knowhow or processes, or consist of the development and transfer of a technical plan or technical design. In the present facts there is no such technical information, knowledge or skill, knowhow or process that is available to the assessee in order to independently use it. CIT(A) proceeded then on attribution of income without establishing a PE J P Coats in India. In this regard we refer to relevant observation of Coordinate Bench of this Tribunal reproduced hereinabove to hold that J P Coats do not have a PE in India. Accordingly, we are of the view that the payments made by assessee to J P Coats cannot be held to be taxable in India as it does not amount to income as per DTAA as well as Income tax Act. Assessee in default u/s. 201(1) - Since it is held that the assessee was not liable to deduct TDS on the payments made to J P Coats for A.Ys. 2016-17 2017-18, the assessee cannot be held to be an assessee in default , u/s. 201(1) of the Act. We accordingly, delete the disallowance and the interest computed u/s. 201(1A) of the Act on the payments made by assessee to J P Coats for both years under consideration.
Issues Involved:
1. Whether the payment made by the assessee to J&P Coats Ltd. for bandwidth charges constitutes 'royalty' under Section 9(1)(vi) of the Income Tax Act and Article 13 of the India-UK DTAA. 2. Whether the payment can be classified as 'Fees for Technical Services' (FTS) under Section 9(1)(vii) of the Income Tax Act and Article 13 of the India-UK DTAA. 3. Whether the assessee is liable to be treated as an 'assessee in default' under Section 201(1) for non-deduction of TDS on the payments made to J&P Coats Ltd. Detailed Analysis: 1. Royalty under Section 9(1)(vi) and Article 13 of India-UK DTAA The primary issue was whether the payments made by the assessee to J&P Coats Ltd. for bandwidth charges could be classified as 'royalty' under Section 9(1)(vi) of the Income Tax Act and Article 13 of the India-UK DTAA. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the payment constituted 'royalty' because it involved the use of a process or equipment. They relied on Explanation 2, 5, and 6 to Section 9(1)(vi), which broadened the definition of 'royalty' to include payments for the use of any process, whether secret or not, and irrespective of the location or control of the process. However, the Tribunal found that the term "process" under Explanation 2 to Section 9(1)(vi) implies a process that is an item of intellectual property. It was noted that the payment was made for bandwidth services provided by British Telecom (BT) to J&P Coats, which in turn provided these services to the assessee. The Tribunal emphasized that there was no transfer of any intellectual property or exclusive rights to the assessee. The Tribunal also referred to various judicial precedents, including the decisions of the Authority for Advance Rulings (AAR) and the Delhi High Court, which held that payments for bandwidth services do not constitute 'royalty'. The Tribunal concluded that the payments made by the assessee to J&P Coats Ltd. could not be classified as 'royalty' under Section 9(1)(vi) or Article 13 of the India-UK DTAA. The Tribunal also noted that the definition of 'royalty' under the DTAA had not been amended to align with the broader definition under the Income Tax Act. 2. Fees for Technical Services (FTS) The AO also considered the payments as FTS under Section 9(1)(vii) of the Income Tax Act. The CIT(A) upheld this view, stating that the services provided by J&P Coats were ancillary and subsidiary to the application or enjoyment of the right, property, or information in connection with and for processes and software. The Tribunal, however, noted that for a payment to be classified as FTS under the India-UK DTAA, it must 'make available' technical knowledge, experience, skill, know-how, or processes to the recipient. The Tribunal found that the services provided by J&P Coats did not make any technical knowledge or skill available to the assessee that could be independently used. The Tribunal referred to the decision of the Delhi Tribunal in the case of J.C. Bamford Excavators Ltd., which involved a different context and facts, including the existence of a service PE and transfer of technology. The Tribunal concluded that the payments made by the assessee to J&P Coats Ltd. could not be classified as FTS under Article 13 of the India-UK DTAA. 3. Assessee in Default under Section 201(1) Since the Tribunal held that the payments made by the assessee to J&P Coats Ltd. did not constitute 'royalty' or FTS, the assessee could not be treated as an 'assessee in default' under Section 201(1) for non-deduction of TDS. Consequently, the disallowance and interest computed under Section 201(1A) on the payments made by the assessee were deleted. Conclusion: The Tribunal allowed the appeals filed by the assessee for the assessment years 2016-17 and 2017-18, holding that the payments made to J&P Coats Ltd. for bandwidth charges did not constitute 'royalty' or FTS under the Income Tax Act or the India-UK DTAA. Consequently, the assessee was not liable to be treated as an 'assessee in default' under Section 201(1) for non-deduction of TDS.
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