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2009 (2) TMI 23 - AAR - Income TaxThe proceedings against the applicant were initiated in 2003. By the date of entering fresh agreement in the year 2006 even the assessments were concluded. All these years the applicant kept quiet perhaps watching the outcome of the assessment and appellate proceedings. Now after the adverse order was passed by the C(A) the appeal was filed before ITAT and application was filed in 2008 before AAR. In view of this AAR refused to give ruling and rejected the application.
Issues Involved:
1. Whether payments received by MOL Corporation (MOLC) from the applicant are 'royalty income' taxable in India under Section 9(1)(vi) of the Income-tax Act, 1961 and/or the provisions of the DTAA between India and USA. 2. Whether payments made by independent Indian distributors to Microsoft Regional Sales Corporation (MRSC) should be regarded as licensing revenues accruing to MOLC and taxable as 'royalty income' under Section 9(1)(vi) of the Act and/or the provisions of the DTAA between India and USA. Detailed Analysis: Issue 1: Taxability of Payments to MOLC as Royalty Income The applicant contends that payments made to MOLC are not 'royalty income' under Section 9(1)(vi) of the Income-tax Act, 1961 because: - The payment is for a sub-license fee and not for a right used in India. - The title to the products passes outside India, and the sale occurs outside India. - The products are manufactured in Singapore, and no income-generating activity occurs within India. The applicant also argues that under Article 12 of the DTAA between India and the USA, the payments do not fall under "payment of any kind received as a consideration for the use of any copyright of a scientific work." The consideration paid by the distributor/end-user is for the purchase of copyrighted articles, not for the use of any right in 'copyright' as defined in Section 14(b) of the Indian Copyright Act. Hence, the applicant claims no obligation to withhold tax on payments made to MOLC. Issue 2: Payments to MRSC as Licensing Revenues The applicant argues that payments made by Indian distributors to MRSC are not licensing revenues accruing to MOLC and should not be treated as 'royalty income'. Instead, these payments are sale revenues because the end-users get the right to use the 'copyrighted article' and not the 'right to use copyright' in software products. Hence, the applicant asserts that neither under the Income-tax Act nor under the DTAA, can the income derived by MOLC be subjected to tax in India, and therefore, the applicant is not required to withhold tax on such payments. Revenue's Objection and Proviso to Section 245 R(2) The Revenue objects to the application under clause (i) of the proviso to Section 245 R(2), stating that similar questions are pending before the Income-tax Appellate Tribunal in the case of Gracemac, which merged with MOLC. The Commissioner (DIT, Intl. Taxation-1, New Delhi) pointed out that assessments against Gracemac for the years 1999-2000 to 2005-06 held the payments received by Gracemac as royalty income taxable in India. These appeals are now before the Tribunal, and the findings will impact the current application. Authority's Discretion and Decision The Authority noted that the word 'question' in the proviso to Section 245-R(2) should be understood broadly to prevent conflicting decisions. The Authority also referenced the case of Airport Authority of India (AAR NO.753/2007), emphasizing that the tax deduction at source is a separate issue, although aligned with the substantive tax liability of the recipient of income. However, the Authority decided not to entertain the application at this stage due to the potential for conflicting decisions and the applicant's delay in seeking an advance ruling. Conclusion The Authority exercised its discretion under Section 245 R(2) to reject the application without expressing any view on the merits. The application was rejected to avoid conflicting decisions and because the applicant did not approach the Authority at the earliest opportunity. The objection of the Revenue regarding the application being designed for tax avoidance was overruled due to insufficient evidence. Final Ruling: The application is rejected under Section 245 R(2) of the Income-tax Act, 1961, without expressing any view on the merits.
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