2009 (2) TMI 24 - AAR - Income Tax

Discretion of AAR to admit application for ruling - It is not in dispute that the same questions raised in this application are pending before the Appellate Tribunal in the appeals of Gracemac. Gracemac, after the merger has lost its legal identity and the applicant has stepped into the shoes of Gracemac. The issue is the same which is pending before ITAT. Application rejected.

Summary

Issues:
1. Whether payments received by the Applicant from MO Singapore for functions performed in Singapore under the license agreement are taxable in India as royalty income.
2. Whether payments made by independent Indian distributors to MRSC should be regarded as licensing revenues accruing to the Applicant taxable as royalty income.

Analysis:

Issue 1:
The applicant, a company incorporated in the USA, entered into a license agreement with MO Singapore granting non-exclusive rights to manufacture and sell Microsoft products. The applicant received payments from MO based on the net selling price of products distributed by MRSC. The Revenue contended that the questions raised in the application were pending determination in appeals filed by Gracemac, the entity that merged with the applicant. The Appellate Commissioner had dismissed the appeals filed by Gracemac, and further appeals were pending before the ITAT. The Authority rejected the application under section 245R(2) as the same questions were pending before the Tribunal, whether pursued by Gracemac or the merged company. The Authority emphasized that the legal and factual reality was that the appeals concerned the applicant, who had stepped into Gracemac's shoes after the merger. The application was rejected without delving into the merits of the case.

Issue 2:
Regarding the second question, the applicant contended that the payments made by independent Indian distributors to MRSC were not licensing revenues. It was argued that the use of software by end-users did not constitute the use of copyright in the software, and therefore, the payments received by MRSC could not be considered as royalty income. However, the Authority did not delve into the merits of this issue as the application was rejected under section 245R(2) due to the pending nature of similar questions in appeals filed by Gracemac. The Authority highlighted that the pending appeal proceedings concerned the applicant, despite the technicality of Gracemac being the appellant in the appeals.

In conclusion, the Authority rejected the application without considering the merits of the case due to the pending nature of similar questions in appeals filed by the entity that merged with the applicant. The Authority emphasized that the legal and practical reality was that the appeals concerned the applicant, who had taken over the rights and responsibilities of the merging entity.