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2018 (4) TMI 1362 - AT - Income TaxIncome based on the nature of services rendered by assessee - article 12 of Indo USA DTAA - whether section 9(1)(v)(c) are not in the nature of royalties/fees for included services? - income incurred in India - Held that - The decision of the coordinate bench in assessee s own case for AY 2000-01 to 2004-05, that royalty income of the appellant earned from OEMs situated outside India for the patents licensed to OEMS for manufacture of CDMA Network outside India we hold that same is not chargeable to tax u/s 9 (1) (vi)(c) of the ACT. As the revenue is not chargeable to tax in India as per Income tax Act 1961 requirement of looking at the provision of article 12 (7) of Indo USA DTAA is futile. Ground No 1 and 2 of the appeal of the assessee. Royalty from BREW operator agreement of ₹ 67848685/- and 15% thereof amounting to ₹ 10177303/- is not chargeable to tax in the hands of the assessee u/s 9(1)(vi) as well as Article 12 of the Indo-USA Tax Treaty. Ground No. 3 of the appeal of the assessee is allowed. The taxation of royalty in respect of the CDMA handsets and equipment and the addition in respect of invoicing the revenues under the BREW agreement thus stand deleted.
Issues Involved
1. Taxability of royalty income under Section 9(1)(vi)(c) of the Income Tax Act and Article 12(7) of the India-US tax treaty. 2. Taxability of revenue from BREW Operator and BREW Carrier Agreements. 3. Initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act. 4. Levy of interest under Section 234B of the Income Tax Act. Detailed Analysis 1. Taxability of Royalty Income The primary issue was whether the royalty income earned by the assessee from Original Equipment Manufacturers (OEMs) situated outside India for patents licensed to them for the manufacture of CDMA mobile handsets and network equipment outside India is taxable under Section 9(1)(vi)(c) of the Income Tax Act and Article 12(7) of the India-US tax treaty. - Arguments of the Assessee: - The income earned from OEMs is not taxable in India as the patents were used outside India. - The burden of proof lies on the revenue to show that the OEMs used the patents for business carried on in India or for earning income from a source in India. - No additional evidence was provided by the revenue to prove that OEMs were carrying on business in India for the relevant assessment years. - Arguments of the Revenue: - OEMs have a business presence in India and are assessed to tax in India. - The royalty income should be taxable in India as the OEMs use the patented technology in products sold in India. - Decision: - The Tribunal relied on its previous decisions in the assessee’s own case for earlier years, where it was held that the royalty income from OEMs situated outside India is not taxable under Section 9(1)(vi)(c) of the Income Tax Act. - The revenue failed to provide additional evidence to prove that the OEMs were carrying on business in India for the relevant assessment years. - The Tribunal concluded that the royalty income earned by the assessee from OEMs is not chargeable to tax in India. 2. Taxability of Revenue from BREW Agreements The issue was whether the revenues received by the assessee under the BREW Operator Agreement and BREW Carrier Agreement are taxable as royalty income in India under Section 9(1)(vi) of the Income Tax Act and Article 12 of the India-US tax treaty. - Arguments of the Assessee: - The payment for the BREW software is for a copyrighted article and not for the copyright itself. - The rights transferred are specific to the nature of computer programs and do not constitute royalty. - Arguments of the Revenue: - The license fee for the right to reproduce and use the BREW Software should be considered as royalty. - The software is licensed and not sold, and thus, the payment should be treated as royalty. - Decision: - The Tribunal relied on the decision of the Hon’ble Delhi High Court in the case of DIT v. Infrasoft Ltd., which held that the payment for a copyrighted article does not constitute royalty. - The Tribunal concluded that the revenue from BREW agreements is not taxable as royalty income in India. 3. Initiation of Penalty Proceedings The issue was whether the initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act was justified. - Decision: - The Tribunal held that the initiation of penalty proceedings is premature and thus, rejected the ground related to the initiation of penalty proceedings. 4. Levy of Interest under Section 234B The issue was whether the interest under Section 234B of the Income Tax Act should be levied. - Decision: - As the Tribunal held that the income of the assessee is not chargeable to tax in India, the question of levy of interest under Section 234B does not arise. - The Tribunal upheld the Dispute Resolution Panel’s direction not to levy interest under Section 234B, relying on the decision of the Hon’ble Delhi High Court in GE Package Power Inc. Conclusion The appeals of the assessee for the assessment years 2009-10 to 2012-13 were partly allowed, and the appeal of the revenue for the assessment year 2012-13 was dismissed. The Tribunal held that the royalty income from OEMs situated outside India and the revenue from BREW agreements are not taxable in India. The initiation of penalty proceedings was deemed premature, and the levy of interest under Section 234B was not justified.
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