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2019 (7) TMI 419 - AT - Income TaxCharacterization of income - Income deemed to accrue or arise in India - compensation received by the assessee on termination of network participation agreement from Citibank N.A. - royalty OR business income - PE in India - Indo-US DTAA - HELD THAT - We find that the compensation received by the assessee does not fit into any of the definition of royalty either under the provisions of the Act or as per the definition contained in DTAA. We find from Article 7 of Indo-US DTAA that the subject mentioned compensation is to be taxed only in USA and not in India. Hence it can be safely concluded that the subject mentioned receipt is only a business receipt falling under the head profits and gains of business or profession of the assessee. CIT(A) had erroneously applied the provisions of Section 28(ii)(a) which only talks about the termination of terms and conditions of managerial remuneration by way of an agreement or understanding and is absolutely not relevant to the issue under dispute before us. The relevant provision that is applicable in the instant case is 28(va)(b). CIT(A) has also observed that there is no provision in the original agreement dated 30/06/2008 for early termination. In this regard, we find that this observation of the CIT(A) is incorrect in as much as Article 4 containing the term of agreement impliedly provided for earlier termination As already held that the compensation received by the assessee is only business receipt in the hands of the assessee - whether the assessee is having a permanent establishment in India or not has not been verified by the lower authorities. This was only a claim of the assessee right from the beginning commencing from the level of the AO. We find that since the lower authorities did not accept the subject mentioned compensation as a business receipt, there was no occasion for them to look into the aspect of the existence of permanent establishment in India for the assessee. We find that as per Article 7 of Indo-US DTAA, the subject mentioned compensation is to be taxed only in USA and not in India. Assessee s case falls u/s.28(va)(b) and hence the compensation received by the assessee is to be treated only as the business receipt. As per Article 7 of Indo-US DTAA, the compensation is taxable only in USA and not in India in the hands of the assessee. We also find that the existence of permanent establishment in India for the assessee requires factual verification by the ld. AO. Hence, we deem it fit and appropriate in the interest of justice and fair play to remand this issue to the file of the ld. AO with the following directions - - AO to verify whether the assessee is having a Permanent Establishment in India or not - evidences in this regard are to be provided by the assessee. - Assessee should also provide evidence before the ld. AO to prove that the said compensation has been duly subjected to tax in USA as per the relevant Article 7 of Indo-US DTAA. - Decided in favour of asssessee for statistical purposes.
Issues Involved:
1. Classification of Compensation Received on Termination of Network Participation Agreement. 2. Taxability of Compensation Under the Head 'Income from Business' vs. 'Royalty'. 3. Applicability of Article 7 of Indo-US DTAA. 4. Verification of Permanent Establishment in India. Detailed Analysis: 1. Classification of Compensation Received on Termination of Network Participation Agreement: The primary issue is whether the compensation received by the assessee on termination of the Network Participation Agreement with Citibank N.A. should be considered as 'royalty' or 'business income'. The assessee, a non-resident company operating a global card/payment network, received a compensation of USD 10 lakhs (approximately ? 6.22 crores) from Citibank N.A. upon early termination of the agreement. The assessee claimed this compensation as business income, while the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] classified it as royalty. 2. Taxability of Compensation Under the Head 'Income from Business' vs. 'Royalty': The assessee argued that the compensation received should be treated as business income and not royalty. The original Network Participation Agreement dated 30/06/2008 granted Citibank N.A. non-exclusive rights to use certain know-how and technical processes, for which the assessee received participation fees, duly offered as royalty under the Indo-US DTAA. However, the termination agreement dated 07/01/2014 led to the early termination of this original agreement, and the compensation received was for this termination. The Tribunal found that the compensation did not fit the definition of 'royalty' under either the Income Tax Act or the Indo-US DTAA and should be treated as business income under Section 28(va)(b) of the Act. 3. Applicability of Article 7 of Indo-US DTAA: According to Article 7 of the Indo-US DTAA, the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. Since the assessee claimed it did not have a permanent establishment in India, the compensation should be taxable only in the USA. The Tribunal agreed with this interpretation, holding that the compensation is to be taxed in the USA and not in India. 4. Verification of Permanent Establishment in India: The Tribunal noted that the lower authorities did not verify whether the assessee had a permanent establishment in India, as they did not accept the compensation as business income. The Tribunal remanded the case to the AO for factual verification of the existence of a permanent establishment in India. The assessee was directed to provide evidence to support its claim that the compensation was subjected to tax in the USA as per Article 7 of the Indo-US DTAA. Conclusion: The Tribunal held that the compensation received by the assessee is to be treated as business income under Section 28(va)(b) of the Income Tax Act and is taxable only in the USA as per Article 7 of the Indo-US DTAA. The case was remanded to the AO for verification of the existence of a permanent establishment in India and to ensure that the compensation has been taxed in the USA. Order: The appeal of the assessee was allowed for statistical purposes, with directions for further verification by the AO. Pronouncement: Order pronounced in the open court on 15/03/2019.
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