2022 (12) TMI 1091 - AT - Income Tax

Income deemed to accrue or arise in India - Amount received by on account of transfer of trademark and brand name - Whether be treated as royalty under Article 12 of India Turkey Double Taxation Avoidance Agreement (DTAA), instead of capital gains under Article 13 of the DTAA - assessee is a non-resident corporate entity incorporated under the laws of Turkey and a tax resident of Turkey - HELD THAT - As relying on Hilton Roulunds Ltd. case 2018 (4) TMI 1485 - DELHI HIGH COURT licensee acknowledges the licensor s rights and title over the trademark, the manner of use of trademark/brand name is specified and restricted in the TLA and the licensee is bound by such conditions/restrictions. TLA authorizes the licensor to terminate the agreement in case of any breach of the conditions. That being the case, it has to be held that it is a case of licence conferring right to use the trademark/brand name and not assignment/transfer of brand name/trademark in favour of the licensee. Thus we have no hesitation in holding that the consideration received by the assessee for permitting the right to use of brand name/trademark under TLA is nothing else but in the nature of royalties as defined under section 9(1)(vi) read with Article 12(3) of India Turkey tax treaty. Therefore, we concur with the view expressed by learned DRP. Grounds are dismissed. Taxation of royalty income at the rate of 15% as per the treaty provision instead of applying the lower rate of tax as per the provisions of the domestic law - HELD THAT - We find, the claim of the assessee has neither been examined by learned DRP, nor by the AO. Therefore, we restore this issue to the Assessing Officer for examining assessee s claim with reference to the provisions of treaty and section 90(2) of the Act. Needless to mention, the assessee must be provided reasonable opportunity of being heard before deciding the issue. Set off of royalty income against the long term capital loss - HELD THAT - Having heard the parties, we find, this issue also has not been addressed either by the DRP or by the Assessing Officer. Therefore, we restore this issue to the Assessing Officer for examining assessee s claim, keeping in view the provisions of section 71(3) of the Act. Before deciding the issue, the assessee must be given a reasonable opportunity of being heard. This ground is allowed for statistical purposes.

Summary

Issues Involved:
1. Classification of the amount received from the transfer of trademark and brand name as royalty or capital gains.
2. Taxation rate applicable to royalty income.
3. Set-off of royalty income against long-term capital loss.
4. Consequential and premature grounds.

Detailed Analysis:

1. Classification of the Amount Received from the Transfer of Trademark and Brand Name as Royalty or Capital Gains:

The core issue revolves around whether the amount received by the assessee for transferring the trademark and brand name can be treated as royalty under Article 12 of the India-Turkey Double Taxation Avoidance Agreement (DTAA) or as capital gains under Article 13 of the DTAA. The assessee, a non-resident corporate entity from Turkey, transferred exclusive, irrevocable, and perpetual rights to use certain trademarks and brand names to its Indian subsidiary for a lump sum consideration. The assessee claimed this amount as capital gains and sought exemption under Article 13 of the DTAA. However, the Assessing Officer treated it as income from other sources under Article 21 of the Tax Treaty.

The Dispute Resolution Panel (DRP) accepted that the assessee provided the necessary documentary evidence, including the Trademark Licence Agreement (TLA), but concluded that the assessee retained ownership rights over the trademarks and brand names. The DRP, referring to the OECD Model Tax Convention Commentary, held that the consideration is for the use of or the right to use the trademark, thus representing royalty. The DRP relied on the Delhi High Court's decision in Hilton Roulunds Ltd. Vs. CIT, which established that if rights are retained by the owner, it is usually a license and not an assignment.

The Tribunal, upon examining the TLA, noted that the agreement granted the licensee a right to use the trademarks and brand names within a defined geographical territory but retained ownership rights with the assessee. The agreement imposed various conditions and restrictions on the licensee, including the right to terminate the agreement under certain circumstances. Thus, the Tribunal concluded that the assessee had not alienated its ownership rights but had merely granted the right to use the trademarks and brand names, classifying the consideration received as royalty under section 9(1)(vi) of the Act and Article 12 of the DTAA.

2. Taxation Rate Applicable to Royalty Income:

The assessee contended that the royalty income should be taxed at the rate of 15% as per the treaty provision rather than the lower rate of tax as per the domestic law. The Tribunal noted that this issue was not examined by the DRP or the Assessing Officer. Hence, the Tribunal restored this issue to the Assessing Officer for examination in light of the provisions of the treaty and section 90(2) of the Act, ensuring the assessee is given a reasonable opportunity to be heard.

3. Set-off of Royalty Income Against Long-Term Capital Loss:

The assessee sought to set off the royalty income against long-term capital loss. The Tribunal found that this issue was also not addressed by the DRP or the Assessing Officer. Therefore, the Tribunal restored this issue to the Assessing Officer for examination, considering the provisions of section 71(3) of the Act, with a directive to provide the assessee a reasonable opportunity to be heard before making a decision.

4. Consequential and Premature Grounds:

Grounds 6 and 7 raised by the assessee were deemed consequential and premature at this stage and were dismissed by the Tribunal.

Conclusion:

The appeal was partly allowed for statistical purposes, with specific issues restored to the Assessing Officer for further examination. The Tribunal upheld the DRP's view that the consideration received by the assessee for the transfer of trademark and brand name is in the nature of royalties as defined under section 9(1)(vi) and Article 12(3) of the India-Turkey tax treaty.