2023 (9) TMI 1681 - AT - Income Tax

Income chargeable to tax in India or not - payment made by the assessee to its foreign entity towards use of overall ICT infrastructure - DTAA between India and Netherlands - Scope of amended DTAA provisions - HELD THAT - On a perusal of the amendment to Article 12(4) of the DTAA effective from 01-04-1998 it is clear that the term Royalties means payment received as a consideration for the use or right to use any copyright including any patent trademark design or model for information concerning industrial commercial or scientific experience. The hitherto inclusion of payment for use of industrial commercial or scientific equipment constituting Royalties under para 4(b) of article 12 as per Para (III) in para 4(b) has been omitted w.e.f. 01-04-1998. Since the assessment year involved is 2012-13 on a pertinent query as to whether the DTAA was further amended vide any Notification AR answered it in negative by placing on record a copy of the DTAA. When we consider the copy of original DTAA with the copy of the DTAA as now given it is seen that after clause VII of the Protocol in the originally filed DTAA there is a heading Amending Notification No. SO 693(E) dt. 30-08-1999 and thereafter mention is made of the Paras (III) and (VI) which are under consideration. No reason could be adduced as to why there was change in the text of two copies of the DTAA. DR expressed his inability to point out if any further amending notification was also issued in respect of the DTAA having impact on the ambit of Article 12(4) from 1998 up to the financial year relevant to the A.Y. 2012-13 under consideration. It would be just and fair if the impugned order on this issue is set aside and the matter is restored to the file of the AO for examining the position of the DTAA prevailing for the assessment year under consideration and then deciding the issue by treating the amount paid by the assessee as a consideration for use of the overall Infrastructure facility of VIBV. If the amending notification dated 30-08-1999 is the last notification in that situation the case will fall under Para (VI) and not Para (III) making the amount not chargeable to tax in the hands of VIBV. In the otherwise scenario the AO will examine the effect of such further amendments if any to Article 12(4) to the DTAA for deciding the issue in the right perspective. Needless to say the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. The originally order passed u/s.254(1) is amended to this extent.

Summary

ISSUES PRESENTED and CONSIDERED

The primary issue considered was whether the payment made by the assessee to its foreign entity, Vanderlande Industries Holding, B.V. Netherlands (VIBV), for the use of ICT infrastructure, was chargeable to tax under the Double Tax Avoidance Agreement (DTAA) between India and the Netherlands. Specifically, the Tribunal examined whether such payment qualified as 'Royalties' under Article 12 of the DTAA, which would necessitate tax deduction at source under Indian tax laws.

ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The relevant legal framework involved the interpretation of Article 12 of the DTAA between India and the Netherlands, which defines 'Royalties'. The Tribunal also considered the amendments to Article 12(4) introduced by Notification No.11050 dated 30-08-1999, which included payments for the use of industrial, commercial, or scientific equipment as 'Royalties'. The Tribunal examined whether these amendments were applicable to the assessment year 2012-13.

Court's Interpretation and Reasoning

The Tribunal initially held that the payment was taxable as 'Royalties' under Article 12(4)(b) of the DTAA due to the inclusion of payments for the use of industrial, commercial, or scientific equipment. However, upon further examination of the amendments effective from 01-04-1998, it was found that such payments were omitted from the definition of 'Royalties'. The Tribunal noted the absence of any further amendments to the DTAA that would affect the assessment year in question.

Key Evidence and Findings

The Tribunal relied on the text of the DTAA and the amendments introduced by the 1999 Notification. The Tribunal noted discrepancies between different copies of the DTAA provided by the parties but found no evidence of further amendments affecting the definition of 'Royalties' for the relevant assessment year.

Application of Law to Facts

The Tribunal applied the amended definition of 'Royalties' under Article 12(4) effective from 01-04-1998, which excluded payments for the use of industrial, commercial, or scientific equipment. Since the assessment year was 2012-13, the Tribunal concluded that the payment did not qualify as 'Royalties' under the DTAA, thus not requiring tax deduction at source.

Treatment of Competing Arguments

The Tribunal considered the assessee's argument that the payment was a reimbursement and not taxable as 'Royalties'. Initially, this argument was rejected, but upon further examination of the DTAA amendments, the Tribunal acknowledged the validity of the assessee's position that the payment was not taxable under the DTAA's definition of 'Royalties' effective from 01-04-1998.

Conclusions

The Tribunal concluded that the payment made by the assessee to VIBV for the use of ICT infrastructure was not chargeable to tax as 'Royalties' under the DTAA for the assessment year 2012-13. The matter was remanded to the Assessing Officer (AO) to verify the applicability of the DTAA amendments and make a determination accordingly.

SIGNIFICANT HOLDINGS

The Tribunal's significant holding was that the payment for the use of ICT infrastructure did not constitute 'Royalties' under Article 12(4) of the DTAA, as amended effective from 01-04-1998. The Tribunal stated: "In other words, if the amending notification dated 30-08-1999 is the last notification, in that situation, the case will fall under Para (VI) and not Para (III), making the amount not chargeable to tax in the hands of VIBV."

The Tribunal established the core principle that amendments to the DTAA must be considered to determine the taxability of payments, and in the absence of further amendments, the definition effective from 01-04-1998 should apply.

The final determination was to remand the issue to the AO for further examination, allowing the assessee a reasonable opportunity for a hearing. The appeal was allowed for statistical purposes, and the original order was amended to this extent.