2016 (1) TMI 34 - AT - Income Tax

Amount received is in the nature of royalty or not - taxability in India - Section 9(1)(xi) - activity of providing access to its internet by which it provides a gateway that will facilitate call centers to incoming and outgoing calls from India to the people of USA, referred as Cincom Gateway - whether the consideration paid for the use of such facility is in the nature of royalty as defined under the DTA between India and USA? - India USA DTAA - Held that - Undisputedly, the impugned payment falls within the definition of royalty as defined under the provisions of 9(1)(vi) of the Act. However, since the assessee company is a resident of United States of America, it is entitled to be governed by the provisions of DTAA between India and USA, the term royalty was defined in the Article 12(3) of the DTAA From the facilities provided by the American company to the Indian company, which are of the nature of online, analytical data procession, it would be clear that the payment is received as consideration for the use of, or the right to use design or model, plan, secret formula or process . The use by the Indian company of the CPU and the consolidated date network of the American company is not merely use of or the right to use any industrial, commercial or scientific equipment as envisaged in article 12(3)(b) of the DTA but more than that. It is the use of embedded secret software (an encryption product) developed by the American company for the purpose of processing raw data transmitted by the Indian company, which would also clearly fall within the ambit of article 12(3)(a) of the DTA between India and the USA. In this case, use of Transponder is involved which is not a self contained operating unit. It is in orbit with footprints all over the world so that its location cannot be attributed with reference to location of its customers. Thus the consideration paid is in the nature of royalty within the meaning article 12(3) of DTA between India and USA. - Decided against assessee.

Summary

Issues Involved:
1. Validity of the CIT(A)'s order.
2. Taxability of communication charges in India.
3. Classification of services as 'royalty' under the Income Tax Act and DTAA.
4. Applicability of AAR ruling and other judicial precedents.

Detailed Analysis:

1. Validity of the CIT(A)'s Order:
The assessee challenged the CIT(A)'s order, claiming it was erroneous both in law and on facts. The CIT(A) had classified the payment received by the assessee as 'royalty' under the Income Tax Act and the Double Taxation Avoidance Agreement (DTAA) between India and the USA, which the assessee contested.

2. Taxability of Communication Charges in India:
The assessee, a foreign company, provided software solutions and entered into a communication agreement with an Indian company. The assessee received substantial payments for providing internet and email facilities. Initially, the assessee offered these payments as fees for included services but later contended they were not taxable in India. The CIT(A) ruled these payments as 'royalty', making them taxable in India.

3. Classification of Services as 'Royalty' under the Income Tax Act and DTAA:
The core issue was whether the payments for internet and email facilities constituted 'royalty'. The CIT(A) relied on the AAR ruling in P. No. 30 of 1999, which classified similar payments as 'royalty'. The Tribunal upheld this view, noting that the payments fell within the definition of 'royalty' under Section 9(1)(vi) of the Income Tax Act and Article 12(3) of the DTAA. The Tribunal emphasized that the services involved the use of embedded secret software, which aligns with the definition of 'royalty' as consideration for the use of intellectual property.

4. Applicability of AAR Ruling and Other Judicial Precedents:
The assessee cited several judicial precedents, including the Delhi High Court's decision in Asia Satellite Telecommunication Co. Ltd. However, the Tribunal found these cases distinguishable. The Tribunal gave more weight to the AAR ruling in P. No. 30 of 1999, which involved similar facts and concluded that payments for the use of embedded software constituted 'royalty'. The Tribunal also considered the retrospective amendment to Section 9(1)(vi) of the Income Tax Act, which supported the classification of such payments as 'royalty'.

Conclusion:
The Tribunal dismissed the assessee's appeal for the assessment year 2002-03 and allowed the Revenue's appeals for the assessment years 2003-04 to 2006-07. The Tribunal concluded that the payments received by the assessee were indeed 'royalty' under both the Income Tax Act and the DTAA, making them taxable in India. The decision was pronounced in the open court on 30th September 2015.