2019 (8) TMI 729 - AT - Income Tax

Treatment of Business income as Royalty income - Article 12 of India-Ireland DTAA - no fixed place of business or permanent establishment in India - assessee sells subscriptions to its Indian customers/subscribers, on the basis of which they are able to access Gartner s research products over the internet from its data server which is located outside India in lieu of subscription fees - A.O observed that the assessee as the copyright owner of the research products exploited copyright protection vigorously. HELD THAT - Tribunal while disposing off the appeal of the assessee for A.Y 2007-08 2014 (1) TMI 1281 - ITAT MUMBAI , placed reliance on the decision of the Hon ble High Court of Karnataka in the case of Wipro Ltd. Vs. ITO 2011 (10) TMI 473 - KARNATAKA HIGH COURT had concluded, that the subscription fees received by the assessee would constitute royalty . Admittedly, the issue and also the facts and the circumstances in the present appeal of the assessee remains the same as were involved in its appeals for the preceding years. We uphold the view taken by the CIT(A) that the A.O had rightly concluded that the subscription fees of ₹ 90,10,34,288/- received by the assessee from its Indian customers/subscribers was to be assessed as royalty as per the provisions of Sec. 9(1)(vi) of the Act r.w Article 12 of the India-Ireland DTAA and subjected to tax @10% on gross basis as per Article 12 of the India-Ireland DTAA. - appeal filed by the assessee is dismissed

Summary

Issues Involved:
1. Erroneous treatment of business income as royalty income.
2. Erroneous levy of interest under Section 234B.
3. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Erroneous Treatment of Business Income as Royalty Income:
The primary issue revolves around whether the subscription fees received by the assessee from Indian customers should be classified as "business income" or "royalty income" under Section 9(1)(vi) of the Income-tax Act, 1961, and Article 12 of the India-Ireland Double Taxation Avoidance Agreement (DTAA).

- Background: The assessee, a company incorporated in Ireland, distributes research products in the form of subscriptions. These products are accessible online from servers located outside India. The assessee argued that since it did not have a permanent establishment in India, the subscription fees should not be taxed in India.

- Assessment: The Assessing Officer (A.O) disagreed, recharacterizing the subscription fees as "royalty" income. This view was based on the assertion that the subscription fees were for the use of copyrighted material, thus falling under the definition of "royalty" in the Income-tax Act and the DTAA. The A.O cited the Karnataka High Court decision in Wipro Ltd. Vs. ITO, which had similarly classified payments to Gartner as "royalty."

- Appeal to CIT(A): The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the A.O's decision, referencing past Tribunal decisions in similar cases involving the assessee for previous assessment years (A.Ys 2003-04, 2005-06, 2008-09, 2009-10, 2010-11, 2011-12, and 2012-13). These decisions consistently treated the subscription fees as "royalty."

- Tribunal's Decision: The Income Tax Appellate Tribunal (ITAT) reviewed the case and noted the consistency in past rulings against the assessee. The Tribunal upheld the CIT(A)'s decision, affirming that the subscription fees should be taxed as "royalty" under Section 9(1)(vi) of the Act and Article 12 of the India-Ireland DTAA. The Tribunal emphasized maintaining consistency with prior judgments, including the Karnataka High Court's ruling in Wipro Ltd. Vs. ITO.

2. Erroneous Levy of Interest under Section 234B:
The second issue concerns the levy of interest under Section 234B of the Income-tax Act.

- Background: The A.O levied interest amounting to ?79,15,262 for A.Y 2013-14 and ?89,75,241 for A.Y 2014-15, treating the subscription fees as "royalty" income.

- Appeal to CIT(A): The CIT(A) upheld the A.O's decision, leading the assessee to appeal to the ITAT.

- Tribunal's Decision: The ITAT, following its decision on the primary issue of income classification, upheld the levy of interest under Section 234B. Since the subscription fees were confirmed as "royalty," the interest levy was deemed appropriate.

3. Initiation of Penalty Proceedings under Section 271(1)(c):
The third issue involves the initiation of penalty proceedings under Section 271(1)(c) for concealment of income or furnishing inaccurate particulars.

- Background: The A.O initiated penalty proceedings under Section 271(1)(c) following the recharacterization of the subscription fees as "royalty."

- Appeal to CIT(A): The CIT(A) upheld the initiation of penalty proceedings, which the assessee challenged before the ITAT.

- Tribunal's Decision: The ITAT, consistent with its rulings on the previous issues, upheld the initiation of penalty proceedings under Section 271(1)(c).

Conclusion:
The ITAT dismissed the appeals for both A.Y 2013-14 and A.Y 2014-15, affirming the decisions of the lower authorities on all issues. The subscription fees were correctly classified as "royalty" income, the levy of interest under Section 234B was upheld, and the initiation of penalty proceedings under Section 271(1)(c) was deemed appropriate. The judgments were pronounced on 09/08/2019.