2020 (1) TMI 124 - AT - Income Tax

Characterizing subscription revenue received by the appellant in the nature of royalty or fee for technical services under the Act and under the Indian United Kingdom Tax Treaty - PE in India - nature and character of subscription revenue received by the assessee from the customers in India - HELD THAT - The assessee failed to bring on record any evidence to prove that the finding of facts recorded by the ITAT for earlier year 2020 (1) TMI 66 - ITAT MUMBAI is incorrect. Therefore considering the facts and circumstances and also respectfully following the decision of the ITAT in assessee s own case for earlier years, we are of the considered view that subscription charges received by the assessee from the customers in India is in the nature of royalty. We further are of the opinion that once the receipt in question has been decided as royalty in nature, then there is no need to go in to the question of assessee having PE in India. Article 13(6) can be pressed into service only in the case when the existence of PE of non-resident is not in dispute. In this case the assessee has contended before the lower authorities that it does not have any PE in India and under these facts and circumstances the provisions of Article 13(6) cannot be invoked in the case when the receipt is found as royalty. When the issue has been decided by the Tribunal against the assessee in the preceding assessment years more than once and no difference in facts obtaining in the impugned assessment year has been brought to our notice by the assessee. Adhering to the norms of judicial discipline, we respectfully follow the decision of the Tribunal on the issue, as referred to above, and hold that the assessee cannot take the benefit of Article 13(6) of India UK Tax Treaty. Thus we hold that not only the subscription fee is in the nature of royalty but the provision of Article 13(6) of the Tax Treaty would not be applicable to the assessee. Accordingly, the grounds are dismissed.

Summary

Issues Involved:
1. Characterization of subscription revenue as royalty or fee for technical services under the Income Tax Act and the India-United Kingdom Tax Treaty.
2. Applicability of Article 13(6) of the India-United Kingdom Tax Treaty regarding the taxation of royalty income attributable to a Permanent Establishment (PE) in India.

Detailed Analysis:

1. Characterization of Subscription Revenue:
The primary issue in this appeal concerns whether the subscription revenue received by the assessee from customers in India should be characterized as royalty or fee for technical services under the Income Tax Act and the India-United Kingdom Tax Treaty. The assessee contended that the revenue was business profit, not royalty or fee for technical services. However, the Revenue treated it as royalty.

The Tribunal referred to its earlier decisions in the assessee’s own case for the assessment years 2008-09, 2009-10, and 2012-13, where it was held that the subscription revenue is in the nature of royalty as per Article 13(3) of the India-UK Tax Treaty. The Tribunal reiterated that the subscription charges received by the assessee from Indian customers are for the use or right to use the assessee’s system and software, which includes providing access to a foreign exchange deal matching system. This system facilitates transactions between Indian banks and their counterparts.

The Tribunal emphasized that the services provided by the assessee involved the use of its server located outside India and the necessary equipment and connectivity provided through its Indian subsidiary. The Tribunal concluded that the payments made by Indian clients for using this system and software constitute royalty under Article 13(3) of the India-UK Tax Treaty and the provisions of the Income Tax Act.

2. Applicability of Article 13(6) of the India-United Kingdom Tax Treaty:
The alternative claim made by the assessee was that only the royalty income attributable to the PE in India should be taxed under Article 13(6) of the India-UK Tax Treaty. The assessee argued that since the Assessing Officer (AO) had acknowledged the existence of a PE in India, Article 13(6) should apply, limiting the taxability to the income attributable to the PE.

The Tribunal referred to its previous decisions where it had already addressed this argument. It was held that once the subscription revenue is characterized as royalty, there is no need to consider the existence of a PE or the applicability of Article 13(6). The Tribunal noted that the assessee had not challenged the existence of a PE in the earlier years and reiterated that Article 13(6) could only be invoked when the existence of a PE is not in dispute.

The Tribunal further emphasized that in the earlier years, it had consistently held that the receipt in question is royalty, and the applicability of Article 13(6) was not relevant. The Tribunal found no change in the facts for the current assessment year and upheld its previous decisions, stating that the assessee cannot benefit from Article 13(6) of the India-UK Tax Treaty.

Conclusion:
The Tribunal dismissed the appeal, holding that the subscription revenue received by the assessee from Indian customers is in the nature of royalty under Article 13(3) of the India-UK Tax Treaty and the Income Tax Act. Consequently, the provisions of Article 13(6) regarding the taxation of royalty income attributable to a PE in India do not apply. The Tribunal adhered to its previous decisions on identical issues in the assessee’s own case for earlier assessment years, maintaining judicial discipline.