2023 (8) TMI 146 - AT - Income Tax

Income deemed to accrue or arise in India - Royalty Income - assessee is a non-resident corporate entity incorporated under the laws of United Arab Emirates (UAE) and stated to be engaged in the business of leasing of helicopter to the clients across the world - assessee claimed that the amount received, being in the nature of business income, is not taxable in India, in absence of a Permanent Establishment (PE) - HELD THAT - As per the definition of royalty in paragraph 3 of Article 12, the royalty income has to be received for use or right to use of any copyright, trademark, patent etc. In the facts of the present appeal, admittedly, no income was actually received by the assessee from the lessee. This factual position has been accepted by the departmental authorities. The receipt of lease income is fraught with uncertainties as parties are in dispute and litigations are pending for past so many years. Even, there is no likelihood of end of the litigation in near future. In the aforesaid scenario, it cannot be said that the assessee has received any royalty income, either under the domestic law or under the treaty provisions.The expression received used in paragraph 3 of Article 12 of India UAE DTAA read in conjunction with paragraph 1 2 of Article 12 would mean actual receipt of royalty and not any receipt on accrual or deemed basis. AO had treated an amount as royalty income of the assessee during the year purely based on the amount shown in Form 26AS, however, CIT (Appeals) has restricted the addition purely based on the four invoices raised by the assessee. When the admitted factual position is that the assessee has not even received any amount against those four invoices, in our view, the royalty income cannot be added on notional basis. Thus, we direct the AO to delete the addition - Decided in favour of assessee.

Summary

Issues involved:
The judgment deals with the taxability of income from royalty in the context of a lease agreement between a non-resident corporate entity and an Indian entity.

Taxability of Income from Royalty:
The dispute in the appeal centered around the taxability of Rs. 1,43,59,792/- as income from royalty. The Assessing Officer contended that the lease charges received from leasing a helicopter should be treated as royalty under the India-UAE Double Taxation Avoidance Agreement (DTAA) and the Income-tax Act, 1961. The Assessing Officer's decision was upheld by the Commissioner (Appeals).

Contentions of the Assessee:
The assessee argued that the lease of the helicopter did not involve the transfer of intellectual property rights, and therefore, the lease rental should not be taxed as royalty. The assessee also contended that as no income was received from the lessee, the royalty income cannot be taxed on an accrual basis.

Department's Position:
The Departmental Representative asserted that income from the use of equipment, including helicopters, is taxable as royalty under the Act and the India-UAE DTAA. The Department argued that even if no income was received, royalty income can be taxed on an accrual basis.

Judgment and Analysis:
The Tribunal considered the factual position where the assessee did not receive any payment towards leasing the helicopter due to disputes and litigation. The Tribunal analyzed the relevant provisions of the India-UAE DTAA regarding the taxability of royalty income. It was observed that as no income was actually received by the assessee, the conditions for taxing royalty income were not met. The Tribunal held that the royalty income cannot be added on a notional basis and directed the Assessing Officer to delete the addition sustained by the Commissioner (Appeals). The Tribunal did not delve into the issue of whether the amount could be treated as equipment royalty under the domestic law and treaty provisions.

Conclusion:
The appeal was allowed, and the addition of Rs. 1,43,59,792/- as royalty income was deleted. The judgment emphasized the importance of actual receipt of royalty income for taxability purposes under the India-UAE DTAA.