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TMI Blog2021 (10) TMI 1401X X X X Extracts X X X X X X X X Extracts X X X X ..... t fall within the purview of the term 'royalty' and the stand taken by the Assessing Officer in this regard is misconceived, illegal, erroneous and incorrect. 1.3 The Appellant submits that the Assessing Officer be directed to delete the addition of Rs.2,72,37,701/- so made by her and to re-compute its total income and tax thereon accordingly. Without prejudice to the foregoing 2.0 Re.: Incorrect tax rate applied 2 : 1 The Assessing Officer has erred in not taxing the alleged royalty at the rate of 10% u/s.11 5A of the Income-tax Act, 1961. 2.2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject the lease rentals received by the Appellant even if taxable as 'royalty' ought to be taxed at the rate of 10 % in terms of section 1 15A of the Income-tax Act, 1961 and the stand taken by the Assessing Officer in this regard is misconceived, illegal, erroneous and incorrect. 2.3 The Appellant submits that the Assessing Officer be directed to recompute the total income and tax liability of the assesse accordingly. 3.0 Re: Levy of interest u/s 234B of the Income-tax Act, 1961: 3.1 The Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in making of glass fibre using bushings. OCNLIC has, by Technology License agreement dated 27.01.2011, granted OCIPL, a license to manufacture glass fibres. The license granted by this agreement includes the intellectual property in the bushing and specifically provides that OCIPL will purchase all precious metals required in order to maintain the bushing from OCNLIC or its affiliates, which includes the assessee also. OCIPL has paid OCNLIC royalty @4% of net sales as the consideration under the Technology License agreement dated 27.01.2011, which has been taxed in the hands of OCNLIC as royalty in India.Since the bushing wears out after approx. 250 days of use, OCIPL needs to refurbish and re-fabricate the bushings after approx. 250 days by melting down the bushing, adding required quantities of alloy, and re-fabricating each bushing, which process is done by Owens Corning (Singapore) Pte Ltd ('OCSPL'), a Singapore company.The said OCIPL leases in the quantity of alloy required to fabricate/refurbish the bushing from the assessee. Lease rentals are paid by OCIPL to the assessee based on the total weight of alloy leased on a monthly basis. The Master Lease Agreement date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP that the alloy is an ingredient of the bushing. In fact, the main asset which is leased out as per the master lease agreement dated 02,04,2007 is the license to use the intellectual property rights in the form of drawing and designs of the bushing. Therefore, it is not the alloy of the bushing bull the license to use the intellectual tights of the design of the bushing. The DRP has noted that ii is immaterial ah to whether the original bushing has changed its form of not but what is important is the right of the assessee to use the intellectual property right in the design of bushing, provided under the said lease agreement. The DRP is of the view that the receipts of the assessee under the lease agreement is actually in the nature of royalty. This royalty has been paid for obtaining the license to use the intellectual property rights/beneficial rights of the drawing and designs of the bushing and arc clearly taxable under Article 12(3) of the DTAA between India and USA and Section 9(l)(vi) read with. Explanation 5 of the I T.Act, 1961. 7.6 In view of the above detailed discussion, the above Ground of Objection No, 1, 2 &3 of the company is rejected." 4. The learned AR subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 243 ITR 559 (Mad.) 2. Bharti Airtel Ltd. Vs. ITO (2016) 47 ITR(T) 418 (Del.) The Ld. A.R. finally prayed that in view of the above ground No.1 may kindly be allowed. 5. The learned DR, on the other hand,submitted that the consideration received by the assesse is only royalty and has rightly been held by the DRP. The Ld. D.R. filed a detailed submission which is reproduced as under: "During the course of clarification, the synopsis in the case is submitted as under. "....that the amount received by the appellant for leasing of alloy be held as Fees for Included Services (FIS). However, the bench pointed out that the same does not emanate from the DRP's order. It was then submitted that the powers of the Tribunal does allow it to consider the issues/stand taken before it. In this regards reliance is placed on the decisions of ITAT (Bang) in the case of Bangalore International Airport Limited [TS-202ITAT-2016(Bang)] wherein the Tribunal has considered and decided an issue which was neither raised by the appellant nor the respondent (copy attached for easy reference, along with Karnataka High Court decision on the same order subsequently, where it approved the action ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... X TREATY MEMORANDUM OF UNDERSTANDING CONCERNING FEES FOR INCLUDED SERVICES IN ARTICLE 12 Paragraph 4 (in general) Under paragraph 4 technical and consultancy services are considered included services only to the following extent: (1) as described in paragraph 4(a), if they are ancillary and subsidiary to the application or enjoyment of a right, property or information for which a royalty payment is made; or (2) as described in paragraph 4(b), if they make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. Thus, under paragraph 4(b), consultancy services which are not of a technical nature cannot be included services. Paragraph 4(a) Paragraph 4(a) of Article 12 refers to technical or consultancy services that are ancillary and subsidiary to the application or enjoyment of any right, property, or information for which a payment described in paragraph 3(a) or (b) is received. Thus, paragraph 4(a) includes technical and consultancy services that are ancillary and subsidiary to the application or enjoyment of an intangible for which a royalty is received under a license or sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the latter's use of the process. Such services include, for example, the provision of information and advice on sources of supply for materials needed in the manufacturing process, and on the development of sales and service literature for the manufactured product. The payments allocable to such services do not form a substantial part of the total consideration payable under the contractual arrangement. Are the payments for these services fees for "included services"? Analysis: The payments are fees for included services. The services described in this example are ancillary and subsidiary to the use of a manufacturing process protected by law as described in paragraph 3(a) of Article 12 because the services are related to the application or enjoyment of the intangible and the granting of the right to use the intangible is the clearly predominant purpose of the arrangement. Because the services are ancillary and subsidiary to the use of the manufacturing process, the fees for these services are considered fees for included services under paragraph 4(a) of Article 12, regardless of whether the services are described in paragraph 4(b) The appellant's primary contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l precious metals required in order to maintain the bushing from OCNLIC or its affiliates including the assessee. During the year the assessee has received an amount of Rs 2,72,37,701/- from OCIPL and OCIIPL towards lease rentals of alloys. The AO treated the said receipts as royalty in terms of Article 12(3) of the DTAA between India and USA and as per section 9(1)(vii) read with Explanation 5 of the Income-tax Act and brought it to tax accordingly. The assessee, on the other hand, maintains that the said income is lease rental and not taxable in India. We note that the alloy provided by the assessee to OCIPL and OCIIPL are used in re-fabrication of bushings used by these companies in the process of manufacture of glass fibres. We note that the agreement to acquire these materials is as perthe Technology License agreement dated 27.01.2011, whereby OCIPL is granted license to manufacture glass fibre and also stipulated that OCIPL will purchase all precious metals required in order to maintain the bushing from OCNLIC or its affiliates, which includes the assesse also. Thus, the assessee has provided only alloy to these companies and charged lease rentals based on the weight of the a ..... 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