2021 (10) TMI 1401 - AT - Income Tax

Income taxable in India - Amounts received for leasing of alloys taxed as royalty - India US DTAA - assessee being a non-resident company incorporated in accordance with the corporate laws of United States of America and a tax resident of that County - HELD THAT - Royalty for design of bushing is not paid by OCIPL to OCNLIC and payment to assessee is only towards lease rentals i.e. bushings made of alloys comprising Platinum and Rhodium. We note that the assessee has not provided any services to OCIPL and OCIIPL inconnection with intellectual property related to bushing and, since, the intellectual property right with regard to the bushings is with OCNLIC and assessee is merely providing alloys of Platinum and Rhodium, consideration for alloys cannot be treated as royalty. The case is covered by the decision of Neyveli Lignite Corpn. Ltd. 1999 (10) TMI 40 - MADRAS HIGH COURT wherein it has been held that payment to be constituted as royalty should be the payment made to a person who has exclusive right over a thing for allowing another to make use of that thing. Similarly, the case is also covered by the decision of the Delhi Bench of the Tribunal in the case of Bharti Airtel Ltd. 2016 (3) TMI 680 - ITAT DELHI wherein it has been held that in order to receive a royalty in respect of allowing the usage or right to use any property including an intellectual property, the owner thereof must have an exclusive right over such property. Technology for manufacture of glass fibre including the use of bushing has been provided by OCNLIC a Dutch Company and royalty has been paid to that Dutch Company and, therefore, the amount of lease rental on alloy which are used to refurbish the bushing cannot be again treated and taxed as royalty in the hands of the assessee by invoking the India US DTAA and provisions of section 9(1)(vii) read with Explanation 5 of the Income-tax Act. Addition deleted - Decided in favour of assessee.

Summary

Issues Involved:
1. Taxation of lease rentals as royalty.
2. Incorrect tax rate applied.
3. Levy of interest under Section 234B of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Taxation of Lease Rentals as Royalty:
The primary issue revolves around whether the lease rentals amounting to Rs. 2,72,37,701/- received by the assessee for leasing alloys should be taxed as 'royalty'. The Assessing Officer (AO) treated the lease rentals as royalty under Article 12(3) of the DTAA between India and the USA and Section 9(1)(vii) read with Explanation 5 of the Income-tax Act. The DRP upheld this view, noting that the lease agreement included the license to use intellectual property rights in the form of drawings and designs of the bushings. The DRP emphasized that the main asset leased was the intellectual property rights, not just the alloy itself. The assessee argued that the lease rentals were purely for the alloy and not for any intellectual property rights, citing the Master Lease Agreement and the technology license agreement with OC NL Invest Cooperatief (OCNLIC). The Tribunal agreed with the assessee, stating that the payments were purely for the lease of alloys and not for any intellectual property rights, referencing decisions from the Madras High Court and the Delhi Tribunal to support their conclusion.

2. Incorrect Tax Rate Applied:
This issue was raised as a precautionary measure, asserting that even if the lease rentals were taxable as 'royalty', they should be taxed at the rate of 10% under Section 115A of the Income-tax Act. However, since the Tribunal ruled in favor of the assessee on the primary issue, this ground was not adjudicated.

3. Levy of Interest under Section 234B:
The assessee contested the levy of interest under Section 234B of the Income-tax Act, arguing that no interest was leviable based on the facts and prevailing law. Similar to the second issue, this was also not adjudicated as it was contingent on the outcome of the primary issue.

Conclusion:
The Tribunal concluded that the lease rentals received by the assessee were not 'royalty' but payments for leasing alloys. Consequently, the addition made by the AO was deleted, and the appeal was allowed. The issues of incorrect tax rate and levy of interest were not addressed due to the favorable ruling on the primary issue. The judgment was pronounced in the open court on 4th October 2021.