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2019 (7) TMI 419 - AT - Income TaxCharacterization of income - Income deemed to accrue or arise in India - compensation received by the assessee on termination of network participation agreement from Citibank N.A. - royalty OR business income - PE in India - Indo-US DTAA - HELD THAT:- We find that the compensation received by the assessee does not fit into any of the definition of royalty either under the provisions of the Act or as per the definition contained in DTAA. We find from Article 7 of Indo-US DTAA that the subject mentioned compensation is to be taxed only in USA and not in India. Hence it can be safely concluded that the subject mentioned receipt is only a business receipt falling under the head profits and gains of business or profession of the assessee. CIT(A) had erroneously applied the provisions of Section 28(ii)(a) which only talks about the termination of terms and conditions of managerial remuneration by way of an agreement or understanding and is absolutely not relevant to the issue under dispute before us. The relevant provision that is applicable in the instant case is 28(va)(b). CIT(A) has also observed that there is no provision in the original agreement dated 30/06/2008 for early termination. In this regard, we find that this observation of the CIT(A) is incorrect in as much as Article 4 containing the term of agreement impliedly provided for earlier termination As already held that the compensation received by the assessee is only business receipt in the hands of the assessee - whether the assessee is having a permanent establishment in India or not has not been verified by the lower authorities. This was only a claim of the assessee right from the beginning commencing from the level of the AO. We find that since the lower authorities did not accept the subject mentioned compensation as a business receipt, there was no occasion for them to look into the aspect of the existence of permanent establishment in India for the assessee. We find that as per Article 7 of Indo-US DTAA, the subject mentioned compensation is to be taxed only in USA and not in India. Assessee’s case falls u/s.28(va)(b) and hence the compensation received by the assessee is to be treated only as the business receipt. As per Article 7 of Indo-US DTAA, the compensation is taxable only in USA and not in India in the hands of the assessee. We also find that the existence of permanent establishment in India for the assessee requires factual verification by the ld. AO. Hence, we deem it fit and appropriate in the interest of justice and fair play to remand this issue to the file of the ld. AO with the following directions:- - AO to verify whether the assessee is having a Permanent Establishment in India or not - evidences in this regard are to be provided by the assessee. - Assessee should also provide evidence before the ld. AO to prove that the said compensation has been duly subjected to tax in USA as per the relevant Article 7 of Indo-US DTAA. - Decided in favour of asssessee for statistical purposes.
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