2025 (6) TMI 104 - AT - Income Tax

Income taxable in India - Provisions of distance learning course - HELD THAT - For AYs 2011-12 2014-15 and 2016-17 also the coordinate benches had held that the income of the assessee from the provision of distance learning courses is not taxable in India after placing reliance on the decision of case of Engineering Analysis Centre of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT After noting that there is no change in the facts and circumstances in this year we hold that the addition made by the AO on the direction of DRP on account of the provision of distance learning courses is not justified and is therefore deleted. Sale of physical publications - After noting that there is no change in facts and circumstances during the year we hold that the addition made by the AO on account of the sale of physical publications is not justified and is therefore deleted. Provision of advertising space - Addition made by the Ld. AO on account of the provision of advertising space is not justified and is therefore deleted. Database access facility - We hold that the addition made by the Ld. AO on account of the data base access facility is not justified and is therefore deleted. Clearing House Facility (ICH facility) Joining and annual fees (membership fees) - We are unable to subscribe to the manner in which the A.O/DRP had summarily rejected the claim of the assessee that as the ICH services were provided by the assessee viz. IATA Canada directly outside India and the fees in respect of the said services was also received by the assessee in its bank account maintained outside India therefore the revenue pertaining to the said ICH services could not have been attributed to the IATA-India branch. In our considered view the matter in all fairness requires to be restored to the file of the AO. AO shall in the course of the set aside proceedings verify the veracity of the claim of the assessee that the ICH services were provided by assessee viz. IATA Canada directly outside India. In case the claim of the assessee is found to be in order then the addition of fees received from providing ICH services made in its hands would stand vacated. Data processing charges - Addition made by AO on account of the joining and annual fees (membership fees) is not justified and is therefore deleted. Classroom training courses - Income from class room training course was suo moto offered to tax in AY 2020-21 amounting to USD should be reduced in AY 2020-21 to the extent of credit note issued by IATA Canada in subsequent years i.e. in AY 2021-22. DR has not objected to the above-mentioned proposition.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in this appeal relate primarily to the taxability of various streams of income earned by the assessee under the provisions of the Income-tax Act, 1961 and the India-Canada Double Taxation Avoidance Agreement ("tax treaty"). The key issues are:

• Whether the Authorized Training Centers ("ATCs") in India constitute a dependent agent Permanent Establishment ("DAPE") of the assessee under Article 5(4) and 5(5) of the India-Canada tax treaty, thereby rendering income from distance learning courses taxable as business profits under Article 7.
• Whether the income from sale of physical publications/manuals qualifies as 'royalty' under Article 12(3) of the tax treaty and is taxable in India.
• Whether receipts from provision of advertising space on the assessee's website and publications amount to 'royalty' under Article 12(3) of the tax treaty.
• Whether income from database access facilities/charges constitutes 'royalty' under Article 12 of the tax treaty.
• Whether joining and annual membership fees, provision of IATA Clearing House ("ICH") facility, and e-services data processing charges are taxable as business profits attributable to the IATA India branch (alleged PE) under Article 7 of the tax treaty.
• Whether credit notes issued in subsequent years against classroom training courses should be considered for adjustment in the tax computation for the relevant assessment year.
• Whether interest under Sections 234A and 234B of the Income-tax Act has been correctly computed.
• Whether penalty proceedings initiated under Sections 274 read with 270A of the Act should be sustained.

2. ISSUE-WISE DETAILED ANALYSIS

Dependent Agent PE (DAPE) status of ATCs and taxation of distance learning courses:

Legal framework and precedents: The Tribunal examined Articles 5(4) and 5(5) of the India-Canada tax treaty, which define the circumstances under which an enterprise has a PE in the other contracting state, particularly focusing on the dependent agent PE provisions. Article 5(5) provides that an enterprise will not be deemed to have a PE merely because it carries on business through an agent of independent status acting in the ordinary course of business, unless the agent's activities are devoted wholly or almost wholly on behalf of the enterprise and transactions are not at arm's length.

Precedents relied upon include the Tribunal's own decisions in the assessee's prior years (AY 2012-13 and others), the Special Bench decision in Motorola Inc. Vs. Dy. CIT, and the Bombay High Court's ruling in DIT Vs. Delmas France, which emphasize the onus on the revenue to prove that the agent is not independent and that transactions are not at arm's length.

Court's interpretation and reasoning: The Tribunal found that the ATCs are independent third-party organizations offering a variety of courses, including but not limited to those designed by the assessee. The evidence showed that ATCs had multiple revenue streams and were not exclusively dependent on the assessee. The Tribunal noted that the revenue authorities failed to demonstrate that transactions between the assessee and ATCs were not at arm's length. The Dispute Resolution Panel's (DRP) reliance on the ATCs being dependent agents was rejected due to lack of evidence that the ATCs' activities were devoted wholly or almost wholly to the assessee or that transactions were not arm's length.

Key evidence and findings: The Tribunal analyzed financial statements and course offerings of various ATCs, showing their independent business operations. It also noted that the course materials were dispatched directly from outside India, and ownership transferred outside India. The Tribunal relied on the absence of any adverse findings on arm's length nature of transactions.

Application of law to facts: Applying Article 5(5), the Tribunal concluded that the ATCs qualify as agents of independent status, and thus no PE arises in India. Consequently, income from distance learning courses cannot be taxed as business profits attributable to a PE in India.

Treatment of competing arguments: The revenue's reliance on the DRP's order and the AO's attribution of 40% of gross receipts to the alleged PE was rejected. The Tribunal held that the DRP's observations were general and unsupported by concrete evidence. The Tribunal also declined to remit the matter back for further inquiry as there was no prima facie material to suggest non-arm's length transactions.

Conclusion: The Tribunal held that the ATCs do not constitute a DAPE of the assessee in India and income from distance learning courses is not taxable under the India-Canada tax treaty. The addition made by the AO on this ground was deleted.

Taxability of income from sale of physical publications:

Legal framework and precedents: Article 12(3) of the India-Canada tax treaty defines 'royalties' to include payments for use or right to use copyrights or for information concerning industrial, commercial or scientific experience. The Tribunal relied on its earlier decision for AY 2012-13 and the Madhya Pradesh High Court ruling in CIT Vs. HEG Ltd., which held that mere sale of publications without transfer of intellectual property rights does not constitute royalty.

Court's interpretation and reasoning: The Tribunal found that the publications/manuals (e.g., Dangerous Goods Regulations) were compilations of publicly available information issued by ICAO and did not involve transfer of copyright or undisclosed technical information. The customers acquired ownership of the physical manuals but no right to reproduce or exploit the content.

Key evidence and findings: The Tribunal examined the content of the manuals, their basis on ICAO instructions, and the manner of sale directly to customers. It noted that the manuals were user-friendly reference materials.

Application of law to facts: Since no use or right to use copyright was granted, and the information was publicly available, the receipts from sale of physical publications did not fall within the definition of royalty under Article 12(3).

Treatment of competing arguments: The revenue's contention that the income was royalty was rejected as the Tribunal found no intellectual property transfer or exclusive know-how involved.

Conclusion: The addition treating sale proceeds as royalty was deleted.

Taxability of receipts from provision of advertising space:

Legal framework and precedents: Article 12(3) of the tax treaty defines royalty, and the Tribunal relied on its own earlier decisions and the ITAT Mumbai ruling in Yahoo India (P) Ltd. Vs. DCIT, which held that payments for advertising space do not constitute royalty.

Court's interpretation and reasoning: The Tribunal held that provision of advertising space on the assessee's website or publications did not grant any right to use or exploit the assessee's logo, brand, or goodwill. The customers merely placed advertisements without acquiring any intellectual property rights.

Key evidence and findings: The Tribunal noted that the advertisement services were managed from outside India and consideration was received outside India. It also reviewed similar precedents where advertising payments were held to be business profits, not royalty.

Application of law to facts: The receipts from advertising space did not satisfy the definition of royalty and thus were not taxable as such under the treaty.

Treatment of competing arguments: The revenue's reliance on the DRP order was rejected as the Tribunal found no right to use or exploit intellectual property was granted.

Conclusion: The addition treating advertising receipts as royalty was deleted.

Taxability of database access facility charges:

Legal framework and precedents: The Tribunal referred to the India-Canada tax treaty and its earlier decisions for AYs 2011-12, 2014-15, and 2016-17, holding that database access fees for publicly available data do not constitute royalty.

Court's interpretation and reasoning: The Tribunal found that the databases comprised publicly available information collated and organized by the assessee, and the fees were for facilitating access rather than imparting any technical or scientific experience or copyright use.

Key evidence and findings: The Tribunal noted that the data such as currency exchange rates and tariffs were publicly available and the subscription fee was received outside India.

Application of law to facts: The income from database access was held not to be royalty and thus not taxable in India.

Treatment of competing arguments: The revenue's reliance on the DRP order was again rejected in view of the consistent precedents.

Conclusion: The addition on account of database access fees was deleted.

Taxability of joining and annual fees, ICH facility fees, and e-services data processing charges:

Legal framework and precedents: Article 7 of the tax treaty provides that business profits are taxable in the source state only if attributable to a PE. The Tribunal relied on its earlier decisions including the Supreme Court ruling in Ishikawajima Harima Heavy Industries Co. Ltd. Vs. DIT, which held that profits attributable to a PE are limited to the role played by the PE in the transactions.

Court's interpretation and reasoning: The Tribunal accepted the assessee's contention that these services and fees were provided and collected directly outside India by IATA Canada and were not connected to activities of the IATA India branch (alleged PE). The Tribunal directed the matter to be restored to the AO for verification of the claim that these services were provided outside India.

Key evidence and findings: The Tribunal noted that the IATA India branch was permitted by RBI to conduct non-commercial activities on a no-profit basis and filed returns under the principle of mutuality. The DRP's rejection of the claim was found unsustainable without verifying the factual claim.

Application of law to facts: Only profits attributable to the PE's role in India are taxable. Where services are provided and fees received outside India, such income cannot be attributed to the PE.

Treatment of competing arguments: The revenue's reliance on the DRP order was set aside, and the matter remanded for factual verification.

Conclusion: The appeal was allowed for statistical purposes with directions for fresh adjudication.

Classroom training courses and credit notes:

Legal framework and precedents: The issue concerned adjustment of income for credit notes issued in subsequent years.

Court's interpretation and reasoning: The Tribunal noted that the assessee had inadvertently offered income for tax and subsequently issued credit notes. The AO had rejected the claim for adjustment due to lack of third-party confirmation.

Key evidence and findings: The assessee submitted additional evidence including invoices, credit notes, and email communications showing rescheduling due to COVID-19.

Application of law to facts: The Tribunal restored the issue to the AO for verification and consequential relief.

Treatment of competing arguments: The revenue did not object to the adjustment on verification.

Conclusion: The issue was remanded for limited purpose of verifying credit notes and allowing relief.

Computation of interest under Sections 234A and 234B:

The Tribunal directed recomputation of interest after giving effect to the order, as agreed by both parties.

Penalty proceedings under Sections 274 read with 270A:

The Tribunal observed that the issue was premature and did not require adjudication at this stage.

3. SIGNIFICANT HOLDINGS

"An enterprise carrying on business in the other contracting state through an agent of independent status acting in the ordinary course of business shall not be deemed to have a permanent establishment in that state, unless the agent's activities are devoted wholly or almost wholly on behalf of the enterprise and transactions are not made under arm's length conditions."

"In the absence of any finding that transactions between the principal and the agent are not at arm's length, the agent retains its independent status, and no dependent agent PE arises."

"Receipts from sale of physical publications, which are mere compilations of publicly available information and do not involve transfer of intellectual property rights or undisclosed technical information, do not constitute 'royalty' under Article 12(3) of the India-Canada tax treaty."

"Provision of advertising space without granting any right to use or exploit the brand or logo of the assessee does not amount to royalty."

"Database access fees for facilitating access to publicly available information do not constitute royalty."

"Business profits attributable to a PE are limited to the extent of the role played by the PE in the transactions. Income from services provided and fees received outside India cannot be attributed to the PE."

"The onus lies on the revenue to establish the existence of a PE and to prove that transactions between the enterprise and agent are not at arm's length."

"Inadvertent inclusion of income subsequently adjusted by credit notes should be verified and adjusted accordingly."

"Interest under Sections 234A and 234B must be recomputed after giving effect to the Tribunal's order."

The Tribunal allowed the appeal on all substantive grounds relating to the taxability of income streams, vacated the additions made by the AO and DRP, remanded certain issues for factual verification, and declined to adjudicate penalty proceedings at this stage.