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2017 (1) TMI 1786 - ITAT MUMBAIIncome accrued or deemed to accrue in India - consideration received by the Appellant for the use of the SAP system is subject to tax as royalty under the Income Tax Act at the rate of 20 percent on a gross basis - assessee a tax resident of Malaysia is engaged in the business of marketing, distribution and sale of household products, fabrics and personal care - DR submitted, payment received by the assessee from CPI is in the nature of royalty as defined both in section 9(1)(vi) of the Act and Article–13(5) of DTAA with Malaysia - HELD THAT:- Undisputedly, meaning of royalty as provided under Explanation–2 to section 9(1)(vi), initially did not include equipment royalty. Only by way of an amendment brought to Explanation–2 to section 9(1)(vi) by Finance Act, 2001, clause (iva) providing for equipment royalty was inserted with effect from 1st April 2002. Thus, till assessment year 2001–02, section 9(1)(vi) did not provide for equipment royalty. Therefore, since equipment royalty was not coming within the meaning of royalty as provided under section 9(1)(vi) r/w Explanation–2 amount received could not have been brought to tax under the Act, at least, till assessment year 2001–02 considering the provisions of section 90(2) of the Act. Whether the payment made by CPI to CPM towards user of the system can be brought into tax in India under Article–13(5)(b) of India–Malaysia DTAA (Old)? - Admittedly, in the facts of the present case also, it has not been established by the Department that CPI while accessing the SAP system, exercises any control and possession thereof. Hence, the amount paid cannot be treated as “royalty”. More so, when the facts on record suggests that the CPI has been granted a limited access to the SAP system by establishing a communication line at its own cost for use of data available in the SAP system. In the present case, there is nothing to suggest that the CPI has obtained the right to use of any of such things as mentioned in clause (iii) for which it has paid the amount to CPM. On the contrary, it is very much evident that the payment made by CPI is for the purpose of accessing the SAP system hosted by CPM at its facilities for exchange of information / data. As far as the reliance upon Explanation–6 to section 9(1)(vi), in our considered opinion, it will have no bearing on the issue at hand as the expansion of scope of process in Explanation–6 would not apply to the assessee as it does not relate to payment made towards transmission by satellite. What is meant by the aforesaid Explanation is live transmission of programs such as channel feed and not SAP which is used for input of data and generation of reports. Therefore, in our considered opinion, the payment received by the assessee from CPI towards use of SAP system can neither be treated as “equipment royalty” nor “process royalty” either under the provisions of the Act or the relevant DTAA . Since we have held that the consideration received by the assessee from CPI towards use of SAP system is not royalty, in terms of Indo–Malaysian treaty, it will be a business profit under Article–7 of the treaty. Therefore, in terms of Article–7, unless the enterprise of a contracting State has a P.E. in the other contracting State, the business profit cannot be brought to tax in the other contracting State. That being the case, the consideration received by the assessee from CPI towards use of SAP system is not taxable in India. Ground no.1, is allowed. - Decided against revenue. Department bringing to tax the consideration received towards service rendered by treating it as fees for technical services - HELD THAT:- Though, section 9(1)(vii) of the Act treats income by way of fees for technical services to be taxable in India, however, there is no such expression under the India Malaysia treaty (old). Therefore, the amount received towards service charges has to be treated as business profit of the assessee under Article–7 of the DTAA. Admittedly, as the assessee has no P.E. in India, the amount cannot be brought to tax in India. Though, it is the stand of the department that in view of Article 3(2) of the treaty, definition of FTS provided u/s 9(1)(vii) of the Act would also apply to the treaty, however, we are unable to accept it. In our view, some expression is used in the treaty but not defined, whereas, a definition of such expression is provided in the Act, in that event, in terms of Art.3(2) of the treaty the provisions of the Act will apply. As far as observations of the learned Commissioner (Appeals) that the assessee cannot switch its option to be taxed either under the Act or DTAA, in respect of different sources of income, on reading the provisions of section 90(2) of the Act, we do not find any such restriction imposed therein. As per the plain reading of section 90(2), the provisions of the Act shall apply to the extent they are more beneficial to the assessee. In other words, if the provision of DTAA qua a particular item of income is more beneficial to the assessee, the same has to apply. Ground no.2, is allowed. Levy of interest under section 234B and 234D - HELD THAT:- There is no dispute to the fact that the assessee is non–resident company. Therefore, in terms of section 195 of the Act, liability is on the payer to deduct tax while making payments to the assessee. If the payer has failed to deduct tax at source, the assessee cannot be held liable for non–payment of advance tax and consequently levy of interest under section 234B - Thus we hold that in the peculiar circumstances of the case, interest under section 234B is not chargeable. We find that the issue has been decided in Clough Engineering Ltd. [2011 (2) TMI 1603 - ITAT DELHI] by holding that interest under section 234D is to be charged after excluding the interest granted under section 244A. In view of the aforesaid, we direct the Assessing Officer to charge interest under section 234D only on the principal amount and not on the interest granted under section 244A. Consequently, grounds no.5 and 6 are allowed.
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