2021 (11) TMI 1137 - AT - Income Tax

Income deemed to accrue or arise in India - Taxability of income generated in India - appellant has received revenue from cinema halls/theatres in India - PE in India under the India-USA Tax Treaty - AO concluding that the income has directly accrued and arisen in India - AO royalty received by the appellant from Warner Bros. Pictures (India) Pvt. Ltd. as business income u/s 9(1)(i) - HELD THAT - We find the Hon ble Tribunal in assessee s own case for the earlier years has allowed the claim in favour of the assessee. We considered the decision of the Coordinate Bench of this Honble Tribunal for the A.Y 2014-15 2019 (10) TMI 1543 - ITAT MUMBAI as rightly held by the CIT (A) even if income arises to the Non-Resident due to the business connection in India the income accruing or arising out of such business connection can only be taxed to the extent of the activities attributed to permanent establishment. In this case the assessee does not have any permanent establishment in India. Since the Indian company who obtained the rights is acting independently Agency PE provisions are not applicable to the assessee company. The assessee relied on the decision of Ishikawajma-Harima Heavy Industries Ltd 2007 (1) TMI 91 - SUPREME COURT that incomes arising to a Non-Resident cannot be taxed as business income in India without a PE. As the assessee does not have any permanent establishment in India the incomes arising outside Indian Territories cannot be brought to tax. Therefore there is no need to differ from the findings of the CIT (A) and accordingly the Revenue Appeal is dismissed.

Issues Involved:
1. Approval of draft assessment order without adherence to Principles of Natural Justice.
2. Characterization of royalty as business income.
3. Revenue from cinema halls/theatres in India without evidence.
4. Income accrual in India despite agreements signed outside India.
5. Assessment of royalty received as business income under section 9(1)(i).
6. Warner Bros. Pictures (India) Pvt. Ltd. as Dependent Agent Permanent Establishment (DAPE).
7. Non-consideration of arm's length royalty payments under India-USA Tax Treaty.
8. Attribution of 65% of royalty as profits attributable to India.
9. Contempt of Tribunal's earlier orders.
10. Charging of interest under section 234B.

Issue-wise Detailed Analysis:

1. Approval of Draft Assessment Order:
The assessee contended that the draft assessment order was incomplete and violated Principles of Natural Justice. The Tribunal did not specifically address this issue but focused on the substantive tax treatment.

2. Characterization of Royalty as Business Income:
The assessee argued that royalty income should not be treated as business income. The Tribunal referenced previous decisions where it was established that royalty from the distribution of cinematographic films is not taxable as business income under the India-USA DTAA. The Tribunal upheld this view, noting that the revenue's appeal to the Bombay High Court did not alter the standing precedent.

3. Revenue from Cinema Halls/Theatres:
The AO's claim that the assessee received revenue from cinema halls/theatres in India without evidence was rejected. The Tribunal found no basis for this assertion and relied on past rulings that supported the assessee's position.

4. Income Accrual in India:
The AO concluded that income accrued in India despite agreements being signed outside the country. The Tribunal reiterated that the agreements and payments occurred outside India, and thus, the income could not be taxed in India under the DTAA provisions.

5. Assessment of Royalty as Business Income:
The AO assessed the royalty received from Warner Bros. Pictures (India) Pvt. Ltd. as business income under section 9(1)(i). The Tribunal rejected this, citing consistent rulings that the income does not qualify as business income under the DTAA.

6. Warner Bros. Pictures (India) Pvt. Ltd. as DAPE:
The AO and DRP held that Warner Bros. Pictures (India) Pvt. Ltd. was a DAPE. The Tribunal found no PE in India, referencing earlier decisions that the Indian entity acted independently and did not constitute a PE.

7. Arm's Length Royalty Payments:
The AO and DRP did not address the alternative objection regarding arm's length royalty payments. The Tribunal, following previous rulings, concluded that the arm's length principle negated the existence of a PE, thus supporting the assessee's position.

8. Attribution of 65% of Royalty as Profits:
The AO arbitrarily attributed 65% of royalty as profits attributable to India. The Tribunal found this allocation unreasonable and unsupported by evidence, aligning with past decisions that did not attribute such profits to India.

9. Contempt of Tribunal's Orders:
The assessee claimed contempt of earlier Tribunal orders. The Tribunal did not explicitly address this but implicitly supported the assessee by adhering to its previous rulings.

10. Charging of Interest under Section 234B:
The AO charged interest under section 234B, and the DRP claimed lack of jurisdiction. The Tribunal did not specifically address this issue but allowed the appeal, effectively negating the interest charge.

Conclusion:
The Tribunal allowed the appeal, upholding the assessee's arguments based on consistent judicial precedents. The income from royalty was not taxable as business income under the India-USA DTAA, and no PE existed in India. The appeal was allowed, and the additions made by the AO were deleted.

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