TMI Blog2012 (6) TMI 328X X X X Extracts X X X X X X X X Extracts X X X X ..... irrespective of the system of accounting, royalties are taxable on cash basis. Accordingly it is held that the amount provided by the licensee in its books of account but not paid to the assessee is not taxable. Matter restored to the file of AO to decide about chargeability of interest u/s 234B & 234C. - IT Appeal NOS. 1600, 1601 & 1656 (DELHI) OF 2011 - - - Dated:- 8-6-2012 - R.P. TOLANI, K.G. BANSAL, JJ. ORDER K.G. Bansal, Accountant Member These three appeals for two different years, consisting of one appeal of the assessee and two appeals of the revenue, were argued in a consolidated manner by the Ld. Counsel for the assessee and the Ld. Sr. DR. Therefore, we find it convenient to pass a consolidated order. 1.1 The assessee has taken up two grounds in its appeal for assessment year 2004-05. Ground No. 1 is that Ld. CIT(A) erred in upholding the taxation of notional royalty income against well established principle that only real income can be taxed. Without prejudice to this ground, in ground No. 2, it is mentioned that assessee follows cash system of accounting and, therefore, it cannot be taxed unless the income is actually received. 1.2 The reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for assessment year 2003-04 as the agreement has been signed on 15.1.96. This exemption has not been claimed in assessment year 2004-05 as the agreement for this year was signed after 1.6.2002. Therefore, it has been held that he erred in not granting exemption u/s 10(6A) for assessment year 2003-04. The revenue is aggrieved by this order. 4. Before us, Ld. Sr. DR submits that the agreement under which royalty was received in this year was signed on 15.1.1991. This agreement has been placed in the paper book on page Nos. 139 to 162. It is inter-alia mentioned in the agreement that the assessee owns goodwill and enjoys a special and very high reputation in the field of the quick service restaurant industry with respect to its valuable trademark, service marks, trade names, slogans, designs, insignias, emblems, symbols, package designs, distinctive building designs and other architectural features, logos and other proprietary identifying characteristics identifying and distinguishing, used or to be used in connection with its products, business, technology and system ("Trademarks" for short). The agreement is for 7 years. The licence granted under the agreement is renewable afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r offshore parent companies on the automatic route without any restriction on duration of royalty payments. Henceforth, all companies will be permitted on the automatic approval route to make royalty payment @ 8% of exports and 5% on domestic sales without any restriction on duration in respect of the extent of foreign equity in the share holding. The case of the Ld. SR. DR is that the licensee, being a whole at subsidiary of the assessee - company, the old agreement was extendable without any further approval. 4.3 . Further, the Ld. Sr. DR drew our attention to notes on accounts of Yum regarding accrual of royalty which mentions that the technology licensee agreements have expired on 14.1.2003 and 31.3.2002 respectively. No royalty has accrued from 1.1.2003 in case of the assessee and 1.4.2002 in case of KFCIH. It has been agreed that no royalty is payable till the renewal of the agreements in notes on accounts for assessment year 2004-05, it is mentioned that the agreements expired on 14.1.2003 and 31.3.2002 respectively. These have been renewed on 1.7.2003. It has been agreed that royalty is not payable for the period in which the agreements were not valid. 4.4 The Ld. Sr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2 (c) or 3 of Article 8." 4.5 . Paraphrased in the context of this case, paragraph No. 1 provides that royalties accruing to the assessee in India and paid in the USA may be taxed in the USA. Paragraph No. 2 provides that such royalties etc. may be taxed in India also. Paragraph No. 2 also provides for the rate of tax at 15% of the gross amount of royalty. The case of the Ld. Sr. DR is that the article uses the words "gross amounts" which have not been defined under the DTAA. Therefore. these words will have the same meaning as assigned to them under the Act. Section 198 provides that all sums deducted in accordance with the provisions of chapter XVII shall, for the purpose of computing the income of assessee, be deemed to be income received. The exclusionary proviso is not applicable to the facts of this case. Under this provision "gross amounts" will be the amount actually paid to the assessee and the amount of tax deducted at source, for wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Act, which will govern the taxation of income ; (1982) 137 ITR (Statute)I. Therefore, it is urged that the income of the assessee is taxable @ 15% of the amount actually paid by the licensee to it. Coming to the inclusion of the royalty income of three months during which the agreement was not in force, our attention has been drawn towards the DTAA. In paragraph No. 1, it is provided that royalties and fees for included services arising in a contracting state and paid to a resident of the other Contracting State may be taxed in that other State (emphasis supplied by the Ld. Counsel). On the basis of this provision it is argued that the taxation of royalty under the DTAA is based on cash system of accounting and not mercantile system of accounting. 5.1. Finally, it is argued that the whole of the income of the assessee was subject to tax deduction at source, therefore, the assessee had not incurred any liability for payment of advance tax u/s 209. Sections 234B and 234C are in the nature of machinery provisions, which cannot override the charging provision. Thus, it is argued that since there is no liability to pay advance tax, there will also be no liability to pay intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is light, the provision in section 198 is in the nature of definition only. Therefore, the order of the Ld. CIT(A) is reversed on this issue. Consequently ground No. 1 in both the appeals of the revenue is allowed. 7. The second question is - whether, the income by way of royalty is taxable on cash basis or mercantile basis ? We find that this issue has been decided by 'B' Bench of Delhi Tribunal in the case of CSC Technology Singapore Pte. Ltd. in ITA No. 5604/Del/2010 dated 17.2.2012. This decision takes care of the submissions of the Ld. Sr. DR and the Ld. Counsel in our case. The Tribunal considered the decision in the case of DCIT v. Uhde Gmbh . [1996] 54 TTJ 355 (Bom), National Organic Chemical Industries Ltd. v. DCIT [2005] 96 TTJ 765 (Bom.) and CIT v. Standard Triumph Motor Co. Ltd. [1979] 119 ITR 573. In the decision it has been mentioned that paragraph No. 1 uses the words " royalties and fees for included services arising in a contracting state and paid to a resident of the other contracting state". Thus the initial point of taxation is the arising of the royalty in India, but it is finally taxed on the basis of amount of royalty paid to the non-resident. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act of this case, the payee had provided for the payment of royalty in the books of account of this year but such royalties were not paid to the assessee in absence of any agreement approved by the RBI or for which it could be deemed that the approval has been granted. What is important to note is that royalty for this period has not been paid. Since royalties are taxable on cash basis, it is not necessary for us to go into press note No. 8 (2000) relied upon by the Ld. Counsel and press note No. 9 (2000) relied upon by the Ld. Sr. DR. Accordingly it is held that the amount provided by the licensee in its books of account but not paid to the assessee is not taxable. 9. In regard to the ground No. 2, in the appeals of the revenue, the Ld. Counsel has mentioned that if royalties are taxed on receipts basis, there will be no liability to pay interest u/s 234B and 234C even on the basis of interpretation canvassed by the Ld. Sr. DR. This is a matter of verification. The other argument has been that there was no liability to pay advance tax. This is a matter on which amendment has been proposed in Finance Bill, 2012. In the circumstances, we think it fit to restore the matter to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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