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TMI Blog2019 (7) TMI 419X X X X Extracts X X X X X X X X Extracts X X X X ..... come for the A.Y.2014-15 was filed by the assessee on 26/03/2015 declaring total income of Rs. Nil and assessee had offered Rs. 4,92,37,120/- as royalty income under Double Taxation Avoidance Agreement (DTAA). The assessee had entered into Network Participation Agreement (hereinafter referred to as 'agreement') with Citi Bank N.A. dated 30/06/2008 pursuant to which the assessee granted non-exclusive right to Citi Bank N.A. for using the knowhow, the technical process etc., and received participation fee thereon. The assessee duly offered the said income of participation fee as royalty in its regular return of income in terms of specific clause contained in DTAA between India and USA. On this fact, there is no dispute. The said agreement was to expire on 30/06/2016 as the original agreement entered was for a period of eight years. However, the Citi Bank thought it fit to terminate the said agreement and accordingly, entered into yet another agreement with the assessee on 07/01/2014 to terminate the agreement w.e.f. 31/12/2014. The said termination agreement / understanding mandated Citi Bank N.A to pay a compensation of USD$ 10 lakhs equivalent to Rs. 6,22,66,501/- to the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpressions used in the agreement are as under:- DD. Diners Club Acquiring Business- The business of establishing and maintaining relations and arrangements with Member Establishments and International Member Establishments to permit the use of Cards and Accounts for purchasing goods and services, in accordance with the terms of this Agreement and the IOM, EE. Diners Club Card Business - The Diners Club Issuing Business and the Diners Club Acquiring Business, collectively, FF. Diners Club Issuing Business- The business of issuing Cards and Accounts to Card members and Customers and servicing the use of Cards and Accounts, the provision of other related services to Card members or Customers, in accordance with the terms of this Agreement and the IOM. GG. Diners Club Network- The worldwide system, currently identified by the use Member Establishments, permitting the provision of services to Card members and Customers, Establishments and International Member Establishments. HH. Diners World Settlement Systems- The international clearing system I by or on behalf of DCI for the settlement of transactions and fund transfers among , Other Participants ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... now-How and DCI Merchant Data relevant to the operation of the Diners Club Issuing Business in the Territory; (ii) the non-exclusive right to operate a Diners Club Acquiring Business in the Territory and use all Know-How and DCI Merchant Data relevant to the operation of the Diners Club Acquiring Business in and (iii) the right to access the Diners Club Network for the purposes described In Clauses (i) and (ii) above (whether or not the network is called the Diners Club Network and regardless of what other names or trademarks are used by said network), in each case during term of this Agreement and for the purposes of operating such Diners Club Card Businesses, but for no other purpose. B. Subject to the terms and conditions of this Agreement, the Trademark License Agreement and the IOM, Participant access the grant of the rights described in Section 2,1 A hereof and agrees that it shall not conduct its Diners Club Card Business outside the Territory, except to the extern that it is party to another agreement with DC! expressly authorizing it to conduct a Diners Club Card Business outside the Territory. C. At all times during any term of this Agreement, DCI shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee which was entered at the behest of Citi Bank N.A, pursuant to which the original agreement dated 30/06/2008 stands terminated effective from 31/12/2014. The relevant clauses in the said termination agreement are reproduced herein below. "Based on our prior discussions and exchange of "proposals for conclusion of this matter, we now set fort; our understanding of the terms and conditions that we have agreed upon for our final agreement: NPA Termination - As of the date of this Agreement, Citibank shall no longer have any right to issuers Diners Club cards in the Territory defined in the NPA. The NPA shall be terminated effective as on December ,31, 2014. As consideration for the payment by Citibank pursuant to the terms of this Agreement, DCI waives its rights related to Excluded Merchant Data and Customer Data under Sections 4 of the NPA. Disposition of Existing Diners Club Accounts- With effect from the date of signing this agreement the Diners Club customer card accounts may be closed and the customer may be solicited for other card products by Citibank. Citibank agrees that it shall inform Diners Club card holders that, if they desire to continue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax as royalty. In addition to this, the assessee had received termination compensation of Rs. 6.22 crores from Citi Bank N.A.. Pursuant to the termination agreement dated 7.1.2014 with effective date from 31.12.2014 and pursuant to receipt of compensation thereon to the tune of Rs. 6.22 crores , the assessee had not provided any technical knowhow, technical process, secrets, etc as provided in the original agreement dated 30.6.2008 to Citi Bank N.A.. Hence the subject mentioned compensation receipt cannot be attributed for the use of those knowhow, process, secrets etc. 5.4. We find that the term 'Royalty' is defined in the Act u/s.9(i)(vi) as under:- "Income deemed to accrue or arise in India. 9. (1) The following incomes shall be deemed to accrue or arise in India :- (vi) income by way of royalty payable by- (a) the Government ; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al or scientific equipment but not including the amounts referred to in section 44BB; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v)." 5.5. We find that the term 'royalty' is also defined in Indo-US DTAA as under:- ARTICLE 12 ROYALTIES AND FEES FOR INCLUDED SERVICES "3. The term "royalties" as used in this Article means : (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; Provided that sub-clause (a) shall not apply to- (i) any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business [or profession], which is chargeable under the head "Capital gains"; (ii) any sum received as compensation, from the multilateral fund of the Montreal Protocol on Substances that Deplete the Ozone layer under the United Nations Environment Programme, in accordance with the terms of agreement entered into with the Government of India. Explanation.-For the purposes of this clause,- (i) "agreement" includes any arrangement or understanding or action in concert,- (A) whether or not such arrangement, understanding or action is formal or in writing; or (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings; (ii) "service" means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as accounting, banking, co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 5.10. In view of the aforesaid facts and the relevant provisions discussed in detail hereinabove, we hold that the 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:- a. The ld. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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