TMI Blog2019 (7) TMI 419X X X X Extracts X X X X X X X X Extracts X X X X ..... e before us. The relevant provision that is applicable in the instant case is 28(va)(b). CIT(A) has also observed that there is no provision in the original agreement dated 30/06/2008 for early termination. In this regard, we find that this observation of the CIT(A) is incorrect in as much as Article 4 containing the term of agreement impliedly provided for earlier termination As already held that the compensation received by the assessee is only business receipt in the hands of the assessee - whether the assessee is having a permanent establishment in India or not has not been verified by the lower authorities. This was only a claim of the assessee right from the beginning commencing from the level of the AO. We find 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. Assessee s case falls u/s.28(va)(b) and hence the compensation received by the assessee is to be treate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c., 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 ₹ 6,22,66,501/- to the assessee. The assessee accepted that the said compensation received takes the character of the revenue receipt received in the ordinary course of its business and offered the same under the head income from business . Since the assessee did not have a permanent establishment in India, as claimed by it as per Article-7 of Indo-US DTAA, the said receipt is not taxable in India in the hands of the assessee and is taxable only in USA. The ld. AO observed that the termination ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement 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 and DCI. PP. Gross receipts. The aggregate of (a) Participant's total gross billings (including any late fees, annual fees or any other similar charge) billed to its Card members or its Customers for any Diners Club product or service now existing or hereafter develope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 use commercially reasonable efforts to operate the Diners Club Card Business consistent with past practice. D. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... participation fee thereon for the same period and had offered the same to tax as royalty. In addition to this, the assessee had received termination compensation of ₹ 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formula or process or trade mark or similar property ; ( iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; ( iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; ( iva) the use or right to use any industrial, commercial 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er:- Profits and gains of business or profession. 28. The following income shall be chargeable to income-tax under the head Profits and gains of business or profession ,- ( va) any sum, whether received or receivable, in cash or kind, under an agreement for- ( a) not carrying out any activity in relation to any business or profession; or ( b) not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ective Date (the Initial Term ) and, unless earlier terminated or extended in accordance with the provisions of this Section 4,1 hereinafter set forth, shall expire at 11:59 p.m. New York time on the day before the eighth {8th} anniversary of the Effective Date, This Agreement shall be subject to renewal for a renewal term of five (5) years each (the Renewal Term ), The Renewal Term shall be commence on the day following the expiration date of the Initial Term and shall expire at 11:59 p.m. New York time on the day before the fifth (5th) anniversary of the date of its commencement. 5.9. We have already held hereinabove that the compensation received by the assessee is only business receipt in the hands of the assessee. We find that the fact is as to whether the assessee is having a permanent establishment in India or not has not been verified by the lower authorities. This was only a claim of the assessee right from the beginning commencing from the level of the Assessing Officer. We find 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 exist ..... X X X X Extracts X X X X X X X X Extracts X X X X
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