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Income Tax Appellate Tribunal, MUMBAI BENCH “I”, MUMBAI
Before: SHRI MAHAVIR SINGH, VICE-&SHRI RAJESH KUMAR
Per Rajesh Kumar, Accountant Member:
This appeal by the assessee is directed against the order of the DRP-2 Mumbai, dated 14.12.2015, u/s. 144C(5) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) relating to A.Y. 2012-13.
The assessee has raised following Grounds of appeal: “1.0 Re: Amounts received for leasing of alloys taxed as royalty:
1.1 The Assessing Officer has erred in taxing the amount of Rs. 2,72,37,701/- receivedby the Appellant during the year under consideration for leasing of alloy as 'royalty'. 1.2 The Appellant submits that considering the facts and circumstances of its case and thelaw prevailing on the subject the lease rentals received by the Appellant do not fall within the purview of the term 'royalty' and the stand taken by the Assessing Officer in this regard is misconceived, illegal, erroneous and incorrect.
1.3 The Appellant submits that the Assessing Officer be directed to delete the addition of Rs.2,72,37,701/- so made by her and to re-compute its total income and tax thereon accordingly.
Without prejudice to the foregoing 2.0 Re.: Incorrect tax rate applied 2 : 1 The Assessing Officer has erred in not taxing the alleged royalty at the rate of 10% u/s.11 5A of the Income-tax Act, 1961.
2.2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject the lease rentals received by the Appellant even if taxable as 'royalty' ought to be taxed at the rate of 10 % in terms of section 1 15A of the Income-tax Act, 1961 and the stand taken by the Assessing Officer in this regard is misconceived, illegal, erroneous and incorrect.
2.3 The Appellant submits that the Assessing Officer be directed to re- compute the total income and tax liability of the assesse accordingly.
3.0 Re: Levy of interest u/s 234B of the Income-tax Act, 1961:
3.1 The Assessing Officer has erred in levying interest u/s. 234B of the Income-tax Act, 1961 on the Appellant.
3.2The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject no interest u/s. 234B is leviable and the stand taken by the Assessing Officer in this regard is misconceived. incorrect, erroneous and illegal.
3.3 The Appellant submits that the Assessing Officer be directed to delete the interest u/s. 234B so levied on it and to re-compute its tax liability accordingly.
4.0 Re: General 4.1 The appellant craves leaves to add, alter, amend, substitute and/or modify in any manner whatsoever all or any of the foregoing grounds of appeal at or before the hearing of the appeal.”
3. The issue involved in Ground no.1 is against the final assessment order dated 28.01.2016 passed u/s 143(3) r.w.s. 144C(13) of the Act in pursuance of direction of of the DRP wherein the lease rentals amounting to Rs 2,72,37,701/- was treated as royalty and taxed accordingly. The facts in brief are that the assessee being a non- resident company incorporated in accordance with the corporate laws of United States of America and a tax resident of that County. The assessee has filed return of income on 28.11.2012 declaring total income at “Nil” and claimed refund of Rs 47,47,635/-, which was processed u/s. 143(1) of the Income Tax Act, 1961. Thereafter, the case of the assessee was selected for scrutiny and notices u/s. 143(2)/142(1) were issued and served on the assessee. During the year under consideration, the assessee has leased out an alloy comprising of rhodium and platinum to ‘Owens-Corning (India) Pvt. Ltd.’ (OCIPL) and Owens Corning Industries (India) Private Limited (OCIIPL) and received lease rentals in respect thereof. Besides, the assessee has also provided engineering services to OCIPL. The assessee has not offered ,income received by way of lease rentals, of Rs 2,72,37,701/- to tax in its return of income. The assessee is a US Company and a group concern of Owens Corning, which is a leading manufacturer of glass. As stated above, OCIPL is engaged in manufacture of glass fibres in India by using bushings that are made of precious metals like Platinum and Rhodium. Another company OC NL Invest Cooperatief (OCNLIC) a company incorporated in the Netherlands has the rights to grant licenses of technology/intellectual property used in making of glass fibre using bushings. OCNLIC has, by Technology License agreement dated 27.01.2011, granted OCIPL, a license to manufacture glass fibres. The license granted by this agreement includes the intellectual property in the bushing and specifically provides that OCIPL will purchase all precious metals required in order to maintain the bushing from OCNLIC or its affiliates, which includes the assessee also. OCIPL has paid OCNLIC royalty @4% of net sales as the consideration under the Technology License agreement dated 27.01.2011, which has been taxed in the hands of OCNLIC as royalty in India.Since the bushing wears out after approx. 250 days of use, OCIPL needs to refurbish and re-fabricate the bushings after approx. 250 days by melting down the bushing, adding required quantities of alloy, and re-fabricating each bushing, which process is done by Owens Corning (Singapore) Pte Ltd ('OCSPL'), a Singapore company.The said OCIPL leases in the quantity of alloy required to fabricate/refurbish the bushing from the assessee. Lease rentals are paid by OCIPL to the assessee based on the total weight of alloy leased on a monthly basis. The Master Lease Agreement dated 1 April 2007 between OCIPL and the assessee has also been filed before the Bench which provides for the terms and conditions. For the financial year ended on 31.03.2012, the assessee received Rs 2,72,37,701 from OCIPL and OCIIPL towards lease rental of alloys. The AO treated the amount of lease rentals as royalty on the ground that these were earned out of license to use intellectual property rights in the form of drawing and designs of the bushings and the same is taxable under Article 12(3) of the DTAA between India and USA and section 9(1)(vii) read with Explanation 5 of the Income-tax Act. The assessee has challenged the final assessment order passed in pursuance of the order of the DRP. The DRP whiel rejecting the appeal of the assesee on this issue has observed and held as under:
7.1 TheAppendix 1, Grounds of objection NO. 1,2 & 3 relates to treatment of an amount of Rs.2,72,37,701/- as 'royalty' income. The facts are that the assessee is a company based in USA and belongs to Owens Corning Croup, which is a leading manufacturer of glass. M/s Owens Coming India Pvt. Ltd. (OCIPL) is an India company and isengaged in manufacture of glass fibers in India.
7.2 The 'Bushings' which are used in the process of manufacture of glass fibers are made of precious metal via Platinum and Rhodium. The average life of the busing is 250 days approximately.
7.3 As per the lease agreement between Owena Corning Inc. and Owens Corning India Pvt. Ltd., Design No. R20-2372-TT47B and 2 bushings - Design No. R20-24G9-TT7 has been leased to Owens Corning India Pvt Ltd. By Owens Corning Inc. USA. Those 10bushings received from Owens Corning inc. were deployed by Owens Corning India Pvt. Ltd, in the manufacturing process, during the financial year 2000-07 and alter every 250 days were sent for re-fabrication to Owens Corning, Singapore. The Owens Corning, Singapore received the required amount of alloys directly from Owens Corning Inc. in the form of ingots, powder form, etc, for the re-fabrication process.
7.4 At the outset, the DRP has noted that these lease rent receipt have been shown as royalty and has been offered to tax by the assessee company for the A.Y. 2007-08, Since, the factual position remains the same, the lease rental receipts have been rightly treated as royalty by the AO for the current year under consideration.
7.5 It is noted by the DRP that the alloy is an ingredient of the bushing. In fact, the main asset which is leased out as per the master lease agreement dated 02,04,2007 is the license to use the intellectual property rights in the form of drawing and designs of the bushing. Therefore, it is not the alloy of the bushing bull the license to use the intellectual tights of the design of the bushing. The DRP has noted that ii is immaterial ah to whether the original bushing has changed its form of not but what is important is the right of the assessee to use the intellectual property right in the design of bushing, provided under the said lease agreement. The DRP is of the view that the receipts of the assessee under the lease agreement is actually in the nature of royalty. This royalty has been paid for obtaining the license to use the intellectual property rights/beneficial rights of the drawing and designs of the bushing and arc clearly taxable under Article 12(3) of the DTAA between India and USA and Section 9(l)(vi) read with. Explanation 5 of the I T.Act, 1961.
7.6 In view of the above detailed discussion, the above Ground of Objection No, 1, 2 &3 of the company is rejected.”
The learned AR submitted before the Bench that the assessee merely provides alloys to OCIPL and OCIIPL for which it charges lease rentals based on a defined formula clearly based on the weight of metal alloy leased, which is evident from the Master Lease Agreement dated 01.04.2007 entered into between the assessee and OCIPL. The fact that alloys have been provided to OCIPL can be seen from Exhibit No.1 of the Agreement, copy of which has been submitted at page no.4 of the paper-book submitted vide submission dated 1.12.2018. The ld AR submitted that the assesse provides only metal alloys by referring to copy of invoice filed in the paper book.The ld AR argued that metal alloys provided by the assesse to OCIPL and OCIIPL are used in the re-fabrication and refurbishing of bushings which are used by these companies in the process of manufacture of glass fibres. The bushing are re-fabricated by the s separate Singapore entity called OCSPL. The ld AR submitted that the royalty in connection with the design of bushings is already paid by these companies as part of technology license Agreement with OCNLIC which is filed at page no. 27-50of the paper book filed on 4.11.2020. The ld AR submitted that the as is evident from the agreement that OCNLIC has the right to grant sublicense to the Intellectual Property in the territory and OCIPL pays royalty towards all the know how including design , drawings for bushings. The ld AR submitted that such royalty is subject to tax withholding by OCIPL in India. The ld AR while referring to agreement between OCIPL and OCNLIC pointed out that purchase of alloy is a separate requirement and has been provided in clause VI-G which states that OCIPL should purchase all precious metals, equipment and alloy services from OCNLLIC or its affiliates which includes the assesse also. The Ld. A.R. therefore, submitted that royalty for design of machine is spared by OCIPL to OCNLIC and the payment to the appellant is purely towards the alloy comprising metal of platinum and rhodium. The Ld. A.R. therefore submitted that the assessee has not provided any right to OCIPL and OCIIPL in connection with intellectual property related to the bushings and therefore without such a right being granted the consideration could not be treated as royalty. In defence of his argument the Ld. A.R. relied on the following decisions: 1. CIT vs. Neyveli Lignite Corpn Ltd. (2000) 243 ITR 559 (Mad.) 2. Bharti Airtel Ltd. Vs. ITO (2016) 47 ITR(T) 418 (Del.)
The Ld. A.R. finally prayed that in view of the above ground No.1 may kindly be allowed.
5. The learned DR, on the other hand,submitted that the consideration received by the assesse is only royalty and has rightly been held by the DRP. The Ld. D.R. filed a detailed submission which is reproduced as under: “During the course of clarification, the synopsis in the case is submitted as under. “….that the amount received by the appellant for leasing of alloy be held as Fees for Included Services (FIS). However, the bench pointed out that the same does not emanate from the DRP's order. It was then submitted that the powers of the Tribunal does allow it to consider the issues/stand taken before it. In this regards reliance is placed on the decisions of ITAT (Bang) in the case of Bangalore International Airport Limited [TS-202- ITAT-2016(Bang)] wherein the Tribunal has considered and decided an issue which was neither raised by the appellant nor the respondent (copy attached for easy reference, along with Karnataka High Court decision on the same order subsequently, where it approved the action of the ITAT though remitting the same back for reconsideration) Various other decisions as regards the powers of ITAT are also available.
The proposition put up herein is that the appellant belongs to the Owens Corning Group of companies who are pioneers in Glass Technology. The Indian subsidiary is using the technology patented by the Parent Company (or one of its group). It is reiterated that the said technology was already in use by the Indian entity and even royalty in respect of the complete remittance was offered as royalty.
The following chart has been prepared on the basis of the Recital on Page 27 of the paper book submitted by the appellant From the above chart it is clear that the Indian company had a composite agreement since 8/4/1997 which was time and again extended and as per agreement dated 8/5/2002 (two agreements mentioned) the same was signed again on 22/7/2008 with an additional agreement on 17/12/2008 in respect of AGM technology. In the intervening period, on 20/10/2006 due to Corporate Restructuring the ongoing composite agreement for use of licensor Intellectual property, patents and trademarks seems to have been amended due to assignment of the rights by Owen Comings to OC NL Invest Cooperativ UA to sublicence its intellectual property.
The agreement referred and effective from 1/4/2007 clearly refers to the same superseding the earlier agreements. This agreement itself was valid for five years i.e upto 2012. However, the Group for whatever reasons, rearranged its working whereby the technology was transferred to a Netherland Group company and other activities divided over various group companies/subsidiaries spread over geographical areas. The agreement in this regard is dated 27-01-2011.
Various articles of the said agreement which are being relied upon are : Article 12(3), 12(4), 12(8) of the DTAA Agreement between India and USA. -to highlight the fact that the whole scheme of arrangement is to be considered in total and in view of the primary remittance being in the nature of royalty (THOUGH TO A RELATED ENTITY) the other remittances are to be held as being for the purpose of fees for included services as envisaged in the Memorandum to the DTAA treaty between USA and India. Reference is drawn to the Memorandum to the Indo-US agreement which states as under: MEMORANDUM OF UNDERSTANDING MAY 15, 1989. U.S. - INDIA TAX TREATY MEMORANDUM OF UNDERSTANDING CONCERNING FEES FOR INCLUDED SERVICES IN ARTICLE 12 Paragraph 4 (in general)
Under paragraph 4 technical and consultancy services are considered included services only to the following extent: (1) as described in paragraph 4(a), if they are ancillary and subsidiary to the application or enjoyment of a right, property or information for which a royalty payment is made; or (2) as described in paragraph 4(b), if they make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. Thus, under paragraph 4(b), consultancy services which are not of a technical nature cannot be included services. Paragraph 4(a) Paragraph 4(a) of Article 12 refers to technical or consultancy services that are ancillary and subsidiary to the application or enjoyment of any right, property, or information for which a payment described in paragraph 3(a) or (b) is received.
Thus, paragraph 4(a) includes technical and consultancy services that are ancillary and subsidiary to the application or enjoyment of an intangible for which a royalty is received under a license or sale as described in paragraph 3(a), as well as those ancillary and subsidiary to the application or enjoyment of industrial, commercial, or scientific equipment for which a royalty is received under a lease as described in paragraph 3(1).
It is understood that, in order for a service fee to be considered "ancillary and subsidiary" to the application or enjoyment of some right, property, or information for which a payment described in paragraph 3(a) or (b) is received, the service must be related to the application or enjoyment of the right, property, or information. In addition, the clearly predominant purpose of the arrangement under which the payment of the service fee and such other payment are made must be the application or enjoyment of the right, property, or information described in paragraph 3.
The question of whether the service is related to the application or enjoyment of the right, property, or information described in paragraph 3 and whether the clearly predominant purpose of the arrangement is such application or enjoyment must be determined by reference to the facts and circumstances of each case.
Factors which may be relevant to such determination (although not necessarily controlling) include:
whether the person performing the services is the same person as, or a related person to, the person receiving the royalties described in paragraph 3 (for this purpose, persons are considered related if their relationship is described in Article 9 (Associated Enterprises) or if the person providing the service is doing so in connection with an overall arrangement which includes the payor and recipient of the royalties).
To the extent that services are not considered ancillary and subsidiary to the application or enjoyment of some right, property, or information for which a royalty payment under paragraph 3 is made, such services shall be considered "included services" only to the extent that they are described in paragraph 4(b).
Example (1) Facts: A U.S. manufacturer grants rights to an Indian company to use manufacturing processes in which the transferor has exclusive rights by virtue of process patents or the protection otherwise extended by law to the owner of a process. As part of the contractual arrangement, the U.S. manufacturer agrees to provide certain consultancy services to the Indian company in order to improve the effectiveness of the latter's use of the process. Such services include, for example, the provision of information and advice on sources of supply for materials needed in the manufacturing process, and on the development of sales and service literature for the manufactured product. The payments allocable to such services do not form a substantial part of the total consideration payable under the contractual arrangement. Are the payments for these services fees for "included services"?
Analysis: The payments are fees for included services. The services described in this example are ancillary and subsidiary to the use of a manufacturing process protected by law as described in paragraph 3(a) of Article 12 because the services are related to the application or enjoyment of the intangible and the granting of the right to use the intangible is the clearly predominant purpose of the arrangement. Because the services are ancillary and subsidiary to the use of the manufacturing process, the fees for these services are considered fees for included services under paragraph 4(a) of Article 12, regardless of whether the services are described in paragraph 4(b)
The appellant's primary contention is that no services are provided and the agreement is for lease of alloy only. This is a stripped down version of the service provided. As pointed out the manufacturing technology necessarily involves the use of bushing ( which are patented items) and this bushing is manufactured/repaired by the other AE namely Owen Corning (Singapore) Pte Ltd. The alloy in its bare form is not usable and it forms part of the items used in manufacturing process and that is inclusive in the technology agreement. The leased alloy is nothing without it being used in the form of BUSHING and this forms part of technology agreement on which royalty is separately paid As this is assessee's appeal, there was no need to challenge the DRP finding of the transaction being Royalty. As the assessee is challenging the same, without prejudice, the alternate submission of it being FIS is being made now.
In a nutshell it is submitted that keeping in mind the scheme of things the remittances fall under the clause of Fees for Included Services as submitted and explained hereinabove. Hence it is immaterial whether the royalty is paid to the assessee or not (when the same is paid to an associated enterprise) as is clear from the example in DTAA Agreement and the issue is of the taxability of the receipts and not the limbs under which it is taxed.”
We have heard the rival submissions and perused the material on record. The undistinguished facts are that the assessee is a US resident company and taxed resident of USA and its income in India and its taxability is governed by the provisions of Income tax Act, 1961 as well as the India US DTAA. The assessee is engaged in the business of leasing of alloys comprising of Rhodium and Platinum, which are used in manufacture of glass fibres. The Indian subsidiary of the assessee OCIPL is engaged in the business of glass fibres in India by using bushings that are made of precious metals like Platinum and Rhodium. Another company OC NL Invest Cooperatief (OCNLIC) a company incorporated in the Netherlands has the rights to grant licenses in respect of technology/intellectual property used in making of glass fibre using bushings. OCNLIC has by Technology License agreement dated 27.01.2011 granted OCIPL, a license to manufacture glass fibres, which includes the intellectual property in the bushing and specially provides that OCIPL will purchase all precious metals required in order to maintain the bushing from OCNLIC or its affiliates including the assessee. During the year the assessee has received an amount of Rs 2,72,37,701/- from OCIPL and OCIIPL towards lease rentals of alloys. The AO treated the said receipts as royalty in terms of Article 12(3) of the DTAA between India and USA and as per section 9(1)(vii) read with Explanation 5 of the Income-tax Act and brought it to tax accordingly. The assessee, on the other hand, maintains that the said income is lease rental and not taxable in India. We note that the alloy provided by the assessee to OCIPL and OCIIPL are used in re-fabrication of bushings used by these companies in the process of manufacture of glass fibres. We note that the agreement to acquire these materials is as perthe Technology License agreement dated 27.01.2011, whereby OCIPL is granted license to manufacture glass fibre and also stipulated that OCIPL will purchase all precious metals required in order to maintain the bushing from OCNLIC or its affiliates, which includes the assesse also. Thus, the assessee has provided only alloy to these companies and charged lease rentals based on the weight of the alloy metal leased. Thus, it is clear that royalty for design of bushing is not paid by OCIPL to OCNLIC and payment to assessee is only towards lease rentals i.e. bushings made of alloys comprising Platinum and Rhodium. We note that the assessee has not provided any services to OCIPL and OCIIPL inconnection with intellectual property related to bushing and, since, the intellectual property right with regard to the bushings is with OCNLIC and assessee is merely providing alloys of Platinum and Rhodium, consideration for alloys cannot be treated as royalty. The case is covered by the decision of Hon’ble Madras High Court in the case of CIT vs. Neyveli Lignite Corpn. Ltd. [243 ITR 459], wherein it has been held that payment to be constituted as royalty should be the payment made to a person who has exclusive right over a thing for allowing another to make use of that thing. Similarly, the case is also covered by the decision of the Delhi Bench of the Tribunal in the case of Bharti Airtel Ltd. Vs. ITO (47 ITR 418), wherein it has been held that in order to receive a royalty in respect of allowing the usage or right to use any property including an intellectual property, the owner thereof must have an exclusive right over such property. We note that the technology for manufacture of glass fibre including the use of bushing has been provided by OCNLIC a Dutch Company and royalty has been paid to that Dutch Company and, therefore, the amount of lease rental on alloy which are used to refurbish the bushing cannot be again treated and taxed as royalty in the hands of the assessee by invoking the India US DTAA and provisions of section9(1)(vii) read with Explanation 5 of the Income-tax Act.
In view of these facts, we are not in agreement with the conclusion drawn by the DRP on this issue and, accordingly, set aside the directions of the DRP and direct the AO to delete the addition.
The issues raised in Ground nos. 2 & 3 are not adjudicated as they are without prejudice to Ground no.1, which we have already decided in favour of the assessee.