Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “I”, BENCH
Before: SHRI M.BALAGANESH, AM & SHRI RAVISH SOOD, JM
आदेश / O R D E R PER M. BALAGANESH (A.M):
This appeal filed by the assessee is directed against the order of Commissioner of Income Tax (Appeals) -56 [hereinafter referred to as the ld CITA], Mumbai dated 07/11/2017 for A.Y. 2014-15 in the matter of order passed u/s.143(3) r.w.s. 144C(3) of the Income Tax Act, 1961.
The only issue to be decided in this appeal is as to whether the compensation received by the assessee on termination of network M/s. Diners Club International Club Ltd., participation agreement from Citibank N.A. could be construed as royalty as against business income claimed by the assessee in the facts and circumstances of the case.
The brief facts of this issue are that the assessee is a non-resident company operating global card / payment network. The return of income 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. The assessee accepted that the said compensation received M/s. Diners Club International Club Ltd., 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 agreement effective from 31/12/2014 emanated only out of the original agreement dated 30/06/2008 and hence could have to be construed as a continuation of the original agreement dated 30/06/2008. Accordingly, the Ld. AO held that the subject mentioned compensation received in the sum of Rs.6.22 Crores also partakes the character of royalty on the premise that it flows from the original agreement dated 30/06/2008. With these observations, the Ld. AO taxed the sum of Rs 6.22 crores as royalty under the head ‘income from other sources’. This action of the ld. AO was upheld by the ld. CIT(A).
Aggrieved, assessee is in appeal before us.
We have heard the rival submissions. It would be relevant to understand the scope of the original network participation agreement dated 30/06/2008 which are reproduced as under:- “THIS NETWORK PARTICIPATION AGREEMENT ("Agreement") is made effective on this 30th day of June 2008. ("Effective Date") between DINERS CLUB INTERNATIONAL LTD. a corporation organised and existing under the laws of the State of New York, U.S.A. (“DCI”) and CITIBANK, NA, MUMBAI BRANCH, the Mumbai, India branch ("Participant") of Citibank, N.A., a United States national banking association.
M/s. Diners Club International Club Ltd., Recitals DCI and Participant previously entered into a Network Participation Agreement, dated as of August 1, 2003 (along with the amendments and ancillary documents thereto, the "Old NPA”). Pursuant to a Stock Purchase Agreement dated as of April 4,2008, an Affiliate of Discover has agreed to purchase DCI from Citibank, N,A., an Affiliate of Citigroup; and It is a condition to the closing of such Discover Affiliate's purchase of DCI that DCI and Participant, as an Affiliate of Citigroup terminate the Old NPA and replace it m its entirety with this Agreement on and as of the Effective Date; The relevant definitions of certain expressions 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 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 developed, plus (b) all other gross revenue received by Participant devolving in any way from Participant's use of the Trademarks and related goodwill, plus (c) the total face amount of all M/s. Diners Club International Club Ltd., sales by Participant of Diners Club product and services not otherwise included in clauses (a) and (b) above, plus (d) the amount of any interest and principal installment payments received by Participant on bans to Card members and Customers not otherwise included in clauses (a) and (b) above; in each case without deduction, offset, exclusion or omission of any kind and calculated on a monthly basis. TT. International Operations Manual (“IOM”) - The uniform set of guidelines for the conduct of Diners Club Card Businesses worldwide, including without operational, procedural and technical matters necessary or useful to the functioning of Diners Club Network, as amended from time to time, as applicable to Participant in accordance with this Agreement. UU. All information about the operation of the Diners Club Card Business (including, but not be limited to, operating procedures, product parameters, marketing techniques, intellectual property incorporating Trademarks, software, business methods, analytical tools and the like,, but excluding Participant Data , Merchant Data and Customer Data), in any form, developed by DCI, any Other Participant or any sub franchisee of any Other Participant or, to the extent used primarily in the Diners Club Card Business, developed by Participant provided, that Know-How shall exclude information developed under Co-Branding Arrangements. PPP. Payment Multiple- The applicable multiple set forth on Exhibit 5.1A. ARTICLE II PARTICIPATION IN THE DINERS CLUB NETWORK Section 2.1 Grant of Rights A. Subject to the terms and conditions of this Agreement the Trademark License Agreement and the IOM, DCI grants to Participant (i) the exclusive right, subject to Section 2.1D, to operate a Diners Club Issuing Business in the Territory and exclusively (as to all persons other than DCI and its Affiliates) use in the Territory all Know-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.
M/s. Diners Club International Club Ltd., 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. In the event that Participant's annual Turnover shall be less than $81,253,000 for any year of this Agreement during the Initial Term, then unless there shall have been a Market Disruption affecting Participant during such year, DCI shall provide Notice to Participant of the same, and unless there shall be a Market Disruption affecting Participant during, or participant's annual Turnover shall equal or exceed $81,253,000 for, the succeeding year of this Agreement, Participant's tights described in Section 2.1A(i) hereof shall cease to be exclusive in the Territory. E. To the extent Participant Data is provided to DCI under this Agreement, the Trademark License Agreement or the IOM, Participant grants to DCI the non-exclusive right to use such Participant Data during the term of this Agreement and for purposes of operating the Diners Club Network, but for no other purpose. F. The parties acknowledge that in conducting its Diners Club Acquiring Business, the Participant may have used, and may continue to use, third Person acquirers.” ARTICLE IV TERM OF AGREEMENT “Section 4.1 Initial Term. This Agreement shall be effective for a period of eight (8) years from the Effective 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.” (underlining provided by us)
M/s. Diners Club International Club Ltd., 5.1. The assessee pursuant to this agreement was entitled to participation fee, cross border fees and other fees which were duly offered by it as royalty income in accordance with the Clauses mentioned in Indo-US DTAA, on which fact, there is no dispute before us.
5.2. Now, it would be relevant to look into the relevant clauses of the termination agreement dated 07/01/2014 entered into between Citi Bank, N.A. and assessee 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 to have a Diners Club card they should contact HDFC Bank using information provided to a card holder by Citibank. Citibank agrees to give DCI prior notice and an opportunity to review and approve the communication to customers about the change in their account status and shall also provide to DCI the content and timing of the customer communication plan. DCI and Citibank agree that Citibank may commence the customer process as of the time that the Termination Fee is paid as set out below.
M/s. Diners Club International Club Ltd., Termination Fee - As consideration to DCI for its agreement on the matters set out in this Agreement, but especially the intended termination of the existing NPA prior to its normal expiration, Citibank agrees to remit the sum of One Million Dollars ($1,000,000) to DCI in January, 2014 as full and final payment from Citibank for early termination of the NPA Agreement. Upon such payment, neither Citibank nor any of its affiliates shall be liable for any other payment or consideration for early termination of the NPA Agreement. This payment does not modify or eliminate any obligation of Citibank to pay amounts otherwise due under the NPA in the normal course of business' prior to the final termination of the NPA accordingtothe terms of the NPA.” (emphasis supplied by us)
5.3 The assessee pursuant to this termination agreement, received compensation of Rs.6.22 Crores, which was treated by the assessee as business receipt and since, the assessee did not have any permanent establishment in India, as claimed by it, the assessee stated that the subject mentioned compensation receipt is not liable to be taxed in India as per Article 7 of Indo- US DTAA. The ld. AO however, held that the said compensation flows from the original agreement dated 30/06/2008 though characterized as termination agreement and the same was received only for rendering same type of services by the assessee to Citi Bank, N.A. Accordingly, the ld. AO held that the said compensation also partakes character of royalty to be taxed under the head ‘income from other sources’. It is not in dispute that the assessee had allowed the usage of knowhow, technical process, secrets etc to Citi Bank N.A. upto the period ending 31.12.2014 as per the original Network Participation Agreement dated 30.6.2008 and had also received ‘participation fee’ thereon for the same period and had offered the same to tax as royalty.
M/s. Diners Club International Club Ltd., 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 source outside India ; or (c) a person who is a non-resident, 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 in India or for the purposes of making or earning any income from any source in India :
Provided that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the M/s. Diners Club International Club Ltd., imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976, and the agreement is approved by the Central Government :
Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India.
Explanation 2.—For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for— (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret 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 M/s. Diners Club International Club Ltd., (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 information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and (b) payments of any kind received as consideration for 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.”
5.6. We find that the compensation received by the assessee does not fit into any of the definition of royalty either under the provisions of the Act or as per the definition contained in DTAA. We find from Article 7 of Indo- US DTAA that the subject mentioned compensation is to be taxed only in USA and not in India. The relevant portion of Article 7 is reproduced hereunder:- “The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other M/s. Diners Club International Club Ltd., Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment ; (b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment ; or (c) other business activities carried on in the other State of the same or similar kind as those effected through that permanent establishment.”
5.7. We find that the assessee’s case squarely falls under Section 28 (va)(b) of the Act which is reproduced hereunder:- “Profits and gains of business or profession.
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 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 M/s. Diners Club International Club Ltd., (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, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging;]”
5.8. Hence it can be safely concluded that the subject mentioned receipt is only a business receipt falling under the head profits and gains of business or profession of the assessee. In this regard, we find that the ld. CIT(A) had erroneously applied the provisions of Section 28(ii)(a) of the Act which only talks about the termination of terms and conditions of managerial remuneration by way of an agreement or understanding and is absolutely not relevant to the issue under dispute before us. As stated above, the relevant provision that is applicable in the instant case is 28(va)(b) of the Act. We find that the ld. 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 ld. CIT(A) is incorrect in as much as Article 4 containing the term of agreement impliedly provided for earlier termination. For the sake of convenience, the relevant article is hereby reproduced :-
M/s. Diners Club International Club Ltd., TERM OF AGREEMENT “Section 4.1 Initial Term. This Agreement shall be effective for a period of eight (8) years from the Effective 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 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 M/s. Diners Club International Club Ltd., 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. b. Assessee should also provide evidence before the ld. AO to prove that the said compensation has been duly subjected to tax in USA as per the relevant Article 7 of Indo-US DTAA.