OWENS CORNING ,MUMBAI vs. THE DEPUTY COMMISSIONE OF INCOME TAX _(INTERNATIONAL TAXATION)-CIRCLE-3(2)(2), MUMBAI

The ld. AR submitted that the issue of treating the receipts towards lease rental as Royalty is a recurring issue and that the co-ordinate bench in assessee's own case has deleted the addition made by the AO in AY 2012-13 to 2014-15, 2017-18 to 2019-20. The ld. AR further submitted that the lease rental income received by the assessee for the year under consideration is under the same agreement as applicable in the above AYs and therefore the issue is covered by the decision of the Co-ordinate Bench.

The ld. DR on the other hand submitted a written note in support of the order of the AO and the finding of the DRP.

We have heard the parties and perused the material available on record. We noticed that the co-ordinate bench has considered the similar issue in assessee's own case for AY 2019-20 (ITA No. 2042/Mum/2022 dated 15.02.2022) where it has been held that “6. We have heard the rival contentions and perused the record. As submitted by the learned AR, we noticed that this is a recurring issue and the Coordinate Bench of the Tribunal has examined this issue in assessee’s own case in relating to A.Y. 2012-13. The coordinate bench of Tribunal, vide its order dated 4.10.2021, has held that the lease rental income received by the assessee on leasing of alloys cannot be treated as royalty in the hands of the assessee in terms of India-USA DTAA and also under provisions of section 9(1)(vi) of the I.T. Act. For the sake of convenience we extract below the operative portion of the order passed by the Tribunal in A.Y. 2012-13 (referred supra) : “6. 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 in connection 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 section 9(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.”

During the course of hearing the ld. AR submitted the copy of lease agreement under which the impugned payments are made. From the perusal of the said agreement, we notice that the lease payments made during the year are identical to the payments made during the earlier year under the said agreement.

In the result, the appeal of the assessee is allowed.