AIRCON BEIBARS (FZE),NEW DELHI vs. DCIT CIRCLE-1(1)(1) INTERNATIONAL TAXATION, NEW DELHI

per the provisions of the Act as well as India – UAE Treaty, royalty

income can be taxed purely on receipt basis. In support of such

contention, he relied upon the following decisions:

dated 22.10.2012

taxmann.com 102 (Mumbai)

misconceived the provisions of section 279 of the Companies Act,

2013 while concluding that as per the said provision, the assessee

should have accounted for its income on accrual basis. He

submitted, the first appellate authority has completely overlooked

the fact that section 279 of the Companies Act applies in specific 5 | P a g e

ITA No.4721/Del/2019 AY: 2015-16

condition. He submitted, as per the established facts on record,

except the TDS credit, the assessee did not receive any amount of

income from the Indian entity during the year. He submitted, at

best, TDS credit could be treated as business income of the

assessee. However, in absence of a PE in India, such income is

not taxable in India. Thus, he submitted, the addition made

should be deleted.

authorities, the learned Departmental Representative submitted,

section 9(1)(vi) of the Act clearly provides for taxability of income

from use or right to use of equipment as royalty. He submitted,

identical provision is contained under Article 12(3) of India – UAE

DTAA. He submitted, unlike some other treaties, India – UAE

DTAA does not provide for exclusion of aircraft/helicopter from

being treated as equipment. Thus, he submitted, in view of such

clear provision, both under the Act and the treaty, the income

from leasing of the helicopter has to be treated as royalty. As

regards assessee’s claim that no lease income was received during

the year, learned Departmental Representative submitted that the

royalty income can also be taxed on accrual basis.

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decisions relied upon and perused the materials on record. The

short issue arising for consideration is whether the alleged lease

income received by the assessee towards leasing of a helicopter is

taxable as royalty income under the provisions of Act as well as

under the treaty provisions. Undisputed facts are, by virtue of a

dry lease agreement executed on 03.07.2012, the assessee had

leased a helicopter to an Indian entity M/s. Heligo Charters Pvt.

Ltd. for a period of 3 years. It is also an undisputed fact that in

the financial year relevant to the assessment year under dispute,

the assessee had raised only four invoices for the months of April,

2014 to July, 2014 for an amount of Rs.1,43,59,792/-. It is

established on record, due to serious dispute between the parties

regarding the terms of lease and other issues, the assessee did

not receive any payment towards leasing of the helicopter from

the lessee, leave alone, the amount for which four invoices were

raised. It is also a fact on record that the parties went into

litigation on the issue of implementation of the terms of lease

agreement through arbitration proceeding and thereafter before

the Hon’ble Bombay High Court.

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sale of the helicopter to the lessee for an amount of USD $

5,00,000, however, ultimately, the sale of helicopter did not

happen as the assessee challenged the arbitration award before

the Hon’ble Bombay High Court and a Single Judge Bench of the

Hon’ble Bombay High Court stayed the arbitration award. The

injunction granted by the Hon’ble Single Judge of the Hon’ble

Bombay High Court was subsequently confirmed by Hon’ble

Division Bench of the Hon’ble Bombay High Court. While

dismissing the appeal filed by Heligo Charters Pvt. Ltd.. The

aforesaid facts clearly reveal that though in Form 26AS the

amount of Rs.5,28,58,080/- was reflected as the income

paid/credited to the assessee, since, the lessee deducted tax on

the said amount, however, in reality the assessee did not receive

even a single rupee towards lease income.

acknowledged the aforesaid factual position, which is clearly

reflected in the observations made in paragraph 6.20 of the first

appellate order. Keeping in perspective the aforesaid factual

position, it has to be decided whether the so called royalty income

is taxable at the hands of the assessee on notional basis. Article 8 | P a g e

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12 of India – UAE DTAA deals with taxability of royalty. As per

paragraph 1 of Article 12, royalty income paid to a resident of

another contracting State is taxable in that State. However,

paragraph 2 provides that such royalty income arising in the

source State can also be taxed in the source state in accordance

with domestic law of that State. However, if the recipient of

royalty income is a beneficial owner, the tax chargeable shall not

exceed 10% of the gross royalty income. Paragraph 3 of Article 12

defines the term ‘royalty’ to mean, payment of any kind received

as a consideration for the use of or the right to use of copy right,

patent, trademark, secret formula, processes, industrial,

commercial or scientific equipment, etc. Thus, as per the

definition of royalty in paragraph 3 of Article 12, the royalty

income has to be received for use or right to use of any copyright,

trademark, patent etc. In the facts of the present appeal,

admittedly, no income was actually received by the assessee from

the lessee. This factual position has been accepted by the

departmental authorities.

12 of India – UAE DTAA is not fulfilled. In this context, we may

refer to the decision of the Coordinate Bench in case of ADIT (IT- 9 | P a g e

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3) Vs. Johnson & Johnson (supra), wherein, the Hon’ble Bench

dealt with pari materia provision contained in India – USA DTAA. In any case of the matter, the receipt of lease income is fraught

with uncertainties as parties are in dispute and litigations are

pending for past so many years. Even, there is no likelihood of

end of the litigation in near future. In the aforesaid scenario, it

cannot be said that the assessee has received any royalty income,

either under the domestic law or under the treaty provisions.

Further, in our considered opinion, the expression ‘received’ used

in paragraph 3 of Article 12 of India – UAE DTAA read in

conjunction with paragraph 1 & 2 of Article 12 would mean

‘actual receipt’ of royalty and not any receipt on accrual or

deemed basis. At this stage, it is necessary to observe, though,

the Assessing Officer had treated an amount of Rs. 5,28,58,080/-

as royalty income of the assessee during the year purely based on

the amount shown in Form 26AS, however, learned

Commissioner (Appeals) has restricted the addition to

Rs.1,43,59,792/- purely based on the four invoices raised by the

assessee. When the admitted factual position is that the assessee

has not even received any amount against those four invoices, in

our view, the royalty income cannot be added on notional basis. 10 | P a g e

ITA No.4721/Del/2019 AY: 2015-16

Thus, we direct the Assessing Officer to delete the addition of Rs.

1,43,59,792/- sustained by learned Commissioner (Appeals).

is not taxable under Article 12(3) of India – UAE DTAA as no

royalty income was actually received by the assessee in this year,

we do not find it necessary to go into the issue, as to whether the

amount in dispute can at all be treated as equipment royalty both

under the domestic law as well as under treaty provision. Hence,

the issue is kept open.

Order pronounced in the open court on 31st July, 2023

Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT VICE PRESIDENT Dated: 31st July, 2023. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi

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