Delhi Bench of Income Tax Appellate Tribunal ( ITAT ) granted relief to Spicejet. The tribunal upheld the decision of CIT(A) on instructing the Assessing Officer (AO) to verify whether the amount comes under royalty and if not deletes the addition.
The bench stated that payment for leasing or hiring equipment is not a royalty as per the provisions of the India-Netherlands Double Taxation Avoidance Agreement (DTAA).
The brief fact is that the AO has disallowed the amount of Rs. 1,32,00,000 paid to M/s KLM Engineering under section 40(a)(i) of the Income Tax Act, 1961 by entertaining the view that the payment made is in the nature of royalty, hence, required deduction of tax at source under section 195 of Income Tax Act.
After considering the submissions of the assessee, CIT(A) found that the assessee had entered into a leasing agreement with M/s. KLM Engineering and Maintenance and had taken on lease rotables.
Further stated that as per the India – Netherlands DTAA receipt from equipment leasing/hiring is not included within the definition of royalty, as applicable to the assessment year under dispute.
It was also established that M/s. KLM Engineering and Maintenance did not have a Permanent Establishment in India, hence the income was not taxable as a business profit. The CIT(A) concluded that the sum is not taxable in accordance with the Treaty Provisions.
The CIT(A) instructed the AO to verify whether the amount is exempt from taxation under the Tax Treaty and, if so, to delete the addition.
The bench of G.S. Pannu (Accountant Member) and Saktijit Dey (Judicial Member) observed the definition of royalty under the new India – Netherlands DTAA, issued vide notification No. SO-6 93[E], dated 30.08.1999, the expression “royalty” has been amended with retrospective effect from 01.04.1998.
It would mean payment of any kind received as a consideration for the use of or the right to use any copyright of literary, artistic or scientific work, including, cinematograph film, any patent, trademark, design or model, plan, secret formula or process or for information concerned, inter alia, commercial, scientific experience.
The tribunal noted that as against the definition of royalty before its amendment, wherein leasing/hiring of equipment etc. was included in the expression “royalty”, in the amended provision, amount received from leasing/hiring of equipment was specifically excluded.
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