The Delhi bench of the Income Tax Appellate Tribunal ( ITAT) observed that the amount received as per Article 12(3) of India- United State of America (USA) Double Taxation Avoidance Agreement (DTAA)., not royalty u/s 9(1) (vi) of Income Tax Act, 1961
The issue to be decided was whether in dispute arising in the appeals relates to the taxability of administrative fee received by the assessee as royalty under section 9(1)(vi) ) of Income Tax Act, 1961, as well as under Article 12(3) of India-USA Double Taxation Avoidance Agreement (DTAA).
The assessee was a non-resident corporate entity incorporated in the United States of America (USA) and is a tax resident of the USA. It is asserted that the assessee operates as a non-profit entity, thus enjoying tax exemption status in the USA, with a copy of the tax exemption certificate available on record.
The assessee served as the exclusive global decimal administrator appointed by the mobile industry to provide International Mobile Equipment Identification (IMEI) numbers for tracking specific mobile phones. The database of IMEI numbers was maintained by the assessee outside of India. The purpose of the assessee’s operations was to combat the theft of mobile phone equipment and prevent the misuse of mobile devices for criminal activities. This was achieved by sharing information with call network providers and instructing them to blacklist specific IMEI numbers, rendering them unusable on GSM networks, thereby curbing the misuse of these particular mobile phones.
The Assessing Officer requested the assessee to justify why the administrative fees it received should not be classified as royalty under section 9(1)(vi) ) of Income Tax Act, 1961, and Article 12(3) of the India-USA Double Taxation Avoidance Agreement (DTAA). In response, the assessee provided detailed submissions asserting that the amount received did not meet the criteria for royalty under either domestic law or treaty provisions. However, the Assessing Officer remained unconvinced by the assessee’s arguments.
The Assessing Officer contended that the amount received constituted royalty as it involved the use of intellectual property such as trademarks and the provision of technical or commercial information. Similarly, he noted that the definition of royalty under Article 12(3) of the DTAA mirrored the domestic law.
The Assessing Officer highlighted that MSAI utilized the trademark of GSMA and distributed unique IMEI numbers, paying fees for the same. He asserted that the IMEI number, being a unique invention for tracking mobile devices, constituted the use of intellectual property and information related to industrial, commercial, or scientific experience. Consequently, he concluded that the administrative fee received by the assessee amounted to royalty.
The assessee challenged the Assessing Officer’s decision before the Dispute Resolution Panel (DRP) and the Commissioner (Appeals). However, both authorities upheld the Assessing Officer’s determination.
The counsel for the assessee P.P. Singh reiterated the arguments, emphasizing that the assessee neither possesses nor shares any technology for the implantation of IMEI numbers in devices. He contended that it was the responsibility of the device manufacturer to embed unique IMEI numbers into the devices they produce, as they possess the requisite technology for this purpose.
Additionally, he stressed that there was no provision of service by the assessee to MSAI or any other customer in India, therefore ruling out any question of payment towards royalty or Fees for Technical Services (FTS). Instead, he clarified that the amount exchanged between the assessee and MSAI constitutes revenue sharing, with no service charges involved.
The counsel for the revenue Sanjay Kumar argued that the fees received cannot be categorized as FTS, as the assessee does not provide any managerial, technical, or consultancy services to MSAI or any other entity in India.
He asserted that under no circumstances can the received amount be treated as royalty, as it is not payment for the use or right to use copyright, literature, artistic or scientific works, or motion picture films, nor for the use or right to use any industrial, commercial, or scientific equipment. He concluded that the received payment does not fall under either section 9(1) (vi) of Income Tax Act, 1961, or Article 12(3) of the India-USA DTAA.
The bench considered the arguments presented by both sides and examined the evidence on record. As previously discussed, the assessee functions as a global decimal administrator appointed by the mobile industry to provide unique identification numbers known as IMEI or TAC for tracking mobile devices. As highlighted by the learned counsel for the assessee, this entity was the sole provider of these numbers worldwide. Moreover, reiterating its non-profit status, the assessee enjoys tax exemption in the USA.
According to Article 12(3) of the India-USA Double Taxation Avoidance Agreement (DTAA), the remuneration received did not qualify as royalty. This was because the compensation received could not be interpreted as payment for the use or right to use any copyrighted literary, artistic, or scientific works, including motion pictures or works on film or videotape used in connection with television. Furthermore, it could not be considered payment for any patent, trademark, design, model, plan, secret formula, or process. Similarly, it did not pertain to information regarding industrial, commercial, or scientific expertise, nor did it involve payment for the use or right to use industrial, commercial, or scientific equipment.
The two member bench of the tribunal comprising G.S.Pannu ( Vice President) and Saktijit Dey ( Vice President) concluded that the remuneration received by the assessee does not meet the criteria for royalty under both section 9(1)(vi) ) of Income Tax Act, 1961, and Article 12(3) of the India-USA DTAA. Accordingly, instruct the Assessing Officer to remove the additions for both disputed assessment years.
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