The Income Tax Appellate Tribunal (ITAT) Bangalore bench while granting relief to ABB Switzerland held that income received from India by way of Royalties should be taxed in India only on receipts basis under the India-Switzerland Double Taxation Avoidance Agreement (DTAA). The bench also observed that which was not taxed on accrual basis.
The Assessee, ABB Switzerland Ltd is a company incorporated and operating in Switzerland.Assessee company filed its return for assessment year 2014-15 by declaring total income of Rs.184,07,46,733 as special income (royalty income).
The case was selected for scrutiny with a reason ‘International Transaction(s) in respect of intangible property and Large International transaction(s) Statutory notices were served on the assessee.
After that the transfer pricing officer did not make any adjustment u/s. 92CA r.w.s. 92C to the ALP determined by the assessee in respect of international transactions with its AE.
During the assessment proceedings, the AO observed from the Form 3CEB that the assessee had received Rs.185,69,65,563/- as royalty from M/s. ABB India Ltd. but in the return of income the assessee had offered only Rs.184,07,46,730/-.
A show cause notice was issued to the assessee on the difference in respect of royalty income. In response, the assessee claimed that ABB India Ltd. had unilaterally established a provision for royalty payments in the amount of Rs. 1,62,18,833/- and that the assessee company had not filed any bills to match this provision. Further royalty is taxed in the year in which consideration towards the same is received.
Thereafter the AO concluded the assessment and held that royalty income is charged on accrual basis and not on receipt basis. Hence income received from India by way of Royalties should be taxed in India on accrual basis.
Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals)[CIT(A)], who dismissed the appeal. Therefore the assessee filed the second appeal before the tribunal.
Before the bench counsel for the assessee submitted that the license provided by the appellant is in the nature of royalty and the term ‘royalty’ has been defined in the Indian Income-tax Act as well as the treaty provision.
As per the DTAA provisions, royalty is taxable in the year in which consideration is actually received. According to Form 26AS, ABB India Ltd. (Deductor/payer) has reported an amount of Rs.184,07,46,733/- on which tax has been deducted and the same amount has been offered by the assessee as for taxation in India on receipt basis in the impugned assessment year.
Counsel for the revenue submitted that as per Article 12 of the DTAA provisions, royalty and fees for technical services arising in India and paid to non-resident should be taxed on accrual basis.
Tribunal during the proceedings observed that The assessee is a NRI and has received royalty from ABB Technology Ltd. which has been offered to tax @ 10% and the same is reflected in Form 26AS. The assessee has been offering income since AY 2011-12 on a cash basis. Royalty is taxable only in the year of receipt as per the provisions of DTAA.
After considering the facts and circumstances of the case and also explanation of the assessee two member bench of George George K (Vice President) and Laxmi Prasad Sahu (Accountant Member) held that income received from India by way of Royalties should be taxed in India only on receipts basis under the India-Switzerland Double Taxation Avoidance Agreement (DTAA).
Chavali Narayan appeared for the assessee and Veera Raghavan appeared for the revenue.
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