The Income Tax Appellate Tribunal (ITAT), Delhi Bench, has recently, in an appeal filed before it, held that no tax can be levied on payments in lieu of ‘business profits’, in the absence of a PE in India.
The aforesaid observation was made by the Delhi ITAT, when appeals were filed before it by the assessee, as against two separate orders of the Commissioner of Income Tax (Appeals) (CIT (Appeals), New Delhi, both dated 22.06.2022, for assessment years 2018-19 and 2019-20.
The grounds of the assessee’s appeal being that, on the facts and in the circumstances of the case and in law, the DRP has erred in confirming the action of the AO , in not concluding that the receipt from subscription fees of INR 18,65,00,000 from Indian subscriber to its Lexis Nexis database is in the nature of ‘Business Profits’, under Article 7 of the India- USA DTAA and not taxable in India as the Appellant did not have a “Permanent Establishment” in India under Article 5 of the India-USA DTAA, the brief facts of the case were that the assessee was a tax resident of United States of America, who was engaged in the business of maintaining online data base (Lexis Nexis), pertaining to legal and law related information which included articles copy of judgments filed patent applications before patent registry and other legal information.
The assessee had no fixed place of business or a Permanent Establishment in India, and since the assessee had no PE in India, the asessee filed return of income by treating that the subscription fees received for providing excess to data base was in the nature of ‘Business Income’, which is not taxable in India as per the provisions of India-US Double Taxation Advance Agreement (DTAA).
Thereafter, assessment proceedings were initiated against the assessee for both the assessment years, along with the draft assessment order passed under Section 143(3) read with Section 144C, by observing that from the Assessee’s website, it is seen that the assessee is not providing ‘mere accesses’ to a static data base, but that is providing full-fledged services and solutions for legal professionals.
The final assessment order came to be passed on for the Assessment Year 2018-19, by assessing the total income of the assessee at Rs. 18,65,00,000/- as ‘fees For Technical Services’, and were brought to tax at 10% on the gross basis as per Section 115A of the Income Tax Act, as well as under Article 12 of the India USA DTAA, vide order, dated 22/06/2022.
In so far as, Assessment Year 2019- 20 is concerned the final assessment order came to be passed by assessing the total income of the assessee at Rs.9,41,39,051/, out of which Rs.7,36,93,619/, was treated as Fees for Technical Services which is taxable in India at 10% on the gross basis, as per Section 115A of the Income Tax Act and under Article 12 of India-USA DTAA vide orders dated 22/06/2022.
And, it is being aggrieved by the final assessment orders dated 22/06/2022 for Assessment Year 2018-19 and 2019-20, passed under Section 143 read with Section 144(13) of the Income Tax Act, that the assessee has preferred the present two Appeals on the grounds mentioned above, before the Delhi ITAT.
Hearing the opposing contentions of both sides as presented by Shri Ravi Sharma, Adv.& Shri Rishabh Malhotra, A.R., both on behalf of the assessee, and by Shri Anshuman Pattnaik, the [CIT] – D. R., on behalf of the Revenue, the Delhi ITAT observed:
“In the case of Elsevier Information System GmbH, it was held that the receipt of the assessee therein does not qualify as FTS as per the provisions Section 9(1) (vii) of the Income Tax Act, wherein the Tribunal Bench of Mumbai adjudicated the issue regarding treaty of ‘Indo-German Tax Treaty’ wherein the provisions of FTS are similar to Section 9(1)(7) of the Act. The only difference to the present appeal is that the applicable treaty is Indo-US Tax Treaty.
“As per Article 7 of India-US DTAA, the income from subscription to Assessee’s data base is in the nature of business profit, therefore, the same is not taxable in India as the assessee has no permanent establishment in India. By respectfully following the ratio laid down by the Mumbai Tribunal in the case of Elsevier Information System GmbH, in the absence of any material available on record to prove that the assessee is providing full-fledged service and solutions for legal professions, we are of the opinion that the A.O. has committed an error in making the addition”, the coram of Dr B. R. R Kumar, the Accountant Member and Yogesh Kumar U.S, the Judicial Member added.
Thus, the Delhi ITAT held:
“In view of the same, the payment received by the assessee is in the nature of ‘Business Profit’, which cannot be brought to tax in India, in the absence of PE. Accordingly, the grounds of both the appeals of the assessee are allowed. In the result, the appeal of the Assessee in ITA No. 1877/Del/2022 and ITA No. 1876/Del/2022 are allowed.”
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