Payment to ICC as `Rights fee’ is not `Royalty’, holds ITAT Delhi [Read Order]

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The Delhi bench of Income Tax Appellate Tribunal (ITAT) held that, the payment made by the assessee to ICC as `Rights fee’ is not in the nature of `Royalty’ or `Fees for technical services’ covered under section 9(1)(vi) or 9(1(vii) of the Income Tax Act.

The Tribunal were hearing a two cross appeals filed by Reebok India Company and DCIT New Delhi.

The Assessing Officer noticed that as per the terms of the Agreement, the assessee was allowed right to use Designations, Marks and ICC logo etc., which in his opinion fell under the definition of `Royalty’ as defined under section 9(1)(vi) of the Income Tax Act.

The AO further held that such payment was also in the nature of `Fees for technical services’, as the services provided by ICC were in the nature of `Managerial services’. In the absence of the assessee having deducted tax at source from the payment made to ICC, the AO proposed disallowance u/s 40(a)(i) of the Income Tax Act in the draft order.

The assessee challenged such proposed disallowance before the DRP, who vide its direction dated 16.12.2015, held that: `the benefits availed by the assessee from ICC did not fall within the ambit of Royalty or FTS’ and accordingly no disallowance was called for.

The Tribunal examined the payment of Rs.4.56 crore made by the assessee as `Rights fee’ for availing the `Rights package’ as per Appendix 3 can be construed as `Royalty’ under Clause (iii) or (vi) of Explanation 2 to section 9(1)(vi) of the Act, being payment for use of any patent, invention, model, design or trademark or similar property etc.; or services in connection with the use of patent, invention, design etc.

While relying the Delhi High Court Judgment in DIT Vs. Sheraton International Inc held that, the appellant-assessee in that case was incorporated in the USA and non-resident company was engaged in providing services to hotels in various parts of the world. It also entered into an agreement with ITC for providing services to its hotels. The scope of services in the agreement was publicity, advertisement and sales. In consideration of these services, ITC agreed to pay fee @ 3% of the room sales to the assessee. The AO came to hold that the payment received by the assessee was in the nature of fees for technical services. He also held that the assessee has a business connection in India. Income of the assessee was estimated by treating such amount as `fees for included services’ chargeable to tax under Article 12(4)(b) of the DTAA with the USA. The tribunal deleted the addition by holding that the main services rendered by the assessee to ITC were advertisement and publicity. Use of trademarks by ITC in other enumerated services was held to be incidental to the main services. Thus, the tribunal held that the amount was neither in the nature of `Royalty’ as per Explanation 2 to section 9(1)(vi) nor in the nature of `Fees for technical services’ as per Explanation 2 to section 9(1)(vii) but only `Business income’. As the assessee did not have any PE in India, the business income was also held to be not chargeable to tax. The Hon’ble High Court approved the view taken by the Tribunal. We find that the facts of the case under consideration are on much stronger footing. In that case, the services to be rendered by Sheraton were not only publicity, advertisement but also concerning sales, for which one composite payment was made, which was held to be not in the nature of `Royalty’.

The Tribunal bench comprising of Judicial Member Kuldip Singh and Accoutant Member R.S Syal observed that, “In the instant case, we are concerned only with payment of Rs.4.56 crore as `Rights fee’, which is exclusively for the use of Marks of ICC for the purposes of promotion and advertisement and not for manufacture and sale of licensed products. When a consolidated payment for both the advertisement and non- advertisement services was held to be not `Royalty’, we cannot hold payment only for the advertisement services, as royalty. In view of the foregoing discussion, we are of the considered opinion that the DRP has canvassed an unimpeachable view and no exception can be taken to the direction for deleting the disallowance u/s 40(a)(i) of the Act”.

The Tribunal also observed that, the assessee was not obliged to deduct tax at source on this payment. Ex consequenti, the provisions of section 40(a)(i) of the Income Tax Act are not attracted.

Read the full text of the order below.

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