The Pune Income Tax Appellate Tribunal ( ITAT ) has recently held that the right to use a trademark is royalty as per Indo- Netherland Double Taxation Avoidance Agreement (DTAA).
Assessee Balasai Net Pvt. Ltd. is a domestic company in which public is not substantially interested and the assessee is engaged in the business of providing web hosting, mailing solutions, server collection, providing virtual dedicated servers, cloud computing, server management and server security, etc. on verification of expenses, it was found by the Assessing officer that the assessee has incurred an amount of Rs. 30, 90,448/- further revealed that the assessee has not deducted TDS against such payment.
Thereafter the assessing officer found that service charge is also a type of service where the right to use is inherent and thus fall in the definition of royalty. Therefore, consideration is taxable as royalty both under the Act as well as tax treaty. Also AO made a total disallowance of Rs. 30, 90,448/- on all the payments and added to the total income of the assessee.
Counsel for the assessee contended that disallowance has been made by the Department considering only section 9 with Explanation 5 as amended by the Finance Act, 2012 read with section 40(a) and section 195 of the Income Tax Act 1961. However, the. A.O has failed to analyze the applicability of DTAA between India and Netherland defining the term “royalty” as per Article 12 of such DTAA.
Further royalty means the payment of any kind for the use of any copyright, etc. trademark, design, so the assessee is not falling in any of such heads specified in the definition of royalty.
Counsel for revenue submits that the assessee herein on entering an agreement with Softlayer gets the right only to use the trademark, but the exclusive ownership of such trademark is with Softlayer.
If this fact is read into the definition of royalty as per Article 12 of DTAA between India and Netherland which defines royalty means the payment of any kind received as consideration for the use of right to use, any copyright, patent, trademark, etc., therefore, as per the agreement with Softlayer when the assessee is using the trademark which is owned by Softlayer then that right to use the trademark will fall in the definition of royalty.
After considering the contentions of the both parties the division bench of the ITAT comprising the Partha Sarathi Chaudhury, (Judicial Member) and G.D. Padmahshali, (Accountant Member) set aside the order of CIT(A) and remand the matter to the file of the A.O for re-adjudication as per law after complying with principles of natural justice.
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