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April 15, 2023

According to the India-US DTAA, lease rental from affiliated businesses is not royalty

According to the India-US DTAA, lease rental from affiliated businesses is not royalty

Fact and issue of the case

The assessee has filed this appeal challenging the assessment order dated 21.7.2022 passed by the Assessing Officer for A.Y. 2019-20 under section 143(3) read with section 144C(13) of the I.T. Act in pursuance of the direction given by learned Dispute Resolution Panel (DRP). The assessee is aggrieved by the decision of the Assessing Officer in assessing the lease rental income of Rs. 10.31 crores received by the assessee from its Associated Enterprises as royalty under section 9(1)(vi) of the Act as well as under Article 12 of the DTAA entered between the India and USA.

The assessee herein is a company incorporated in USA and is a group concern of Owens Corning Group of companies, which are leading manufacturer of Glass. This group is having Indian associated companies named M/s. Owen Corning India Pvt. Ltd. (OCIPL) and M/s. Owen Corning Industry India Pvt. Ltd. (OCIIPL). During the year under consideration the assessee has leased out a metal alloy to its Indian Associate OCIPL and received lease rental of Rs. 10.31 crores. The assessee claimed that this is not taxable in India as it is its business receipt and it does not have any permanent establishment in India as per Article 5 of India-USA DTAA. It also submitted that it does not have any business connection in India. The Assessing Officer however took the view that the above said amount of Rs.10.31 crores is in the nature of “royalty” company and accordingly assessed the same as income of the assessee. Learned DRP also confirmed the same and hence the assessee has filed this appeal before the Tribunal.

At the time of hearing, the learned AR submitted that the assessee has received identical lease rental income from its Indian associated enterprises in the earlier years also and the same was assessed as royalty by the Assessing Officer. He submitted that the Tribunal has deleted the said addition in A.Y. 2013-14 to 2014-15; 2017-18 to 2018-19. Accordingly he submitted that this issue is covered by the decisions rendered by the Coordinate Benches in assessee’s own case in the earlier years and accordingly prayed for deletion of royalty income assessed by the Assessing Officer.

The Learned DR, however, supported the order passed by learned DRP.

Observation by the tribunal

The tribunal has heard the rival contentions and perused the record. As submitted by the learned AR, we noticed that this is a recurring issue and the Coordinate Bench of the Tribunal has examined this issue in assessee’s own case in ITA No. 2050/Mum/2016 relating to A.Y. 2012-13. The co­ordinate bench of Tribunal, vide its order dated 4.10.2021, has held that the lease rental income received by the assessee on leasing of alloys cannot be treated as royalty in the hands of the assessee in terms of India-USA DTAA and also under provisions of section 9(1)(vi) of the I.T. Act. For the sake of convenience we extract below the operative portion of the order passed by the Tribunal in A.Y. 2012-13 (referred supra) :

We have heard the rival submissions and perused the material on record. The undistinguished facts are that the assessee is a US resident company and taxed resident of USA and its income in India and its taxability is governed by the provisions of Income tax Act, 1961 as well as the India US DTAA. The assessee is engaged in the business of leasing of alloys comprising of Rhodium and Platinum, which are used in manufacture of glass fibres. The Indian subsidiary of the assessee OCIPL is engaged in the business of glass fibres in India by using bushings that are made of precious metals like Platinum and Rhodium. Another company OC NL Invest Cooperatief (OCNLIC) a company incorporated in the Netherlands has the rights to grant licenses in respect of technology/intellectual property used in making of glass fibre using bushings. OCNLIC has by Technology License agreement dated 27.01.2011 granted OCIPL, a license to manufacture glass fibres, which includes the intellectual property in the bushing and specially provides that OCIPL will purchase all precious metals required in order to maintain the bushing from OCNLIC or its affiliates including the assessee. During the year the assessee has received an amount of Rs 2,72,37,701/- from OCIPL and OCIIPL towards lease rentals of alloys. The AO treated the said receipts as royalty in terms of Article 12(3) of the DTAA between India and USA and as per section 9(1)(vii) read with Explanation 5 of the Income-tax Act and brought it to tax accordingly. The assessee, on the other hand, maintains that the said income is lease rental and not taxable in India. We note that the alloy provided by the assessee to OCIPL and OCIIPL are used in re-fabrication of bushings used by these companies in the process of manufacture of glass fibres. We note that the agreement to acquire these materials is as perthe Technology License agreement dated 27.01.2011, whereby OCIPL is granted license to manufacture glass fibre and also stipulated that OCIPL will purchase all precious metals required in order to maintain the bushing from OCNLIC or its affiliates, which includes the assesse also. Thus, the assessee has provided only alloy to these companies and charged lease rentals based on the weight of the alloy metal leased. Thus, it is clear that royalty for design of bushing is not paid by OCIPL to OCNLIC and payment to assessee is only towards lease rentals i.e. bushings made of alloys comprising Platinum and Rhodium. We note that the assessee has not provided any services to OCIPL and OCIIPL inconnection with intellectual property related to bushing and, since, the intellectual property right with regard to the bushings is with OCNLIC and assessee is merely providing alloys of Platinum and Rhodium, consideration for alloys cannot be treated as royalty. The case is covered by the decision of Hon’ble Madras High Court in the case of CIT vs. Neyveli Lignite Corpn. Ltd. [243 ITR 459], wherein it has been held that payment to be constituted as royalty should be the payment made to a person who has exclusive right over a thing for allowing another to make use of that thing. Similarly, the case is also covered by the decision of the Delhi Bench of the Tribunal in the case of Bharti Airtel Ltd. Vs. ITO (47 ITR 418), wherein it has been held that in order to receive a royalty in respect of allowing the usage or right to use any property including an intellectual property, the owner thereof must have an exclusive right over such property. We note that the technology for manufacture of glass fibre including the use of bushing has been provided by OCNLIC a Dutch Company and royalty has been paid to that Dutch Company and, therefore, the amount of lease rental on alloy which are used to refurbish the bushing cannot be again treated and taxed as royalty in the hands of the assessee by invoking the India US DTAA and provisions of section9(1)(vii) read with Explanation 5 of the Income-tax Act. In view of these facts, we are not in agreement with the conclusion drawn by the DRP on this issue and, accordingly, set aside the directions of the DRP and direct the AO to delete the addition.”

We noticed that the decision rendered in A.Y. 2012-13 by the Coordinate Bench has been followed in assessee’s own case in A.Y. 2013-14, 2014-15, 2017-18, & 2018-19. Accordingly, consistent with the view taken by the Tribunal in the earlier years on an identical issue, we hold that the lease rental income earned by the assessee cannot be treated as royalty income, both under provisions of DTAA and Income Tax Act. Accordingly we direct the Assessing Officer to delete the assessment of Rs. 10.31 crores made in the hands of the assessee as royalty income.

In the result, appeal filed by the assessee is allowed.

Pronounced in the open court on 15.2.2023.


In the result, appeal of the assessee is allowed and ruled in favour of the assessee

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