The main legal point established in the judgment is the interpretation of the definition of 'Royalty' under the Income Tax Act, 1961 and the application of the Double Tax Avoidance Agreement (DTAA) in determining the taxability of payments received by the Assessee.

JUDGMENT :

Firdosh P. Pooniwalla, J.

The present Appeal is filed by the Revenue challenging the Order dated 25th January 2017 passed by the Income Tax Appellate Tribunal (ITAT). Respondent is the Assessee under the provisions of the Income Tax Act, 1961 (the Act) and the relevant Assessment Year is 1999-2000.

2. The Assessee, i.e. Colgate Palmolive Marketing SDN BHD, is an entity incorporated in Malaysia and is engaged in the business of marketing, distribution and sale of household products, fabrics and personal care. Colgate Palmolive (India) Limited (CPI) entered into an Agreement dated 14th May, 1998 with the Assessee for use of the Assessee’s SAP system (the said Agreement). As per the said Agreement, the Assessee was to charge CPI for the use of the SAP system. CPI was required to make payments towards consideration for the use of the system, consideration towards rendering services comprising of costs of maintenance, up-gradation of the system to keep it functional and fees for training personnel for using the SAP system. For the Financial Year 1998-99 (A. Y. 1999-2000), as per the said Agreement, CPI paid to the Assessee a sum of USD 11,80,500/- for the use of the SAP system and a further sum of USD 3,85,000/- towards rendering services as mentioned above.

3. The Assessee filed its Return of Income for Assessment Year 1999-2000, on 29th December, 1999, declaring ‘Nil’ income. During the course of assessment proceedings, the Assessing Officer (AO), on verifying the Return of Income and financial statements, found that the Assessee had received an amount of USD 3,85,000/- on account of rendering services to CPI and further a sum of USD 11,80,500/- on account of use of the SAP system. The AO observed that the payments received on account of the use of the SAP system were covered under the definition of ‘Royalty’ as defined under Explanation 2 (iii) to Section 9 (1) (vi), and accordingly taxed the same. Furthermore, the AO also observed that the payments received on account of rendering services were in the nature of ‘fees for technical services’. Accordingly, by an Order dated 22nd March 2002, passed under Section 143(3) of the Act, the AO completed the assessment by taxing the said payments.

4. Aggrieved by the said Order dated 22nd March 2002 of the AO, the Assessee filed an Appeal before the Commissioner of Income Tax (Appeals), Mumbai [CIT(A)]. The CIT(A), dismissed the Assessee’s Appeal by an Order dated 16th December 2003.

5. Aggrieved by the said Order dated 16th December 2003, the Assessee filed an Appeal before the Income Tax Appellate Tribunal (ITAT), being ITA No. 2129 of 2004. The grounds raised by the Assessee in the said Appeal, read as under:-

“Ground 1

The Learned Commissioner of Income Tax (Appeals), XXXI, Mumbai [CIT(A)] erred in holding that the consideration received by the Appellant for the use of the SAP system is subject to tax as royalty under the Income Tax Act,1961 (‘Act’), at the rate of 20 percent on a gross basis.

Ground 2

The Learned CIT(A) erred in holding that the consideration received by the Appellant in respect of the services is subject to tax as ‘fees for technical services’ under the Act, at the rate of 20 percent on a gross basis.

Ground 3

The Learned CIT(A) erred in denying the option granted to the Appellant under Section 90 of the Act, to be taxed under provisions of the Act or the Double Tax Avoidance Agreement, as the case may be, to the extent whichever is more beneficial to the Appellant.

Ground 4

The Learned CIT(A) has erred in holding that the payments received by the Appellant for the use of the system and for the rendering of services are not in the nature of reimbursement of expenses.”

6. By an Order dated 25th January 2017, the ITAT allowed the Appeal of the Assessee. The said Order dated 25th January 2017 of the ITAT has been impugned by the Department in the present Appeal. The following questions of law were proposed in the Memo of Appeal:-

“(a) Whether on the facts and in the circum