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2024 Supreme(Online)(ITAT) 2605
INCOME TAX APPELLATE TRIBUNAL (BANGALORE BENCH)
Beena Pillai, J, Chandra Poojari, ACJ
M/S. MANN HUMMEL GMBH BENGALURU – Appellant
Versus
DEPUTY COMMISSIONER OF INCOME-TAX INTERNATIONAL TAXATION CIRCLE-1(2) BENGALURU – Respondent
IT(IT)A No. 669/Bang/2023
For the Appellants/Petitioners: Not mentioned
For the Respondents: Not mentioned
Payment received for leased line charges is not classified as royalty under domestic law or DTAA due to absence of exclusive rights over the used equipment.
Headnote:(A) Income Tax Act, 1961 - Sections 9(1)(vi), 143(3), 144C(13) - DTAA - Payment received for leased line/GAN charges - Court held that it does not qualify as royalty under domestic law or the DTAA due to lack of exclusive rights in the equipment used, emphasizing service rather than property transfer. (Paras 5.10, 5.19)
(B) Legal Standard for Royalty - Terms 'process' and 'use' are defined contextually; the recipient must have control over equipment to be taxable as royalty. Previous cases interpreted emphasize this requirement. (Paras 5.7, 5.8)
Facts of the case:
The appellant, a company based in Germany, engaged in global filter manufacturing, disputed tax implications of received payments classified as royalties under the Income Tax Act, as assessed by the Deputy Commissioner. The assessment order initiated penalty under section 270A.
Findings of Court:
Assessed payments not treated as royalty; deemed as business income taxable per German laws.
Issues: Whether payments classified as royalty and taxability under section 9(1)(vi).
Ratio Decidendi: Payments treated as reimbursements rather than royalties, emphasizing that mere service provision does not equate to usage rights. Service and equipment differentiation critical for tax assessments.
Result: Appeal allowed.
| Table of Content |
|---|
| 1. background of the assessment and tax implications. (Para 2) |
| 2. arguments on the nature of payments and applicability of royalty. (Para 3) |
| 3. court's analysis on the nature of the payment as royalty. (Para 5) |
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER
Present appeal arises out of the order dated 12.07.2023 passed by the Ld.ACIT(International Taxation), Circle – 1(2), Bangalore for A.Y. 2020-21 on following grounds of appeal:
“Based on the facts and circumstances of the case and in law, Mann Hummel GMBH respectfully craves leave to prefer an appeal against the assessment order passed by the Deputy Commissioner of Income-tax, International Taxation Circle — 1(2), Bengaluru (hereinafter referred to as the "learned AO") dated 12 July 2023, under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 ("the Act") on the following grounds:
1. The order of the learned AO is based on incorrect interpretation of law and therefore is bad in law.
2. The learned AO and the Hon'ble Dispute Resolution Panel ("DRP") erred, in law and on facts, by holding that the payment received towards cross charge of lease line / Global Area Network (-GAN") charges, amounting to INR 49,54,520/-, is in the nature of Royalty and hence chargeable to tax under the Act and Article 12 of the India- Germany Double Taxation Avoidance Agreement ("DTAA").
3. The learned AO and the Hon'ble DRP erred, in law and on facts, by holding that the payment made towards standardised lease line / GAN charges by Mann and Hummel Filter Private Limited ("MHIN-) to MHDE constitute charges for the "use of or right to use equipment" (i.e., cable, routers etc.) and thereby constitute Royalty as defined under the Act and the India-Germany DTAA.
4. The learned AO and the Hon'ble DRP failed to appreciate the fact that neither MHDE nor MHIN has any right or control over the equipment used by the third party service provider and accordingly holding that the MHIN has a right to use the equipment.
5. Without prejudice to the above, the learned AO erred in making an addition of markup component of INR 1,90,558 (which is included in INR 49,54,520 received towards lease line/ GAN charges) to the assessed income without considering the fact that such markup element has already been offered to tax in the return of income filed by the Appellant, thereby leading to double taxation of income.
6. Without prejudice, the Learned AO and the Honble DRP has failed to appreciate the fact that the payment made by MHIN to MHDE towards third party services is mere cost to cost re-imbursement of the standardised lease line/ GAN charges paid by the Appellant to the third party service provider.
7. The learned AO erred, in law and on facts, in initiating penalty proceedings under section 270A of the Act.
The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law.”
2. Brief facts of the case are as under:
2.1 Assessee is a company based in Germany and is engaged in the manufacture and sale of industrial and automotive filters globally. It is noted that all the grounds raised by the assessee are on single issue and therefore they are being disposed of in a consolidated way.
2.2 For the year under consideration, assessee filed its return of income u/s. 139(1) of the Act on 07.01.2021 declaring gross total income of Rs.20,17,04,050/-. Subsequently, return was revised declaring total income of Rs.16,55,65,610/- claimed and refund of Rs.36,13,850/-. The case was selected for scrutiny for issue of reduction of income in revised return and claim of refund and income from other sources. Accordingly, notice u/s. 143(2) of the act was issued to the assessee along with notice u/s. 142(1) calling upon assessee to furnish various details in respect of the claim. Vide submissions dated 14.07.2021, 14.03.2022, 22.
