Indian Tax Tribunal holds Indian subsidiary’s online auction income to not be royalty under India-US bilateral tax treaty

ITAT holds that income from providing online auction services to its wholly owned subsidiary in India from its Global Market Operations Centres located outside India cannot be taxed as royalty under article 12 of the India-US bilateral tax treaty.

The ITAT also held that no profit attribution can be made to the alleged PE of the assessee when its AE i.e. Indian subsidiary was remunerated at arm’s length price, by relying on the Indian Supreme Court ruling in Morgan Stanley.

The assessee company earned income from its Indian subsidiary in respect of online auction services and claimed that the same was in the nature of business profits, which in the absence of a PE was not taxable in India. However, Revenue (the Indian Income Tax Department) held that the Indian subsidiary was a dependent agent PE of the assessee and thus the business profits were taxable in India. Alternatively, Revenue held that the payments received by the assessee from the Indian subsidiary were royalty income under article 12 of the bilateral tax treaty, which was upheld by the Commissioner of Indian Income Tax Appeals [CIT(A)].

With regard to the profit attribution to the alleged DAPE, the ITAT noted that while framing assessments for the assessee for all the subject assessment years (2004/05 to 2011/12), no TP adjustment was made or in cases where a TP adjustment was made, the same were deleted pursuant to dispute resolution panel (DRP) directions. Thus, the ITAT opined that “it is undisputed that in the assessment of the AE, the transfer pricing adjustments do not survive. Hence, attribution of income to the alleged PE is not sustainable.”

As regards Revenue’s alternate plea that the income is in the nature of royalty under article 12(3), the ITAT also noted that it is not Revenue’s contention that the Indian subsidiary has control over the online platform used by it, opining that “once it is clear that at no point of time the control of equipment is exclusively granted to AE i.e. Ariba India or its clients, the treatment of the receipt as royalty is not tenable.” Also, the ITAT concurred with the assessee’s submission that there is no base erosion in this case since the Indian subsidiary has retained a majority of the revenues earned from the clients (around 88% to 97%) and offered the same to tax in India in its income tax returns and only a miniscule percentage of the revenues (around 3% to 12.50%) has been paid to the assessee. Thus the ITAT held that there was no base erosion on account of the non-taxability of the assessee.

The ITAT relied on the jurisdictional HC ruling in Asia Satellite Telecommunications, wherein it was held that consideration paid to a satellite company for up-linking and down-linking of TV signals will not be deemed as royalty for use of transponders inside the satellite, rejecting the CIT(A)’s finding that granting access through user ID and passwords for availing the facility would grant control over the equipment involved in the process.

The ITAT thus noted that it is an erroneous proposition that is not sustainable and accepted the assessee’s submission that the assessee has merely conducted online auction on its platform and that at all times the control over process and information etc. remained with the assessee, also relying on the coordinate bench ruling in Salesforce.com Singapore.