Article 12 of the India-Germany DTAA – Assessee was not liable to tax on royalty accrued but not received since it was chargeable to tax under DTAA on receipt basis

FACTS

The assessee (FC Germany) had entered into an agreement with FC India for use of the trademark owned by the assessee for marketing and sale of products procured by FC India for sale within India. In its return of income, FC Germany offered to tax the consideration received under the agreement as royalty and had further offered certain interest income.

The assessee followed the cash method of accounting. In the course of the assessment proceedings for F.Y. 2014-15, it explained that it had not received royalty and it had inadvertently included the same in its tax return. The assessee further explained that since FC India was facing a liquidity crisis it was unable to make royalty payment. Hence, the assessee had entered into a termination agreement with FC India pursuant to which the liability for payment of royalty from F.Y. 2011-12 to 2015-16 was waived. In support of its contention, the assessee submitted a no-objection certificate dated 26th October, 2016 issued by the RBI. The A.O. held that the royalty agreement could not be terminated on a back date as FC India had already used the brand and, hence, income had accrued to FC Germany.On appeal, the CIT(A) upheld order of the A.O.Being aggrieved, the assessee appealed before the ITAT.

HELD

It was noted that the assessee had waived royalty payment since FC India was facing liquidity crisis. And it could not be said that the waiver agreement was an arrangement of convenience as it was backed by a no objection certificate issued by the RBI.

Articles 12(1) and 12(3) require royalty to be received by the non-resident. Factually, even prior to the waiver of royalty, neither FC India had paid royalty nor had the assessee received royalty.

In support of its contention, the assessee relied on several decisions1 in which the judicial authorities have held that under the DTAA royalty is chargeable to tax in the hands of the non-resident on receipt basis.

Hence, royalty payable by FC India (but not paid) to the assessee was not taxable in India.