Case Law Details
Citation:- Assistant Director of Income-tax Vs. M/s. Universal International Music BV (ITA No. 6063/M/2004, 9034/M/2004, ITA 2304/M/2006 & ITA 5064/M/2006) dated 31 January 2011
The taxpayer, a resident of Netherlands, belongs to Universal group of companies which are engaged in manufacturing of audio and video recording, acquisition, alienation, exploitation, assigning and managing of copy rights, licenses, patents, etc.
Under the business model, a group company would enter into contracts with various artists, singers etc. Such company was known as repertoire companies. The repertoire company was free to license the products to other group companies for exploitation. Further, as per group policy, for any business outside the home territory of the repertoire company, the commercial exploitation rights were transferred to another group company. Accordingly, repertoire company was license holders to commercially exploit the rights around the world.
The Taxpayer had acquired musical recording rights from other repertoire companies and had been granted the commercial exploitation rights of such musical tracks in India and licensed the same to an Indian company against payment of royalty.
The Taxpayer offered tax @ 10% in respect of the above royalty income received from the Indian company in accordance with Article 12 of India-Netherlands Tax Treaty (DTAA). However, the Tax Officer (TO) denied the beneficial rate, by observing that the Taxpayer was not the beneficial owner of the royalty and was only a collecting agent for the repertoire companies.
On appeal before the first level appellate authority, the Taxpayer submitted stated that the royalty had arisen from commercial exploitation of musical rights owned/ controlled by the taxpayer on its own To substantiate it’s claim, the Taxpayer submitted sample agreements entered into with repertoire companies and certificate of residence issued by the Netherlands Tax Office confirming that the Taxpayer was resident of Netherlands and was the beneficial owner of the royalty income. Based on the documents filed, the first appellate authority held that the Taxpayer was the beneficial owner of the royalty income.
Issues before the Tribunal
The issue before the Tribunal was whether the Taxpayer company was to be regarded as beneficial owner of the royalty income and hence eligible for beneficial tax rate under article 12 of the India-Netherlands tax treaty?
Ruling of the Tribunal
The Tribunal while coming to the conclusion that the taxpayer was the beneficial owner of the royalty income observed as under:
• The taxpayer had on its own filed a certificate from the tax authority of Netherlands wherein it was stated that the taxpayer was regularly filing return of income and paying tax thereon including the royalty income received from the Indian companies. The certificate from the tax authority indicates that the Taxpayer was tax resident of Netherlands and was beneficial owner of royalty income received Indian companies from time to time within the meaning of Article 12 of DTAA.
• Such certificate of residence issued by the tax authority of the contracting state has to be accepted as sufficient evidence regarding the status of the taxpayer and the beneficial ownership in terms of the circular No.789 dated 13.4.2000 issued by the tax authorities. The Hon’ble Supreme Court had upheld the validity of the aforesaid circular in case of Union of India and Another v. Azadi Bachao Andollan (263 ITR 706).
• The Tribunal held that since the TO had not doubted the tax residence certificate issued by the Netherland tax authority, the Taxpayer could be considered as beneficial owner of royalty, even in the absence of any evidence of agreements with repertoire companies regarding acquisition of rights by the taxpayer.
Conclusion :- The Tribunal has reiterated the principle that a certificate from the tax authorities of the other country regarding residency and beneficial ownership would be a sufficient evidence for beneficial ownership. The Ruling seems to suggest that although the referred circular was issued in the context of India-Mauritius tax treaty, compliance of the same could be relied upon by foreign companies from other jurisdictions for demonstrating beneficial ownership.
