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Mumbai Tribunal rules domain registration charges are not taxable as royalty under DTAA
In the case of CIT vs. Narmada Chematur Petrochemicals Ltd. (Taxpayer) [TS-34-SC-2023] being a Special Leave Petition (SLP) before the Supreme Court (SC), the SC was concerned with the issue whether revenue deduction for lease rent in the hands of lessee can be disputed by tax authority when lessor’s ownership is confirmed in lessor’s tax proceedings.
The Taxpayer acquired property on lease from its holding company viz. Gujarat Narmada Valley Fertilizers Company Ltd. (GNFC) and claimed revenue deduction of lease rentals paid. The tax authority denied revenue deduction by asserting that the lease transaction is in the nature of finance lease and, hence, the Taxpayer would qualify as owner of property. But the tax authority allowed depreciation on the property. The first appellate authority upheld the tax authority’s order.
On further appeal by the Taxpayer, the Ahmedabad Tribunal took note of the tax dispute in GNFC’s case where GNFC’s ownership was disputed by the tax authority to deny depreciation. But the Ahmedabad Tribunal in GNFC’s case held that GNFC is the owner of the property entitled to depreciation and it was correctly offering the whole of lease rent received from the Taxpayer as business income. Accordingly, the Tribunal allowed Taxpayer’s appeal and upheld revenue deduction for lease rent.
On further appeal by the tax authority, the Gujarat High Court (HC) similarly took note of its co-ordinate bench ruling[1] in GNFC’s case wherein the HC held GNFC to be owner of property leased to Taxpayer and entitled to depreciation. Following the coordinate bench ruling in GNFC’s case, the Gujarat HC in Taxpayer’s case dismissed the tax authority’s appeal. Being aggrieved, the tax authority filed an SLP before the SC.
The SC dismissed the tax authority’s SLP against Gujarat HC’s ruling in GNFC’s case. Hence, the SC also dismissed the tax authority’s SLP in the Taxpayer’s case by observing that, once lessor is held to be the owner of the property and entitled to depreciation, the tax authority cannot be permitted to treat the lessee as owner of same property to deny the revenue deduction for lease rent and allow depreciation.
[1] DCIT v. Gujarat Narmada Valley Fertilizers Company Ltd. [ITA No. 516 of 2012]