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2014 (4) TMI 887 - AT - Income TaxExistence of Permanent establishment - DTAA between India and UK - Whether the stay of the seconded employees of the assessee for more than 90 days in India, engaged in providing managerial services to JCB India, constitute Services Permanent Establishment (P.E) - Held that - TTA provides not only for the supply of IP Rights by the assessee to JCB India but also to depute its personnel for rendering services in connection with such IP Rights - The assignment of personnel by the assessee is not independent of TTA - the assessee was not to appoint and select some personnel for sending to JCB India, but was to depute its technical personnel on assignment basis - the supply of personnel on assignment basis is a part and parcel of the overall TTA read with IPAA and not de hors. Relying upon Dit (International Taxation) Versus Morgan Stanley And Company Inc. 2007 (7) TMI 201 - SUPREME Court - there is no quarrel on the duration of stay of such personnel of the assessee which admittedly is more than ninety days within the twelve-months period - This position was duly admitted by the assessee before the Assessing Officer and such position has not been denied - all the requisite conditions for attracting the mandate of Art.5(2)(k)(i) stand satisfied inasmuch as there is furnishing of services including managerial services and such services are other than those taxable under Article 13 (Royalties and fees for technical services) - such services are rendered within India - services are rendered by the assessee through its employees and activities continued for a period of more than ninety days within twelve months period - JCB India constituted a service P.E of the assessee in India the order of the CIT(A) set aside and the matter remitted back to the AO. Whether royalties/fees for technical services is taxable under Article 7 as held by the AO or Article 13(2) Held that - The amount of royalty and consideration for rendering of services by the employees of second category do not fall in para 6 of Article 13 and are hence chargeable to tax as per para 2 of Article 13 of the DTAA - As both these amounts make up the total consideration, its splitting into two parts, viz., towards royalty and employees of the second category has become academic, which would otherwise have been required if one of such components had fallen under para 6 of Article 13 for the computation of income as per Article 7 of the DTAA - In so far as fees for technical services for rendering of services by the employees of the first category is concerned, this falls under para 6 of Article 13 - Once the amount falls under para 6, it would automatically stand excluded from para 2 of Article 13 and would find its place under Article 7 of the DTAA. The amount of royalties or fees for technical services assumes the character of Business profits on its arrival in Article 7 - Such amount will intermingle with other business profits, if already available as per Article 7 and will shed its character of royalty or fees for technical services in so far as the computation of income and its taxation under the DTAA is concerned - It is totally misleading to construe the amount of royalties and fees for technical services coming through Article 13(6) to Article 7 as retaining the same character as was there under Article 13 - the consideration for rendering of services by the employees of the first category is chargeable to tax under Article 7 of the DTAA and as such the provisions dealing with the computation and the taxation as provided under Article 7 shall apply pro tanto - separate details of receipts and actual expenses incurred for earning them are not available on record thus, the matter is remitted back to the AO for fresh determination of the amount of income in terms of Article 7. The services rendered by the employees of the first category, being eight deputationists, constituted service PE of the assessee in India - The order holding is overturned and the view taken by the AO is restored - The second ground about the direction of the CIT(A) that the entire amount should be considered as royalty and not as business income is partly allowed Decided partly in favour of Revenue. Levy of Interest u/s 234B of the Act Held that - The decision in DIT v. Jacabs Civil Incorporated 2010 (8) TMI 37 - DELHI HIGH COURT followed - as the assessee included the amount of royalty and fees for technical services in its total income the assessee is relieved from any interest liability u/s 234B of the Act Decided in favour of Assessee.
Issues Involved:
1. Permanent Establishment (PE) of the Assessee in India 2. Taxability of Income as 'Royalty' or 'Business Profits' 3. Levy of Interest under Section 234B Detailed Analysis: 1. Permanent Establishment (PE) of the Assessee in India Summary of Judgment: The core issue was whether the stay of seconded employees of the assessee in India constituted a Service Permanent Establishment (PE) under Article 5(2)(k)(i) of the Double Taxation Avoidance Agreement (DTAA) between India and the UK. Key Points: - The assessee, a UK-based company, entered into a Technology Transfer Agreement (TTA) and an International Personnel Assignment Agreement (IPAA) with its Indian subsidiary. - The Assessing Officer (AO) held that the seconded employees constituted a Service PE as they stayed in India for more than 90 days and provided managerial services. - The CIT(A) disagreed, stating that the seconded employees became employees of the Indian subsidiary and thus did not constitute a PE. - The Tribunal analyzed the nature of the secondment, concluding that the seconded employees remained employees of the assessee, thus constituting a Service PE in India. Conclusion: The Tribunal held that JCB India constituted a Service PE of the assessee in India, overturning the CIT(A)'s decision and restoring the AO's view. 2. Taxability of Income as 'Royalty' or 'Business Profits' Summary of Judgment: The next issue was whether the income received by the assessee should be taxed as 'Royalty' under Article 13(2) or as 'Business Profits' under Article 7 of the DTAA. Key Points: - The AO argued that the income should be treated as 'Business Profits' because it was effectively connected with the Service PE. - The CIT(A) held that the income should be treated as 'Royalty'. - The Tribunal distinguished between different components of the income: - Royalty: Income from the transfer of IP Rights was treated as 'Royalty' under Article 13(3). - Fees for Technical Services: Income from services rendered by seconded employees was treated as 'Fees for Technical Services' under Article 13(4). - The Tribunal concluded that the income related to the seconded employees fell under Article 7 due to the effective connection with the Service PE, while the rest remained under Article 13(2). Conclusion: The Tribunal partially allowed the AO's view, holding that the services rendered by seconded employees constituted 'Business Profits' under Article 7, while other income remained 'Royalty' under Article 13(2). 3. Levy of Interest under Section 234B Summary of Judgment: The final issue was regarding the levy of interest under Section 234B for non-payment of advance tax. Key Points: - The CIT(A) held that the interest was consequential. - The assessee argued that since it had included the entire amount of royalty and fees for technical services in its total income, it should not be liable for interest under Section 234B. - The Tribunal referred to the Delhi High Court's judgment in DIT v. Jacabs Civil Incorporated, which held that if the assessee admits income chargeable to tax but does not pay advance tax due to non-deduction of tax at source by the payer, no interest under Section 234B is applicable. Conclusion: The Tribunal allowed the assessee's cross-objection, holding that no interest under Section 234B was leviable. Final Outcome: - The Tribunal partly allowed the Revenue's appeal, holding that the assessee had a Service PE in India and that income related to services rendered by seconded employees should be taxed as 'Business Profits' under Article 7. - The Tribunal allowed the assessee's cross-objection, ruling out the levy of interest under Section 234B.
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