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2014 (7) TMI 260 - AT - Income TaxEstablishment of PE in India service PE - Article 5 of Indo-UK DTAA Held that - The AO has observed that the employees of JCBE, earlier seconded to JCBI, continued to render services to JCBI during the year in question in the same way as they were doing in the past the details coupled with the fact that JCBE received 99.5% of royalty from the assessee left nothing to doubt that there was service PE of the assessee as per Article 5(2)(k) of the DTAA covered within the ambit of other personnel - this position has been candidly accepted by the assessee - all the requisite conditions for attracting the mandate of Article 5(2)(k) are satisfied inasmuch as (i) there is furnishing of services including managerial services; (ii) such services are other than those taxable under Article 13 (royalties and fees for technical services); (iii) such services are rendered out of India; (iv) such services are rendered by other personnel ; and (v) such activities continued for a period of more than 90 days within 12 months period - It is thus rightly held that the service PE of the assessee is established in India Decided against Assessee. Royalty earned connected with service PE in India Held that - The Tribunal in the earlier year has held that the total amount consisting Lumpsum Licence/Know-how Fees and also royalty was consideration for the transfer of IP rights simplicitor and also the service rendered by the employees of the second category - in so far as the question of royalty representing consideration for the transfer of IP rights simplicitor was concerned, the service PE representing the deputationists had no role to play either in creating or making it available to JCB India - That is how the Tribunal came to hold that the same was not effectively connected with the service PE of the assessee in India - the consideration for rendering of services by the employees of first category was chargeable to tax under Article 7 of the DTAA thus, the matter is remitted back to the AO for determination of the amount of income in terms of Article 7 Decided in favour of Assessee. Applicability of Article 13(2) Royalty subject to tax @ 20% plus surcharge and education cess u/s 115A(1)(b) of the Act Held that - The Department has no power to file appeal or object to the any direction issued by the DRP in pursuance of which the AO passed order u/s 144C, if the assessee filed objection before the DRP before this cut-off date of 1.7.2012 - the assessee filed objection against the draft assessment order before the DRP on 30.01.2012 - the objection in the case was filed by the assessee before the DRP prior to 01.07.12, the Revenue could have neither filed appeal nor cross objection against the order of the Assessing Officer the cross objection is not maintainable. Neither the AO nor the DRP has held that the assessee is a beneficial owner of the royalty and hence the same should be charged to tax at the lower rate of 15% as provided under the DTAA revenue goes without saying that right to appeal is a statutory right provided to the aggrieved party it can be exercised strictly in accordance with and as per the terms of the relevant provision - If the law does not specifically or generally confer such a right against a particular action of the authorities, then the same cannot be inferred - section 253 of the Act does not give any right to the Revenue to appeal against a non-finding of the AO or the DRP, as the case may be - CO of the Revenue lacks the necessary mandate so as to become eligible for consideration and adjudication Decided against Revenue. The effect of the section in unequivocal terms is that the provisions of the Act or the DTAA, which ever are more beneficial to the assessee, apply - the provisions of Art. 13(2) of the DTAA providing for lower rate of tax, being more beneficial to the assessee, shall apply if it is found to be covered within the mandate of the Article 13 of the DTAA - the assessee offered the entire amount as royalty income in its hands and admittedly JCBE did not - The assessment of royalty income has been made on substantive basis in the hands of the assessee and there is no assessment of such royalty income in the hands of the JCBE - It is not the case of the parties before us that the amount received by the assesee should have been charged to tax in the hands of JCBE as it was the real and the beneficial owner of the amount received by the assessee who merely acted as a mediator between JCBI and JCBE. For the applicability of Article 13(2) of the DTAA, the requirement is that the beneficial owner should be the resident of the UK - It is not that if the formal recipient, a resident of UK, is not the beneficial owner, then the benefit is lost, notwithstanding the fact that the beneficial owner is also the resident of UK - relief of lower rate of taxation can be denied if the beneficial owner of the royalty is a resident of some third state, neither being India nor UK - the assessee, a resident of UK, is not a beneficial owner as per the stand point of the Revenue, still the benefit of lower rate of tax cannot be denied because the beneficial owner of the royalty, being JCBE, is admittedly resident of UK - the royalty has arisen in India, and the beneficial owner of this royalty is resident of UK - the tax shall be charged @ 15% as provided in Article 13(2) of the DTAA. - Decoded partly in favor of assessee.
Issues Involved:
1. Existence of Service Permanent Establishment (PE) in India. 2. Effective connection of royalty with the Service PE. 3. Charging of interest under section 234B. 4. Tax rate applicable to royalty income under Indo-UK DTAA. 5. Maintainability of Revenue's Cross Objection. Detailed Analysis: 1. Existence of Service Permanent Establishment (PE) in India: The primary issue was whether the assessee had a Service Permanent Establishment (PE) in India under Article 5 of the Indo-UK Double Taxation Avoidance Agreement (DTAA). The assessee, a UK-based company, derived income from royalties and fees for technical services, which were taxed at 15% as per the DTAA. The AO observed that the assessee's employees seconded to JCBI in India constituted a Service PE under Article 5(2)(k)(i) of the DTAA. The Tribunal noted that the tripartite agreement dated 17.12.2007, where JCBE sublicensed intellectual property to the assessee, did not alter the fact that JCBE's employees continued to render services in India. Hence, the Tribunal upheld the AO's decision, confirming the existence of a Service PE in India. 2. Effective Connection of Royalty with the Service PE: The next issue was whether the royalty earned by the assessee was effectively connected with the Service PE in India. The Tribunal referred to its earlier order for AY 2006-07, which distinguished between royalties for intellectual property rights and fees for technical services rendered by employees. It concluded that royalties for intellectual property rights were not effectively connected with the Service PE, whereas fees for technical services by certain employees were. Following this precedent, the Tribunal directed the AO to determine the income accordingly, distinguishing between royalties and fees for technical services. 3. Charging of Interest Under Section 234B: The assessee contested the charging of interest under section 234B. The Tribunal, following its earlier decision for AY 2006-07, ruled in favor of the assessee, stating that the liability for interest under section 234B did not arise as the assessee had included the royalty and fees for technical services in its total income. 4. Tax Rate Applicable to Royalty Income Under Indo-UK DTAA: The Revenue argued that the royalty should be taxed at 20% under section 115A(1)(b) of the Act, as the assessee was not the beneficial owner of the royalty. The Tribunal dismissed this argument, stating that the beneficial owner of the royalty was JCBE, a resident of the UK. It held that the lower tax rate of 15% under Article 13(2) of the DTAA was applicable, as the beneficial owner was a UK resident. 5. Maintainability of Revenue's Cross Objection: The Revenue filed a Cross Objection, claiming that the royalty should be taxed at 20%. The Tribunal dismissed the Cross Objection on two grounds: first, it was not maintainable as per law since the objection was filed before the cut-off date of 1.7.2012; second, the Cross Objection lacked the necessary mandate as it did not pertain to any adverse finding by the AO or DRP. The Tribunal emphasized that the right to appeal is statutory and must be exercised within the confines of the relevant provisions. Conclusion: The Tribunal upheld the existence of a Service PE in India and directed the AO to determine the income by distinguishing between royalties and fees for technical services. It ruled in favor of the assessee on the issue of interest under section 234B and applied the lower tax rate of 15% under the DTAA. The Revenue's Cross Objection was dismissed as not maintainable.
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