2016 (8) TMI 809 - AT - Income Tax

Royalty income - India-Italy DTAA - technical agreement - existence of PE in India - Held that - In substances neither there is any material about the requirement of the services by the recipient of the services nor provision of such services, if any, by the employees of the BO of the assessee. Therefore, in absence of any such material it cannot be said that income of royalty is the income arising out of results of the activities of the permanent establishment. In fact, the income of royalty is because of the direct dealing of the New Holland tractors limited with the assessee without the aid or support from its permanent establishments in India. Hence, we now decide the issue of admission of additional evidence. According to us , these evidences does not have any bearing in deciding the issue involved in the present appeal, hence we dismiss the application of revenue for admission of the linked in profile of the two employees of Bo as well as the extract of the directory. In view of this, we are not in agreement with the stand of the revenue that royalty income received by the assessee is effectively connected with its branch office in India and therefore in terms of article 12(5), assessee is not entitled for preferential tax treatment according to article 12 (1) & (2) of the DTAA. In the result We hold that royalty income earned by the assessee on account of technical agreement with the New Holland Tractors Private limited is not effectively connected with the BO of the assessee in absence of any positive and substantive material that services have been rendered by the employees of the BO of the assessee and therefore same is chargeable to tax as Royalty income as per article 13(1) and (2) of the India Italy DTAA - Decided in favour of assessee

Issues Involved:
1. Validity of the order passed by the Assessing Officer (AO) under section 143(3) read with section 144C of the Income Tax Act.
2. Confirmation of the draft order by the Dispute Resolution Panel (DRP).
3. Taxability of royalty income received by the Head Office (HO) and its connection with the Branch Office (BO).
4. Ignoring the predominant objective of the Technical Collaboration and License Agreement.
5. Presumption of engineering services rendered by the BO or HO employees.
6. Non-granting of credit for taxes deducted at source.
7. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Validity of the Order Passed by the AO:
The assessee challenged the validity of the order passed by the AO under section 143(3) read with section 144C of the Income Tax Act. The Tribunal dismissed this ground as it was general in nature and did not warrant specific arguments.

2. Confirmation of the Draft Order by the DRP:
The assessee contested the confirmation of the draft order by the DRP. The Tribunal noted that the DRP upheld the AO’s decision, which included treating the royalty income as effectively connected to the BO and thus taxable at a higher rate. The Tribunal found no substantive argument from the assessee to overturn this confirmation.

3. Taxability of Royalty Income:
The core issue was whether the royalty income received by the HO was effectively connected with the BO, making it taxable at the rate applicable to business income (41.82% for AY 2007-08 and 42.23% for AY 2009-10) instead of the concessional rate (20%) under the India-Italy Double Taxation Avoidance Agreement (DTAA).

The Tribunal examined the Technical Collaboration and License Agreement (TCLA) and found that the technical support and training stipulated in the agreement were sophisticated and required personnel from the HO. The DRP and AO inferred that since no personnel from the HO visited India, the BO’s employees must have provided the services, thus connecting the royalty income to the BO.

The Tribunal, however, found that the assessee provided sufficient evidence showing that three HO employees visited India for the required support and training, none staying for more than 90 days. The Tribunal held that the revenue failed to establish that the BO’s employees were involved in providing these services. Therefore, the royalty income was not effectively connected to the BO and should be taxed at the concessional rate as per the DTAA.

4. Ignoring the Predominant Objective of the TCLA:
The assessee argued that the predominant objective of the TCLA was to permit the use of Intellectual Property Rights (IPR) and not to render services. The Tribunal agreed, noting that the BO was not involved in the activities related to the TCLA, and thus the royalty income should be treated as such and taxed accordingly.

5. Presumption of Engineering Services Rendered by BO or HO Employees:
The AO presumed that engineering services were rendered by the BO or HO employees based in India. The Tribunal found no evidence supporting this presumption and ruled that the services were provided by the HO employees, who visited India as needed.

6. Non-granting of Credit for Taxes Deducted at Source:
The assessee claimed that the AO did not grant credit for taxes deducted at source amounting to ?11,70,935. The Tribunal remanded this issue back to the AO to verify the TDS certificates and grant the appropriate credit after necessary inquiries.

7. Initiation of Penalty Proceedings Under Section 271(1)(c):
The Tribunal did not specifically address the initiation of penalty proceedings under section 271(1)(c) as it was a general ground supporting the main appeal. This ground was dismissed due to the lack of specific arguments.

Conclusion:
The Tribunal ruled in favor of the assessee on the primary issue of the taxability of royalty income, holding that it was not effectively connected to the BO and should be taxed at the concessional rate under the DTAA. The issue of TDS credit was remanded to the AO for verification. The appeals for both AY 2007-08 and AY 2009-10 were partly allowed.

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