2017 (11) TMI 61 - AT - Income Tax

Royalty receipt - DTAA between India and Saudi Arabia - receipt in question is not Royalty and it is FTS? - PE in India - Whether there is PE or not in India because if a PE is there, income is taxable @ 40% and if no PE is there, income whether Royalty or FTS is taxable @ 10%? - Held that - This is not a case of the revenue that any other invoice is raised by the assessee. When admittedly, the only invoice raised is in respect of stay of 4 Engineers in India on the basis of man hours spent by them in India, it cannot be said that any other service was rendered in the present case without physical presence by way of virtual modes like e mail, internet, video conference etc. and therefore, physical presence of employee is not essential. Because of these differences in facts, this tribunal order cited by the learned DR of the revenue is not applicable in the present case. We, therefore, follow the tribunal order cited by the learned AR of the assessee having been rendered in the case of Clifford Chance vs. DCIT (2001 (9) TMI 1141 - ITAT MUMBAI) and hold that in the present case, the stay in India of the assessee was only 90 days and since it is less than 182 days as required under Article 5 (3) (b) of the India SA DTAA, there is no PE. Whether the impugned receipt is Royalty or FTS? - Held that - There are some exceptions provided in Article 22 (2) where Article 22 (1) is not applicable but those exceptions do not include FTS. Therefore, we are of the considered opinion that in view of Article 22 (1) of DTAA between India & Saudi Arabia, FTS is not taxable in India because it will fall in Article 22 (1) and as per this Article, income is taxable in the state of residence i.e. Saudi Arabia. In this regard, we find that the A.O. has noted in Para 5 of the assessment order that the exact details of the work done by the four service Engineers of ELEMAC in India were never furnished. In the absence of the complete details, this issue cannot be decided. We feel it proper to restore this after to the file of the A. O. for a fresh decision with the direction that the assessee should provide all details required by the A.O. The A. O. should decide this issue afresh after providing adequate opportunity of being heard to the assessee.

Summary

Issues:
1. Taxability of payments received by the appellant as royalty under the Income-tax Act, 1961 and the Double Taxation Avoidance Agreement between India and Saudi Arabia.
2. Applicability of provisions of the Income-tax Act in the absence of specific Article for taxability in the DTAA.
3. Determination of Permanent Establishment (PE) in India.
4. Levy of interest under section 234B of the Act.
5. Penalty proceedings under section 271(1)(c).

Issue 1: Taxability of payments as royalty
The appellant contested that the fees received for services rendered should not be considered as royalty under the Income-tax Act and the DTAA between India and Saudi Arabia. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) held the fees as royalty, subject to taxation under section 115A of the Act. The appellant argued that in the absence of a specific Article in the DTAA for the taxability of such payments, the Act should not be applicable. The tribunal analyzed the facts and held that the income should be taxed at 10% if it is not considered royalty. The tribunal referred to relevant case laws and directed the AO to reconsider the issue with complete details provided by the appellant.

Issue 2: Applicability of provisions in the absence of specific Article in DTAA
The tribunal deliberated on whether the absence of a specific Article in the DTAA for taxability should invoke the provisions of the Income-tax Act. The appellant argued against the taxation of fees under section 115A of the Act, highlighting the lack of a specific provision in the DTAA for fees on technical services without a Permanent Establishment (PE) in India. The tribunal emphasized the need for clarity on taxability under the DTAA and directed a fresh decision by the AO with complete details provided by the assessee.

Issue 3: Determination of Permanent Establishment (PE)
The dispute revolved around the existence of a Service PE in India due to the presence of service engineers. The AO considered man-days of services rendered, while the tribunal emphasized the importance of solar days as per the DTAA. The tribunal referred to relevant case laws to establish that only solar days should be considered to determine the existence of a PE. Based on the duration of stay in India, the tribunal concluded that there was no PE as per the DTAA.

Issue 4: Levy of interest under section 234B
The AO was criticized for levying interest under section 234B of the Act, with the tribunal highlighting errors in the assessment. The tribunal directed a review of the interest levy, indicating discrepancies in the AO's decision.

Issue 5: Penalty proceedings under section 271(1)(c)
The initiation of penalty proceedings under section 271(1)(c) by the AO was challenged by the appellant. The tribunal acknowledged the concerns raised and directed a reevaluation of the penalty proceedings.

In conclusion, the tribunal partially allowed the appeal for statistical purposes, emphasizing the need for a fresh decision by the AO with complete details provided by the appellant for a comprehensive assessment of the tax implications and applicability of relevant provisions.