2023 (1) TMI 227 - HC - Income Tax

Status of a beneficial owner - provisions of Article 12 of the DTAA - assessee, in terms of Article 12 of the DTAA, had offered the aforementioned amount for taxation @ 15% of gross receipts - assessee had a back-to-back arrangement of passing on the fee received to its holding company - AO denied the respondent/assessee the benefit it had sought to take by resorting to Article 12 of the India-USA Double Taxation Avoidance Agreement - assessee which is a company incorporated under the laws of United States of America, rendered branding and management services to an Indian entity going by the name Fujitsu - HELD THAT - First, there was no back-to-back arrangement, according to him, between the respondent/assessee, as noticed above, and its holding company, FL. Second, in order to deny the respondent/assessee the status of a beneficial owner, the AO had to find that the assessee was either an agent or conduit for the holding company i.e., Fujitsu Limited, Japan. The second proposition, as a matter of fact, flows from the findings of fact returned by the CIT(A). CIT (A) has found as a matter of fact that the appellant was playing the role of a service provider after procuring the same from other group companies and that it had dominion over the fees received by it. We have also put to Mr Chandra as to whether there was any ground raised in the appeal preferred before the Tribunal that the finding returned by the CIT(A) was perverse. No specific ground in those terms was framed. It is Mr Chandra s submission though that the ground raised was that the CIT(A) had erred in concluding that the respondent/assessee was entitled to the status of a beneficial owner. To our minds, once it is held that there was no back-to-back arrangement and the respondent/assessee had dominion and control over the fees received by it and thus entitled to status of a beneficial owner, then, even according to the appellant/revenue, the provisions of Article 12 of the DTAA will kick in. Tribunal, as noted above, has sustained the orders passed by the CIT(A). According to us, no substantial question of law arises in the above-captioned appeal.

Issues Involved:

1. Taxation rate applicable to the receipts from branding and management services under the India-USA Double Taxation Avoidance Agreement (DTAA).
2. Determination of beneficial ownership of the receipts.
3. Validity of the Assessing Officer's (AO) claim of a back-to-back arrangement between the respondent/assessee and its holding company.

Detailed Analysis:

Issue 1: Taxation Rate Under DTAA

The primary issue was whether the receipts from branding and management services provided by the respondent/assessee to Fujitsu Consulting India Pvt. Ltd. (FCI) should be taxed at 25% as per Indian domestic law or at 15% under Article 12 of the India-USA DTAA. The respondent/assessee offered the amount for taxation at 15% of gross receipts under Article 12 of the DTAA. The AO, however, taxed the receipts at 25% on a gross basis, denying the benefit under the DTAA.

Issue 2: Determination of Beneficial Ownership

The AO's order was based on the assertion that the respondent/assessee was not the beneficial owner of the receipts since they were transferred to its holding company, Fujitsu Limited, Japan (FL), on a back-to-back basis. The AO argued that the respondent/assessee merely served as a conduit or channel for the income, making FL the actual beneficial owner. Consequently, the AO concluded that the receipts should be taxed as per Indian domestic law.

Issue 3: Validity of AO's Claim of Back-to-Back Arrangement

The respondent/assessee contested the AO's claim, arguing that it had full and unconditional rights over the fees received and was not obligated to pass them on to FL. The CIT(A) examined the evidence, including email communications between the respondent/assessee and FCI, and concluded that there was no back-to-back arrangement. The CIT(A) found that the respondent/assessee played an active and meaningful role in delivering services, thereby establishing its status as a beneficial owner.

Judgment Analysis:

1. CIT(A)'s Findings:
- The CIT(A) conducted a detailed examination of the records and email communications, which evidenced the respondent/assessee's active involvement in providing services to FCI.
- The CIT(A) determined that the respondent/assessee had dominion and control over the fees received and was not merely a conduit for FL.
- The CIT(A) concluded that the respondent/assessee was the beneficial owner of the fees and thus entitled to the benefits under Article 12 of the DTAA.

2. Tribunal's Decision:
- The Tribunal upheld the CIT(A)'s order, agreeing that the respondent/assessee was the beneficial owner and that there was no back-to-back arrangement with FL.
- The Tribunal dismissed the appellant/revenue's appeal, sustaining the CIT(A)'s findings.

3. High Court's Ruling:
- The High Court examined the record and found no substantial question of law arising from the appellant/revenue's appeal.
- The Court noted that the CIT(A) had made factual findings that the respondent/assessee had dominion over the fees and was not acting as an agent or conduit for FL.
- The Court dismissed the appeal, affirming that the respondent/assessee was entitled to the 15% tax rate under Article 12 of the DTAA.

Conclusion:

The High Court dismissed the appellant/revenue's appeal, affirming the CIT(A) and Tribunal's findings that the respondent/assessee was the beneficial owner of the fees received for branding and management services and was entitled to the tax benefits under Article 12 of the India-USA DTAA. The Court found no evidence of a back-to-back arrangement with FL and concluded that the respondent/assessee had dominion and control over the receipts.

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