2005 (10) TMI 32 - AAR - Income Tax

Non-resident companies - Group provides various products to various business worldwide, by providing BIRs information to help customers improve their understanding of a prospective client or supplier - payments made by the B Ltd. for the electronic purchases of Business Information Reports (BIRs) to the applicant will be treated as part of the applicant s business profits and hence covered within the provision of article 7 of the treaty - applicant will be held as not having a PE

Summary

Issues Involved:
1. Treatment of payments made for electronic purchase of Business Information Reports (BIRs) under Article 7 of the Indo-UK Double Taxation Avoidance Agreement (DTAA).
2. Determination of the existence of a Permanent Establishment (PE) in India under Article 5 of the DTAA.
3. Taxability of business profits in India under Article 7 read with Article 5 of the DTAA.
4. Requirement of withholding tax under section 195 of the Income Tax Act, 1961.
5. Obligation to file a tax return in India under section 139 of the Income Tax Act, 1961.
6. Applicability of penal provisions under the Income Tax Act, 1961 for non-filing of tax returns.

Detailed Analysis:

Issue 1: Treatment of Payments under Article 7 of the DTAA:
The applicants, two non-resident companies from the UK, sought a ruling on whether payments made by an Indian company (B Ltd.) for the electronic purchase of BIRs would be treated as part of the applicant's business profits under Article 7 of the Indo-UK DTAA. The ruling clarified that the payments made by B Ltd. to the applicant for the electronic purchase of BIRs would indeed be treated as part of the applicant's business profits and hence be covered within the provisions of Article 7 of the DTAA.

Issue 2: Determination of Permanent Establishment (PE) in India:
The applicant contended that it did not have a PE in India, as defined under Article 5 of the DTAA. The ruling examined whether B Ltd. could be considered a PE of the applicant. It was determined that B Ltd. operates independently, purchases BIRs on a principal-to-principal basis, and is not under the control of the applicant. Therefore, B Ltd. does not constitute a PE of the applicant in India. The ruling emphasized that the applicant does not have any subsidiary, branch, office, place of business, or agent in India, and thus, does not have a PE in India.

Issue 3: Taxability of Business Profits in India:
Based on the determination that the applicant does not have a PE in India, the ruling concluded that the applicant's business profits from the sale of BIRs to B Ltd. are not taxable in India under Article 7 of the DTAA. The applicant's business profits are taxable only in the UK, as the applicant does not have a PE in India.

Issues 4, 5, and 6: Withholding Tax, Filing Tax Returns, and Penal Provisions:
The applicant did not press for rulings on these issues. Therefore, the ruling did not address the requirement of withholding tax under section 195, the obligation to file a tax return in India under section 139, or the applicability of penal provisions for non-filing of tax returns.

Relevance of 'Conditions of Service':
The ruling addressed the Revenue's argument that the 'conditions of service' between B Ltd. and its customers indicated that B Ltd. was granted rights to use the copyright in the BIRs. The ruling clarified that the 'conditions of service' are generic and omnibus in nature, and certain conditions may not apply to specific products or activities. It was determined that the applicant retains all intellectual property rights in the BIRs, and no copyright is assigned or licensed to B Ltd. The transactions between the applicant and B Ltd. are on a principal-to-principal basis, and the 'conditions of service' are not relevant to the case.

Conclusion:
The ruling concluded that the payments made by B Ltd. to the applicant for the electronic purchase of BIRs are part of the applicant's business profits and are covered under Article 7 of the DTAA. The applicant does not have a PE in India under Article 5 of the DTAA, and therefore, its business profits are not taxable in India. The ruling did not address issues related to withholding tax, filing tax returns, and penal provisions, as these were not pressed by the applicant. The 'conditions of service' between B Ltd. and its customers do not affect the determination of the applicant's tax liability in India.