2019 (4) TMI 1428 - AT - Income Tax

Taxability of Royalty Income FTS - assessee offer to tax @ 10% on gross basis on royalty FTS - AO treat the same as business profit - India Russia DTAA - assessee had accepted that since it has branch office in India it constitutes a PE in India within the meaning of Article 5 of the DTAA. - HELD THAT - To sum up, being a member of consortium, the appellant company cannot pay royalty to itself and, therefore, the share received from the execution of the three projects is business profit of the appellant company. Since there is no transfer of any technical know-how and even if the services are rendered in India by the head office and not by the branch office, then also, the revenue of the appellant company cannot be bifurcated as royalty and fees for technical services. Moreover, the entire payment received during the year has to be attributable to the PE in India, and, therefore, the same is taxable as business profit. Since the assessee is having PE in India, Article 12 of the DTAA between India and Russia is not applicable. Therefore, the findings of the lower authorities cannot be faulted with. Attribution of Income and allowance of expenses incurred by the Head Office - HELD THAT - There is no dispute that the appellant company is having a PE in India. Therefore, whatever income the appellant company has earned from the projects has been earned through its PE. Therefore, the whole of the profit of the appellant company is attributable to its PE and since the expenses have already been allowed, incurred for the purpose of the PE, therefore, there is no need to tamper with the findings of the CIT(A) in the light of Article 7(3) of the India Russia DTAA. Transit Office Facility Expenses - HELD THAT - AR stated that since the payments have been made to sovereign Russian Embassy , there was no occasion to deduct tax at source. There is no dispute that the impugned amount has been paid to Russian Embassy as cost of accommodation to the Russian Employees. But the least the appellant company could have provided is the confirmation from Russian Embassy itself. We, therefore, allow one more opportunity to the appellant company to furnish the confirmations from the Russian Embassy in this regard. The appeals of the assessee are partly allowed for statistical purposes. Interest u/s 234B - HELD THAT - This issue is covered in favour of the assessee and against the Revenue by the judgment of the Hon'ble Jurisdictional High Court in the case of GE Packaged Power Inc. 2015 (1) TMI 1168 - DELHI HIGH COURT no interest is leviable on the respondent assessees under Section 234B, even though they filed returns declaring NIL income at the stage of reassessment. The payers were obliged to determine whether the assessee were liable to tax under Section 195(1), and to what extent, by taking recourse to the mechanism provided in Section 195(2) of the Act. The failure of the payers to do so does not leave the Revenue without remedy; the payer may be regarded an assessee-in-default under Section 201, and the consequences delineated in that provision will visit the payer . Also see ZTE CORPORATION 2017 (1) TMI 1338 - DELHI HIGH COURT .

Summary

Issues Involved:
1. Royalty Vs. Business Income
2. Fees for Technical Services (FTS) or business profits
3. Attribution of Income and allowance of expenses incurred by the Head Office
4. Transit Office Facility Expenses
5. Interest u/s 234B of the Income-tax Act, 1961

Detailed Analysis:

1. Royalty Vs. Business Income:
The appellant company bifurcated its income into Royalty income by the Head Office and fees for technical services by the Branch Office in India. The revenue authorities treated the royalty income as business profit. The appellant argued that the technical bid provided by the Head Office constituted royalty income due to the technical know-how provided. However, the tribunal found that since the appellant was a consortium member in the projects, the income received was business profit, not royalty. The tribunal stated, "being a member of consortium, the appellant company cannot pay royalty to itself," and thus, the income is attributable to the Permanent Establishment (PE) in India and taxable as business profit.

2. Fees for Technical Services (FTS) or Business Profits:
The appellant claimed fees for technical services for its branch office under various projects. The tribunal concluded that the income should not be bifurcated as royalty and fees for technical services. The tribunal emphasized that "the entire payment received during the year has to be attributable to the PE in India," making it taxable as business profit.

3. Attribution of Income and Allowance of Expenses Incurred by the Head Office:
The tribunal confirmed that since the appellant had a PE in India, the whole profit is attributable to the PE. The tribunal upheld the CIT(A)'s findings that expenses incurred for the PE have already been allowed under Article 7(3) of the India-Russia DTAA, thus no further adjustments were necessary.

4. Transit Office Facility Expenses:
The expenses paid by the appellant to the Russian Federation for accommodation of Russian employees were disallowed due to lack of confirmation from the Russian Embassy. The tribunal allowed the appellant another opportunity to furnish the required confirmations, stating, "the least the appellant company could have provided is the confirmation from Russian Embassy itself."

5. Interest u/s 234B of the Income-tax Act, 1961:
The CIT(A) directed that interest u/s 234B is not chargeable, which the Revenue contested. The tribunal upheld the CIT(A)'s decision, citing the Hon'ble Jurisdictional High Court's judgment in GE Packaged Power Inc., which held that the primary liability of deducting tax is on the payer, and no interest is leviable on the assessee under Section 234B. The tribunal also referenced the Delhi High Court's decision in ZTE Corporation, affirming that the issue is resolved in favor of the assessee.

Conclusion:
The appeals of the assessee are partly allowed for statistical purposes, and the appeals of the revenue are dismissed. The tribunal's order was pronounced in the open court on 15.04.2019.