2019 (12) TMI 769 - AT - Income Tax

Service PE in India - Royalty - attribution of profit - AO has erred in holding that Appellant has a service Permanent Establishment ( PE ) in India within the meaning of Article 5 of India UK Double Taxation Avoidance Agreement ( DTAA ) - Whether Appellant has a service PE in India under Article 5(2)(k) of the DTAA? - HELD THAT - Following the decision in own case 2018 (9) TMI 961 - ITAT DELHI , decided in favor of assessee.

Issues Involved:
1. Consideration of submissions by the assessee.
2. Existence of a service Permanent Establishment (PE) in India.
3. Nature of Technology Transfer Agreement (TTA) and International Personnel Assignment Agreement (IPAA).
4. Connection of royalty income to the alleged service PE.
5. Computation mechanism for chargeability of royalty income under the DTAA.
6. Attribution of profits to the Indian company.
7. Consistency with previous Tribunal orders.
8. Levying of interest under sections 234A and 234B of the Act.
9. Initiation of penalty proceedings under section 271(1)(c) of the Act.

Detailed Analysis:

1. Consideration of Submissions by the Assessee:
The assessee argued that the assessment order was passed without due consideration of its submissions. The Tribunal acknowledged this grievance but did not provide a separate ruling on this issue, implying it was addressed within the context of the other issues.

2. Existence of a Service Permanent Establishment (PE) in India:
The Tribunal upheld the decision that the assessee had a service PE in India under Article 5 of the India-UK DTAA. This was based on the secondment of employees by the assessee to JCB India, which continued for more than ninety days within a twelve-month period. This finding was consistent with the Tribunal's previous decisions for Assessment Years (AY) 2006-07 and 2012-13.

3. Nature of Technology Transfer Agreement (TTA) and International Personnel Assignment Agreement (IPAA):
The Tribunal found that the TTA and IPAA were independent contracts for different purposes. The IPAA involved employees sent on deputation to JCB India, which was not related to the services under the TTA. However, the Tribunal held that the seconded employees constituted a service PE in India, as previously determined in earlier assessments.

4. Connection of Royalty Income to the Alleged Service PE:
The Tribunal ruled in favor of the assessee, stating that the royalty income was not effectively connected to the service PE in India. This was consistent with previous Tribunal decisions, which found that the service PE had no role in creating or making the intellectual property rights available to JCB India.

5. Computation Mechanism for Chargeability of Royalty Income under the DTAA:
The Tribunal agreed with the assessee that the entire royalty received from India could not be subjected to tax in India since no functions, assets, or risks associated with the alleged PE were present in India. The royalty income could only be taxed to the extent of profits attributable to Indian operations, following the principle of apportionment under Rule 10(ii) of the Income Tax Rules, 1962.

6. Attribution of Profits to the Indian Company:
The Tribunal set aside the issue of attribution of profits to the file of the Assessing Officer for fresh determination. This decision was in line with the Tribunal's previous rulings, which required the Assessing Officer to consider the actual expenses incurred for earning the receipts and determine the income in terms of Article 7 of the DTAA.

7. Consistency with Previous Tribunal Orders:
The Tribunal emphasized the importance of consistency with its previous orders. It noted that the issues of service PE and royalty connection had been decided in earlier years and followed those decisions for the current assessment year.

8. Levying of Interest under Sections 234A and 234B of the Act:
The Tribunal directed the Assessing Officer to verify if the assessee had filed its return of income before the due date. If found correct, the Assessing Officer was instructed to charge interest as per the provisions of the law.

9. Initiation of Penalty Proceedings under Section 271(1)(c) of the Act:
The Tribunal did not provide a separate ruling on the initiation of penalty proceedings, implying that this issue was not specifically addressed in the final judgment.

Conclusion:
The Tribunal's judgment was a mix of upholding previous decisions and providing directions for fresh determinations. The issues of service PE and royalty connection were decided based on prior rulings, while the attribution of profits and interest levying were remanded to the Assessing Officer for further verification and computation. The appeal was allowed in part, with specific instructions for the Assessing Officer to follow the principles of natural justice.

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