9911796707
TMI Blog2014 (7) TMI 260X X X X Extracts X X X X X X X X Extracts X X X X ..... It is thus rightly held that the service PE of the assessee is established in India – Decided against Assessee. Royalty earned connected with service PE in India – Held that:- The Tribunal in the earlier year has held that the total amount consisting Lumpsum Licence/Know-how Fees and also royalty was consideration for the transfer of IP rights simplicitor and also the service rendered by the employees of the second category - in so far as the question of royalty representing consideration for the transfer of IP rights simplicitor was concerned, the service PE representing the deputationists had no role to play either in creating or making it available to JCB India - That is how the Tribunal came to hold that the same was not effectively connected with the service PE of the assessee in India - the consideration for rendering of services by the employees of first category was chargeable to tax under Article 7 of the DTAA – thus, the matter is remitted back to the AO for determination of the amount of income in terms of Article 7 – Decided in favour of Assessee. Applicability of Article 13(2) – Royalty subject to tax @ 20% plus surcharge and education cess u/s 115A(1)(b) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be the resident of the UK - It is not that if the formal recipient, a resident of UK, is not the beneficial owner, then the benefit is lost, notwithstanding the fact that the beneficial owner is also the resident of UK - relief of lower rate of taxation can be denied if the beneficial owner of the royalty is a resident of some third state, neither being India nor UK - the assessee, a resident of UK, is not a beneficial owner as per the stand point of the Revenue, still the benefit of lower rate of tax cannot be denied because the beneficial owner of the royalty, being JCBE, is admittedly resident of UK - the royalty has arisen in India, and the beneficial owner of this royalty is resident of UK - the tax shall be charged @ 15% as provided in Article 13(2) of the DTAA. - Decoded partly in favor of assessee. - ITA No.80/Del/2013 and CO No.160/Del/2014 - - - Dated:- 4-7-2014 - SHRI R.S. SYAL AND SHRI C.M. GARG, JJ. For the Appellant : Shri G.C. Srivastava, CA For the Respondent : Shri Sanjeev Sharma, DR ORDER PER R.S. SYAL, AM: This appeal by the assessee and the Cross Objection by the Revenue arise out of the order passed by the AO u/s 143(3) read wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of rights under the Technology Transfer Agreement (TTA) and International Personnel Assign Agreement (IPAA) in these earlier years was held to be effectively connected with the said service PE of the assessee in India. Relying on para 6 of Article 13, the Assessing Officer took the view in the earlier years that such royalties/fees for technical services was liable to be considered as Business Profits under Article 7 of the DTAA as it was effectively connected with the P.E. After grossing up the receipt of royalty in terms of sec. 195A and allowing deduction for expenses at the rate of 20% of such amount of royalties/fees for technical services, he had computed total income of the assessee. 3.3. The AO noticed in the proceedings for the instant year that JCBE continued to second its employees to JCBI as was done in the earlier years. The details of such employees have been reflected on pages 3 and 4 of the assessment order. He further observed that all the terms and conditions for the use of the licence by JCBI were similar to those of the earlier Agreement. The only difference in this year was that under the new Agreement dated 17.12.2007, royalty was first paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee in India, the AO has observed that the employees of JCBE, earlier seconded to JCBI, continued to render services to JCBI during the year in question in the same way as they were doing in the past. This position was noticed by virtue of Clause (d) of the new Agreement and Clause 4.2 of this Agreement which clarifies that the delivery of technical documentation and making available of technical personnel as set out in earlier clauses III and IV of the Technology Agreement shall remain unaffected by this agreement and shall continue as rights and obligations between JCBE and JCBI under the Technology Agreement. The AO held that the above details coupled with the fact that JCBE received 99.5% of royalty from the assessee left nothing to doubt that there was service PE of the assessee as per Article 5(2)(k) of the DTAA covered within the ambit of other personnel . Since this position has been candidly accepted by the ld. AR as well, we, therefore, refrain from any independent evaluation of this aspect. The ld. AR accentuated that his objections against the holding of the service PE of the assessee in India were practically the same which were taken for the earlier years. The trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to such employees was covered within para 6 of Article 13 of the DTAA. That is how, the Tribunal concluded that the consideration for rendering of services by the employees of first category was chargeable to tax under Article 7 of the DTAA. The AO was directed to determine the amount of income in terms of Article 7. As the facts for the instant year are admittedly similar to those of the preceding years on this issue, respectfully following the precedent for A.Y. 2006-07, we set aside the impugned order and send the matter back to the file of AO for determining income in consonance with the directions given for the earlier year. 6. The last ground of the assessee s appeal against the charging of interest u/s 234B is also decided in assessee s favour by following the view taken in the order for AY 2006-07. Relevant discussion has been made in para 20.2 of the order by which it was held that the liability of interest u/s 234B did not arise as the assessee had included the amount of royalty and fees for technical services in its total income. 7. The Revenue has filed a Cross Objection (CO) by raising the following ground :- Considering the fact that Article 13(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ady been checked by a group of three CITs constituting the DRP. However, later it was realized that the interest of the Revenue was suffering because of certain directions given by the DRP prejudicial to the interest of the Revenue, which the Assessing Officer cannot tinker with and become binding on him. With a view to empower the CIT to challenge such adverse directions given by the DRP pursuant to which the Assessing Officer has passed order u/s 144C, the legislature stepped in by introducing sub-section (2A) to section 253 w.e.f. 1.7.2012, which provides that the : The Commissioner may, if he objects to any direction issued by the Dispute Resolution Panel under sub-section (5) of section 144C in respect of any objection filed on or after the 1st day of July, 2012, by the assessee under sub-section (2) of section 144C in pursuance of which the Assessing Officer has passed an order completing the assessment or reassessment, direct the Assessing Officer to appeal to the Appellate Tribunal against the order. Sub-section (4) of section 253 empowering the assessee or the Assessing Officer to file cross objection was also suitably amended by the Finance Act, 2012 to, inter alia, pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that the appeal or the cross objection can be filed by the Revenue only if the CIT objects to any direction issued by the DRP or against any part of the order of the Assessing Officer (in pursuance of the directions of the DRP) . Thus it is manifest that the appeal can be filed only against direction issued by the DRP and the CO can be filed against any part of the order of the Assessing Officer passed in pursuance to the direction of the DRP. The nitty-gritty of the matter is that Revenue should have objection either against the Direction of the DRP or against the order passed by the Assessing Officer. In other words, the scope of the appeal or cross objection by the Revenue is confined to the some adverse finding rendered by either of the authorities, as the case may be. 12. Let us briefly recapitulate the facts of the extant case. The assessee derived income in the nature of royalties and offered the same to tax @ 15% on gross basis as per such lower rate of tax provided under Article 13(2) of the DTAA. The AO held that the assessee has a service PE in India and since such royalty was effectively connected with the PE, the entire income would fall under Article 7 as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts , naturally he had no occasion to apply his mind on the correctness of the assessee s claim of the rate of tax. Now, since the Assessing Officer s view has been partly overturned and that of the assessee restored pro tanto, it would become essential for the Assessing Officer to calculate tax on such amount in conformity with our decision, by firstly, ascertaining the quantum of such royalty and then applying the correct rate of tax. We have rendered our decision only on the quantum aspect which was agitated before us, and not on the aspect of the rate of tax to be applied, which was not specifically assailed. In such circumstances, one option can be to leave such aspect to be decided afresh by the Assessing Officer in the order giving effect to the tribunal order, and the other option can be to decide it here and now. As the ld. DR has raised such issue and the ld. AR has also requested to adjudicate the same right in these proceedings, we are taking up the same for decision on merits. 15. It can be observed from the factual narration given above that JCBE was receiving royalty from JCBI in earlier years. As per the new Agreement entered into amongst JCBE, JCBI and the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s hands and admittedly JCBE did not. The assessment of such royalty income has been made on substantive basis in the hands of the assessee and there is no assessment of such royalty income in the hands of the JCBE. It is not the case of the parties before us that the amount received by the assesee should have been charged to tax in the hands of JCBE as it was the real and the beneficial owner of the amount received by the assessee who merely acted as a mediator between JCBI and JCBE. As such, we are not going into this aspect. 19. Coming back to the examination and evaluation of the point of view of the Revenue that the benefit of Article 13(2) cannot be made available to the assessee, we consider it expedient to take stock of the prescription of the relevant part of para 2 of Article 13 which is as under:- 2. However, as the royalties and fees for technical services may also be taxed in the contracting state in which they arise and according to laws of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other contracting state, the tax so charged shall not exceed. . 20. The essence of this provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DTAA can be withdrawn if the beneficial owner of the royalty in our case happens to be not a resident of UK. A case has been made out that since the assessee, a resident of UK, is not the beneficial owner of the royalty etc., the benefit of lower rate of taxation would be automatically forfeited. In our considered opinion, this contention is devoid of merits because the requirement for the applicability of Article 13(2) of the DTAA is that the beneficial owner should be the resident of the UK. It is not that if the formal recipient, a resident of UK, is not the beneficial owner, then the benefit is lost, notwithstanding the fact that the beneficial owner is also the resident of UK. Such relief of lower rate of taxation can be denied if the beneficial owner of the royalty is a resident of some third state, neither being India nor UK. Despite the fact that the assessee, a resident of UK, is not a beneficial owner as per the stand point of the Revenue, still the benefit of lower rate of tax cannot be denied because the beneficial owner of the royalty, being JCBE, is admittedly resident of UK. As the royalty in the present case has arisen in India, and the beneficial owner of this ro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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