9911796707
TMI Blog2016 (6) TMI 248X X X X Extracts X X X X X X X X Extracts X X X X ..... dia) Private Limited and Imerys Minerals (India) Private Limited respectively; 2. Non applicability of Article 24 - Limitation of Relief of the treaty to the royalty and interest income of the Appellant The learned AO based on directions of the Hon'ble DRP has erred in applying the provisions of Article 24 - Limitation of Relief of the Treaty and in denying the application of concessional rate of tax as per the Treaty to the royalty and interest income earned by the Appellant; 3. Initiation of penalty proceedings under section 271(1)(c) of the Act of the Act The learned AO based on directions of the Hon'ble DRP has erred in initiating penalty proceedings under section 271(1)(c) of the Act. 3. The issue arising in the present appeal is against the rate of tax to be applied i.e. in the facts of the case whether the benefits under India - Singapore Tax Treaty are to be allowed or th e income is to be assessed under section 115A of the Act. 4. Briefly, in the facts of the case, the assessee was a company incorporated in Singapore and was tax resident of Singapore as per India- Singapore Double Taxation Avoidance Agreement (DTAA). The assessee company was 100% subsidiary of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. Based on the submissions filed by the assessee, the Assessing Officer proposed draft assessment order under section 144C r.w.s. 143(3) of the Act, wherein the assessee's total income was computed at Rs. 69,62,080/-, which was same as the return of income. However, in view of the fact that the assessee was not beneficial owner of interest and royalty, the assessee's claim for lower rate of tax for interest and royalty as per DTAA was rejected and the income was taxed @ 20% as per sections 115A(1)(a)(B) and 115A(1)(b)(B) of the Act, respectively plus surcharge and education cess. The assessee filed objections against the draft assessment order before the Dispute Resolution Panel (DRP), Pune. After hearing the same, the DRP rejected the objections raised by the assessee company. While disposing the objections, the DRP confirmed the decision of Assessing Officer that the assessee was not the beneficial owner of interest and royalty income, also the benefits of India-Singapore DTAA to the assessee were denied. In view thereof, the Assessing Officer passed an order under section 143(3) r.w.s. 144C(13) of the Act holding that since the assessee was not beneficial owner of ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t had received interest and was the direct beneficiary of the said interest. The learned Authorized Representative for the assessee referred to Article 11 of DTAA between India and Singapore and pointed out that if the beneficial owner was non-resident of India, then 15% of gross amount of interest was to be charged. As per Article 12 of DTAA, royalty receipts were to be charged @10%. The first issue to be decided in the present appeal vide ground of appeal No.1 was the question of beneficial owner, whether the same was the UK company or Singapore company. The learned Authorized Representative for the assessee pointed out that the issue as ground of appeal No.2, the Assessing Officer had erred in applying the provisions of Article 24 i.e. limitation of relief of treaty and in denying the application of concessional rate of tax as per treaty to the royalty and interest income earned by the assessee. The first objection raised by the Assessing Officer was that the said amount was not remitted in this year. The learned Authorized Representative for the assessee pointed out that even if the assessee succeeds on beneficial owner, since the amount was not remitted in this year, the quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id down by Pune Bench of Tribunal in Shaan Marine Services Pvt. Ltd. Vs. Dy. D irector of Income Tax (2014) 165 TTJ 952 (Pune) as to what is conduit company. Further reliance was placed on the ratio laid down by the Hon'ble Supreme Court in Union of India Vs. Azadi Bachao Andolan (2003) 263 ITR 706 (SC) and it was pointed out that before the apex court, the validity of circular was challenged, which circular in turn, stated that the Certificate of Residency would constitute sufficient evidence of status. The learned Authorized Representative for the assessee summed up in saying that royalty income was offered on accrual basis in Singapore, hence, the assessee was entitled to the Treaty benefit and the provisions of Article 24 of DTAA were not applicable. With regard to interest income, it was pointed out by him that the same was offered on receipt basis and there was no dispute that it was not taxed in Singapore. Further, it was pointed out by him that there was no condition under the Act that the same should be remitted in the fiscal year. 8. The learned Departmental Representative for the Revenue in reply, stated that the issue is to be decided whether the assessee was beneficia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accrued was to be paid on loans on quarterly basis. Further, these loans were granted by the assessee in accordance with External Commercial Borrowing (ECB) guidelines issued by the Reserve Bank of India. The assessee has furnished on record the Tax Residency Certificate from its head office in Singapore. The assessee claims that it has no Permanent Establishment / PE in India. During the year under consideration, the assessee had received royalty from INPL at Rs. 48,88,234/- and interest of Rs. 20,73,846/- from IMPL. The assessee claimed that the rate of tax on such receipts was to be applied as per DTAA between India and Singapore. 11. The factual aspect of the royalty payment was that the assessee had raised invoices relating to royalty for the period January, 2005 to December, 2009 on 19.10.2010 and for the period January 2010 to September, 2010 on 11.10.2010. INPL had remitted the amount of royalty for the period January, 2005 to December, 2009 on 14.07.2010 and for the period January, 2010 to September, 2010 on 06.12.2010. Since the assessee had not received income in Singapore from India during the financial year 2009-10, the Assessing Officer show caused the assessee as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not have any PE in India. However, in respect of royalty income and interest income accrued / received by the assessee for the year under consideration, it had furnished the return of income and had offered that it was liable to pay taxes as per the provisions of DTAA. Admittedly, there is no dispute as to the quantum of income to be assessed in the hands of assessee. Both the assessee and the Assessing Officer have computed income at Rs. 69,62,080/-. The dispute is as to the rate of tax to be applied on such income. 14. The relevant Articles for taxability of interest and royalty in India under Singapore Tax Treaty are reproduced hereunder for reference: - "ARTICLE 11: INTEREST - 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed : (a) 10 percent of the gross amount of the interest if such interest is paid on a loan granted by a bank carryi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l services may also be taxed in the Contracting State in which they arise and agreed to the laws of Contracting State, but if the recipient was the beneficial owner of royalties or fees for technical services, the tax so charged, was not to exceed 10%. Further under Article 11 of DTAA, similar provisions are laid down in respect of interest, except rates of tax i.e. in respect of loans granted by a bank or a financial institution, it would be taxed @10% of the gross amount of interest and in all other cases 15% of the gross amount of interest. Under Article 24 of DTAA, the limitation of relief is provided that where the agreement provides that the income from sources in a Contracting State, shall be exempt from tax, or taxed at reduced rate in that Contracting State and under the laws in force in the other Contracting State, the said income is subjected to tax by reference to the amount thereto which is remitted to or received in the other Contracting State and not by reference to the full amount thereof. It is further provided that the exemption or reduction of tax to be allowed under this agreement in first mentioned Contracting State shall apply to so much of the income as is re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly and exclusively for manufacturing the products and for no other purpose whatsoever and shall not be sub-licensed by the licensee to any other person without written consent of the licensor. In consideration of the grant of license, it was agreed that royalty equivalent to amount of 5% per annum of annul net sales of products realized for a particular year shall be paid by the licensee to the licensor. In order to provide the services to INPL, the assessee claims that it had provided services to INPL through its employees, who had also travelled to India, against which it had received royalties and the assessee was the beneficial owner of royalty received from Indian company and hence, was eligible for concessional tax rate @10% under Article 12(2) of India-Singapore Tax Treaty. The copies of invoices raised by the assessee along with documents submitted with authorized dealer for remittance of royalty and the Certificate issued by the auditor for the payment of royalty under foreign technical collaboration and also the extracts of Singapore tax return for 2009 are placed at pages 72 to 92 of the Paper Book. The royalty payments paid by INPL were subjected to tax deduction at sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 143(1) of the Act. However, where the assessee was the beneficial recipient of the interest income, the same is to be taxed @ 15% as per the DTAA 21. The next plea of the assessee before the authorities below was that the limitation of relief provided in Article 24 of DTAA would arise in case where the income is so much of income as is remitted to or received in the other Contracting State. In other words, the benefit of DTAA provisions is restricted to the amount of income which is the subject matter of taxation in the other Contracting State. In a situation, where the non-resident company claims Treaty protection, then the same should remain confined to the amount which is actually subjected to tax in the source country. The above said provision is provided to avoid situation, under which income which is not subject to tax in the residence jurisdiction, will be available for Treaty protection in the other Contracting States. 22. In the facts of the present case before us, it is not the case of Revenue that the amount has not been remitted to Singapore, but the benefit of Tax Treaty have been denied to the assessee since the said amount has not been remitted in the current f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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