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2016 (8) TMI 809

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..... well as the extract of the directory. In view of this, we are not in agreement with the stand of the revenue that royalty income received by the assessee is effectively connected with its branch office in India and therefore in terms of article 12(5), assessee is not entitled for preferential tax treatment according to article 12 (1) & (2) of the DTAA. In the result We hold that royalty income earned by the assessee on account of technical agreement with the New Holland Tractors Private limited is not effectively connected with the BO of the assessee in absence of any positive and substantive material that services have been rendered by the employees of the BO of the assessee and therefore same is chargeable to tax as "Royalty" income as per article 13(1) and (2) of the India Italy DTAA - Decided in favour of assessee
SHRI I. C. SUDHIR, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER For The Assessee : Sh. CS Aggarwal, Sr. Adv Mr. RP Mall, Adv For The Revenue : Sh. Anuj Arora, CIT DR ORDER PER PRASHANT MAHARISHI, A. M. 1. For AY 2007-08 This is that appeal filed by the assessee against the order of the ld Assessing officer ( AO) dated 01-10-2010 passed u/s 1 .....

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..... facts and circumstances of the case and in law, the Learned Dispute Resolution Panel (Ld. DRP) erred in confirming the draft order of the Ld. AO and conclusions contained therein. 3. That on the facts and in the circumstances of the case, the Ld. DRP and the Ld. AO grossly erred in relying on the assessment order for the Assessment Year 2007-08 and concluded the assessment on that basis without examining the facts and circumstances of the case. 4. That on the facts and in the circumstances of the case and in law, the Ld. DRP and the Ld. AO, erred in holding that the royalty income received by the Head Office ('HO') of the appellant was effectively connected with the Branch Office ('BO') and therefore taxable at the rate of 42.23% (including surcharge and education cess) in India. 5. That on the facts and in the circumstances of the case and in law. the Ld. DRP and Ld. AO erred in: i) ignoring that the predominant objective of the Technical Collaboration and License Agreement, between the HO and New Holland Tractors India Private Limited, under which the royalty has been earned by the HO. which is permitting the use of the Intellectual Property Rights owned .....

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..... dispute about the taxability of the business income of ₹ 1696122/- offered by the assessee under the head "Business Income" and same was accepted as it is in order u/s 143(3) of the Income Tax Act and same is chargeable to tax @ 41.82% according to Income Tax Act. However, the sole dispute in this appeal is with respect to the sum of ₹ 5216224/- which is offered and claimed by the assessee as royalty income chargeable to tax thereon @ 20% on gross basis. The ld Assessing Officer passed draft assessment order on 24.12.2009 wherein, he held that royalty income of ₹ 5216224/- is „effectively connected‟ to the permanent establishment of the assessee in India and therefore same is not chargeable to tax as royalty income @ 20% on gross basis but as business income to be taxed @ 41.82%. The main reason given by the ld. Assessing Officer is that on perusal of the term stipulated in the agreement of royalty between Iveco Spa Italy and New Holland Tractors he inferred that the assessee‟s personnel are constantly present in India and are providing technical support services. He was also of the view that the branch office is employing around 25 employees wh .....

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..... istance was rendered by the employees of the BO. For this reason, the royalty income gets effectively connected with the permanent establishment in the shape of the BO. The action of the AO in taxing the royalty income on net basis is therefore to be upheld." 9. Based on the above direction the ld Assessing Officer passed the final order u/s 143(3) of the Act on 01.10.2010 treating the royalty income as effectively connected to the permanent establishment and chargeable to tax @41.82% on gross basis. Against this order, the assessee has preferred appeal raising 6 grounds of appeal. Ground No. 1 and 2 and 6 are general in nature and are supporting the main ground of the appeal and therefore no argument were advanced specifically hence, they are dismissed. 10. The main ground of appeal is ground No. 3 and 4(a) of the appeal, which are against holding that the royalty income received by the Head Office of the appellant is effectively connected with the Branch Office and therefore taxable @41.82% in India. 11. Before us ld AR of the appellant submitted two paper books and one judgment paper book along with written synopsis titled as brief note covering all his arguments. 12. The l .....

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..... e related to the agreement. c. He further submitted that for AY 2006-07, was the first year of assessment of branch office in India in which the royalty was received and offered to tax invoking article 13(2) of the Indo Italy DTAA and was accepted by the revenue that it is a royalty income which is not effectively connected with the Branch Office in India. He further stated that till to date that return of the assessee is not disturbed. d. He further submitted that the BO is engaged in providing business development assistance in purchase activities and after sales support services to the Head Office and therefore it does not provide any service in relation to the agreement with Holland Tractor services, hence, it cannot be stated that the impugned royalty income is effectively connected with the BOs activity in India. e. He further referred to the decision of Hon‟ble Delhi High Court in CIT Vs. Sumitomo Corporation in ITA NO. 714/2014 dated 16.11.2015 to state that only those profits which are economically attributable to PE are chargeable to tax as business income of the assessee under Article 12(5) of the DTAA and it makes a distinction between the income which are the .....

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..... Lal Mohar Thakur, Air 1931 PC 143 8 Arjan Singh Vs. Kartan Singh, 1951 Air 193 (SC) 9 Smt. Girijamma Vs. Kamala Engg. Works Air 2000 Kant 239 10 Mandala Madhava Rao Vs. Mandala Yodagin AIR 2001 AP 407 11 Raj Kumar Jain Vs. Assistant Commissioner of Income Tax reported in 50 ITD 1 12 Cit Vs. Anima Investment Ltd. (2000) 73 ITD 125 (Del) ™ 13. Commissioner of Income Tax Vs. Manish Build Well (P) Ltd (2012) 204 Taxman 106 (Delhi) In substance, his argument was that BO of the assessee was not at all engaged in any of the activities for performance of the agreement of Holland Tractors with the assessee and therefore the income is not at all effectively connected with the BO and hence is rightly offered for taxation as Royalty. 17. Against this the ld DR submitted as under:- a. That the assessee has not provided information of duration of stay of the employees of the head office who visited in India and therefore the ld Assessing Officer has inferred that the royalty income is effectively connected to PE of the assessee in India. He further submitted that the assessee company is having 25 employees who are equipped to render services, which are mandated by the agree .....

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..... set aside to the file of Assessing Officer. f. The revenue further relied on the decision of the Special Bench in case of ACIT Vs. Clough Engineering Ltd. 11 Taxmann.com 17 (Del) (SB) to submit the intent of effective connection of the other income with the PE on the basis of „asset test‟ or „activity test‟. 18. We have carefully considered the rival contentions. It is for the understanding of the whole issue it is important to look at the agreement between assessee and New Holland Tractor India Pvt Ltd. for technical collaboration and license agreement dated 17.12.2004. as per this agreement, the assessee is „ Licensor‟ and the Holland Tractor India Private Limited is „licensee‟. The brief salient conditions of the agreement are extracted as under:- a. The Licensor is in the business of designing, developing, manufacturing and selling commercial vehicles and diesel engines throughout the world, being the legitimate owner of the related technology and know-how and being in possession of valuable and confidential design and technical and manufacturing data and information; b. The Licensor has already established in India, for the .....

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..... terms and conditions of the agreement including the remuneration are undisputed. Therefore, they are not discussed . 19. The contention of the Ld AO and DRP is that these services to be provided by the assessee to Holland Tractors P Ltd are sophisticated and in absence of support of employees of the BO of the assessee could not have been accomplished. Since the assessee has not established about the employees who visited for provision of these services, the obvious conclusion reached by the revenue is that such assistance is rendered by the employees of the BO of the assessee in India. 20. Further to understand the controversy it is necessary to see the provision of article 13 of the India Italy DTAA [DTAA] Article 13 Royalties and fees for technical services 1. Royalties and fees for technical services 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 royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, or fees for technical services, .....

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..... royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 7. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of royalties or fees for technical services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this article shall apply only to the last-mentioned amount. In such case, the excess part of the payment shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention. [ underline supplied by us] 21. It is undisputed fact that assessee has a permanent establishment in India as a branch office. It is also not disputed by the parties that assessee has earned „royalty‟ in India which falls under article 13(3) of the India-Italy DTAA. According to article 13(5) of the DTAA, if the right, property or contract in respect of which royalty is earned is effectively connected with the permanent establishment of the assessee then the assessee losses concessional treatment .....

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..... As the BO employs technically qualified staff, it is inferred by revenue that employees of the BO has provided these services. In fact, prior to this agreement with the New Holland Tractors Limited, assessee was having such technical agreement with other party in India and at that, time branch of office of India did not exist at all. Further there is mere allegation by the revenue that the services have been performed by the persons employed by the BO of the assessee in relation to the impugned contract even when assessee has categorically given information vide letter dated 23/12/2009. Merely having some staff with its BO, that are technically qualified, it cannot be inferred that they have provided services for performance of the impugned contract. In fact the services rendered by the branch office in India which are tabulated in the letter of permission dated 11/12/2004 of the Reserve bank of India, are also technical in nature which inter alia includes providing technical support services to the clients of its HO in India, after sales support services, warranty services etc., therefore to perform that activity also BO of the assessee in India needs technically qualified employe .....

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..... come arising through the permanent establishment is the existence of the permanent establishment at the time when whatever decisively caused the profits to accrue, actually accrued". The income producing activities should be connected with the permanent establishment not only economically but also in substance." [underlines supplied by us] 23. In substances neither there is any material about the requirement of the services by the recipient of the services nor provision of such services, if any, by the employees of the BO of the assessee. Therefore, in absence of any such material it cannot be said that income of royalty is the income arising out of results of the activities of the permanent establishment. In fact, the income of royalty is because of the direct dealing of the New Holland tractors limited with the assessee without the aid or support from its permanent establishments in India. Hence, we now decide the issue of admission of additional evidence. According to us , these evidences does not have any bearing in deciding the issue involved in the present appeal, hence we dismiss the application of revenue for admission of the linked in profile of the two employees of .....

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