2017 (6) TMI 1174 - AT - Income Tax

Assessee's Payments Deemed 'Royalty' under India-UAE DTAA

The Tribunal concluded that payments received by the assessee were classified as 'royalty' under the DTAA between India and UAE. In the absence of a ... Characterisation of cross border payments as royalty under Article 12 of the Indo UAE DTAA and Explanation 2 to section 9(1)(vi) of the Act - fees for technical services (FTS) v. royalty - distinction between supply of know how (use/right to use information) and provision of services - service permanent establishment under Article 5(2)(i) of the DTAA - residence requirement and tax residency certificate for claiming treaty benefits under Article 4 and section 90 - priority and scope of a DTAA as a complete code to be strictly interpreted; domestic law applies where treaty is silentResidence requirement and tax residency certificate for claiming treaty benefits under Article 4 and section 90 - Entitlement to benefits of the India UAE DTAA was not available to the assessee for AYs 2010 11 and 2011 12 as the certificate of residence filed related only to 01.04.2012-31.03.2013 and did not cover the years under consideration; assessee failed to prove management and control in UAE. - HELD THAT: - The Tribunal held that treaty benefits under Article 4 and section 90 are available only to residents of a Contracting State and proof of residence (tax residency certificate) for the relevant period is necessary. The certificate produced related to a later year (valid from 01.04.2012) and therefore did not cover the assessment years 2010 11 and 2011 12. The assessee also failed to establish that it was wholly managed and controlled in UAE. Consequently the assessee was not entitled to DTAA relief for the years under appeal and domestic law remained applicable. [Paras 23]Assessee not entitled to DTAA benefit for AY 2010 11 and 2011 12 for lack of timely tax residency certificate and failure to prove management and control in UAE.Service permanent establishment under Article 5(2)(i) of the DTAA - Assessee was held to have a service permanent establishment (service PE) in India under Article 5(2)(i) because services (including consultancy) were furnished through personnel in India and the activities continued/continued to be rendered such that the service PE test was satisfied. - HELD THAT: - The Tribunal analysed Article 5(2)(i) and found that the clause is an inclusive provision independent of Article 5(1)'s fixed place requirement. The decisive elements are furnishing of services through employees/personnel in the other State and continuation of such activities aggregating to the period contemplated by the Article. On the material, including the nature and continuity of services and admissions in the assessee's replies, the Tribunal concluded that the service PE limb applied. The Tribunal therefore accepted the authorities' view that a service PE existed and rejected the objection that Revenue had taken a new case. [Paras 53, 54, 55, 56, 57]Assessee has a service PE in India within the meaning of Article 5(2)(i) of the DTAA.Characterisation of cross border payments as royalty under Article 12 of the Indo UAE DTAA and Explanation 2 to section 9(1)(vi) of the Act - fees for technical services (FTS) v. royalty - distinction between supply of know how (use/right to use information) and provision of services - Payments made by ABB Ltd. to ABB FZ LLC were characterisable as royalty (use/right to use information concerning industrial, commercial or scientific experience) and not merely FTS; accordingly they were taxable in India under Article 12 of the DTAA and section 9 read with section 5 of the Act. - HELD THAT: - The Tribunal examined the Regional Headquarter Services Agreement and the scope of services actually purportedly provided. It found that the agreement and the facts showed transfer/permission to use specialised, confidential know how, information and IPR type material (including express confidentiality and intellectual property clauses) rather than pure performance of services requiring substantial expenditure by the supplier. Applying the DTAA definition of royalties and the tests drawn from jurisprudence and commentary (distinguishing supply of know how from mere service provision), the Tribunal concluded the payments fell within Article 12(3) (and corresponding Explanation 2 to section 9) and thus constituted royalty liable to tax in India (subject to PE considerations and treaty limits). The Tribunal rejected the assessee's reliance on decisions which, on the facts, were distinguishable. [Paras 60, 62, 65]The consideration received was properly characterised as royalty and taxable in India under Article 12 of the DTAA and the domestic charging provisions.Final Conclusion: The Tribunal dismissed the appeals for AY 2010 11 and 2011 12. It held that the assessee could not claim DTAA benefits for the years under appeal for want of an appropriate tax residency certificate and proof of management and control in UAE; found that a service permanent establishment existed in India; and concluded that the payments constituted royalty (use/right to use information/know how) taxable in India under Article 12 of the Indo UAE DTAA and the domestic law. Appeals therefore failed and the assessment orders were upheld. Issues Involved:1. Classification of payments as 'royalty' under the Income-tax Act, 1961 and the Double Taxation Avoidance Agreement (DTAA) between India and UAE.2. Applicability of the Act when there is no specific Article in the DTAA for taxability of a particular payment.3. Levy of interest under section 234B of the Act.4. Initiation of penalty proceedings under section 271(1)(c) of the Act.Detailed Analysis:1. Classification of Payments as 'Royalty':The primary issue was whether the payments received by the assessee from ABB Ltd. for services rendered could be classified as 'royalty' under the Income-tax Act and the DTAA between India and UAE. The assessee argued that these payments were for technical services and not 'royalty'. However, the Tribunal found that the services provided by the assessee involved sharing specialized knowledge, expertise, and experience, which were not available in the public domain. This was evidenced by the confidentiality clauses in the agreement. Therefore, the Tribunal concluded that the payments were indeed 'royalty' under Article 12(3) of the DTAA, which includes payments for the use of or the right to use industrial, commercial, or scientific experience.2. Applicability of the Act in Absence of Specific Article in DTAA:The Tribunal examined whether, in the absence of a specific article for Fees for Technical Services (FTS) in the DTAA, the provisions of the Income-tax Act would apply. The Tribunal referred to the AO's and DRP's findings that where the DTAA is silent, the domestic law prevails. The Tribunal upheld this view, stating that the absence of a specific provision in the DTAA means that the domestic law, i.e., Section 9(1)(vii) of the Act, would govern the taxability of such payments.3. Levy of Interest under Section 234B:The assessee contested the levy of interest under Section 234B of the Act. However, the Tribunal did not provide a detailed discussion on this issue, as the primary focus was on the classification of payments and the applicability of the DTAA provisions. The levy of interest under Section 234B was implicitly upheld as part of the final order.4. Initiation of Penalty Proceedings under Section 271(1)(c):The assessee also challenged the initiation of penalty proceedings under Section 271(1)(c) of the Act. The Tribunal did not delve into this issue in detail, as the main contention revolved around the nature of the payments received and their taxability. The initiation of penalty proceedings was not specifically addressed in the final judgment.Conclusion:The Tribunal concluded that the payments received by the assessee from ABB Ltd. were 'royalty' under the DTAA between India and UAE. It was also held that in the absence of a specific article for FTS in the DTAA, the provisions of the Income-tax Act would apply. Consequently, the appeals filed by the assessee for the assessment years 2010-11 and 2011-12 were dismissed.