2014 (7) TMI 260 - AT - Income Tax

UK Company PE in India: 15% Tax Rate Upheld for Royalties

JC Bamford Investments Versus DDIT, Circle-3(1), International Taxation, New Delhi.

JC Bamford Investments Versus DDIT, Circle-3(1), International Taxation, New Delhi. - [2014] 33 ITR (Trib) 493 (ITAT [Del]) Issues Involved:1. Existence of Service Permanent Establishment (PE) in India.2. Effective connection of royalty with the Service PE.3. Charging of interest under section 234B.4. Tax rate applicable to royalty income under Indo-UK DTAA.5. Maintainability of Revenue's Cross Objection.Detailed Analysis:1. Existence of Service Permanent Establishment (PE) in India:The primary issue was whether the assessee had a Service Permanent Establishment (PE) in India under Article 5 of the Indo-UK Double Taxation Avoidance Agreement (DTAA). The assessee, a UK-based company, derived income from royalties and fees for technical services, which were taxed at 15% as per the DTAA. The AO observed that the assessee's employees seconded to JCBI in India constituted a Service PE under Article 5(2)(k)(i) of the DTAA. The Tribunal noted that the tripartite agreement dated 17.12.2007, where JCBE sublicensed intellectual property to the assessee, did not alter the fact that JCBE's employees continued to render services in India. Hence, the Tribunal upheld the AO's decision, confirming the existence of a Service PE in India.2. Effective Connection of Royalty with the Service PE:The next issue was whether the royalty earned by the assessee was effectively connected with the Service PE in India. The Tribunal referred to its earlier order for AY 2006-07, which distinguished between royalties for intellectual property rights and fees for technical services rendered by employees. It concluded that royalties for intellectual property rights were not effectively connected with the Service PE, whereas fees for technical services by certain employees were. Following this precedent, the Tribunal directed the AO to determine the income accordingly, distinguishing between royalties and fees for technical services.3. Charging of Interest Under Section 234B:The assessee contested the charging of interest under section 234B. The Tribunal, following its earlier decision for AY 2006-07, ruled in favor of the assessee, stating that the liability for interest under section 234B did not arise as the assessee had included the royalty and fees for technical services in its total income.4. Tax Rate Applicable to Royalty Income Under Indo-UK DTAA:The Revenue argued that the royalty should be taxed at 20% under section 115A(1)(b) of the Act, as the assessee was not the beneficial owner of the royalty. The Tribunal dismissed this argument, stating that the beneficial owner of the royalty was JCBE, a resident of the UK. It held that the lower tax rate of 15% under Article 13(2) of the DTAA was applicable, as the beneficial owner was a UK resident.5. Maintainability of Revenue's Cross Objection:The Revenue filed a Cross Objection, claiming that the royalty should be taxed at 20%. The Tribunal dismissed the Cross Objection on two grounds: first, it was not maintainable as per law since the objection was filed before the cut-off date of 1.7.2012; second, the Cross Objection lacked the necessary mandate as it did not pertain to any adverse finding by the AO or DRP. The Tribunal emphasized that the right to appeal is statutory and must be exercised within the confines of the relevant provisions.Conclusion:The Tribunal upheld the existence of a Service PE in India and directed the AO to determine the income by distinguishing between royalties and fees for technical services. It ruled in favor of the assessee on the issue of interest under section 234B and applied the lower tax rate of 15% under the DTAA. The Revenue's Cross Objection was dismissed as not maintainable.