Service permanent establishment and treaty rate principles decided under the Indo-UK DTAA, with section 234B interest rejected.

The Tribunal held that the assessee had a service permanent establishment in India under Article 5(2)(k) of the Indo-UK DTAA because services were furnished through personnel in India for the requisite period. It further held that the royalty element was not wholly effectively connected with that permanent establishment, so the income issue was set aside and remanded to the Assessing Officer for recomputation in line with earlier directions. Interest under section 234B was not leviable because the relevant income had been disclosed in the return. The Revenue's cross objection on the treaty rate and Article 13(2) was held not maintainable, and the assessee was entitled to the 15% treaty rate.

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Issues: (i) Whether the assessee had a service permanent establishment in India under Article 5(2)(k) of the Indo-UK DTAA; (ii) whether the royalty received by the assessee was effectively connected with that permanent establishment and, to that extent, taxable as business profits and/or royalty under the DTAA; (iii) whether interest under section 234B of the Income-tax Act, 1961 was chargeable; and (iv) whether the Revenue's cross objection challenging the rate of tax and the applicability of Article 13(2) of the DTAA was maintainable and whether the lower treaty rate was available.

Issue (i): Whether the assessee had a service permanent establishment in India under Article 5(2)(k) of the Indo-UK DTAA.

Analysis: The assessee and its group company had an arrangement under which technical personnel and related services continued to be rendered in India. The Tribunal followed its earlier view for prior years and held that the statutory conditions of Article 5(2)(k) were satisfied, including furnishing of services through other personnel for the requisite period.

Conclusion: The service permanent establishment in India was established against the assessee.

Issue (ii): Whether the royalty received by the assessee was effectively connected with that permanent establishment and, to that extent, taxable as business profits and/or royalty under the DTAA.

Analysis: The Tribunal distinguished between royalty for intellectual property rights and consideration attributable to services rendered by different categories of employees. Following the earlier year's order, it held that the royalty element was not wholly effectively connected with the permanent establishment, while the service component required fresh quantification by the Assessing Officer in accordance with the earlier directions.

Conclusion: The impugned order was set aside on this aspect and the matter was remanded to the Assessing Officer for determination of income in accordance with the earlier year's directions.

Issue (iii): Whether interest under section 234B of the Income-tax Act, 1961 was chargeable.

Analysis: The Tribunal followed its earlier decision and noted that the assessee had included the royalty and fees for technical services in its return, so the preconditions for levy of interest under section 234B were not met.

Conclusion: Interest under section 234B was not leviable against the assessee.

Issue (iv): Whether the Revenue's cross objection challenging the rate of tax and the applicability of Article 13(2) of the DTAA was maintainable and whether the lower treaty rate was available.

Analysis: The Tribunal held that the Revenue had no statutory right to file the cross objection in the facts of the case, since the assessee's objections before the DRP were filed before the statutory cut-off date. On merits, it held that the treaty phrase "beneficial owner" requires the beneficial owner to be a resident of the other contracting state, and the lower rate cannot be denied merely because the immediate recipient is not the beneficial owner if the beneficial owner is admittedly resident of the treaty partner state. It therefore rejected the Revenue's contention under section 115A(1)(b) of the Act.

Conclusion: The cross objection was not maintainable and, in any event, the assessee was entitled to the 15% rate under Article 13(2) of the DTAA.

Final Conclusion: The assessee succeeded on the procedural challenge to the Revenue's cross objection and on the levy of interest, while the question of taxation of receipts was partly restored for recomputation by the Assessing Officer in accordance with the earlier year's directions.

Ratio Decidendi: Where the treaty beneficiary requirement is satisfied by the beneficial owner being resident of the other contracting state, the lower treaty rate cannot be denied merely because the formal recipient is not the beneficial owner; and a Revenue cross objection is not maintainable unless the statute specifically confers that right in the relevant DRP regime.

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