2015 (5) TMI 607 - AT - Income Tax

Tribunal finds PE in India, links royalty income to Indian operations. Interest charges consequential. Penalty premature.

JC Bamford Investments Rocester Versus Additional Director of Income Tax

The tribunal determined that the assessee had a Permanent Establishment (PE) in India and that the royalty income was effectively connected to the service ... Existence of Permanent Establishment (PE) in India or not - India UK DTAA - Held that:- All the requisite conditions for attracting the mandate of Article 5(2)(k) are satisfied inasmuch as (i) there is furnishing of services including managerial services; (ii) such services are other than those taxable under Article 13 (royalties and fees for technical services); (iii) such services are rendered out of India; (iv) such services are rendered by ‘other personnel’; and (v) such activities continued for a period of more than 90 days within 12 months’ period. It is thus held that the service PE of the assessee is established in India. Respectfully following the order above in assessee’s own case for the assessment year 2008- 09, the issue agitated is decided against the assessee by holding that the services PE of the assessee is established in India. - Decided against assessee. Royalty earned - whether effectively connected with the service PE of the assessee in India? - Held that:- As decided in assessee's own case [2014 (7) TMI 260 - ITAT DELHI] Tribunal in the earlier year has held that the total amount consisting Lumpsum Licence/Know-how Fees and also royalty was consideration for the transfer of IP rights simplicitor and also the service rendered by the employees of the second category - in so far as the question of royalty representing consideration for the transfer of IP rights simplicitor was concerned, the service PE representing the deputationists had no role to play either in creating or making it available to JCB India - That is how the Tribunal came to hold that the same was not effectively connected with the service PE of the assessee in India - the consideration for rendering of services by the employees of first category was chargeable to tax under Article 7 of the DTAA – thus, the matter is remitted back to the AO for determination of the amount of income in terms of Article 7 – So, respectfully following the aforesaid referred to order these issues are set aside and remitted back to the file of the AO for determining the income inconsonance with the direction given for the earlier years - Decided in favour of Assessee by way of remand. Liability of interest u/s 234B did not arise as the assessee had included the amount of royalty and fees for technical services in its total income - Decided in favour of assessee. Issues Involved:1. Permanent Establishment (PE) in India.2. Royalty income effectively connected to the service PE.3. Computation mechanism for chargeability of royalty income.4. Profit earning at arm's length.5. Levying of interest under Sections 234A, 234B, 234C, and 234D.6. Initiation of penalty proceedings under Section 271(1)(c).Detailed Analysis:1. Permanent Establishment (PE) in India:The primary issue was whether the assessee had a Permanent Establishment (PE) in India. The assessee's counsel conceded that this issue had been decided against them in the previous assessment year (2008-09). The tribunal referred to its earlier decision, which established that the service PE of the assessee was indeed in India. The tribunal reiterated that the conditions under Article 5(2)(k) of the DTAA were satisfied, including furnishing services, rendering services out of India, and such activities continuing for more than 90 days within 12 months. Consequently, the tribunal held that the service PE of the assessee was established in India.2. Royalty Income Effectively Connected to the Service PE:The assessee argued that the royalty earned was not effectively connected to the service PE. The tribunal referred to its previous order for the assessment year 2008-09, which elaborated that the royalty was for the transfer of intellectual property rights and not for services rendered by the employees. Therefore, the royalty was not effectively connected to the service PE and was chargeable to tax under Article 13(2) of the DTAA. The tribunal directed the AO to determine the income in line with the earlier year's directions.3. Computation Mechanism for Chargeability of Royalty Income:The assessee contended that the entire royalty received from India should not be subjected to tax in India. The tribunal, following its earlier decision, held that the royalty income should be taxed only to the extent of profits attributable to Indian operations. The AO was directed to follow the computation mechanism as per Rule 10(ii) of the Income Tax Rules, 1962, consistent with Article 7(3) of the DTAA.4. Profit Earning at Arm's Length:The assessee argued that since the Indian company (JCB India) was profitable at arm's length, no further attribution was possible even in the case of an alleged PE. The tribunal, referencing its previous orders, agreed with the assessee's contention and directed the AO to follow the precedent set in the earlier years.5. Levying of Interest under Sections 234A, 234B, 234C, and 234D:The tribunal noted that the issue of charging interest under Section 234B had been decided in favor of the assessee in the earlier years. The tribunal held that the liability of interest under Section 234B did not arise as the assessee had included the royalty and fees for technical services in its total income. For the remaining sections (234A, 234C, and 234D), the tribunal held that the charging of interest was consequential in nature.6. Initiation of Penalty Proceedings under Section 271(1)(c):The issue of initiating penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars of income was deemed premature and did not require adjudication at this stage.Conclusion:The appeal of the assessee was partly allowed for statistical purposes, and the Stay Application was dismissed as infructuous. The tribunal's order emphasized following the precedents set in the earlier years for similar issues.