2018 (7) TMI 2304 - AT - Income Tax

Establishment of Service PE in India under India-UK Tax Treaty: Tribunal Decision on Royalty, FTS, and Income Attribution

J.C. Bamford Excavators Ltd Versus The D.D.I.T

J.C. Bamford Excavators Ltd Versus The D.D.I.T - TMI Issues Involved:1. Service Permanent Establishment (PE) in India under Article 5 of the India-UK Double Taxation Avoidance Agreement (DTAA).2. Connection of royalty to the alleged Service PE.3. Classification of receipts on account of central costs recharges and structural tests as Fees for Technical Services (FTS) under Article 13 of India-UK DTAA.4. Taxability of reimbursement towards salary cost and expenses for seconded employees as FTS.5. Application of computation mechanism under Rule 10 of the Income Tax Rules, 1962, for determining chargeability of income under Article 7 of the DTAA.6. Levy of interest under Section 234B of the Income-tax Act, 1961.Detailed Analysis:1. Service Permanent Establishment (PE) in India:The assessee contested the establishment of a Service PE in India under Article 5 of the India-UK DTAA. The Tribunal upheld the earlier decision that JCB India constituted a Service PE of the assessee in India. The Tribunal noted that the royalty payment structure changed to route payments through JCB Investments, but the nature of services and the relationship between JCBE and JCB India remained unchanged. Consequently, the Tribunal dismissed the assessee's contention, holding that JCB India constituted a Service PE.2. Connection of Royalty to the Alleged Service PE:The Tribunal addressed whether the royalty payments were effectively connected to the Service PE. Referring to earlier decisions, the Tribunal concluded that the royalty payments were not effectively connected to the Service PE. The Tribunal cited that the Service PE, represented by deputed employees, had no role in creating or making available IP rights to JCB India. Thus, the royalty received by the assessee could not be considered under Para 6 of Article 13 of the DTAA.3. Classification of Receipts as Fees for Technical Services (FTS):The Tribunal examined the receipts on account of central costs recharges and structural tests, which the assessee claimed were not taxable as FTS under the DTAA. The Tribunal found that these receipts were ancillary and subsidiary to the application or enjoyment of the right, property, or information for which royalty payments were received. Therefore, these receipts fell under sub-clause (a) of Article 13(4) and were taxable as FTS. The Tribunal dismissed the assessee's contention that the 'make available' clause was not satisfied.4. Taxability of Reimbursement for Seconded Employees:The Tribunal noted that the assessee failed to provide adequate documentation to support the claim that reimbursements for salary costs and expenses of seconded employees were merely reimbursements. The Tribunal restored this issue to the file of the Assessing Officer (AO) for verification. The AO was directed to ensure that the same income was not doubly taxed in the hands of the appellant and JCB Investments.5. Application of Computation Mechanism under Rule 10:The Tribunal addressed the issue of attribution of income in India. It was noted that the AO had already made necessary attributions in the hands of JCB Investments. However, the Tribunal directed the AO to attribute income separately for the assessee after reducing the income already taxed in the hands of JCB Investments to avoid double taxation. The issue was allowed for statistical purposes.6. Levy of Interest under Section 234B:The Tribunal considered the levy of interest under Section 234B of the Act. Referring to its earlier decision, the Tribunal held that the assessee was not liable for interest under Section 234B as the entire amount of royalty and fees for technical services was included in the total income by the assessee. The Tribunal directed the AO to relieve the assessee from any interest liability under Section 234B.Conclusion:The appeal by the assessee was partly allowed. The Tribunal upheld the establishment of a Service PE, confirmed the non-connection of royalty to the Service PE, classified certain receipts as FTS, and restored the issue of reimbursements to the AO for verification. The Tribunal also directed the AO to attribute income separately for the assessee and relieved the assessee from interest liability under Section 234B.