TaxTMI 
TaxTMI 
2014 (4) TMI 887
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....gship company of JCB in UK which owns, develops and manufactures excavators sold under the JCB brand name. The assessee, a non-resident foreign company, being a tax resident of UK, entered into a Technology Transfer Agreement (TTA) with its wholly owned subsidiary JCB India Ltd. on 5.3.2004. The assessee also entered into an International Personnel Assignment Agreement (IPAA) dated 5.12.2005 with JCB India but effective from 1.1.2004. During the relevant year, the assessee claimed to have received a sum of Rs. 40,67,16,967/- as royalties/fees for technical services from JCB India in consideration for grant of exclusive rights to manufacture and market 'Excavator Loader' in the territory of India and outside under the trademark of 3DX. This amount of royalties/fees for technical services was offered for taxation at the rate of 15% by treating the receipt as 'Royalties and Fees for technical services' under Article 13(2) of the Double Taxation Avoidance Agreement between India and UK (hereinafter called 'the DTAA). On perusal of the relevant clauses of TTA read with IPAA, the A.O observed that the assessee was required to send its personnel to the plant of JCB Ind....
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....ector of India Tax (International Taxation) v. Morgan Stanley and Company Inc. [2007] 292 ITR 416 (SC). In the backdrop of his conclusion that JCB India constituted the assessee's service PE in India, the AO held that it carried on the business in India and royalties/fees for technical services received from JCB India was effectively connected with such service Permanent Establishment (PE). Relying on para 6 of Article 13, the Assessing Officer held that such royalties/fees for technical services was liable to be considered as 'Business Profits' under Article 7 of the DTAA as it was effectively connected with the P.E. The assessee's contention that if the royalty was to be considered under Article 7, then income only to the extent of its relation with P.E in India should be taxed, did not find favour with the Assessing Officer. He held that the amount in question was liable to be considered as royalties/fees for technical services as per Article 13, but, by virtue of para 6 of Article 13, its taxability was to be governed by Article 7 without taking away the consequences of royalties/fees for technical services taxable under Article 13. Thereafter he examined the pr....
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....on the order passed by the Mumbai Bench of the Tribunal in DDIT v. Teckmark Global Solutions LLC [2010] 131 TTJ 173 (Mum) in which the Tribunal held that when the employees were not under the control of the assessee, they could not be considered as constituting a Permanent Establishment of the assessee in India. The ld. CIT(A) also observed from the Visiting cards, Lease deeds and Form Nos. 16 etc. of these employees that they had become employees of JCB India on their assignment and thus discharged their duties as employees of JCB India. In that view of the matter, the ld. CIT(A) opined that there was no other material to constitute the assessee's permanent establishment in India. Resultantly, it was held that there could be no computation of income as per Article 7 of the DTAA. The Revenue is in appeal before us through the grounds which have been summarized above. 5. We have heard the rival submissions and perused the relevant material on record. Both the sides have made extensive arguments on i) the question of the establishment or otherwise of the PE by the assessee in India and ii) the effective connection of royalties/fees for technical services with such PE, if any, fo....
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....; ............'' 6.2 The case of the Revenue is that eight employees seconded by the assessee to JCB India were engaged in providing services including managerial, to JCB India. In view of such activities continuing for more than 90 days during the relevant year, the AO held that JCB India constituted service PE of the assessee in India. The relevant discussion is contained in para 6.4 of the assessment order. The ld. AR contended that the visits by the employees of the assessee were of preparatory or auxiliary character in the trade or business of the enterprise as per the provisions of Article 5(3)(e) and hence such visits would not lead to setting up of a PE in India. 6.3 This contention of the ld. AR is partly correct. It is relevant to note that there are two categories of the employees of the assessee who visited JCB India. First category is of eight employees, whose details have been tabulated by the Assessing Officer on pages 7 to 9 of the assessment order, being the employees on deputation to India on assignment basis. This category of employees as per TTA consists of Temporary technical consultants and Resident technical consultants. Second category comprise....
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....ivity is basically to protect the interest of the customer. In the present case the MSAS is a service PE. It is in a sense a service provider .... In such a case it cannot be said that MSCo has been rendering the services to MSAS. MSCo is merely protecting its own interests in the competitive world by ensuring the quality and confidentiality of MSAS services." 6.5 The case of the AO for holding that the assessee has a service PE in India does not rest on the basis of the services rendered by the employees of the second category. It is correct also because such employees do not constitute PE of the assessee in India as per the above extracted observations of the Hon'ble Summit Court in the case of Morgan Stanley (supra). 6.6 In fact, the Assessing Officer considered 'the employees of the first category' for holding the assessee to have a PE in India as per Article 5(2)(k) of the DTAA. A close look at the prescription of Article 5(2)(k)(i) divulges the requirement of a cumulative fulfillment of the following requisites as a sine qua non for constituting a PE of a resident of one State in the other State :- i. Furnishing of services including ma....
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....er Article 13 (Royalties and fees for technical services) 6.9.1 Accentuating on the expression 'other than those taxable under Article 13 (Royalties and fees for technical services)' after the phrase 'furnishing of services including managerial services' as employed in the language of Article 5(2)(k), the ld. AR argued that since such eight employees rendered services in connection with 'Royalties and fees for technical services', hence their stay in India should not be considered for constituting PE in India. In our considered opinion, this contention completely lacks coherence. The important words used in the language of the relevant part of the Article are that the services should be other than those 'taxable under Article 13' (Royalties and fees for technical services). As the entire case of the Assessing Officer rests on the foundation that the consideration for such services is 'taxable' under Article 7, which is definitely 'other than Article 13', in our considered opinion this condition is also fully satisfied. iii. Such services should be rendered within the other Contracting State 6.10.1 There is ....
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....by the Patent Rights, the improvements of Licensor communicated to Licensee and any confidential information of Licensor communicated to Licensee (collectively the "IP Rights"). Licensor hereby also grants to the Licensee during the term of this Agreement a non-exclusive and non-transferable license under the IP Right to use and sell the Licensed Products to any country or territory outside the Territory as determined by mutual written agreement of the parties. The rights granted to the Licensee hereunder to manufacture, assemble, use and sell Licensed Products may only be exercised strictly in accordance with the terms of this Agreement. 2.2 In consideration for the above, the Licensee shall pay to the Licensor a lump sum License/Know-how Fees and royalty as follows:- A. License/Know-how Fees of US $ 1,995,000 payable as follows: (i) US $ 665,000 (1/3) within 30 days of the Effective Date as determined under Clause XI. (ii) US $ 665,000 (1/3) upon delivery of the Know-How to Licensee's designated representative. (iii) Balance of US $ 665,000 (1/3) o....
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....ures. 6.11.6 Relevant parts of Clause-IV of TTA, dealing with the provision of technical personnel, is reproduced as under: - "Clause - IV Technical Personnel 4.1 The Licensor may, from time to time at the Licensee's request and expense, make available specialists or engineers, subject to their availability having regard to their commitments in the Licensor's manufacturing and other operations, as temporary technical consultants, to assist the Licensee's personnel to study, analyse and advise on the problems in the Licensee's Plant in the Territory in relation to the manufacture or assembly of Licensed Products hereunder. In addition to the services by the Licensor's temporary technical consultants, the Licensor shall, if required subject to their availability, at the request and cost of the Licensee during the term of this Agreement, make available to the Licensee qualified and competent persons as resident technical consultants to advise the Licensee in regard to the designing, quality control and manufacture of the Licensed Products to convey technical information and to train the ....
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....ensee's Plant in relation to the manufacture or assembly of Licensed Products; and 'to train the Licensee's employees in the Licensee's Plant'; and also 'to convey technical information'. Such specialists or engineers have been described as Temporary Technical Consultants and Resident Technical Consultants in TTA. These personnel were to be deputed at the Licensee's request and expense and the further condition is that such deputation was to be made 'subject to their availability' with the assessee. JCB India was bound to pay for such personnel at the standard rates fixed by the assessee as set out in Annexure 2 in pounds sterling within 30 days of the date of the assessee's invoices thereof. Such deputation under sub-clause 4.1 was subject to finalization of details of the number of personnel, time and duration of deputation, the payment of the costs and expenses and other terms and conditions relating to such deputation. The terms of payment of boarding and lodging charges, traveling expenses and daily allowances to such technical consultants of the Licensor together with Licensor's charges for all training, drawing facility, consul....
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....ture of an addendum to TTA. The view canvassed by the ld. CIT(A) that both these Agreements are 'materially different having separate purposes' is clearly unsustainable. 6.11.10 It has been provided in IPAA that JCB India desired to utilize the services of the assessee's employees on 'secondment basis'. The term secondment in common parlance means that the employee remains an employee of his existing employer but by virtue of some agreement between the employer and the third person, the employee has to perform the duties for the benefit of such third person. At no time the employee becomes employee of the host company, that is, the third person. Albeit the assessee has placed on record copies of Employment contracts of the persons who were sent on deputation to JCB India, but such Employment contracts are for their original employment with the assessee. No copy of the terms and conditions of such employees on secondment basis has been placed on record. However, a copy of 'JCB International Assignment Policy UK' has been placed on pages 62 to 88 of another paper book. Clause 1.5 of this International Assignment Policy provides that : 'once an expatri....
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....para that the : "personnel of the Licensor and the Licensee during the time they are present on the premises of the other party shall be subject to all rules and regulations prevailing on such premises, but shall not be considered as employees of the other party. Subject to the provisions of this Agreement the Licensor and the Licensee shall each be responsible for the payment of all salary compensation and expenses of their respective personnel." This clause further makes it abundantly clear that that these eight persons, who were sent on deputation to JCB India on secondment basis, continued to remain on the payroll of the assessee company and maintained their lien accordingly. Salary of such personnel was the sole responsibility of the assessee alone, which was admittedly paid by the assessee. The fact that the assessee recovered costs of such employees from JCB India as per the terms of TTA read with IPAA does not prove anything beyond this that both the parties agreed for consideration for the supply of such personnel in the manner as stated in Annexure 2 of TTA read with IPAA. We have noticed above that there are two categories of employees of the assessee visiting JCB India,....
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....impugned order seems to suggest that JCB India was fully equipped to manufacture such backhoe excavators and its Agreement with the assessee was for some minor upgradation. On a specific query, it was fairly conceded on behalf of the assessee that the technology hitherto used by JCB India before entering into TTA with the assessee was completely dispensed with and the new technology provided by the assessee was thereafter used. It was further admitted that the production of earlier models of excavators was stopped by JCB India and new model of backhoe excavator, pursuant to the supply of technology and personnel by the assessee under TTA and IPAA, was introduced. 6.11.12. The ld. CIT(A) appears to have been swayed by the visiting cards and Form Nos. 16 of such employees for coming to the conclusion that they became the employees of JCB India. Form No. 16 was to necessarily show these persons as employees of JCB India since the Indian enterprise not only undertook to pay them salaries and other allowances but also agreed to bear their income-tax burden. Visiting cards do not advance the case of the assessee any further. We are reminded of the well settled position that it is the su....
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....n with such IP Rights. The assignment of personnel by the assessee is not independent of TTA. Further, the assessee was not to appoint and select some personnel for sending to JCB India, but was to depute its technical personnel on assignment basis. Since the supply of personnel on assignment basis is a part and parcel of the overall TTA read with IPAA and not de hors that, we fail to appreciate as to how the decision rendered in the case of Tekmark Global (supra) can be applied which was a case confined to merely selecting and offering such personnel to work in India. We, therefore, hold that the case of Tekmark Global (supra) does not advance the case of the assessee. 6.11.14 At this stage it is relevant to consider the judgment of the Hon'ble Supreme Court in Morgan Stanley (supra) which has been relied by the Assessing Officer to bring home the point that such personnel on deputation remained the employees of the assessee company and hence constituted a service P.E. In that case also two activities were to be carried out, namely, stewardship activities and the work to be performed by deputationists of Morgan Stanley and Company (MSCO) India as employees of Morgan Stanley A....
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....el of the assessee sent on deputation to JCB India continued to remain the employees of the assessee rendering services to the Indian enterprise. v. The activities should continue for a period or periods aggregating more than ninety days within twelve-month period - 6.12 There is no quarrel on the duration of stay of such personnel of the assessee which admittedly is more than ninety days within the twelve-months period. This position was duly admitted by the assessee before the Assessing Officer and such position has not been denied even before us. 7. It is thus seen that all the requisite conditions for attracting the mandate of Art.5(2)(k)(i) stand 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 within India ; iv. such services are rendered by the assessee through its employees ; and v. such activities continued for a period of more than ninety days within twelvemonths period. Ex consequenti, we hold that JCB India constituted a service P.E of the assessee in India. The im....
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....claim of the assessee is that no part of total consideration received by it is consideration for services rendered in India as it represents the price for transfer of IP Rights, which event took place outside India without any involvement of the so-called service P.E in India. 10. Para 2.1 of Clause-II of TTA, as reproduced above, talks of transferring IP Rights to manufacture, assemble, use and sell the licensed products and to achieve that end, use the know-how and inventions etc. covered by the patent rights. Then comes contract price in para 2.2 of Clause-II of TTA which begins when the words : 'In consideration for the above'. The word 'above' in this phrase refers to the contents of para 2.1 which, in turn, denotes the transfer of IP Rights for manufacture and assembly of the licensed products as per know-how supplied by the assessee. Para 2.2 of Clause-II has two categories, viz. A) Licence/Know-how fees and B) Royalty. The ld. DR vehemently argued that B) of para 2.2 described as 'Royalty' is consideration for rendering services by the employees of the first category, who were sent on deputation to India on assignment basis. He put forth that such a....
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....ngle unit of royalties/fees for technical services, as can be seen from para 7.1 of the assessment order, though at some places, he simply referred to the amount as royalty for convenience. He considered Art. 13 of the DTAA and section 44DA, both of which deal jointly with royalties and fees for technical services. It is relevant to note that the assessee also offered the entire amount of royalties/fees for technical services as chargeable to tax as per Article 13(2) of the DTAA. Considering the language of Article 13(6), the AO held that such amount of royalties/fees for technical services was liable to be considered as 'Business Profits' under Article 7 of the DTAA as it was effectively connected with the P.E. It, therefore, follows that the reference at some places in the assessment order of the total amount received by the assessee as 'Royalty', is nothing but representative of both royalties and fees for technical services. In order to decide the character of the consideration for IP Rights, employees of the first category and employees of second category, it will be appropriate to note the prescription of the relevant paras of Article 13 of the DTAA as under :....
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....p; (c) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. 13. Para 3(a) of the Article gives meaning to the term 'royalties' as 'payment of any kind received as consideration for the use of or to right to use any copyright of -----patent, trade mark, design or model -----.We find that the assessee granted to JCB India the technical know-how, patent rights and confidential information for manufacture, assembly, use and sell the licensed products. The consideration for it certainly falls within the scope of 'royalties' as per the DTAA. This aspect has not been disputed by the assessee, who has rightly treated the entire amount as royalty and offered it to tax as per Article 13(2) of the DTAA. 14. Then, there is definition of 'fees for technical services' as given in para 13(4) of the DTAA. It has been defined to mean payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which (a) are ancillary and subsidiary ....
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....of services by employees of first category In India Yes s. 9(1)(vii) and also Art. 13(2) r.w. 13(4) Rendering of services by employees of second category In India No s. 9(1)(vii) and also Art. 13(2) r.w. 13(4) 16.1 Now comes the core question as to whether such royalties and fees for technical services covered under Article 13(3) and (4) of the DTAA can be brought within the ambit of Article 7 of the DTAA? Whereas the assessee kept the entire amount under Article 13(2), the A.O came to hold that the full amount is includible under Article 7 by means of para 6 of Article 13 of DTAA. We have held above that the ld. DR was not correct in arguing that component B. of para 2.2 of TTA characterized as 'Royalty' is exclusively towards the services rendered by the first and the second categories of the employees. It has also been held that the amount relatable to the services rendered by the employees of the second category is embedded in such total consideration as per para 2.2 of TTA. Coming back to our point, we notice that the Assessing Officer has considered para 6 of Article 13 for bringing the royalties and fees for technical services within the meaning of Article 7 ....
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....of the royalties or fees for technical services (the assessee), being a resident of a Contracting State (resident of UK), iii. carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein(i.e. in India), or iv. performs in that other State independent personal services from a fixed base situated therein (i.e. in India), v. and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. 16.3 Point v. provides that the right, property or contract in respect of which the royalties or fees for technical services are paid should be effectively connected with such permanent establishment or fixed base. So we need to decide as to whether the right, property or contract in respect of which the royalties or fees for technical services has been paid are effectively connected with the permanent establishment of the assessee in India. It transpires that there should be; i) right property or contract....
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.... The position is more clear from the fact that the AO specifically held on page 2 of the assessment order that the short term business visits of stewardship nature did not create a PE of the assessee in India. It is axiomatic that JCB India on entity level could not have even possibly been considered as the PE of the assessee in India because the question was of taxing the income earned by the assessee from JCB India and not that earned by JCB India from its Indian operations. Moreover, it has been specifically provided in para 6 of Article 5 that the fact that a company which is a resident of a Contracting State controls or its controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other. The name of JCB India as the service PE of the assessee seems to have been inspired from the case of Morgan Stanley (supra) in which case MSAS was held to be a service PE of MSCO because of the deputation of employees by MSCO to MSAS. The essence of the AO's action is that he treated these....
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....he contract (TTA read with IPAA), under which such employees of the first category were sent to JCB India, is effectively connected with the service PE of the assessee. It will not be out of place to mention that the PE is simply represented by these very eight deputationists. Such fees for technical services arises out of contract (TTA read with IPAA), which contract, in turn, is effectively connected with the PE of the assessee. In view of the above discussion we hold that fees for technical services in relation to the employees of the first category falls within para 6 of Article 13 of the DTAA. 16.7 Next comes fees for technical services resulting from the rendering of services by the employees of the second category. This amount, as noticed above, is embedded in total consideration as per para 2.2 of the TTA. Although such fees for technical services is the result of rendering of services in India but it is not effectively connected with the assessee's PE in India. We have noticed above that only eight deputationists constitute service PE of the assessee in India, which represent the employees of the first category. We have also held above that the employees of the second....
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....contention that since royalties or fees for technical services have been specifically dealt with in Article 13, then no cognizance can be taken of Article 7, which is a general provision. In order to appreciate this contention, it would be apt to note the relevant parts of Article 7 of the DTAA, as under : - "ARTICLE 7 Business profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment. 2 to 8 ................" 9. Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article. 17.2 A cursory look at para 1 of Article 7 of the DTAA manifests that the profits of an enterprise of a Contracting Stat....
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....at particular subject. In such a situation, by which the original special provision sent the subject back to the general provision or any other special provision, the subject will be governed by the general or such other special provision. Coming back to our point, we note that the effect of para 9 of Article 7 is that if 'Business profits' include an item of income which falls under any of the specific Articles of the DTAA, such as Royalties and fees for technical services under Article 13, then such income shall be excluded from the 'Business Profits' under Article 7 and come up for consideration under such specific Articles such as Article 13. But when any para of Article 13 sends the subject back to Article 7, then it shall be administered by the mandate of Article 7 to the exclusion of Article 13. The nutshell is that once Article 7 has excluded royalty or fees for technical services to be considered under Article 13 but para 6 of Article 13 has sent the matter back to Article 7, it is the mandate of Article 7 which shall apply on the amount excluded by para 6 of Article 13. The contention raised on behalf of the assessee in this regard, therefore, fails. 18. ....
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....he inclusion of the amount in the fold of Article 7. Nothing further is required to be established in this regard thereby leaving the manner of computation and rate of taxation of such income within the four corners of Article 7. It means that such amount of royalty or fees for technical services is for all practical purposes considered as 'Business profit' covered under Article 7 and as such, all the consequences of an income falling under 'Business Profits', such as the machinery for computation of income and rate of taxation mutatis mutandis apply. In other words, the amount of such royalties or fees for technical services assumes the character of 'Business profits' on its arrival in Article 7. Such amount will intermingle with other business profits, if already available as per Article 7 and will shed its character of royalty or fees for technical services in so far as the computation of income and its taxation under the DTAA is concerned. It is totally misleading to construe the amount of royalties and fees for technical services coming through Article 13(6) to Article 7 as retaining the same character as was there under Article 13. If for a moment we a....