IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : D : NEW DELHI

BEFORE SHRI R.S. SYAL, AM AND SHRI C.M. GARG, JM ITA No.80/Del/2013 Assessment Year : 2008-09 JC Bamford Investments Rocester, Uttoxeter, ST 145 JP, Staffordshire England.

Vs.

DDIT, Circle-3(1), International Taxation, New Delhi.

PAN : AACCJ0726B CO No.160/Del/2014 (ITA No.80/Del/2013) Assessment Year : 2008-09 DDIT, Circle-3(1), International Taxation, New Delhi.

Vs.

JC Bamford Investments Rocester, Uttoxeter, ST 145 JP, Staffordshire England. PAN : AACCJ0726B

(Appellant) Assessee By Department By

(Respondent) : Shri G.C. Srivastava, CA : Shri Sanjeev Sharma, DR ORDER

PER R.S. SYAL, AM: This appeal by the assessee and the Cross Objection by the Revenue arise out of the order passed by the AO u/s 143(3) read

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with section 144C(13) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation to the assessment year 2008-09. 2.

Ground nos. 1 and 2 of the assessee’s appeal are against the

holding that the assessee has a Service Permanent Establishment (PE) in India within the meaning of Article 5 of Indo-UK Double Taxation Avoidance Agreement (DTAA). 3.1. Briefly stated, the facts of the case are that the assessee is a company incorporated under the laws of and is tax resident of UK. The assessee derived income in the nature of Royalty/fees for technical services (hereinafter also referred to as ‘royalty’), which was offered to tax @ 15% on gross basis in India as per tax rates specified in the DTAA. Before proceeding further, it is relevant to mention that JC Bamford Excavators Ltd., UK (JCBE), another group company, was also incorporated under the laws of and is tax resident of UK. On 05.03.04, JCBE entered into Technology Transfer Agreement (TTA) with JC Bamford India Ltd. (JCBI) to license the know-how and related technical documents consisting of all drawings and designs with an exclusive right to manufacture and market Excavator Loader (P-92 version) in the territory of 2

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India under the brand name 3DX. On 17.12.07, JCBE, JCBI and the assessee entered into a tripartite Intellectual Property Agreement, pursuant to which JCBE’s licence of intellectual property, given to JCBI for

manufacturing and marketing 3DX in India, was sub-

licensed to the assessee company in consideration of the payment of royalty by the assessee to JCBE.

Under the new

Agreement, the licence was to be commercially exploited by JCBI as was done earlier, but the royalty for such user was to be paid by JCBI to the assessee, who was to pass on 99.5% of the same to JCBE. That is how, the assessee derived income in the nature of Royalties/fees for technical services from JCBI which was offered to tax @ 15% in India on gross basis by treating the receipt as ‘Royalties and Fees for technical services’ covered under Article 13(2) of the DTAA.

3.2.

The AO observed that in the earlier years, viz., AYs 2006-

07 and 2007-08, he had held in the case of JCBE that their employees seconded to JCBI on assignment basis in India resulted into constituting service P.E of JCBE in India in terms of Article 5(2)(k)(i) of the DTAA. He further noticed that the payment of 3

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royalty by JCBI to JCBE in respect of rights under the Technology Transfer Agreement (TTA) and International Personnel Assign Agreement (IPAA) in these earlier years was held to be effectively connected with the said service PE of the assessee in India. Relying on para 6 of Article 13, the Assessing Officer took the view in the earlier years 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. After grossing up the receipt of royalty in terms of sec. 195A and allowing deduction for expenses at the rate of 20% of such amount of royalties/fees for technical services, he had computed total income of the assessee.

3.3.

The AO noticed in the proceedings for the instant year that

JCBE continued to second its employees to JCBI as was done in the earlier years. The details of such employees have been reflected on pages 3 and 4 of the assessment order. He further observed that all the terms and conditions for the use of the licence by JCBI were similar to those of the earlier Agreement. The only difference in this year was that under the new Agreement 4

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dated 17.12.2007, royalty was first paid by JCBI to the assessee and the assessee, in turn, paid it to JCBE in full less 0.5%. He found that the royalty ultimately reached JCBE but through the assessee.

After

going

through

various

terms

of

the

new

Agreement in conjunction with the earlier Agreement, it was opined by him that TTA, IPAA and the present Agreement under consideration were not to be looked into isolation from one another. In this backdrop of the facts, he held that the employees of JCBE as seconded to JCBI constituted a service PE of the assesee as they were covered under the expression ‘or other personnel’ in Article 5(2)(k) of the DTAA.

The assessee is

aggrieved against the holding of its service PE in India.

4.

We have heard the rival submissions and perused the

relevant material on record.

It is observed that in the earlier

years, JCBE licensed intellectual property rights for manufacture of excavators under the brand name 3DX to JCBI. However, by virtue of new Agreement entered on 17.12.07 w.e.f. 01.04.07 amongst the assessee, JCBE and JCBI, the intellectual property rights came to be sub-licensed to the assessee without interfering 5

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in any manner its actual exploitation by JCBI. All the terms and conditions for the use of such rights by JCBI under TTA and IPAA are same. The only difference that came into the hitherto arrangement was that whereas earlier JCBI was paying royalty directly to JCBE, now it is being routed through the assessee with the deduction of 0.05%. The question of a service PE of JCBE in India

came

up

for

consideration

before

the

Tribunal

for

assessment years 2006-07 and 2007-08. Vide its order for the AY 2006-07,

the

tribunal

categorized

employees

of

JCBE

on

deputation to India on assignment basis in the first category and those doing stewardship activities and inspection and testing in the second category. JCBI has been held to be constituting a service PE of JCBE in India because of the employees of the first category. The matter of the establishment of PE for the current year would have become a covered matter for the current year if there had not been the new factor of the tripartite agreement dated 17.12.2007, under which JCBE sub-licensed the intellectual property right to the assessee to ‘manage the licensing of JCB UK’s intellectual property to JCB India going forward.’. To buttress the view that the employees of JCBE constituted service PE of the 6

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assessee in India, the AO has observed that the employees of JCBE, earlier seconded to JCBI, continued to render services to JCBI during the year in question in the same way as they were doing in the past. This position was noticed by virtue of Clause (d) of the new Agreement and Clause 4.2 of this Agreement which clarifies that the delivery of technical documentation and making available of technical personnel as set out in earlier clauses III and IV of the Technology Agreement shall remain unaffected by this agreement and shall continue as rights and obligations between JCBE and JCBI under the Technology Agreement. The AO held that the above details coupled with the fact that JCBE received 99.5% of royalty from the assessee left nothing to doubt that there was service PE of the assessee as per Article 5(2)(k) of the DTAA covered within the ambit of ‘other personnel’. Since this position has been candidly accepted by the ld. AR as well, we, therefore, refrain from any independent evaluation of this aspect.

The ld.

AR accentuated that his objections against the holding of the service PE of the assessee in India were practically the same which were taken for the earlier years. The tribunal has discussed and jettisoned such objections in its order for the A.Y. 2006-07. 7

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Under such circumstances and following the precedent, we hold 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. These grounds are, therefore, not allowed. 5.

The next major issue raised through various grounds is

against the holding by the AO that the royalty earned by the assessee was effectively connected with the service PE of the assessee in India. We find that similar issue was there and has been elaborately discussed in the afore stated order of the tribunal for the earlier years. The tribunal has held that the total amount consisting Lumpsum Licence/Know-how Fees and also royalty as mentioned in para 2.2 of TTA was consideration for the transfer of IP rights simplicitor and also the service rendered by

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the employees of the second category. The Tribunal further held that 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 amount of royalty and consideration for rendering of services by the employees of second category has been held to be not falling in para 6 of Article 13 and hence chargeable to tax as per para 2 of Article 13 of the DTAA.

However, as regards the fees for

technical services resulting from the rendering of services by the employees of the second category, the Tribunal has held that the same did not fall in para 6 of Article 13 and was, hence, chargeable to tax as per para 2 of the Article 13 of the DTAA. As regards the consideration for the employees of the first category, the Tribunal has held that the fees for technical services in relation to such employees was covered within para 6 of Article 13 of the DTAA. That is how, the Tribunal concluded that the consideration for rendering of services by the employees of first 9

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category was chargeable to tax under Article 7 of the DTAA. The AO was directed to determine the amount of income in terms of Article 7. As the facts for the instant year are admittedly similar to those of the preceding years on this issue, respectfully following the precedent for A.Y. 2006-07, we set aside the impugned order and send the matter back to the file of AO for determining income in consonance with the directions given for the earlier year. 6.

The last ground of the assessee’s appeal against the

charging of interest u/s 234B is also decided in assessee’s favour by following the view taken in the order for AY 2006-07. Relevant discussion has been made in para 20.2 of the order by which it was held that the 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. 7.

The Revenue has filed a Cross Objection (CO) by raising the

following ground :‘Considering the fact that Article 13(2) is not applicable in this case and the rate of royalty agreement as 5/03/2004, royalties are subject to tax @ 20% plus

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surcharge, education cess under the provisions of section 115A(1)(b) of the Income tax Act, 1961’. 8.

The ld. DR argued that the rate of tax at 15% of the gross

amount as provided under Article 13(2) of the DTAA

can’t be

applied to the royalty income and thus the amount of royalty should be subjected to tax @ 20% u/s 115A(1)(b) of the Act. It was so argued as in the opinion of the Department, the assessee is not the beneficial owner of the royalty paid by JCBI, which has been passed on to JCBE in full after deduction of 0.5%. In other words, the contention was that since it was JCBE who was the beneficial owner of the royalty received from JCBI and not the assessee, Article 13(2) of the DTAA will cease to apply and resultantly, the assessee should be subjected to tax as provided under the domestic law. 9.

We have heard the rival submissions and perused the

relevant material on record.

In our considered opinion, the CO

deserves to be dismissed on two distinct counts. 10.

The first reason is that the CO of the Revenue is not

maintainable as per law. Section 253(1) of the Act deals with the 11

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filing of appeals by the assessee before the tribunal against the orders specified therein. Sub-section (2) of section 253 empowers the Revenue to file appeal before the tribunal. This section provides that the CIT may, if he objects to any order passed by the CIT(A) u/s 154 or 250, direct the Assessing Officer to appeal to the Appellate Tribunal against the order. This section does not embrace cases where the first appeal lies to the tribunal against the order passed by the Assessing Officer u/s 144C(13) pursuant to the direction given by the Dispute Resolution Panel (DRP) u/s 144C(5) of the Act.

This is in a sharp contrast to the specific

entitlement of the assessee under clause (d) of section 253(1) to appeal against the order passed by the Assessing Officer in pursuance of the directions of the DRP. The reason appears to be that when the DRP has scrutinized the draft order of the Assessing Officer and given the appropriate direction to modify it, if necessary, then there is no logic in empowering the CIT to rescrutinize such order of the Assessing Officer and have any grievance against the same. It is more so because the order of the AO has already been checked by a group of three CITs constituting the DRP. However, later it was realized that the 12

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interest of the Revenue was suffering because of certain directions given by the DRP prejudicial to the interest of the Revenue, which the Assessing Officer cannot tinker with and become binding on him. With a view to empower the CIT to challenge such adverse directions given by the DRP pursuant to which the Assessing Officer has passed order u/s 144C, the legislature stepped in by introducing sub-section (2A) to section 253 w.e.f. 1.7.2012, which provides that the : ‘The Commissioner may, if he objects to any direction issued by the Dispute Resolution Panel under sub-section (5) of section 144C in respect

of any objection filed on or after the 1st day of July, 2012, by the assessee under sub-section (2) of section 144C in pursuance of which the Assessing Officer has passed an order completing the assessment or reassessment, direct the Assessing Officer to appeal to the Appellate Tribunal against the order.’ Sub-section (4) of section 253 empowering the assessee or the Assessing Officer to file cross objection was also suitably amended by the Finance Act, 2012 to, inter alia, provide that the Assessing Officer may, on receipt of notice that an appeal against the order of the Assessing Officer in pursuance of the directions of the Dispute 13

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Resolution Panel has been preferred by the assessee under subsection (1), file a cross-objections against any part of the order of the Assessing Officer (in pursuance of the directions of the Dispute Resolution Panel). When we read sub-section (1) of section 253 in juxtaposition to sub-section (2A) of section 253, the position which emerges is that whereas the assessee was earlier also entitled to file appeal against the order passed by the AO pursuant to the Direction of the DRP, the Revenue has been clothed with such power by the Finance Act, 2012, provided the objection was filed by the assessee before the DRP on or after 01.07.12. Thus, it becomes palpable that the Department has no power to file appeal or object to the any direction issued by the DRP in pursuance of which the Assessing Officer passed order u/s 144C, if the assessee filed objection before the DRP before this cut-off date of 1.7.2012. Adverting to the facts of the instant case, we find that the assessee filed objection against the draft assessment order before the DRP on 30.01.2012.

Since the

objection in this case was filed by the assessee before the DRP prior to 01.07.12, the Revenue could have neither filed appeal nor cross objection against the order of the Assessing Officer. We, 14

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therefore, hold that the cross objection filed by the Revenue is not maintainable as per law. 11.

The second reason for which the CO of the Revenue

deserves the fate of dismissal is the language of section 253 of the Act which permits the CIT to authorize the Assessing Officer to file appeal u/s sub-section (2A) ‘if he objects to any direction

issued by the Dispute Resolution Panel under sub-section (5) of section 144C’. In the like manner, cross objection can be filed under sub-section (4) of section 253 of the Act which provides that : ‘the Assessing Officer …. on receipt of notice that an appeal against the order of … the Assessing Officer in pursuance of the directions of the Dispute Resolution Panel has been preferred under sub-section (1) …. he may … file a memorandum of crossobjections… against any part of the order of the Assessing Officer

(in pursuance of the directions of the Dispute Resolution Panel) …’.

The crux of the matter is that the appeal or the cross

objection can be filed by the Revenue only if the CIT objects to any ‘direction issued by the DRP ‘

or ‘against any part of the

order of the Assessing Officer (in pursuance of the directions of the DRP)’. Thus it is manifest that the appeal can be filed only 15

ITA No.80/Del/2013 CO No.160/Del/2014

against direction issued by the DRP and the CO can be filed against any part of the order of the Assessing Officer passed in pursuance to the direction of the DRP. The nitty-gritty of the matter is that Revenue should have objection either against the Direction of the DRP or against the order passed by the Assessing Officer. In other words, the scope of the appeal or cross objection by the Revenue is confined to the some adverse finding rendered by either of the authorities, as the case may be. 12.

Let us briefly recapitulate the facts of the extant case. The

assessee derived income in the nature of royalties and offered the same to tax @ 15% on gross basis as per such lower rate of tax provided under Article 13(2) of the DTAA. The AO held that the assessee has a service

PE in India and since such royalty was

effectively connected with the PE, the entire income would fall under Article 7 as the case was covered under para 6 of the Article 13. After allowing deduction at the rate of 20% of the royalty income, he determined total income and charged tax at the rate of 40% plus surcharge and education cess. The DRP upheld the draft assessment order on such issue except not

16

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allowing the grossing up of the royalty income. Now, the Department is contending through its CO that Article 13(2) is not applicable because the assessee is not the beneficial owner of the royalty received by it from JCBI. It can be noticed from the above jotted facts that neither the Assessing Officer nor the DRP has held that the assessee is a beneficial owner of the royalty and hence the same should be charged to tax at the lower rate of 15% as provided under the DTAA. When the position is so, we fail to see as to how the Revenue can rake up such issue through the CO. It goes without saying that right to appeal is a statutory right provided to the aggrieved party. The same can be exercised strictly in accordance with and as per the terms of the relevant provision. If the law does not specifically or generally confer such a right against a particular action of the authorities, then the same cannot be inferred. Turning to the facts of the instant case, we find that the section 253 of the Act does not give any right to the Revenue to appeal against a non-finding of the Assessing Officer or the DRP, as the case may be.

The natural corollary

which ergo follows is that the instant CO of the Revenue lacks the

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necessary mandate so as to become eligible for consideration and adjudication. 13.

We, therefore, hold that the CO filed by the Revenue is not

maintainable. The same is liable to be and is hereby dismissed. 14.

At this juncture, it is relevant to note that the assessee

claimed the entire receipt as royalty chargeable to tax as per Article 13(2) of the DTAA. The Assessing Officer held the entire amount as chargeable under Article 7 as ‘Business Profits’. Now, we have held supra that some part of the assesee’s receipts is chargeable to tax as ‘Royalty’ and some part as ‘Business profit’. In such circumstances, the question of the rate at which tax should be charged on such royalty, assumes significance. The assessee claimed the royalty as covered under Article 13(2) of the DTAA. Since the Assessing Officer held that the entire receipt was chargeable to tax as ‘Business profits’, naturally he had no occasion to apply his mind on the correctness of the assessee’s claim of the rate of tax. Now, since the Assessing Officer’s view has been partly overturned and that of the assessee restored pro

tanto, it would become essential for the Assessing Officer to 18

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calculate tax on such amount in conformity with our decision, by firstly, ascertaining the quantum of such royalty and then applying the correct rate of tax. We have rendered our decision only on the quantum aspect which was agitated before us, and not on the aspect of the rate of tax to be applied, which was not specifically assailed. In such circumstances, one option can be to leave such aspect to be decided afresh by the Assessing Officer in the order giving effect to the tribunal order, and the other option can be to decide it here and now. As the ld. DR has raised such issue and the ld. AR has also requested to adjudicate the same right in these proceedings, we are taking up the same for decision on merits. 15.

It can be observed from the factual narration given above

that JCBE was receiving royalty from JCBI in earlier years. As per the new Agreement entered into amongst JCBE, JCBI and the assessee, the amount of royalty was first paid by JCBI to the assessee, who, in turn, passed on the same to JCBE in full less 0.50%.

The case of the Revenue is that since 99.5% of the

royalty received by the assessee has been passed on to JCBE, the

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assessee ceased to be the beneficial owner of the royalty paid by JCBI. The ld. DR fervently argued that the benefit of low rate of taxation as provided under Article 13(2) of the DTAA can be allowed only if the assessee is a beneficial owner of the royalty. He argued that since, in this case, the assessee simply acted as a conduit between the JCBI and JCBE, the benefit of Article 13(2) cannot be extended to it as it is not beneficial owner and, hence, the taxability of royalty should be determined as per section 115A(1)(b) of the Act. 16.

After considering the rival submissions and perusing the

relevant material on record, we find that section 90(2) of the Act provides that : ‘Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall

apply to the extent they are more beneficial to that assessee.’. The effect of this section in unequivocal terms is that the

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provisions of the Act or the DTAA, which ever are more beneficial to the assessee, apply. In so far as the instant issue is concerned, the provisions of Art. 13(2) of the DTAA providing for lower rate of tax, being more

beneficial to the assessee, shall apply if it is

found to be covered within the mandate of para 2 of the Article 13 of the DTAA. In the otherwise situation, the issue would be decided in the favour of the Revenue for the charging tax at the rate prescribed u/s 115A of the Act.

17. The whole case of the Revenue rests on the bedrock that the benefit of lower rate as provided under Article 13(2) can’t be extended to the assessee since it is not the beneficial owner of the amount of royalty, which effectively belongs to JCBE and the assessee only acted as an intermediary between JCBI and JCBE in collecting and handing over the same.

18.

At this stage, we want to clarify that the assessee offered

the entire amount as royalty income in its hands and admittedly JCBE did not. The assessment of such royalty income has been made on substantive basis in the hands of the assessee and there

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is no assessment of such royalty income in the hands of the JCBE. It is not the case of the parties before us that the amount received by the assesee should have been charged to tax in the hands of JCBE as it was the real and the beneficial owner of the amount received by the assessee who merely acted as a mediator between JCBI and JCBE. As such, we are not going into this aspect.

19.

Coming back to the examination and evaluation of the point

of view of the Revenue that the benefit of Article 13(2) cannot be made available to the assessee, we consider it expedient to take stock of the prescription of the relevant part of para 2 of Article 13 which is as under:“2. However, as the royalties and fees for technical services may also be taxed in the contracting state in which they arise and according to laws of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other contracting state, the tax so charged shall not exceed.…….”

20. The essence of this provision is that royalty and fees for technical services earned by a resident of UK from a resident of India may also be taxed in India as per the domestic taxation law of India,

that is, in the present context as per the rate of tax 22

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provided in section 115A of the Act. However, the later part of para 2 of the Article 13 clarifies that royalties or fees for technical services shall be charged to tax at lower rate stipulated in this Article, if the beneficial owner of such royalty etc. is the resident of UK.

The ld. DR has vigorously contended that since the

beneficial owner of the royalty in the instant case is not the assessee, but JCBE, the lower rate of tax as provided under para 2 of Article 13 would not be available.

21. Before going ahead, we need to ascertain the meaning of the term ‘beneficial owner’, which has neither been defined under the Act nor the DTAA. In common parlance, a beneficial owner of a particular income is the one who is entitled to such income in his own right. Sometimes, a beneficial owner may turn out to be a person different from the immediate recipient or formal owner or recipient of income. Commentary on the Double Taxation Convention states that the ‘Beneficial ownership’ is ‘an ownership which is not merely the legal ownership by the mere fact of being on the register but the right at least to some extent to deal with the property as your own’. Hence the ‘beneficial owner’ is he who 23

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is free to decide (i) whether or not the capital or other assets should be used or made available for use by others or (ii) on how the yields there from be used or (iii) both. The DTAA applies to persons who are residents of one or both of the Contracting States. As such, the benefits of the Treaty are meant to be given only to the residents of such States and not to the residents of the third State. In a particular case, the formal recipient of income may be resident of one of the Contracting State but the beneficial owner of such income may be the resident of some third State and vice versa. Tax relief in the source State depends on whether the beneficial owner, not the formal recipient of the amount, is resident of the other contacting State.

22.

Applying the above underlying principle, we find the

contention of the ld. DR to be sans merit. The reason for our this decision is that the benefit of lower rate as provided under Article 13(2) of the DTAA can be withdrawn if the ‘beneficial owner’ of the royalty in our case happens to be not a resident of UK. A case has been made out that since the assessee, a resident of UK, is not the beneficial owner of the royalty etc., the benefit of lower 24

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rate

of taxation

would

be

automatically

forfeited. In

our

considered opinion, this contention is devoid of merits because the requirement for the applicability of Article 13(2) of the DTAA is that the beneficial owner should be the resident of the UK. It is not that if the formal recipient, a resident of UK, is not the beneficial owner, then the benefit is lost, notwithstanding the fact that the beneficial owner is also the resident of UK. Such relief of lower rate of taxation can be denied if the beneficial owner of the royalty is a resident of some third state, neither being India nor UK. Despite the fact that the assessee, a resident of UK, is not a beneficial owner as per the stand point of the Revenue, still the benefit of lower rate of tax cannot be denied because the beneficial owner of the royalty, being JCBE, is admittedly resident of UK. As the royalty in the present case has arisen in India, and the beneficial owner of this royalty is resident of UK, we hold that the tax shall be charged @ 15% as provided in Article 13(2) of the DTAA.

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23. In the result, the appeal of the assessee is partly allowed and the CO of the Revenue is dismissed. The order pronounced in the open court on 04.07.2014. Sd/-

Sd/-

[C.M. GARG] JUDICIAL MEMBER

[R.S. SYAL] ACCOUNTANT MEMBER

Dated, 04th July, 2014. dk Copy forwarded to: 1. 2. 3. 4. 5.

Appellant Respondent CIT CIT (A) DR, ITAT AR, ITAT, NEW DELHI.

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