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Income Tax Appellate Tribunal, DELHI BENCH: ‘B’ NEW DELHI
Before: SHRI N. K. SAINI & MS SUCHITRA KAMBLE
PER SUCHITRA KAMBLE, JM
This appeal is filed by the assessee against the order dated 26/09/2017 passed by ACIT, Circle-2 (1)(2), International Taxation u/s 144C (13) read with Section 143(3) of the Income Tax Act, 1961.
The grounds for appeal are as under:-
Under the facts and circumstances of the case and in law, the Learned Dispute Resolution Panel (‘Ld. DRP’) and Learned Assessing Officer (‘Ld. AO’) has erred in passing the assessment order without giving due consideration to the submissions of the Appellant.
Under the facts and circumstances of the case and in law, the Ld. DRP and Ld. AO has erred in holding that Appellant has a service Permanent Establishment (“PE”) in India within the meaning of Article 5 of India UK
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Double Taxation Avoidance Agreement (“DTAA”).
Under the facts and circumstances of the case and in law, the Ld. AO erred in proposing that the Appellant has a service PE in India under Article 5(2) (k) of the DTAA without appreciating that: 3.1. Technology Transfer Agreement (“TTA”) dated March 5, 2004 and International Personnel Assignment Agreement (“IPAA”) dated December 5, 2005 are independent contracts for materially different purposes. 3.2. IPAA between JCB Excavators (“JCBE”) and JCB India Limited (“JCB India”) provides for employees sent by JCBE to JCB India on deputation (secondment) which is admittedly as per specific requirements of JCB India and not for services in relation to TTA. 3.3. Seconded employees sent as per arrangement under IPAA are employees of JCB India. 4. Without prejudice to ground No. 3, under the facts and circumstances of the case and under law, the Ld. DRP and Ld. AO has grossly erred in holding that royalty earned by the Appellant is effectively connected to alleged service PE of the Appellant in India and has failed to appreciate that: 4.1. Intangible property in respect of which royalty has been paid was wholly developed outside India: 4.2. No functions, assets, or risk associated with such intangible property is undertaken or present in India. 4.3. The Ld. AO erred in inadvertently including the royalty received by the Appellant towards backhoe-loader P-106 under a different TTA dated October 21, 2010 amounting to Rs. 2,55,62,494/- as also effectively connected with the alleged Service PE without assigning any reason for the same. 5. Without prejudice to above grounds, under the facts and circumstances of the case, the Ld. DRP and Ld. AO has erred in not applying the desired computation mechanism for chargeability of Royalty income alleged to be covered under provisions of Article 7 of the DTAA between India and UK. The Ld. DRP and Ld. AO failed to appreciate that:
5.1 Under Article 7(1) read with Article 7(2) and 7(3) of the DTAA between India and UK, the entire Royalty received from India cannot be subjected to tax in India since no functions, assets and risks are associated with the alleged PE in India;
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5.2.Royalty income alleged to be considered as business income under Article 7 of the DTAA between India and UK can be taxed only to the extent of profits attributable to Indian operations. The Ld. DRP and Ld. AO thus grossly erred in determining the taxability applying arbitrary mechanism under Rule io(iii) of the Income tax Rules, 1962 and ignoring the principle of apportionment as laid down under Rule io(ii) of the Income tax Rules, 1962 which is consistent with the provisions of Article 7(3) of the DTAA between India and UK. 6. Under the facts and circumstances of the case and in law, without prejudice to the above grounds, the Ld. DRP and Ld. AO has failed to appreciate that the Indian company i.e. JCB India is a profitable company and as long as the same is earning profit at arm’s length, no further attribution is possible even in case of an alleged PE.
Under the facts and circumstances of the case and in law, the Ld. DRP and Ld. AO has erred in not following the Hon’ble Income Tax Appellate Tribunal order in Appellant’s case for AY 2006-07 where it has been held that Royalty earned by the Appellant is not effectively connected to alleged service PE of the Appellant in India.
Under the facts and circumstances of the case and in law:
8.1 the Ld. A.O has erred in levying interest u/s 234B of the Act. 8.2. The Ld. A.O erred in granting lower credit of Tax deducted at source amounting to Rs.18,65,04,610/- instead of Rs.26,71,90,946/-, thereby levying interest u/s 234B of the Act on a higher amount. 9. Under the facts and circumstances of the case and in law, the Ld. A.O erred in law: 9.1. In charging the interest amounting to Rs. 18,63,010/- under section 234C of the Act. 9.2. In levying the interest under section 234A and 234D of the Act. 9.3. In withdrawing the interest under section 244A of the Act. 10. The Ld. AO erred in initiating penalty proceedings under section 271(i)(c) of the Act for furnishing inaccurate particulars of income.
That the above grounds of appeal are without prejudice to each other That the appellant reserves its right to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal.”
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JC Bamford Excavators Ltd., U.K. (‘JCBE’ hereafter), is a company incorporated under the laws of the United Kingdom and has its principal office at Rocester Staffordshire England ST 14 5JP. It is a non-resident Company for the purposes of the Indian tax laws and is a tax resident of U.K. under Article 4 of the tax treaty entered into between India and U.K. It is the flagship company of JCB in U.K. which develops and manufactures excavators. The return of income was filed by the assessee on 29.11.2013 declaring total income of Rs. 1,81,07,24,365/-. The case was selected for scrutiny and initial notice u/s 143(2) of the Income Tax Act, 1961 was issued to the assessee on 16.09.2014 by DDIT(I.T.), Circle 3(1), New Delhi. After internal restructuring of the Income-tax department, the jurisdiction of the case was transferred to Circle 2(1)(2), New Delhi. Accordingly, notice u/s 142(1) and 143(2) of the Act alongwith a detailed questionnaire dated 26.08.2016 was issued to the assessee. The case was referred to TPO for computation of Arm's Length Price u/s 92CA of the Act. As per TPO order dated 31.08.2016, no adverse interference has been drawn by the TPO officer in respect of Arm's Length Price of the international transaction for the year under consideration. On March 5, 2004 JCBE entered into Technology Transfer Agreement ('TTA') with JCB India Ltd. (hereafter JCB India) to licence the know-how and related technical documents consisting of all drawings and designs with an exclusive right to manufacture and market the 'Excavator Loader (P-92 version)’ in the territory of India under the brand name 3DX. On October 21, 2010, JCBE and JCB India entered into another Technology Transfer Agreement pursuant to licence the know- how and related technical documents consisting of all drawings and designs with an exclusive right to manufacture the 'Backhoe Loader (P106)’ in the territory of India. JCBE and JCB India had also entered into an IPAA dated December 5, 2005 pursuant to which JCBE sent some
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of its employees on deputation to JCB India to manage the overall operations of JCB lndia. On December 17, 2007, JCBE, JCB India and JC Bamford Investments Limited (hereafter JCB) entered into an Intellectual Property Agreement ('IPA') pursuant to which the head licence (pertaining to TTA) under its intellectual property to manufacture and market 3DX was transferred by JCBE to JCBI in consideration of the payment of royalty by JCBI to JCBE. In other words, JCBE licensed its technology to JCBI which in turn sub-licensed it to JCB India. This sub- licensing was duly authorised by Clause 2.2 of the 1PA. Further, with effect from July 1, 2011, JCBI had agreed to be released and discharged from its obligations under the IPA and royalty accrued to the JCBE. During the year under consideration, the assessee has earned ‘royalty income’ and 'Fee for Technical Services' from JCB India amounting to Rs. 1,73,77,77,504/- and Rs.7,29,46,861/-respectively. The said receipts are subject to tax @ 15%/10.506% of the gross amount as 'Royalty & Fee for Technical Services', being the tax rate provided under Article 13(2) of Double Taxation Avoidance Agreement entered between India and UK ('DTAA') and section 115A of the Act, as the case may be. The details of the royalty income earned form JCB India are as under:- S. Particulars Amount in INR No. 1 Royalty received from Model 3DX 1,71,22,15,010/- 2 Royalty received other than Model 2,55,62,494/- 3DX Total 1,73,77,77,504/-
It is noteworthy that JCBE used to receive Royalty in the earlier years, i.e. A.Y. 2006-07 & A.Y. 2007-08, it was held by the Assessing Officer in the case of JCBE that the secondment of employees by JCBE to India resulted in establishment of a Permanent Establishment (PE) or a 'service PE’ of the JCBE
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as per article 5(2)(k)(i) of the DTAA between India and UK. And further to it, based on the facts of the case, it was held that the payment of Royalty made by JCB India to the JCBE in respect of the rights granted by the JCBE to JCB India under the TTA, is effectively connected with the such 'service PE' of the assessee in India. And accordingly, the taxation of such royalties was held to be governed by Article 7 of the Treaty and was taxed accordingly.
The Ld. AR submitted that Ground No. 1 is general in nature. The Ld. AR further submitted that Ground Nos. 2, 3, 3.1, 3.2, 3.3 are decided against the assessee in the assessee’s own case for Assessment Year 2006-07 by the Tribunal being ITA No. 540/Del/2011 order dated 14th March 2014 as well as for A.Y. 2012-13 being ITA No. 1700/Del/2017 order dated 31.07.2017.
The Ld. DR relied upon the Assessment Order.
We have heard both the parties and perused all the relevant material available on record. Ground No. 1 is general in nature hence dismissed. As regards Ground No. 2, 3, 3.1, 3.2, and 3.3 in assessee’s own case for A.Y. 2006-07 as well as 2012-13, the Tribunal dismissed these grounds. The relevant extract of the Tribunal’s decision for A.Y. 2012-13 are as under:
“6. After considering the submission of the assessee both the parties agreed before us that there is no change in the facts and circumstances of the case compared to the AY 2006-07 wherein, this issue has been decided against the assessee in the preceding year vide aforesaid referred to order dated 14.03.2014 wherein relevant findings have been given in para 7 which read as under:
“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
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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 twelve months period. Ex consequenti, we hold that JCB India constituted a service P.E of the assessee in India. The impugned order on this score is set aside and the view taken by the AO is restored.”
Therefore, respectfully following the aforesaid order in assessee’s own case for the assessment year 2006-07, the issue agitated vide Ground Nos. 1 to 3 is decided against the assessee by holding that the assessee has a service PE in India. In the result ground Nos 1 to 3 of the appeal of the assessee are dismissed.”
Thus, the issue is squarely covered against the assessee as the facts are identical in the present assessment year. Hence Ground No. 2, 3, 3.1, 3.2, and 3.3 are dismissed.
As regards Ground No.4, 5 & 7, the Ld. AR submitted that the same are decided in favour of the assessee by the decision of the Tribunal for Assessment Year 2006-07 as well as for A.Y. 2012-13 being ITA No. 1700/Del/2017 order dated 31.07.2017.
The Ld. DR relied upon the Assessment Order.
We have heard both the parties and perused all the relevant material available on record. As regards Ground No. 4, 5 & 7, in assessee’s own case for A.Y. 2006-07 as well as 2012-13, the Tribunal allowed these grounds in favour of the assessee. The relevant extract of the Tribunal’s decision for A.Y. 2012-13 are as under:
“10. We have carefully considered the rival contentions and also perused the arguments of the parties that issue is squarely covered by order of the
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coordinate bench and there is no change in the facts and circumstances of the case. The coordinate bench vide order dated 14.03.2014 in ITA No. 540/Del/2011 wherein relevant findings have been given in para 16.5 & 18 which read as under:
“16.5 In so far as the question of royalty representing consideration for the transfer of IP Rights simplicitor is concerned, it is clear that the service PE representing eight deputationists had absolutely no role to play either in creating or making it available to JCB India. It is not even the case of the A.O. that these eight deputationists had anything to do in the grant of IP Rights to JCB India. The service PE, as the very name suggests and the actual position indicates, is concerned only with the activities of rendering services after the grant of IP Rights. The ld. DR was also fair enough to candidly accept this position. Thus, it follows that albeit the amount of royalty received by the assessee arises out of IP Rights which are in the nature of right or property but the same cannot be considered under para 6 of Article 13 because it is not effectively connected with the service PE of the assessee in India.
18……”
Therefore, respectfully following the aforesaid decision regarding whether royalty is effectively collected to the PE of the assessee is decided in favour of the assessee…”
Thus, the issue is squarely covered in favour of the assessee as the facts are identical in the present assessment year. Therefore, Ground No. 4, 5 & 7 are allowed.
The Ld. AR further submitted that Ground No. 6 has to be set aside in light of Tribunal’s decision in the assessee’s own case for A.Y. 2006-07 and 2012-13 and also in light of appeal effect order dated 16th December
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2016 for Assessment Year 2006-07.
The Ld. DR relied upon the Assessment Order.
We have heard both the parties and perused all the relevant material available on record. Ground No. 6 regarding attribution of income has already decided in assessee’s own case for A.Y. 2006-07 as well as 2012-13, the Tribunal set aside this issue to the file of the Assessing Officer. The relevant extract of the Tribunal’s decision for A.Y. 2012-13 are as under:
“10. We have carefully considered the rival contentions and also perused the arguments of the parties that the issue is squarely covered by order of the coordinate bench and there is no change in the facts and circumstances of the case. The coordinate bench vide order dated 14.03.2014 in ITA No.540/Del/2011 wherein relevant findings have been given in para 16.5 & 18 which read as under:
16.5……
….Since separate details of such receipts and actual expenses incurred for earning them are not available on record, we remit this matter to the file of Assessing Officer for fresh determination of the amount of income in terms of Article 7 as per our above discussion after allowing a reasonable opportunity of being heard to the assessee.”
Therefore, respectfully following the aforesaid decision regarding whether royalty is effectively collected to the PE of the assessee is decided in favour of the assessee. Further, the issue of determination income of the service of PE of the assessee is set aside to the file of the ld Assessing Officer and decide it, in accordance with the law and as directed by para No. 18 in the impugned order of the coordinate bench for AY 2006-07. In result ground Nos. 4, 5 and 6 of the appeal of the assessee are decided accordingly.”
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In light of the above findings and also the facts are similar in the present year, we set aside this issue to the file of the Assessing Officer with the direction to decide this issue for fresh determination after following the principles of natural justice given to the assessee. Ground No. 6 is partly allowed for statistical purpose.
As regards Ground No. 8 and 9 of the appeal, the Ld. AR submitted that the assessee moved a rectification application under Section 154 of the Act before the Assessing Officer for granting complete credit of Tax Deducted at Source (TDS) and to rectify the interest inadvertently levied under Section 234A of the Act. Accordingly, the Assessing Officer passed the rectification order wherein complete credit of TDS was granted to the assessee and consequential interest under Section 234B of the Act was accordingly rectified. Also, the Assessing Officer rectified the interest inadvertently levied under Section 234A of the Act and the same was reduced to Nil. Further, interest under Section 234B, 234C, 234D & 244A of the Act are consequential in nature.
The Ld. DR relied upon the Assessment Order.
We have heard both the parties and perused all the relevant material available on record. As relates to Ground No. 8 and 9, the assessee moved a rectification application under Section 154 of the Act before the Assessing Officer for granting complete credit of Tax Deducted at Source (TDS) and to rectify the interest inadvertently levied under Section 234A of the Act. Accordingly, the Assessing Officer passed the rectification order wherein complete credit of TDS was granted to the assessee and consequential interest under Section 234B of the Act was accordingly rectified. Also, the Assessing Officer rectified the interest inadvertently levied under Section 234A of the Act and the same was reduced to Nil. Further, interest under Section 234B, 234C, 234D & 244A of the Act are consequential in nature. Hence, Ground No. 8 and 9
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are allowed for statistical purpose.
As regards Ground No. 10, the Ld. AR submitted that the Assessing Officer erred in initiating penalty proceedings under Section 271(1)(c) of the Act for furnishing inaccurate particulars of income. The same is premature in nature. Ground No. 10 is dismissed.
In result, appeal of the assessee is partly allowed for statistical purpose. Order pronounced in the Open Court on 11th September, 2018.
Sd/- Sd/- (N. K. SAINI) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 11/09/2018 R. Naheed