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Income Tax Appellate Tribunal, DELHI BENCH “C”: NEW DELHI
Before: SHRI I. C. SUDHIR & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M. 1. For AY 2007-08 This is that appeal filed by the assessee against the order of the ld Assessing officer ( AO) dated 01-10-2010 passed u/s 143(3) of the Income tax Act [ Act] rws 144C (1) of the act in pursuance of Direction u/s 144C (5) of the act issued by Dispute Resolution Panel – II [ DRP] New Iveco SPA Italy V ADIT A Y 2007-08 & 2009-10 & 5696/Del/2012
Page 2 of 17 Delhi dated 28-09-2010 on draft Assessment order passed by ld AO on 24-12-2009. 2. The assessee has raised the following grounds of appeal for the Assessment Year 2007-08:- “1 That on the facts and in the circumstances of the case and in law, the order passed by the Ld. Assistant Director of Income-Tax (Ld. AO) under section 143(3) read with section 144C of the Act is bad in law. 2 That on the facts and in the circumstances of the case and in law, the Ld. Dispute Resolution Panel (Ld. DRP) erred in confirming the draft order of the Ld. AO and conclusions contained therein.
3. That on the facts and in the circumstances of the case, the Ld. DRP and the Ld. AO (following the directions of the Ld. DRP), erred in holding that the royalty income received by the Head Office ('HO') of the appellant is effectively connected with the Branch Office and therefore taxable at the rate of 41.82% (including surcharge and education cess) in India. 4(a) In coming to its findings, on the facts and in the circumstances of the case, the Ld. AO: erred in ignoring that the predominant objective of the Technical Collaboration and License Agreement, between the HO and New Holland Tractors India Private Limited, under which the royalty has been earned by the HO, is permitting the use of the Intellectual Property Rights owned by the HO and not of rendering any services. erred in presuming that any engineering services were rendered by the employees of the Branch Office and/or employees of the Head Office who were presumably based in India for a long period (six months or more).
5. That on the facts and in the circumstances of the case, the Ld. AO, erred in not granting the credit for taxes deducted at source of Rs. 11,70,935.
6. The ld AO also erred in facts and in law in initiating penalty proceedings u/s 271(1) (c) of the Act for furnishing inaccurate particulars of income.”
3. The assessee has raised the following grounds of appeal for the Assessment Year 2009-10:
1. That on the facts and in the circumstances of the case and in law, the order passed by the Learned Assistant Director of Income Tax (Ld. AO) under section 143(3) read with section 144(C) of the Act is bad in law.
2. That on the facts and circumstances of the case and in law, the Learned Dispute Resolution Panel (Ld. DRP) erred in confirming the draft order of the Ld. AO and conclusions contained therein.
Iveco SPA Italy V ADIT A Y 2007-08 & 2009-10 & 5696/Del/2012 Page 3 of 17 3. That on the facts and in the circumstances of the case, the Ld. DRP and the Ld. AO grossly erred in relying on the assessment order for the Assessment Year 2007-08 and concluded the assessment on that basis without examining the facts and circumstances of the case.
4. That on the facts and in the circumstances of the case and in law, the Ld. DRP and the Ld. AO, erred in holding that the royalty income received by the Head Office ('HO') of the appellant was effectively connected with the Branch Office ('BO') and therefore taxable at the rate of 42.23% (including surcharge and education cess) in India.
5. That on the facts and in the circumstances of the case and in law. the Ld. DRP and Ld. AO erred in: i) ignoring that the predominant objective of the Technical Collaboration and License Agreement, between the HO and New Holland Tractors India Private Limited, under which the royalty has been earned by the HO. which is permitting the use of the Intellectual Property Rights owned by the HO and not of rendering any services. (ii). Presuming that any engineering services were rendered by the employee of the Branch Office and/ or employees of the Head Office who were presumably based in India for a long period (six months or more).
4. Both the above appeals are on similar grounds and have similar facts. Therefore, we record the facts for AY 2007-08 and then decide the issue for that year first.
5. Assessee , Iveco SPA , company has set up an Indian Branch Office [BO], which is engaged in following activities in India:- i. Undertaking business development and liasoning activities for Iveco. ii. Assisting Iveco in Homologation of its products i.e. assistance in obtaining necessary approvals from various regulator. iii. Providing assistance to Iveco in its global purchasing activities. iv. Sourcing engines locally for exporting the same to Iveco‟s dealer and customers outside India v. Providing after sale support service including warranty services and spare parts to customers in India in relation to products sold by Iveco and its licenses to customer in India vi. Providing technical support services to customers of Iveco in India. Further Branch Office shall not undertake local buying & selling in India and retail trading in India.
Iveco SPA Italy V ADIT A Y 2007-08 & 2009-10 & 5696/Del/2012 Page 4 of 17 The above activities were permitted to the Iveco SpA Italy by the Reserve Bank of India vide their application dated 14.09.2004 for setting up branch office in India.
6. Assessee has entered in to an agreement dated 17/12/2004 with New Holland Tractors India Private Limited for technical collaboration and license agreement for providing right to assemble diesel engines and its parts in India. Under that agreement, it has received royalty income in India. Pursuant to that agreement during FY 2006-07 relevant to AY 2007- 08, assessee has received a sum of Euro 1 lakh from New Holland Tractors.
7. The assessee filed its return of income on 29.10.2007 declaring income of Rs. 6912346/- comprising of Rs. 1696122/- as business income and further offered Rs. 5216224/- as royalty received from New Holland Tractor. Accordingly, the assessee has offered a sum of Rs. 5216224/- to tax in India in terms of Article 13 of India Italy Double Taxation Avoidance Agreement. It is claimed by the assessee that this income was received by the Head Office of the Indian Branch directly. There is no dispute about the taxability of the business income of Rs. 1696122/- offered by the assessee under the head “Business Income” and same was accepted as it is in order u/s 143(3) of the Income Tax Act and same is chargeable to tax @ 41.82% according to Income Tax Act. However, the sole dispute in this appeal is with respect to the sum of Rs. 5216224/- which is offered and claimed by the assessee as royalty income chargeable to tax thereon @ 20% on gross basis. The ld Assessing Officer passed draft assessment order on 24.12.2009 wherein, he held that royalty income of Rs. 5216224/- is „effectively connected‟ to the permanent establishment of the assessee in India and therefore same is not chargeable to tax as royalty income @ 20% on gross basis but as business income to be taxed @ 41.82%. The main reason given by the ld. Assessing Officer is that on perusal of the term stipulated in the agreement of royalty between Iveco Spa Italy and New Holland Tractors he inferred that the assessee‟s personnel are constantly present in India and are providing technical support services. He was also of the view that the branch office is employing around 25 employees who are equipped to render services which are mandated under the contract and further they are providing business development services, therefore it was inferred by him that the support Iveco SPA Italy V ADIT A Y 2007-08 & 2009-10 & 5696/Del/2012 Page 5 of 17 services are being provided through the branch office and thus the royalty income is „effectively connected‟ to the permanent establishment of the assessee i.e. Branch Office. Accordingly, he made such sum liable to be taxed as business income and chargeable to tax @ 41.82%.
Aggrieved by the draft order, assessee filed objection u/s 144C(2)(b) of the Income Tax Act before the ld Dispute Resolution Panel [ DRP] who held as per direction dated 28.09.2010 as under:- “3. We have considered the objections and argument of the ld AR. We have also gone through the assessment order carefully and perused the relevant documents placed in the paper book including the TCLA for providing technical collaboration to M/s. New Holland Tractors. It is seen that as per the Article-5 of the TCLA concerning technical Support and training, the HO was to entrust its technical personnel with the purpose of rendering technical assistance support and consultation in connection with the New Holand Tractor activities under the agreement and the detailed programe for any specific visit and technical support and training was to be drawn in advance. The HO was also to arrange the training/ assistance for specialized personnel of the license with the aim of providing required training on the license products assembly/ manufacturing process, testing and inspection procedures production services etc. as applied by the licenses in its own plants, on terms and conditions to be agreed upon by the parties. We have perused the copies of all the submission of the assessee made before the AO filed in the paper Book. Nowhere the assessee has shown that any personnel from the HO have visited in India for the purpose rendering the assistance and training as mentioned in Article -5 of the agreement. The highly sophisticated technical collaboration under the agreement could not have been accomplished without any assistance by the employees of the assessee company. Since the assessee has not established that any employee from HO have visited India for the purpose of imparting assistance and training as mentioned in Article -5 of the technical collaboration agreement. The obvious conclusion is that such assistance was rendered by the employees of the BO. For this reason, the royalty income gets effectively connected with the permanent establishment in the shape of the BO. The action of the AO in taxing the royalty income on net basis is therefore to be upheld.”
Based on the above direction the ld Assessing Officer passed the final order u/s 143(3) of the Act on 01.10.2010 treating the royalty income as effectively connected to the permanent establishment and chargeable to tax @41.82% on gross basis. Against this order, the assessee has preferred appeal raising 6 grounds of appeal
. Ground No. 1 and 2 and 6 are general in nature and are supporting the main ground of the appeal and therefore no argument were advanced specifically hence, they are dismissed.
10. The main ground of appeal is ground No. 3 and 4(a) of the appeal, which are against holding that the royalty income received by the Head Office of the appellant is effectively connected with the Branch Office and therefore taxable @41.82% in India.
Iveco SPA Italy V ADIT A Y 2007-08 & 2009-10 & 5696/Del/2012 Page 6 of 17 11. Before us ld AR of the appellant submitted two paper books and one judgment paper book along with written synopsis titled as brief note covering all his arguments.
The ld DR submitted three written submissions dated 24.07.2014, 20.10.2014 and 01.10.2014 and also relied upon the decision in case of Clough Engineering Ltd reported at 11 Taxmann.com 70 (Delhi)(SB).
The ld DR also submitted an application for additional evidence under Rule 29 of the Income Tax Tribunal Rules, 1963 and submitting the print out of the Directory of Italian Trade Agency to show that the assessee‟s BO has one chief representative and one Sr. Regional Manager. It is further contended that the name of the chief representative is included the name of the 9 employees of the BO. Their LinkedIn profile of these 2 employees was also submitted.
The ld counsel vehemently objected to the application of the admission of additional evidences.
On the issue of admission of additional evidence, our view is that above documents submitted by the ld DR are relevant only in case there is rendering of services by these persons with respect to the above contract. In case if we find that there is any relationship of rendering of services by the BO of the assessee in relation to this contract at that point of time we will decide this issue. Hence at present this application is kept for decision till we decide prima facie facts of the ground no 3 & 4 of the appeal of the assessee.
On the merits the brief arguments advanced by the ld AR are as under:- a. That the assessee in Italy after developing experience and expertise technology to manufacture diesel engine has granted the license to M/s. New Holland Tractors India Pvt. Ltd. vide agreement dated 17.12.2004. The Branch office of the assessee are opened in India vide application dated 14.09.2004 after obtaining the permission of the Reserve Bank of India. He further submitted that the branch office is engaged in specified activities, which are mentioned in permission given by the Reserve Bank of India, and is not all engaged in providing any services with respect to the agreement entered into by the Head office with the New Holand Tractors India Pvt. Ltd.
Iveco SPA Italy V ADIT A Y 2007-08 & 2009-10 & 5696/Del/2012
Page 7 of 17 b. That branch office is not all equipped or in any manner engaged for providing rights to assemble diesel engines to manufacture original equipments and that even prior to setting up of the branch in India the head office entered into an agreement with the Holand Tractors which itself demonstrates that the BO had no role to play in performance related to the agreement. c. He further submitted that for AY 2006-07, was the first year of assessment of branch office in India in which the royalty was received and offered to tax invoking article 13(2) of the Indo Italy DTAA and was accepted by the revenue that it is a royalty income which is not effectively connected with the Branch Office in India. He further stated that till to date that return of the assessee is not disturbed. d. He further submitted that the BO is engaged in providing business development assistance in purchase activities and after sales support services to the Head Office and therefore it does not provide any service in relation to the agreement with Holland Tractor services, hence, it cannot be stated that the impugned royalty income is effectively connected with the BOs activity in India. e. He further referred to the decision of Hon‟ble Delhi High Court in CIT Vs. Sumitomo Corporation in dated 16.11.2015 to state that only those profits which are economically attributable to PE are chargeable to tax as business income of the assessee under Article 12(5) of the DTAA and it makes a distinction between the income which are the results of the activities of the PE and which arises by the reasons of direct dealing by the enterprise with the HO without the aid or assistance of the PE. He further submitted that in the decision it is held that the part played by the PE in the transaction would determine the extent to which the profit from such transaction can be attributed to the PE and therefore he stressed that the income producing activities should be connected with the PE not only economically but also in substance. He further stated that the decision of the Delhi High Court squarely applies to the present case. f. He further relied upon the decision of Hon‟ble Uttrakhand High Court reported in 42 Taxmann.com 140 in Samsung heavy Industries Co. Ltd.
Iveco SPA Italy V ADIT A Y 2007-08 & 2009-10 & 5696/Del/2012
Page 8 of 17 Vs. DIT wherein it is held that in absence of any material on record to show that the amount received for performing activities outside India was attributable to the business carried out by the assessee‟s PE in India could not be brought to tax in India. He further stated that in the present case, no evidence has been brought on record by revenue except inferences and hence, in the present case the ratio laid down squarely applies to the case of the assessee. g. He further submitted that his submission dated 23.07.2014 running into 18 pages, its rejoinder dated 14.08.2014 to the submission of the revenue, and addendum to the rejoinder submission dated 05.09.2014 and 08.09.2014 may also be considered. Over and above this, he further relied on 13 decisions of various courts as under:- Sr. Particulars No. CIT Vs. Genesis Commet (P) Ltd. reported in 163 Taxmann 482 1. (Del) i) 26 ITR 775 (SC) at 782 (SC) Dhakeswai Cotton Mills Ltd. Vs. CIT 2. ii) 37 ITR 151 (SC) Omar Salay Mohammad Sait Vs. CIT iii) 26 ITR 736 (SC) Dhirajlal Girdharilal Vs. CIT, Bombay iv) 37 ITR 288 (SC) Lal Chand Bhagat Ambica Ram Vs. CIT v) AIR 1977 SC 796 Krishnand Vs. State of Madhya Pradesh vi) Air 1974 SC 171 Jayadayal Poddar Vs. mst Bibi hazra vii) 242 ITR 133 (ker CIT Vs. K. Mahim Udma Deputy Director of Income Tax Vs. M/s. JC Bamford Excavators 3. Ltd. (ITA No. 540/Del/2011 dated 14.03.2014 Worley Pearson Services Pty Ltd., reported in (2009) 312 ITR 273 4. (AAR) Sumitomo Corporation Vs. DCIT reported in 114 ITD 61 5. Mahavir Singh And Others Vs. Naresh Chandra and another 6. reported in (2001) Air 134 at para 5 Parsottam Thakur Vs. Lal Mohar Thakur, Air 1931 PC 143 7. Arjan Singh Vs. Kartan Singh, 1951 Air 193 (SC) 8 Smt. Girijamma Vs. Kamala Engg. Works Air 2000 Kant 239 9 Mandala Madhava Rao Vs. Mandala Yodagin AIR 2001 AP 407 10 Raj Kumar Jain Vs. Assistant Commissioner of Income Tax 11 reported in 50 ITD 1 Cit Vs. Anima Investment Ltd. (2000) 73 ITD 125 (Del) ™ 12 Commissioner of Income Tax Vs. Manish Build Well (P) Ltd (2012) 13. 204 Taxman 106 (Delhi)
Iveco SPA Italy V ADIT A Y 2007-08 & 2009-10 & 5696/Del/2012 Page 9 of 17 In substance, his argument was that BO of the assessee was not at all engaged in any of the activities for performance of the agreement of Holland Tractors with the assessee and therefore the income is not at all effectively connected with the BO and hence is rightly offered for taxation as Royalty.
Against this the ld DR submitted as under:- a. That the assessee has not provided information of duration of stay of the employees of the head office who visited in India and therefore the ld Assessing Officer has inferred that the royalty income is effectively connected to PE of the assessee in India. He further submitted that the assessee company is having 25 employees who are equipped to render services, which are mandated by the agreement. He further relied on the order of the ld DRP strongly. He further referred to several articles of the agreement stating that the technical support and training is part of the contract and the presence of such persons in the branch of the assessee out of which one is expatriate and some are having engineering background, therefore, it is possible that such employees have provided the services described in the agreement. b. That the branch was formed for providing sales support services to the head office and also filed two forms being Form No. 3CEB for the international transactions and therefore, this facts indicates that the services have been provided to India to the licensee i.e. New Holand Tractor and part of payment received is certainly effectively connected to the PE of the assessee in India. He further submitted that RBI permission to the Branch allows it to provide after sales services including warranty and spare parts to its customers in India in relation to product sold by assessee and its licensees to customers in India. The BO of the assessee was also authorized to provide technical support services to customers of assessee in India. c. He further relied on the decision of Delhi Tribunal in the case of JC Bamford Excavators Ltd. 43 Taxmnann. Com 343 (Del) to explain the meaning and scope of the expression “effectively connected” with regard to the royalty.
Iveco SPA Italy V ADIT A Y 2007-08 & 2009-10 & 5696/Del/2012 Page 10 of 17 d. He further submitted that the reliance on the decision of Sumitomo Corporation is distinguishable in facts. e. In the written submission dated 01.10.2014 which was resubmitted on 12.05.2016 it was submitted that the issue of rendering services in India by the BO in connection with the technology agreement is a question of fact and the issue of provision of such services is a disputed fact as the information provided to the AO is different than being claimed now. He was referring to the application of additional evidence made by the revenue wherein LinkedIn profile of one Chief Representative and Indian employee was given. He was further referring about the controversy that in the assessment proceedings for AY 2006-07 assessee‟s branch has 25 people whereas the assessee has shown only 9 employees. He therefore, submitted that in the interest of justice, the issue required to be decided on correct facts, the same can only be done by AO properly, and therefore the issue may be set aside to the file of Assessing Officer. f. The revenue further relied on the decision of the Special Bench in case of ACIT Vs. Clough Engineering Ltd. 11 Taxmann.com 17 (Del) (SB) to submit the intent of effective connection of the other income with the PE on the basis of „asset test‟ or „activity test‟.
We have carefully considered the rival contentions. It is for the understanding of the whole issue it is important to look at the agreement between assessee and New Holland Tractor India Pvt Ltd. for technical collaboration and license agreement dated 17.12.2004. as per this agreement, the assessee is „ Licensor‟ and the Holland Tractor India Private Limited is „licensee‟. The brief salient conditions of the agreement are extracted as under:- a. The Licensor is in the business of designing, developing, manufacturing and selling commercial vehicles and diesel engines throughout the world, being the legitimate owner of the related technology and know-how and being in possession of valuable and confidential design and technical and manufacturing data and information; b. The Licensor has already established in India, for the Licensed Products was having a previous technological cooperation with Messrs. Ashok Leyland of Chennai by means of specific licensing arrangements already expired, and obtained in such a respect a no objection certificate Iveco SPA Italy V ADIT A Y 2007-08 & 2009-10 & 5696/Del/2012
Page 11 of 17 to the establishment of the technical cooperation provided under the Agreement was obtained. c. Purposes of the agreement is that, Licensor to provide such license and the related and required technical assistance and support Under the terms of the Agreement, and to avail itself of the services of the Licensee for having the Licensed Product manufactured and sold to IVECO Indian Customers in order to honour its commitment with these customer up to the establishment in India of its own premises to manufacture and sell IVECO diesel engines and related components and parts to its own customers, included but not limited to IVECO Indian Customers, directly or in partnership with a local manufacturer d. In accordance with the terms and conditions of the Agreement, the Licensor granted to the Licensee the temporary and , non-exclusive right in the Territory for specific activities listed in article 2 of that agreement. e. According to Article 5 of that agreement the assessee is required to provide following technical support and training to the licensee as under :- ARTICLE 5 - TECHNICAL SUPPORT AND TRAINING “5.1 Upon the request of the Licensee, the Licensor is prepared to entrust its technical personnel for defined periods of time with the purpose of rendering technical assistance, support and consultation in connection with all Licensee's activities under this Agreement, under the terms and condition detailed in Attachment D hereto and subject to the approval of the Reserve Bank of India/ Government of India, whenever required. The detailed program for" any specific visit and technical support and training, Shall be discussed and agree in advance as well as any related cost has to be paid to the licensor. 5.2 The Licensor is also available to arrange the training/assistance for specialized, personnel of the Licensee, with the aim of providing required training on the Licensed Products assembly / manufacturing processes, testing and inspection procedures, production services, etc., as applied by UK Licensor in its own plants), on terms and at conditions to be agreed upon by the Parties on a case by case basis.” f. All other terms and conditions of the agreement including the remuneration are undisputed. Therefore, they are not discussed .
The contention of the Ld AO and DRP is that these services to be provided by the assessee to Holland Tractors P Ltd are sophisticated and in absence of support of employees of the BO of the assessee could not have been accomplished. Since the assessee has not established about the employees who visited for provision of these services, the obvious conclusion reached by the revenue is that such assistance is rendered by the employees of the BO of the assessee in India.
Further to understand the controversy it is necessary to see the provision of article 13 of the India Italy DTAA [DTAA] Article 13 Iveco SPA Italy V ADIT A Y 2007-08 & 2009-10 & 5696/Del/2012 Royalties and fees for technical services 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
However such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, or fees for technical services, the tax so charged shall not exceed 20 per cent, of the gross amount of the royalties or fees for technical services.
The term "royalties" as used in this Article means payments of any kind received as a consideration for use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.
The term "fees for technical services" as used in this Article means payments of any amount to any person other than payments to an employee of the person making payments, in consideration for the ser- vices of a managerial, technical or consultancy nature, including the provisions of services of technical or other personnel.
The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, 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. In such a case, the royalties or fees for technical services shall be taxable in that other Contracting State according to its own law.
Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political or administrative sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be Iveco SPA Italy V ADIT A Y 2007-08 & 2009-10 & 5696/Del/2012 Page 13 of 17 deemed to arise in the State in which the permanent establishment or fixed base is situated.
Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of royalties or fees for technical services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this article shall apply only to the last-mentioned amount. In such case, the excess part of the payment shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention. [ underline supplied by us] 21. It is undisputed fact that assessee has a permanent establishment in India as a branch office. It is also not disputed by the parties that assessee has earned „royalty‟ in India which falls under article 13(3) of the India-Italy DTAA. According to article 13(5) of the DTAA, if the right, property or contract in respect of which royalty is earned is effectively connected with the permanent establishment of the assessee then the assessee losses concessional treatment provided in clause 1 & 2 of Article 5 of the DTAA. The claim of the revenue is that the services as per clause 5 of the agreement where in certain technical support services and training is provided is allegedly provided by the employees of the branch of office of the assessee in India. Therefore, argument of the revenue is that income of royalty is effectively connected with the contract generating royalty and hence assessee is not entitled to concessional treatment as per clause 1 & 2 of the Article 13 of DTAA.
It was submitted by assessee before ld DRP and Ld AO that in the FY 2006- 07, three of the employees of assessee company visited India from Italy and provided the needful support and training to the licensee. All these three employees of the assessee were in India for execution of agreement for technical services and none of them stayed in India for more than 90 days. It is also contended that as the services of training and technical support was to be provided on need basis, after that neither there was any need nor any such assistance was provided by employees of the assessee. In any case, no services have been provided by the employees of the BO of assessee in India. Letter dated 23rd December 2009 explains the whole issue before Ld AO and DRP. Contents of this letter remain uncontroverted. Therefore, it Iveco SPA Italy V ADIT A Y 2007-08 & 2009-10 & 5696/Del/2012
Page 14 of 17 is incorrect to state that assessee has not provided the details of the persons who provided services in connection with that agreement. Further, it is also not brought on record by revenue that whether during the year any services were in fact provided by the assessee to the licensee or not. Revenue has not made any inquiry with the licensee also about the nature of services provided by the assessee during the year and who are the persons who provided these services. In absence of this inquiry and material on record, and in view of affirmative statement by the assessee at all stages that employees of the BO of the assessee are not at all capable and are engaged in performance of the contract, it is not possible to say that the activities of the contract are effectively connected with the BO of the assessee. The contention of the Ld AO and DRP is that these services to be provided by the assessee to New Holland Tractors P Ltd are sophisticated and in absence of support of employees of the BO of the assessee could not have been accomplished. As the BO employs technically qualified staff, it is inferred by revenue that employees of the BO has provided these services. In fact, prior to this agreement with the New Holland Tractors Limited, assessee was having such technical agreement with other party in India and at that, time branch of office of India did not exist at all. Further there is mere allegation by the revenue that the services have been performed by the persons employed by the BO of the assessee in relation to the impugned contract even when assessee has categorically given information vide letter dated 23/12/2009. Merely having some staff with its BO, that are technically qualified, it cannot be inferred that they have provided services for performance of the impugned contract. In fact the services rendered by the branch office in India which are tabulated in the letter of permission dated 11/12/2004 of the Reserve bank of India, are also technical in nature which inter alia includes providing technical support services to the clients of its HO in India, after sales support services, warranty services etc., therefore to perform that activity also BO of the assessee in India needs technically qualified employees. Therefore, the revenue has not shown any material that services have been provided by the employees of the BO of the assessee. No presumption can be drawn by revenue regarding involvement of the PE in earning royalty income. To effectively connect royalty with a PE Iveco SPA Italy V ADIT A Y 2007-08 & 2009-10 & 5696/Del/2012
Page 15 of 17 one has to evaluate the „asset test‟ and to effectively connect Fees for technical services with PE one has to evaluate „ activity test‟ or „function test‟. In the present case the sum is offered and accepted for taxation as Royalty , then for evaluation of its effective connection with the PE only „ „assets test‟ should be applied which fails miserably in this case. Assuming that sum is Fees for technical services even then the „ Activity test‟ or function test‟ is also not satisfied. To „effectively connect‟ this royalty income with the PE revenue should establish that (1) PE should be engaged in the performance of of technical services or should be involved in actual rendering of such services, or (2) it should arise as a result of the activities of the PE , or (3) The PE should, at least, facilitate, assist or aid in performance of such services irrespective of the other activities PE performs. Revenue could not bring any material on record, which proves above facts in substance. Honourable Delhi high court in CIT V Sumitomo Corporation [382 ITR 75] held as under :
“27. Article 12(5) of the Double Taxation Avoidance Agreement is on the lines of the OECD Model Convention. It is noticed that the clause in the OECD Model Convention allows the State, where the permanent establishment is located, to "tax only those profits which are economically attributable to the permanent establishment". The clause makes a distinction between those incomes which are the result of activities of the permanent establishment and the income that arises by reason of direct dealings by the enterprise from the head office without the aid or assistance of the permanent establishment. Thus, article 12(5) adopts the "no force of attraction principle". The rationale behind the said rule was to avoid restricting entrepreneurial freedom of disposition "through fictitiously allocating profits by way of generalising standards". Another principle is that the "material date for determination of accrual of income arising through the permanent establishment is the existence of the permanent establishment at the time when whatever decisively caused the profits to accrue, actually accrued". The income producing activities should be connected with the permanent establishment not only economically but also in substance.” [underlines supplied by us] 23. In substances neither there is any material about the requirement of the services by the recipient of the services nor provision of such services, if any, by the employees of the BO of the assessee. Therefore, in absence of any such material it cannot be said that income of royalty is the income arising out of results of the activities of the permanent establishment. In Iveco SPA Italy V ADIT A Y 2007-08 & 2009-10 & 5696/Del/2012 Page 16 of 17 fact, the income of royalty is because of the direct dealing of the New Holland tractors limited with the assessee without the aid or support from its permanent establishments in India. Hence, we now decide the issue of admission of additional evidence. According to us , these evidences does not have any bearing in deciding the issue involved in the present appeal, hence we dismiss the application of revenue for admission of the linked in profile of the two employees of Bo as well as the extract of the directory. In view of this, we are not in agreement with the stand of the revenue that royalty income received by the assessee is effectively connected with its branch office in India and therefore in terms of article 12 (5) , assessee is not entitled for preferential tax treatment according to article 12 (1) & (2) of the DTAA. In the result We hold that royalty income of Rs. 52,16,224/- earned by the assessee on account of technical agreement with the New Holland Tractors Private limited is not effectively connected with the BO of the assessee in absence of any positive and substantive material that services have been rendered by the employees of the BO of the assessee and therefore same is chargeable to tax as „ Royalty‟ income as per article 13 (1 ) and (2) of the India Italy DTAA. In the result ground nos 3 & 4 of the appeal are allowed.
Ground no 5 of the appeal is against not granting credit for taxes of Rs. 11,70,935/- . The parties agreed that this matter should go back to AO and the credit for the taxes should be granted to the assessee if proper TDS certificates are submitted by the assessee. Ld AO may also make any inquiry with respect to such TDS credit , in case if found necessary, and afford opportunity of hearing to the assessee. Therefore ground no 5 of the appeal is set aside to the file of ld AO accordingly.
In the result, appeal of the assessee for AY 2007-08 is party allowed.
Now we come to the appeal of the assessee for AY 2009-10. The ground no 1 and 2 are general in nature and therefore same are dismissed.
Ground no 3 to 5 are on the controversy of taxability of Royalty income arising out of the contract of the assessee with new Holland Tractors Private Limited. The parties confirmed that the facts and circumstances of the case in this appeal are similar to the facts of assessee‟s appeal for AY 2007-08. We have also perused the relevant records and satisfied ourselves Iveco SPA Italy V ADIT A Y 2007-08 & 2009-10 & 5696/Del/2012 Page 17 of 17 that facts of this case are similar to the facts of the case of the assessee‟s appeal for AY 2007-08. We have decided the above issues in that appeal holding that royalty income earned by the assessee on account of technical agreement with the New Holland Tractors Private limited is not effectively connected with the BO of the assessee in absence of any positive and substantive material that services have been rendered by the employees of the BO of the assessee and therefore same is chargeable to tax as „ Royalty‟ income as per article 13 (1 ) and (2) of the India Italy DTAA. Therefore ground no 3 to 5 of the appeal are allowed accordingly.
In the result appeal of the assessee for AY 2009-10 is partly allowed. Order pronounced in the open court on 29/07/2016. -Sd/- -Sd/- (I. C. SUDHIR) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 29 /07/2016 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi Iveco SPA Italy V ADIT A Y 2007-08 & 2009-10 & 5696/Del/2012