TMI Blog2014 (4) TMI 887X X X X Extracts X X X X X X X X Extracts X X X X ..... tted by the assessee before the Assessing Officer and such position has not been denied - all the requisite conditions for attracting the mandate of Art.5(2)(k)(i) stand satisfied inasmuch as there is furnishing of services including managerial services and such services are other than those taxable under Article 13 (Royalties and fees for technical services) - such services are rendered within India - services are rendered by the assessee through its employees and activities continued for a period of more than ninety days within twelve months period - JCB India constituted a service P.E of the assessee in India – the order of the CIT(A) set aside and the matter remitted back to the AO. Whether royalties/fees for technical services is taxable under Article 7 as held by the AO or Article 13(2) – Held that:- The amount of royalty and consideration for rendering of services by the employees of second category do not fall in para 6 of Article 13 and are hence chargeable to tax as per para 2 of Article 13 of the DTAA - As both these amounts make up the total consideration, its splitting into two parts, viz., towards royalty and employees of the second category has become academic, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d A. D. Jain, JJ. For the Appellant : Sanjeev Sharma For the Respondent : G.C. Srivastava and Saurabh Srivastava. ORDER :- PER : R.S. Syal These two cross appeals - one by the Revenue and the other Cross Objection by the assessee - arise out of the order passed by the CIT(A) on 03.11.2010 in relation to the assessment year 2006-07. 2. First ground of the Revenue's appeal is against the holding by the ld. CIT(A) that the stay of the seconded employees of the assessee for more than 90 days in India, engaged in providing managerial services to JCB India, did not constitute Services Permanent Establishment (P.E). The second ground, which is related to the first, projects the grievance in the terms that the ld. CIT(A) erred in holding that income of the assessee be treated as 'Royalty' instead of 'Business profits' as held by the Assessing Officer. 3. Briefly stated the facts of the case are that the assessee is a flagship 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 Agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that one of them was appointed as Managing Director, the other as Joint Managing Director, still another as Vice-President and the remaining five as General Managers. These employees were deputed to ensure that the Licensed products were manufactured as per the specifications provided by the assessee through its technical documents and there was no compromise on quality. The assessee's contention that the persons so deputed to JCB India became the employees of JCB India on their assignment and hence ceased to have any relation with the assessee, was rejected. In view of the deputation of these eight persons for a period of more than 90 days during the previous year relevant to the assessment year under consideration, the A.O held that they constituted services P.E of the assessee (named as JCB India) in India in terms of Article 5(2)(k)(i) of the DTAA. He fortified his view on the strength of the judgment of the Hon'ble Supreme Court in the case of Director 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by JCB India through the assessee. As the assessee did not have any PE in India, the assessee made out a case that no amount could be charged to tax within the meaning of Article 7 of the DTAA. The ld. CIT(A) observed that two agreements, namely, TTA and IPAA were entered into at different points of time. He held that such agreements should be considered as materially different and independent of each other. He further noticed that JBC India filled up vacant position by means of the employees assigned by the assessee who became the employees of JCB India and were to work under the direction, supervision and control of JCB India. For a service PE to be established, it was held to be necessary that the assessee must have rendered some services to JCB India through its employees. Since these eight persons became the employees of JCB India on their deputation, the ld. CIT(A) held that the assessee did not have any PE in India. He bolstered his conclusion by relying 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd continue for a period or periods aggregating more than 30 days within any twelve-month period. Provided . 3. The term permanent establishment shall not be deemed to include : .. (e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information or for scientific research, being activities solely of a preparatory or auxiliary character in the trade or business of the enterprise. However, this provision shall not be applicable where the enterprise maintains any other fixed place of business in the other Contracting State for any purpose or purposes other than the purposes specified in this paragraph; 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the benefit of user and hence it cannot be considered for constituting PE in India. The relevant part of the judgment is as under :- Under art. 5(3)(e) activities which are preparatory or auxiliary in character which are carried out at a fixed place of business will not constitute a PE. .. Stewardship activities involve briefing of the MSAS staff to ensure that the output meets the requirements of the MSCo. These activities include monitoring of the outsourcing operations at MSAS. The object is to protect the interest of the MSCo. These stewards are not involved in day to day management or in any specific services to be undertaken by MSAS. The stewardship activity 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 se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Mr. Andrew Thomas was a part of Product Design Engineering Team. From the above narration of the duties carried out by these eight key personnel deputed by the assessee to JCB India, it is clearly borne out that they were basically engaged in managing the overall operations of JCB India including the quality control. The services so rendered by such persons fall within the ambit of 'services including managerial services'. The first condition thus stands satisfied. ii. Services should be other than those taxable under 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Relevant parts of Clause-II of TTA providing for the grant of license and its consideration reads as under: Clause - II Grant of License and consideration 2.1 The Licensor hereby grants to the Licensee during the term of this Agreement an exclusive non-transferable license in the Territory under the IP Rights to manufacture, assemble, use and sell Licensed Products and for that purpose to use the Know-How, the inventions covered 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see not only undertook to supply Know- How to JCB India, but also 'Assistance' by means of 'engineering skills' to enable it to manufacture the licensed products to the standard of quality by incorporating such specification and features. 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 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available specialists or engineers' to assist JCB India's personnel to study, analyse and advise on the problems in the Licensee'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 allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nothing but elaboration of the terms for the provision of such personnel by the assessee to JCB India and is in the nature 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee company during the term of serving JCB India on deputation. It has been unequivocally provided in this 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee despite their deputation to JCB India. 6.11.11. The language used by the ld. CIT(A) in para 4.2 of the 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. Visiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the supply of IP Rights by the assessee to JCB India but also to depute its personnel for rendering services in connection 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 activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble Supreme Court in Morgan Stanley (supra) on the point. We, therefore, hold that the personnel 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 consequ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents royalties/fees for technical services in terms of Article 13(4). On the other hand, the 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 fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ategory. We want to make it clear that the Assessing Officer has considered the entire amount as a single 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 wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle 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 to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this Article is received. A careful perusal of para 4 of Article 13 of the DTAA div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial owner 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; ii) in respect of which the royalties o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 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 eight employees of the assessee as cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich 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 category, which are presently under con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees 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 State shall be taxable only in the State of residence unless the enterprise carries on business in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubject 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. Another interesting point arises on our holding that the fees for technical services on acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 accept the point of view canvassed by the Assessing Officer in including the amount of royalties or f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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