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Imerys Asia Pacific Pvt. Ltd. Versus The Dy. Director of Income-tax (International Taxation) -I, Pune

2016 (6) TMI 248 - ITAT PUNE

Eligibility to provisions of DTAA between India and Singapore - Benefits under India-Singapore Tax Treaty v/s income assessed under section 115A - Non granting of benefits under the India – Singapore Tax Treaty to the Appellant denied on the basis that it is not the beneficial owner of the income received from royalty and interest - r DTAA between India and Singapore - Held that:- It is not the case of Revenue that the amount has not been remitted to Singapore, but the benefit of Tax Treaty have .....

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it could sub-license and had in furtherance provided services to its sub-licensee and received sub-licensee fees from sub-licensee i.e. INPL, then such royalty income having been received by the assessee non-resident company on its own right as the beneficial owner of the same, such royalty income is to be subject to tax at concessional tax rate at 10%. Similarly, the interest income earned by the assessee was also received by it being its beneficial owner and which in turn, has been remitted t .....

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. 144C(13) of the Income-tax Act, 1961 (in short the Act ). 2. The assessee has raised the following grounds of appeal:- 1. Non granting of benefits under the India - Singapore Tax Treaty ( Treaty ) to the Appellant on the basis that it is not the beneficial owner of the income received from royalty and interest The learned AO based on directions of the Hon ble DRP, has erred in denying Treaty relief to the Appellant on the incorrect basis that the Appellant is not the beneficial owner of the ro .....

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te of tax as per the Treaty to the royalty and interest income earned by the Appellant; 3. Initiation of penalty proceedings under section 271(1)(c) of the Act of the Act The learned AO based on directions of the Hon ble DRP has erred in initiating penalty proceedings under section 271(1)(c) of the Act. 3. The issue arising in the present appeal is against the rate of tax to be applied i.e. in the facts of the case whether the benefits under India - Singapore Tax Treaty are to be allowed or th e .....

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c region, rendering administrative, marketing and sales services to the group and affiliated companies, trading in paper and performance minerals and other related business activities including project work. For the year under consideration, the assessee had filed return of income declaring total income of ₹ 69,62,080/-. The assessee for the year under consideration had offered following receipts for tax in India:- Name of the Entity Nature of transaction Amount (Rs.) Rate of tax applied a .....

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n India and Singapore would not be allowed. The Assessing Officer further on the basis of records available noted that the beneficial owner of royalty was not the assessee, but was Imerys Minerals Ltd., UK. The assessee s claim that knowhow agreement between Imerys Minerals Ltd., UK and Imerys Singapore was on principal to principal basis and the assessee was not an agent of Imerys Minerals Ltd., UK, could not be supported with documentary evidence. The Assessing Officer further noted that the a .....

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ficer thus, held that the assessee was not the beneficial owner of the royalty and interest in the absence of documentary evidence having not been produced by the assessee. Based on the submissions filed by the assessee, the Assessing Officer proposed draft assessment order under section 144C r.w.s. 143(3) of the Act, wherein the assessee s total income was computed at ₹ 69,62,080/-, which was same as the return of income. However, in view of the fact that the assessee was not beneficial o .....

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DRP confirmed the decision of Assessing Officer that the assessee was not the beneficial owner of interest and royalty income, also the benefits of India-Singapore DTAA to the assessee were denied. In view thereof, the Assessing Officer passed an order under section 143(3) r.w.s. 144C(13) of the Act holding that since the assessee was not beneficial owner of royalty and interest income from India and also does not satisfy the provisions of Article 24 of DTAA, the assessee was not eligible to cla .....

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ispute. He further stated that the assessee was resident of Singapore and was non-resident in India. The assessee for the year under consideration had received both interest and royalty from Indian companies and the royalty income was offered to tax @10% and the interest income was offered to tax @15%. However, the Assessing Officer denied the ben efit of lower rate of taxes holding that the provisions of DTAA between India-Singapore were not available to the assessee and taxed the interest and .....

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ities, which was the indicator of the fact that the assessee was operational company. He further referred to para 5 of the assessment order and pointed out that there was existence of an agreement between UK company and Singapore company which was between principal to principal for use of technical know-how. The Singapore entity i.e. the assessee further enters into agreement with the Indian entity for sub-licensing technical know-how, against which it had received royalty. The learned Authorize .....

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wner was non-resident of India, then 15% of gross amount of interest was to be charged. As per Article 12 of DTAA, royalty receipts were to be charged @10%. The first issue to be decided in the present appeal vide ground of appeal No.1 was the question of beneficial owner, whether the same was the UK company or Singapore company. The learned Authorized Representative for the assessee pointed out that the issue as ground of appeal No.2, the Assessing Officer had erred in applying the provisions o .....

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TAA applies. First of all, it was pointed out by the learned Authorized Representative for the assessee that there was no condition in the Treaty that the income has to be remitted in the same fiscal year and if the income is offered on accrual basis in Singapore, the same would be taxed in two places. In this regard, he further submitted that the purpose of Treaty would not be served and the provisions of Treaty were to be interpreted liberally. Our attention was drawn to the financials of asse .....

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rized Representative for the assessee further referred to the agreement placed at pages 54 onwards and referred to the various terms of agreement and further referred to the invoices raised for charging royalty placed at pages 72 and 73 of the Paper Book and the remittance of royalty in the subsequent year as evidenced by the documents placed at pages 74 and 75 of the Paper Book. The learned Authorized Representative for the assessee also referred to the Certificate of Residency given by the Sin .....

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34 of the Paper Book along with list of loans taken and granted at page 176 of the Paper Book. The learned Authorized Representative for the assessee stressed that the investment was out of amounts of Singapore entity and it could not be said that the assessee concern was conduit company. The learned Authorized Representative for the assessee referred to the ratio laid down by Pune Bench of Tribunal in Shaan Marine Services Pvt. Ltd. Vs. Dy. D irector of Income Tax (2014) 165 TTJ 952 (Pune) as t .....

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is in Singapore, hence, the assessee was entitled to the Treaty benefit and the provisions of Article 24 of DTAA were not applicable. With regard to interest income, it was pointed out by him that the same was offered on receipt basis and there was no dispute that it was not taxed in Singapore. Further, it was pointed out by him that there was no condition under the Act that the same should be remitted in the fiscal year. 8. The learned Departmental Representative for the Revenue in reply, state .....

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24 of DTAA were attracted. 9. The learned Authorized Representative for the assessee fairly pointed out that it was the sub-licensee contract entered into between the assessee and India entities. However, the question to be seen was whether the assessee was receiving the income of its own right. The learned Authorized Representative for the assessee placed reliance on the ratio laid down by Authority for Advance Rulings, New Delhi reported (1997) 94 TAXMAN 171 (AAR-New Delhi). 10. We have heard .....

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project work. The assessee entered into a Technology License Agreement with Imerys NewQuest (India) Pvt. Ltd. (INPL), which in turn, makes royalty payment to the assessee. Under the Technology Agreement , non-exclusive, nontransferable, non-assignable and revocable license was granted to INPL to use the technology and know-how in connection with development, manufacture, use and sale of calcium carbonate and calcium carbonate products in geographical territory of India. INPL was to pay royalty .....

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n quarterly basis. Further, these loans were granted by the assessee in accordance with External Commercial Borrowing (ECB) guidelines issued by the Reserve Bank of India. The assessee has furnished on record the Tax Residency Certificate from its head office in Singapore. The assessee claims that it has no Permanent Establishment / PE in India. During the year under consideration, the assessee had received royalty from INPL at ₹ 48,88,234/- and interest of ₹ 20,73,846/- from IMPL. T .....

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2010 on 06.12.2010. Since the assessee had not received income in Singapore from India during the financial year 2009-10, the Assessing Officer show caused the assessee as to the applicability of Article 24 of DTAA i.e. limitation of relief clause in DTAA between India and Singapore . The explanation of the assessee was that it had offered income on accrual basis and hence, had applied reduced rate for royalty and interest income as per DTAA i.e. 10% for royalty and 15% for interest. It was furt .....

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dered to have satisfied and the concessional tax rate in India should not be denied by application of limitation of relief provisions. 12. The know-how license agreement was entered into between Imerys Minerals Ltd., UK and the assessee. Under this agreement, Imerys Singapore could sub-license the know-how to other Imerys group companies i.e. sublicensees and receive royalty income from the said licensees. As per the agreement, Imerys, Singapore i.e. the assessee was liable to pay royalty @2% of .....

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d Imerys Minerls Ltd., UK was principal to principal basis. The case of the assessee before us was that it had earned royalty on its own right and on its own account and hence, was the beneficial owner of entire royalty income received from INPL under Article 12(2) of DTAA. 13. The first condition, in order to be eligible to the provisions of DTAA between India and Singapore, is that the entity should be tax resident of Singapore. The assessee has placed on record the Tax Residency Certificate o .....

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uted income at ₹ 69,62,080/-. The dispute is as to the rate of tax to be applied on such income. 14. The relevant Articles for taxability of interest and royalty in India under Singapore Tax Treaty are reproduced hereunder for reference: - ARTICLE 11: INTEREST - 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and accordi .....

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CLE 12 : 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. 2. 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 Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so cha .....

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amount thereof, then the exemption or reduction of tax to be allowed under this Agreement in the first-mentioned Contracting State shall apply to so much of the income as is remitted to or received in that other Contracting State. 2. However, this limitation does not apply to income derived by the Government of a Contracting State or any person approved by the competent authority of that State for the purpose of this paragraph. The term Government" includes its agencies and statutory bodie .....

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ontracting State, then the same is to be taxed in the other States. It is further provided by clause 12(2) of DTAA that the said royalty and even fees for technical services may also be taxed in the Contracting State in which they arise and agreed to the laws of Contracting State, but if the recipient was the beneficial owner of royalties or fees for technical services, the tax so charged, was not to exceed 10%. Further under Article 11 of DTAA, similar provisions are laid down in respect of int .....

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the said income is subjected to tax by reference to the amount thereto which is remitted to or received in the other Contracting State and not by reference to the full amount thereof. It is further provided that the exemption or reduction of tax to be allowed under this agreement in first mentioned Contracting State shall apply to so much of the income as is remitted to or received in the other Contracting States. 17. In order to adjudicate this issue, we have perused the agreement entered into .....

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icensor in order to develop its market. The licensee on the other hand, wished to obtain the license of know-how, not to use the know-how itself, but in order to sublicense the know-how to third parties customers, subject to terms of the agreement. The licensor thus, agreed to permit the licensee to sub-license the know-how on the terms and conditions of this agreement. As per clause 2.1, the licensor granted to the licensee a non-exclusive, perpetual, irrevocable license, subject to terms and c .....

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erefore, it was agreed that as consideration for the know-how license, the licensee shall pay to the licensor a license fees equal to 2% of the sales of the product realized by sublicensee. 18. The assessee in lieu of this license granted to it, entered into a royalty agreement with INPL, copy of which is placed at pages 51 to 68 of the Paper Book, under which it was agreed that the assessee undertook to provide technology and know-how granted to the licensee a non-exclusive, nontransferable, no .....

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as agreed that royalty equivalent to amount of 5% per annum of annul net sales of products realized for a particular year shall be paid by the licensee to the licensor. In order to provide the services to INPL, the assessee claims that it had provided services to INPL through its employees, who had also travelled to India, against which it had received royalties and the assessee was the beneficial owner of royalty received from Indian company and hence, was eligible for concessional tax rate @10 .....

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t of TDS against the royalty payment of ₹ 48,88,234/-. In the totality of the above said facts and circumstances, we hold that the assessee was the beneficial owner of royalty in line with the provisions of Article 12 of DTAA and the same was to be taxed @10%. We find support from the ratio laid down by the Authority for Advance Rulings, New Delhi in P.No.13 of 1995, In re (supra), wherein it was held that though applicant would be acquiring expertise and technical know-how from third part .....

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of India Vs. Azadi Bachao Andolan (supra) and further the Hon ble Punjab & Haryana High Court in Serco BPO Pvt. Ltd. Vs. AAR in Civil Writ Petition No.11037 of 2014 (O&M), judgment dated 26.08.2015, where the assessee before us is tax resident of Singapore and the Singapore Tax Residency Certificate of the assess ee for 2010 is available at page 93 of Paper Book and the benefit of Treaty is also available to the assessee on this ground. 20. Further, with regard to interest income receive .....

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by the assessee before the Assessing Officer was that the Tax Department has accepted the concessional tax rate in the case of assessment years 2006-07, 2008-09 & 2009-10 and hence the same position should be adopted for assessment year 2010-11. The Assessing Officer rejected the said plea of the assessee since the returns for all those years were processed under section 143(1) of the Act. However, where the assessee was the beneficial recipient of the interest income, the same is to be tax .....

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