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2016 (8) TMI 809 - ITAT DELHI

2016 (8) TMI 809 - ITAT DELHI - TMI - Royalty income - India-Italy DTAA - technical agreement - existence of PE in India - Held that:- 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 establishm .....

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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 earned by the assessee on account of technical agreement with the New Holland Tractors Private limited is n .....

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CS Aggarwal, Sr. Adv Mr. RP Mall, Adv For The Revenue : Sh. Anuj Arora, CIT DR ORDER 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 Delhi dated 28-09-2010 on draft Assessment order passed by ld AO on 24-12-2009. 2. T .....

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at 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 predominan .....

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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 ₹ 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 Learn .....

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essment 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 .....

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e 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. a .....

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rther Branch Office shall not undertake local buying & selling in India and retail trading in India. 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. .....

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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 ₹ 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 di .....

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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 provid .....

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[ 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 tec .....

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icenses 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 assistanc .....

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income on net basis is therefore to be upheld. 9. 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 w .....

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ree 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). 13. 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 n .....

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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. 16. 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 licen .....

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New Holand Tractors India Pvt. Ltd. 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 off .....

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re 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 ITA NO. 714/2014 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 .....

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ould 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. 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 carrie .....

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08.09.2014 may also be considered. Over and above this, he further relied on 13 decisions of various courts as under:- Sr. No. Particulars 1. CIT Vs. Genesis Commet (P) Ltd. reported in 163 Taxmann 482 (Del) 2. i) 26 ITR 775 (SC) at 782 (SC) Dhakeswai Cotton Mills Ltd. Vs. CIT 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 Prade .....

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an Singh Vs. Kartan Singh, 1951 Air 193 (SC) 9 Smt. Girijamma Vs. Kamala Engg. Works Air 2000 Kant 239 10 Mandala Madhava Rao Vs. Mandala Yodagin AIR 2001 AP 407 11 Raj Kumar Jain Vs. Assistant Commissioner of Income Tax reported in 50 ITD 1 12 Cit Vs. Anima Investment Ltd. (2000) 73 ITD 125 (Del) ™ 13. Commissioner of Income Tax Vs. Manish Build Well (P) Ltd (2012) 204 Taxman 106 (Delhi) In substance, his argument was that BO of the assessee was not at all engaged in any of the activities .....

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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 t .....

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on 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 effectiv .....

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laimed 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 p .....

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ent 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 th .....

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reement 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 .....

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:- 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 progra .....

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ms 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 . 19. 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 emplo .....

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axed 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 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. 3. The term "royalties" as used in this Article means payments of any kind received as a .....

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is 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. 5. 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 .....

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e according to its own law. 6. 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 .....

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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 di .....

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re 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. 22. It was submitted by assessee before ld DRP and Ld AO that in the FY 2006-07, three of the employees of ass .....

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ces 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 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 .....

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ed 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 technic .....

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nce 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 .....

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luation 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 .....

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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 .....

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;. 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 activiti .....

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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 ₹ 52,16,224/- earned by the assessee on account of technical agreemen .....

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