JCB Heavy Products Ltd., England V. DCIT (International Taxation), New Delhi

ITA 1741/DEL/2016

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 3508 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 11 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-03-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Assessment Year: 2011-2012
• Appeal Filed On: 01-04-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SATPAL GULATI
• Keywords: Business income; Double taxation relief; Principle of natural justice; Permanent establishment; TDS
• Section: 271(1)(c); 143(3); 195; 44AB; 115A; 13(2); 13

Judgement Text

1 ITA NO. 1741/DEL/2016 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: D NEW DELHI BEFORE MS SUCHITRA KAMBLE, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER I.T.A. NO. 1741/DEL/20 16 (A.Y 2011-12) JCB HEAVY PRODUCTS LTD . , ROCESTER, UTTOXETER, ST14 5JP, STAFFORDSHIRE, ENGLAND. (PAN : AABCJ 4692 H) (APPELLANT) VS D CIT(INTERNATIONAL TAXATION), CIRCLE 2(1)(2) NEW DELHI ( RESPONDENT) APPELLANT BY SH. K. M. GUPTA, ADV. RESPONDENT BY SHRI SATPAL GULATI, SR. D.R. ORDER PER SUCHITRA KAMBLE, JM THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE OR DER DATED 19.01.2016 PASSED BY DCIT, CIRCLE 2(1)(2), INTERNATIONAL TAX ATION, NEW DELHI FOR ASSESSMENT YEAR 2011-12 UNDER SECTION 144C(13) R.W. S. 143(3) OF THE INCOME TAX ACT, 1961. 2. THE GROUNDS OF APPEAL ARE AS UNDER:- 1. THE LEARNED DISPUTE RESOLUTION PANEL (THE LD. DRP) AND LEARNED ASSESSING OFFICER (THE LD. AO) ERRED IN HOLDING T HAT RECEIPTS ON ACCOUNT OF RECTIFICATION AND REWORK BY THE APPELLANT IS IN THE NATURE OF FEES FOR TECHNICAL SERVICES (FTS) WITHIN THE MEANING OF AR TICLE 13 OF DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) ENTERED BETWE EN INDIA & UK. DATE OF HEARING 08.01.2020 DATE OF PRONOUNCEMENT 05.03.2020 2 ITA NO. 1741/DEL/2016 2. WITHOUT PREJUDICE TO GROUND NO.1, ON THE FACTS A ND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO ERRED IN APPLYING THE T AX RATE OF 15% AS PROVIDED UNDER THE DTAA ENTERED BETWEEN INDIA & UK ON REIMBURSEMENTS TOWARDS RECTIFICATION AND REWORK COST, INSTEAD OF T HE LOWER RATE 10.5575% (INCLUDING SURCHARGE AND EDUCATION CESS) PROVIDED U NDER THE ACT. 3. UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. DRP AND LD. AO ERRED IN LEVYING INTEREST UNDER SECTION 234A , 234B, 234C AND 234D OF THE ACT. 4. THE LD. AO ERRED IN INITIATING PENALTY PROCEEDIN GS UNDER SECTION 271(1)(C) OF THE ACT FOR FURNISHING INACCURATE PARTICULARS OF INCOME. THAT THE ABOVE GROUNDS OF APPEAL ARE WITHOUT PREJUD ICE TO EACH OTHER. THAT THE APPELLANT RESERVES ITS RIGHT TO ADD, ALTER , AMEND OR WITHDRAW ANY GROUND OF APPEAL EITHER BEFORE OR AT THE TIME OF HE ARING OF THIS APPEAL. 3. JC BOMFORD HEAVY PRODUCTS LTD. I.E. THE ASSESSE E, IS A COMPANY INCORPORATED UNDER THE LAWS OF THE UNITED KINGDOM. IT IS A NON-RESIDENT COMPANY FOR THE PURPOSES OF INDIAN TAX LAWS AND IS A TAX RESIDENT OF U.K UNDER ARTICLE 4 OF THE DOUBLE TAXATION AVOIDANCE AG REEMENT ENTERED INTO BETWEEN INDIA AND U.K. IT IS A WHOLLY OWNED SUBSIDI ARY OF M/S J.C. BAMFORD EXCAVATORS LIMITED, ENGLAND (JCBE). THE ASSESSEE FI LED RETURN OF INCOME FOR A.Y. 2011-12 DECLARING TOTAL INCOME OF RS.15,68,12, 533/- ON 26.11.2011. THE ASSESSING OFFICER OBSERVED THAT ON 05.03.2004, M/S. JCBE ENTERED INTO TECHNICAL TRANSFER AGREEMENT WITH THE ASSESSEE COMP ANY TO LICENSE THE PATENTS, KNOW-HOW AND DESIGNS AND TO TRANSMIT TECHN ICAL INFORMATION FOR MANUFACTURE OF LICENSED PRODUCTS IN INDIA ON THE TE RMS AND CONDITIONS AGREED UPON. THE ASSESSEE WAS ASKED AS TO SHOW THAT THE AS SESSEE COMPANY IS NOT PERMANENT ESTABLISHMENT IN RESPECT OF THE SERVICES AGAINST WHICH RECEIPTS WERE RECEIVED BY THE ASSESSEE COMPANY WHICH CANNOT BE PERFORMED AT THE PREMISE OF JCB INDIA. THE ASSESSEE COMPANY SUBMITTE D THAT JCB HEAVY PRODUCTS IS A COMPANY INCORPORATED UNDER THE LAWS O F THE UNITED KINGDOM. IT IS A NON RESIDENT COMPANY FOR THE PURPOSE OF THE IN DIAN TAX LAWS AND IS A TAX RESIDENTS OF UK UNDER ARTICLE 4 OF THE DOUBLE TAX ATION AVOIDANCE AGREEMENT ENTERED INTO BETWEEN INDIA AND UK. THE ASSESSEE SUB MITTED BEFORE THE 3 ITA NO. 1741/DEL/2016 ASSESSING OFFICER THAT ROYALTY INCOME EARNED UNDER TECHNICAL TRANSFER AGREEMENT IS EFFECTIVELY CONNECTED WITH THE SERVIC E PERMANENT ESTABLISHMENT. FURTHER AS NO EMPLOYEES OF THE ASSESSEE WERE DEPUTE D TO WORK IN INDIA THE QUESTION OF HAVING ANY PERMANENT ESTABLISHMENT DOES NOT ARISE. THE ASSESSING OFFICER AFTER CONSIDERING THE REPLY OF THE ASSESSEE HELD THAT EVEN WHERE THE FEE IS CHARGED AT COST WITHOUT ANY MARK-UP, IT IS HELD AS NOT A CASE OF REIMBURSEMENT AND TDS U/S 195 IS APPLICABLE. THEREF ORE, THE ASSESSING OFFICER OBSERVED THAT THE RECEIPTS OF TOTAL AMOUNT OF RS.22 ,52,093/- WHICH ARE ATTRIBUTABLE TO THE PE ARE HELD TO BE TAXABLE AS FE ES FOR TECHNICAL SERVICES ON ACQUISITION BASIS. THE ASSESSING OFFICER CONCLUDED THAT THE ASSESSEE HAS A SERVICE PE IN INDIA THROUGH WHICH IT IS CARRYING OU T ITS BUSINESS IN INDIA AND THE ROYALTY RECEIVED BY THE ASSESSEE FROM JCB INDIA IS EFFECTIVELY CONNECTED TO THE PE. THE DRAFT ASSESSMENT ORDER WAS PASSED ON 24 .03.2015. THE ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANE L WHICH WERE DISPOSED OFF VIDE DIRECTION DATED 23.12.2015 BY THE DRP. THE FIN AL ASSESSMENT ORDER WAS PASSED ON 19.01.2016. THE ASSESSING OFFICER HELD TH AT ONCE IT IS ESTABLISHED THAT THERE EXISTS A PE AND THAT THERE ARE RECEIPTS WHICH ARE ATTRIBUTABLE TO SUCH PE, IT NEEDS TO BE SEEN AS TO HOW MUCH OF THE RECEIPTS CAN BE ATTRIBUTABLE TO SUCH PE. IN THE INSTANT CASE, RULE 10(III) OF TH E INCOME TAX RULES, 1962 WAS INVOKED AND HELD THAT 20% OF THE RECEIPTS REPRESENT THE EXPENSES EXCLUSIVELY INCURRED BY THE PE OF THE ASSESSEE IN INDIA. IN OTH ER WORDS, 80% OF THE RECEIPTS ACCRUING TO THE ASSESSEE IS TO BE TAXED AT THE PREV AILING TAX RATE APPLICABLE TO THE FOREIGN COMPANIES. THUS, THE ASSESSING OFFICER HELD THAT AN AMOUNT OF RS.12,54,49,786/- (80% OF 15,68,12,232/-) IS TAXABL E AT THE RATE APPLICABLE TO FOREIGN COMPANIES FOR BUSINESS INCOME, I.E. 40% AND HENCE TAXED ACCORDINGLY. THE AMOUNT OF RS.18,01,674/- WAS TAXED AT 40%. FURT HER, THE AMOUNT OF RECTIFICATION WORK I.E. RS.22,52,093/- WAS TAXED SI MILARLY I.E. 20% OF THE RECEIPTS WERE TREATED AS REPRESENTING THE EXPENSES INCURRED WHOLLY AND EXCLUSIVELY BY THE PERMANENT ESTABLISHMENT OF THE A SSESSEE IN INDIA. 4. BEING AGGRIEVED BY THE ASSESSMENT ORDER, THE ASS ESSEE FILED THE PRESENT 4 ITA NO. 1741/DEL/2016 APPEAL BEFORE US. 5. THE LD. AR SUBMITTED THAT THE ASSESSING OFFICER HAS NOT GIVEN THE FINDING AS TO HOW THE TAXABLE AMOUNT COMES UNDER TH E PURVIEW OF FEES FOR TECHNICAL SERVICES WHEN IT IS A ROYALTY. THE ASSESS ING OFFICER HAS TREATED RECTIFICATION AND REWORK COMPONENTS AS EXPORT SERVI CE ACTIVITIES AND TAXED ENTIRE EXPENSES, BUT THE REPAIR IS ONLY THAT OF RS. 22,52,093/-. THUS, THE ASSESSING OFFICER AS WELL AS DRP WAS NOT JUSTIFIED IN MAKING THESE ADDITIONS. THE LD. AR SUBMITTED THAT THE ASSESSEE EARNED ROYAL TY INCOME FROM JCB INDIA LTD. (JCB INDIA) AMOUNTING TO RS. 156,812,533. TH E SAID RECEIPTS ARE SUBJECT TO TAX @ 158/105575% OF THE GROSS AMOUNT AS ROYALT Y & FEES FOR TECHNICAL SERVICES BEING THE TAX RATE PROVIDED UNDER ARTICLE 13(2) OF DOUBLE TAXATION AVOIDANCE AGREEMENT ENTERED BETWEEN INDIA AND UK (D TAA) AND SECTION 115A OF THE ACT, AS THE CASE MAY BE. THE EXPENSES ARE I N THE NATURE OF PURE REIMBURSEMENTS/BUSINESS PROFITS AND THUS ARE NOT CO NSIDERED AS TAXABLE IN INDIA. THE COMPANY ALSO SOLD MATERIALS/COMPONENT T O RS. 9,928,146 TO JCB INDIA FROM U.K. WHO ARE NOT TAXABLE IN INDIA. THE ASSESSEE COMPANY DOES NOT HAVE ANY BRANCH OFFICE/PROJECT OFFICE/LIAISON OFFIC E/GODOWNS/WAREHOUSE OR ANY OTHER OFFICE OR FIXED PLACE OF BUSINESS IN INDI A. THE ROYALTY PAYMENT MADE BY JCB INDIA FOR FINANCIAL YEAR 2010-11 TO JCB HEAV Y PRODUCTS IS IN CONSIDERATION OF TECHNOLOGY TRANSFER AGREEMENTS ENT ERED INTO BETWEEN JCB INDIA TO THE ASSESSEE. JCB HEAVY PRODUCTS HAS GRAN TED EXCLUSIVE, NON TRANSFERABLE LICENSE TO JCB INDIA TO MANUFACTURE, A SSEMBLE, USE AND SELL EX CAVATOR. PRIMA FACIE THERE IS NO QUESTION OF JCB H EAVY PRODUCTS, BEING CONSIDERED TO HAVE A PERMANENTE ESTABLISHMENT IN IN DIA AS IT HAS NO OFFICE OF ANY SORT (BRANCH/PROJECT OR LIAISON OFFICE) IN INDI A. THE ASSESSEE HAS NOT PROVIDED ANY TECHNICAL SERVICES IN INDIA DURING THE FINANCIAL YEAR 2010-11. IT HAS ONLY EARNED ROYALTY FROM JCB INDIA WHICH WAS DU LY OFFERED TO TAX ON GROSS BASIS IN INDIA. THE LD. AR FURTHER SUBMITTED THAT T HERE WERE NO EXPATRIATES IN INDIA DURING FINANCIAL YEAR 2010-11. THE LD. AR FUR THER REITERATED THAT THE COMPANY DOES NOT HAVE ANY OFFICE OR FIXED PLACE OF BUSINESS IN INDIA. THE 5 ITA NO. 1741/DEL/2016 COMPANY IS EARNING ROYALTY INCOME FROM INDIA WHICH IS TAXABLE ON GROSS BASIS, THEREFORE, IT IS NOT REQUIRED TO MAINTAIN BOOKS OF ACCOUNTS UNDER SECTION 44AA OF THE INCOME TAX ACT, 1961. FURTHER, AS PER PROVIS IONS OF SECTION 44AB OF THE ACT EVERY PERSON CARRYING ON BUSINESS IS REQUIRED T O FILE A TAX AUDIT REPORT ALONG WITH THE TAX RETURN WHEREIN HIS BUSINESS RECE IPTS EXCEED RS. 6 MILLION DURING FINANCIAL YEAR 2010-11. IN THE PRESENT CASE, NO TAX AUDIT REPORT HAS BEEN OBTAINED BY THE COMPANY FOLLOWING THE DECISION OF THE DELHI TRIBUNAL IN CASE OF SNAM PROGETTI SPA VS. JCIT 95 TTJ 424 AND T HE MUMBAI TRIBUNAL IN THE CASE OF CIT VS. CONTINENTAL GUMI WORKS 50 TTJ 6 07 WHEREIN IT HAS BEEN HELD THAT TAX AUDIT REPORT IS NOT REQUIRED TO BE FI LED WHEREIN THE ASSESSEE IS LIABLE TO TAX ON A GROSS BASIS. 6. THE LD. DR SUBMITTED THAT THIS ASPECT OF WHETHER THE INCOME WAS FEES FOR TECHNICAL SERVICES OR NOT HAS NOT BEEN LOOKED I N DETAIL BY THE ASSESSING OFFICER AS WELL BUT THE LD. DR SUBMITTED THAT THE A SSESSING OFFICER HAS GIVEN A CATEGORICAL FINDING WHY THESE ARE FEES FOR TECHNICA L SERVICES. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL T HE RELEVANT MATERIALS AVAILABLE ON RECORD. THE ASSESSING OFFICER CONCLUDE D THAT THE ASSESSEE HAS A SERVICE PE IN INDIA THROUGH WHICH IT IS CARRYING OU T ITS BUSINESS IN INDIA AND THE ROYALTY RECEIVED BY THE ASSESSEE FROM JCB INDIA IS EFFECTIVELY CONNECTED TO THE PE. THE ASSESSING OFFICER HELD THAT ONCE IT IS ESTABLISHED THAT THERE EXISTS A PE AND THAT THERE ARE RECEIPTS WHICH ARE ATTRIBUTAB LE TO SUCH PE, IT NEEDS TO BE SEEN AS TO HOW MUCH OF THE RECEIPTS CAN BE ATTRIBUT ABLE TO SUCH PE. IN THE INSTANT CASE, RULE 10(III) OF THE INCOME TAX RULES, 1962 WAS INVOKED AND HELD THAT 20% OF THE RECEIPTS REPRESENT THE EXPENSES EXC LUSIVELY INCURRED BY THE PE OF THE ASSESSEE IN INDIA. IN OTHER WORDS, 80% OF TH E RECEIPTS ACCRUING TO THE ASSESSEE IS TO BE TAXED AT THE PREVAILING TAX RATE APPLICABLE TO THE FOREIGN COMPANIES. THUS, THE ASSESSING OFFICER HELD THAT AN AMOUNT OF RS.12,54,49,786/- (80% OF 15,68,12,232/-) IS TAXABL E AT THE RATE APPLICABLE TO FOREIGN COMPANIES FOR BUSINESS INCOME, I.E. 40% AND HENCE TAXED ACCORDINGLY. 6 ITA NO. 1741/DEL/2016 THE AMOUNT OF RS.18,01,674/- WAS TAXED AT 40%. FURT HER, THE AMOUNT OF RECTIFICATION WORK I.E. RS.22,52,093/- WAS TAXED SI MILARLY I.E. 20% OF THE RECEIPTS WERE TREATED AS REPRESENTING THE EXPENSES INCURRED WHOLLY AND EXCLUSIVELY BY THE PERMANENT ESTABLISHMENT OF THE A SSESSEE IN INDIA. FROM THE PERUSAL OF THESE OBSERVATIONS OF THE ASSESSING OFFI CER, IT CAN BE SEEN THAT WHILE ARRIVING AT THIS CONCLUSION, THE ASSESSING OFFICER MENTIONED THAT THE ASSESSEE WAS NOT ABLE TO EXPLAIN AS TO FOR WHAT REASON AND P URPOSE SUCH RECTIFICATION WAS CARRIED OUT. NO DOCUMENTARY EVIDENCE IN SUPPORT OF THE SAME WAS FURNISHED SO AS TO CORROBORATE ITS CLAIM THAT SUCH RECEIPTS WERE MERELY REIMBURSEMENTS. WHAT BENEFIT WAS EXTENDED BY THE AS SESSEE OR WHAT SERVICES WERE EXACTLY PROVIDED BY THE ASSESSEE TO THE PAYERS OF SUCH RECTIFICATION OF WORK WAS NOT ELABORATED BY THE ASSESSEE. AND THERE FORE, THE ASSESSING OFFICER HELD THAT THESE ARE FEES FOR TECHNICAL SERVICES REC EIPTS. AFTER GOING THROUGH THE RECORDS, WE OBSERVED THAT THE ASSESSEE HAS PROVIDED THE DETAILS OF RECTIFICATION AND REWORK IN RESPECT OF COMPONENT EXPORT SERVICES ACTIVITY, BUT THE ASSESSING OFFICER HAS NOT AT ALL DISCUSSED THE SAME WHILE GIV ING THE FINDINGS. THEREFORE, IT WILL BE APPROPRIATE TO REMAND BACK THIS ISSUE TO TH E FILE OF THE ASSESSING OFFICER/TPO FOR PROPER ADJUDICATION IN CONSONANCE W ITH THE EVIDENCES FILED BY THE ASSESSEE BEFORE THE ASSESSING OFFICER/TPO. NEED LESS TO SAY, THE ASSESSEE BE GIVEN OPPORTUNITY OF HEARING BY FOLLOWING PRINCI PLES OF NATURAL JUSTICE. THUS, GROUND NO. 1 AND 2 ARE PARTLY ALLOWED FOR STATISTIC AL PURPOSE. AS REGARDS TO GROUND NO. 3 AND 4, THE SAME ARE CONSEQUENTIAL IN N ATURE, HENCE, THESE GROUNDS ARE NOT ADJUDICATED UPON AT THIS JUNCTURE. GROUND NO. 3 AND 4 ARE DISMISSED. 8. IN RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLO WED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 05 TH DAY OF MARCH, 2020 . SD/- SD/- (PRASHANT MAHARISHI) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEM BER DATED: 05/03/2020 PRITI YADAV, SR. PS/R.N* 7 ITA NO. 1741/DEL/2016 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI DATE OF DICTATION 15 . 01 .20 20 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 2 1 .01.2020 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER .01.2020 DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. PS/PS .01.2020 DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT .01.2020 DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/PS 05 .0 3 .2020 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT 05.03.2020 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 05.03.2020 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK