Introduction
In the realm of international business transactions, taxation issues often arise, particularly when it comes to determining the taxability of income received from overseas subsidiaries. One such case of significance is the dispute regarding the taxability of guarantee commission received by Johnson Matthey Public Limited Company (hereinafter referred to as "the Company") from its Indian subsidiaries. This article delves into the legal intricacies surrounding this matter and the recent judicial interpretation thereof.
Background
The crux of the issue revolves around the tax treatment of guarantee charges received by the Company from its Indian subsidiaries under the India-UK Double Taxation Avoidance Agreement (DTAA). The Company initially characterized the guarantee charges as interest income, subject to taxation under Article 12 of the DTAA. However, during the assessment proceedings, the tax authorities took the stance that the guarantee charges should be classified as "other income" under Article 23(3) of the DTAA, thus subjecting it to taxation in India.
Legal Analysis
The primary contention before the court was twofold:
<ol>
<li>Whether the guarantee charges received by the Company from its Indian subsidiaries can be categorized as "interest" under Article 12 of the DTAA.</li>
<li>Whether the income derived from guarantee fees can be said to arise or accrue in India.</li>
</ol>
Upon careful consideration of the arguments presented, the court opined that the guarantee charges cannot be construed as "interest" under Article 12(5) of the DTAA. This conclusion stemmed from the fact that the guarantee charges were not received in connection with any debt owed to the Company by its Indian subsidiaries. Rather, they were remunerations for providing parent company guarantees and counter-indemnification services to lending entities extending credit facilities to the Indian subsidiaries.
Judicial Ruling
The court upheld the decision of the Income Tax Appellate Tribunal, affirming that the guarantee charges do not fall within the ambit of "interest" as defined in Article 12 of the DTAA. Consequently, the court ruled against the Company, holding that the guarantee charges are taxable under the category of "other income" as per Article 23(3) of the DTAA.
Conclusion
The judicial pronouncement in the case of Johnson Matthey Public Limited Company provides clarity on the tax treatment of guarantee charges received from Indian subsidiaries under the India-UK DTAA. While the court's decision sheds light on the characterization of guarantee charges, it leaves open the question of whether such income could constitute business income under Article 7 of the DTAA, to be addressed in future cases.
In conclusion, the case underscores the importance of carefully analyzing the nature of income in cross-border transactions to determine its taxability under relevant tax treaties and domestic laws.
Citation: ITA 727/2018, Delhi High Court

Taxability of Guarantee Commission Received by Johnson Matthey Public Limited Company from Indian Subsidiaries: A Legal Analysis

Taxability of Guarantee Commission Johnson Matthey Case India UK DTAA

<h2>Introduction:</h2>
Double Taxation Avoidance Agreements (DTAA) play a significant role in international taxation, aiming to prevent the double taxation of income earned by taxpayers in two different countries. However, the requirement of a Tax Residency Certificate (TRC) for claiming DTAA benefits has become a subject of legal complexities and practical challenges. In this article, we will delve into the various aspects surrounding TRCs, including their differentiation from other registration certificates, the legal issues surrounding Section 90(4) of the Income Tax Act, the absence of TRC provisions in India's DTAA agreements, and the implications for businesses.
<h2>TRC vs. Incorporation Certificate and Other Registration Certificates:</h2>
It is crucial to clarify that a TRC cannot be equated with an incorporation certificate or any other registration certificates. The provision stated in Section 90(4) of the Income Tax Act explicitly mandates the production of a TRC, along with other relevant information (in Form 10F), for claiming DTAA benefits. While obtaining a TRC can be challenging, especially for individuals, it is vital to comply with the law's mandate.
<h2>Legal Issues Surrounding Section 90(4):</h2>
One of the key legal issues arises from the potential contradiction between Section 90(4) and Section 90(2) of the Income Tax Act, as well as various judgments of the High Court, including the Supreme Court. These judgments establish that, in case of conflict between the Income Tax Act and the provisions of the DTAA, the provisions of the DTAA should prevail. This raises questions about the absolute necessity of a TRC as mandated by Section 90(4).
<h2>Skaps Industries India Pvt Ltd vs ITO, International Taxation, Ahmedabad ITAT</h2>
In this case, the ITAT held that Section 90(2) of the Income Tax Act, 1961 in India provides a unique and unqualified "treaty override" provision. This means that regardless of the provisions in the Income Tax Act, if a person is covered by an agreement under Section 90(1), the provisions of the Act will only apply to the extent that they are more beneficial to the taxpayer. The Act cannot impose a greater burden on the taxpayer than what is specified in the applicable tax treaty.
However, the only limitation to this unqualified treaty override provision is that the provisions of Chapter X-A, which deals with the General Anti Avoidance Rules, will apply to the taxpayer even if they are not beneficial. This exception is stated in Section 90(2A), which is the only provision in the Income Tax Act, 1961 that starts with a non-obstante clause in relation to Section 90(2). Therefore, it is the only restriction on the superiority of tax treaty provisions over the provisions of the Indian Income Tax Act, 1961.
ITAT also observe that:
<blockquote>
8. In the light of our this analysis, when we turn to Section 90(4), as indeed other sub sections of Section 90, we find that these provisions do not start with a obstante clause vis-&agrave;vis Section 90(2) and, therefore, these sub sections cannot be construed as limitation to, or rider to, somewhat unqualified treaty override stipulated in Section 90(2). Whatever interpretation one assigns to this sub section, essentially the fundamental approach has to be that this sub section will be applicable only when the same are more beneficial to the assessee vis-&agrave;-vis the provisions of the applicable tax treaty; that principle of treaty override, as set out in Section 90(2), remains unaffected by these provisions. As we hold so, we make it clear that whether the same position will also apply with respect to Explanations to Section 90 or not is still an open question, uninfluenced by these discussions, as Explanations to Section 90 may perhaps not have the same legal connotations as the sub sections to Section 90. We leave it that for the time being.
</blockquote>
The above decision was also cited and relied by Hyderabad ITAT in the case of Sreenivasa Reddy Cheemalamarri [TS-158-ITAT-2020(HYD)].
<h2>A Unilateral Attempt to Deny Treaty Benefits:</h2>
Furthermore, Section 90(4) can be seen as a unilateral attempt to deny treaty benefits, potentially conflicting with international law and the principles of reciprocity and mutual benefits that underpin international tax treaties. The timing of the insertion of Section 90(4) through the Finance Act 2012, which came after the conclusion of various DTAA agreements, adds to the complexity and requires careful evaluation.
In the realm of international law, the position on unilateral modification of treaties is guided by the principle of pacta sunt servanda, which means that treaties must be observed and complied with in good faith by all parties involved. This principle serves as the cornerstone of the international legal system and promotes stability, predictability, and trust among nations.
Under customary international law, a treaty can only be modified or terminated by the consent of all parties involved. This principle of consent ensures that the rights and obligations established by a treaty are protected and that no party can unilaterally alter or disregard the provisions of a treaty without the agreement of others.
Unilateral modification of a treaty by one party without the consent of the other parties is generally considered a violation of the treaty and may be viewed as a breach of international law. Unilateral modifications can undermine the integrity of the treaty and erode the trust and confidence among the parties.
<h2>Non-Inclusion of Mandatory TRC Requirement in India's DTAA Agreements:</h2>
A noteworthy observation is that none of India's DTAA agreements with other countries contain provisions specifically requiring the mandatory submission of a TRC for availing DTAA benefits. If the TRC were universally mandated, it would necessitate countries to enter into agreements clarifying that benefits can only be availed upon producing a TRC. However, the absence of such provisions in the DTAA agreements raises questions about the absolute necessity of a TRC for claiming DTAA benefits.
<h2>Navigating the Way Forward:</h2>
Considering the legal complexities and practical challenges surrounding TRCs, businesses are advised to make diligent efforts to obtain TRCs from payees. However, in cases where obtaining a TRC is not feasible, businesses must carefully assess the facts and circumstances of each case. This assessment should consider the legal issues discussed earlier, the absence of TRC provisions in DTAA agreements, and the potential risks and consequences of proceeding without a TRC.
It is essential to weigh the available legal avenues and evaluate the potential litigations that may arise from deviating from the TRC requirement. Seeking professional guidance is recommended to ensure compliance with prevailing regulations while balancing the practical challenges faced in obtaining TRCs.
<h2>Conclusion:</h2>
The requirement of a TRC for claiming DTAA benefits presents businesses with a complex and intricate landscape to navigate. While the legal issues surrounding Section 90(4) and the absence of explicit TRC provisions in India's DTAA agreements raise valid concerns about the essential nature of a TRC, businesses must still endeavor to obtain TRCs whenever possible. In cases where TRCs cannot be procured, a meticulous evaluation of the specific circumstances, coupled with expert guidance, is crucial to making informed decisions that ensure compliance and mitigate potential litigations.

Navigating the Complexities of Tax Residency Certificate (TRC) for DTAA Benefits

Navigating the Complexities of Tax Residency Certificate TRC for DTAA

<h2>Overview Tax Residency Certificate (TRC)</h2>
A tax residency certificate (TRC) is a document that confirms an individual's or a company's residency status for tax purposes. The certificate is issued by the tax authorities of the country where the taxpayer is considered a tax resident, based on the local tax laws and regulations.
The purpose of a TRC is to avoid double taxation on income earned in a foreign country. Double taxation occurs when two or more countries levy taxes on the same income. To prevent this, many countries have entered into Double Taxation Avoidance Agreements (DTAAs) with each other. These agreements typically provide for reduced withholding tax rates or NIL withholding on certain types of income, such as dividends, interest, royalties or business income.
To take advantage of these reduced tax rates, taxpayers must provide proof of their residency status in the form of a tax residency certificate. The certificate is usually valid for one fiscal year.
To obtain a tax residency certificate, the taxpayer needs to provide evidence of their residency status, such as proof of their address, employment, and income sources. The application process and requirements may vary depending on the country's tax laws and regulations.
<h2>Regulations for TRC in UAE</h2>
In UAE, the TRC is categorised in two broad catagoreis viz: (1) Natural persons &amp; (2) Legal persons
<h2>Eligibility Criteria Natural Persons</h2>
The applicant must have been a resident of the UAE for at least 180 days. Also an annual lease agreement officially documented by the competent authorities, such as EJARI in Dubai, municipalities in other Emirates and free zone authorities must be attached to the application.
<h2>Eligibility Criteria Legal / Judicial Persons</h2>
In order to be eligible to apply for a TRC, the legal person must have been established for a period of at least one year. Financial accounts must be audited or prepared by an accredited audit firm and attached with other required documents to the application. The report must be certified and stamped by the audit firm. The audited financial report to be attached to the application must cover the year for which the certificate is requested. If the certificate is requested for the present year, the audit report must be covering the past year.
(Note: Offshore companies are not allowed to apply for the service because they are not listed in the Double Taxation Avoidance agreements.)
However, the Cabinet Decision which is effective from 1 Mar 2023 provides that a juridical person shall be considered a Tax Resident in the State in either of the following cases:
1. It was incorporated, formed or recognised in accordance with the legislation in force in the State, and that does not include the branch that is registered by a foreign juridical person in the State. 
2. It is considered a Tax Resident in accordance with the Tax Law in force in the State.
<h2>TRC v/s Citizenship</h2>
It's important to note that tax residency is not the same as citizenship. A person may be a citizen of one country but a tax resident of another. Factors that determine tax residency status vary by country but generally include the number of days spent in the country, the person's permanent home, and the location of their economic interests.
Overall, a tax residency certificate is a useful tool for avoiding double taxation and accessing tax benefits under DTAAs. It's important for taxpayers to understand the local tax laws and regulations and maintain proper documentation to obtain and keep their tax residency certificate.
<h2>Benefits of Having TRC</h2>
TRC is now a days part of legal framework of many contries. In India, section 90(4) of the Income tax Act, 1961 mandatorily requires TRC for availing the benefits of the Double Tax Avoidance Agreements (DTAAs). Such benefits are:
<ul>
<li>Avoidance of double taxation</li>
<li>Reduced or NIL withholding tax rates</li>
<li>Access to tax benefits under the DTAA</li>
<li>Considered as an evidence for the purpose of determing resident country</li>
</ul>
<h2>Connect with Us</h2>
In case if you want to apply for the TRC in UAE or India, then connect with us. Our contact details are as follows:
Mail: <a href="mailto:info@harchandani.in">info@harchandani.in</a>
Mobile: +91 9909880111
WhatsApp: +91 9909880111

How to Apply for Tax Residency Certificate (TRC) of the United Arab Emirates (UAE)

Apply for Tax Residency Certificate (TRC) of UAE

The Hon'ble Bangalore Tribunal while dealing with the matter related to the claiming of Foreign Tax Credit (FTC) held that on perusal of provisions of Rule 128 (8) &amp; (9), it is clear that, one of the requirements of Rule 128 for claiming FTC is that Form 67 is to be submitted by assessee before filing of the returns. The Tribunal opined that this requirement cannot be treated as mandatory, rather it is directory in nature. This is because, Rule 128(9) does not provide for disallowance of FTC in case of delay in filing Form No.67. This view is fortified by the decision of coordinate bench of this Tribunal in case of Ms.Brinda Kumar Krishna vs.ITO in ITA no.454/Bang/2021 by order dated 17/11/2021.
During the hearing, the assessee submitted that "when there is no condition prescribed in DTAA that the FTC can be disallowed for non-compliance of any procedural provision. As the provisions of DTAA override the provisions of the Act, the Assessee has vested right to claim the FTC under the tax treaty, the same cannot be disallowed for mere delay in compliance of a procedural provision."
Accordingly, the Tribunal remand this issue back to the AO to consider the claim of assessee in accordance with law, based on the verification carried out in respect of the supporting documents filed by assessee.

Foreign Tax Credit cannot be denied merely because assessee has not filed the Form 67

FTC, foreign tax credit, DTAA, Form 67 of Income Tax 

On 11th October 2021, CBDT issued vide Notification No.119/2021/F. No. 225/76/2021-ITA.I exempting certain non-resident from furnishing of the Income Tax Return for the AY 2021-22 and onwards subject to fulfilment of certain conditions. The class of person and corresponding conditions are stated as under:
<table>
<tbody>
<tr>
<td width="96">
Sr. No.
</td>
<td width="258">
Class of Person
</td>
<td width="270">
Conditions
</td>
</tr>
<tr>
<td width="96">
1
</td>
<td width="258">
(i)&nbsp; a&nbsp; non-resident,&nbsp; not&nbsp; being&nbsp; a company; or
(ii) a foreign company
</td>
<td width="270">
(i)&nbsp; &nbsp;The&nbsp; said&nbsp; class&nbsp; of&nbsp; persons&nbsp; does&nbsp; not&nbsp; earn&nbsp; any&nbsp; income&nbsp; in India,&nbsp; during the previous&nbsp; year,&nbsp; other&nbsp; than the income&nbsp; from investment&nbsp; in&nbsp; the&nbsp; specified&nbsp; fund referred&nbsp; to in sub-clause&nbsp; (i) of&nbsp; clause&nbsp; (c)&nbsp; of Explanation to&nbsp; clause&nbsp; (4D)&nbsp; of&nbsp; section&nbsp; 10&nbsp; of the said Act; and
&nbsp;
(ii)&nbsp; The&nbsp; provisions&nbsp; of&nbsp; section&nbsp; 139A&nbsp; of&nbsp; the&nbsp; said&nbsp; Act&nbsp; are&nbsp; not applicable&nbsp; to&nbsp; the&nbsp; said&nbsp; class&nbsp; of&nbsp; persons subject&nbsp; to&nbsp; fulfillment of&nbsp; the&nbsp; conditions&nbsp; mentioned&nbsp; in&nbsp; sub-rule &nbsp;(1)&nbsp; of&nbsp; rule&nbsp; 114AAB of&nbsp; the&nbsp; Income-tax&nbsp; Rules,&nbsp; 1962&nbsp; (hereinafter&nbsp; referred&nbsp; to&nbsp; as &ldquo;said rules‟)
</td>
</tr>
<tr>
<td width="96">
2
</td>
<td width="258">
a&nbsp;&nbsp;&nbsp; non-resident being&nbsp;&nbsp;&nbsp; an eligible foreign investor
</td>
<td width="270">
(i)&nbsp; The&nbsp; said&nbsp; class&nbsp; of&nbsp; persons,&nbsp; during&nbsp; the&nbsp; previous&nbsp; year,&nbsp; has made&nbsp; transaction &nbsp;only&nbsp; in&nbsp; capital&nbsp; asset&nbsp; referred&nbsp; to&nbsp; in&nbsp; clause (viiab)&nbsp; of&nbsp; section&nbsp; 47&nbsp; of&nbsp; the&nbsp; said&nbsp; Act,which&nbsp; are&nbsp; listed on&nbsp; a recognised&nbsp;&nbsp; stock&nbsp;&nbsp; exchange&nbsp;&nbsp; located&nbsp;&nbsp; in&nbsp;&nbsp; any&nbsp;&nbsp; International Financial Services Centre and the consideration on transfer of such capital asset is paid or payable in foreign currency;
&nbsp;
(ii)&nbsp; The said&nbsp; class&nbsp; of&nbsp; persons&nbsp; does&nbsp; not&nbsp; earn&nbsp; any&nbsp; income&nbsp; in India,&nbsp; during&nbsp; the&nbsp; previous&nbsp; year,&nbsp; other&nbsp; than&nbsp; the&nbsp; income&nbsp; from transfer of capital asset referred to in clause (viiab) of section 47 of the said Act; and
&nbsp;
(iii)&nbsp; &nbsp;The provisions&nbsp; of&nbsp; section&nbsp; 139A&nbsp; of the&nbsp; said&nbsp; Act are&nbsp; not applicable&nbsp; to&nbsp; the&nbsp; said&nbsp; class&nbsp; of&nbsp; persons&nbsp; subject&nbsp; to&nbsp; fulfillment of the conditions mentioned in sub-rule (2A) of rule 114AAB of the said rules
</td>
</tr>
</tbody>
</table>
&nbsp;
&nbsp;

CBDT conditionally exempts certain non-residents from furnishing ITR

CBDT Circular, Non Resident Return, Income Tax on Non Resident

The Income Tax Appellant Tribunal finds Assessee's reasons behind filing of TRC before CIT(A) instead of Assessing Officer is justifiable
In this case, the Assessee-Individual, a non-resident, in his return of income for AY 2014-15 sought to avail special rates of tax on income from fixed deposits and bank deposits under the India-USA DTAA
Assessee's claim was denied by the AO as the Assessee failed to furnish TRC and information in Form No. 10F under Rule 21AB during the course of assessment proceedings
Assessee's furnished TRC&nbsp;and Form No. 10F as additional evidence before CIT(A) who also rejected Assessee's claim due to delay in furnishing&nbsp;TRC&nbsp;and Form No.10F by holding that Rule 21AB casts an obligation&nbsp;on the assessee to&nbsp;maintain and furnish the documents, therefore, the said information ought to have been available with the Assessee at the time of filing of the return of income itself and was required to furnish&nbsp;TRC and Form No.10F and thus, held that the Assessee failed to comply with the mandate of Section 90(4)/(5).
The Hon'ble ITAT Directs the Assessing Officer to determine the taxability on interest income as per the special rate of tax under the India-USA DTAA.
Rule 21AB(2A) provides as under:
<blockquote>
<div>(2A) The assessee shall keep and maintain such documents as are necessary to substantiate the information provided under sub-rule (1) and an income-tax authority may require the assessee to provide the said documents in relation to a claim by the said assessee of any relief under an agreement referred to in sub-section (1) of section 90 or sub-section (1) of section 90A, as the case may be.]</div>
</blockquote>
<div>The Tribunal considered the facts of the case at length and held as under:</div>
<div>
<blockquote>
After perusing the aforesaid facts, we are of the considered view that there were justifiable reasons for the assessee in not filing the TRC in the course of the assessment proceedings. But then, we cannot also remain oblivious of the fact that the A.O had declined to apply the special rate of tax as per the DTAA, for the reason, that the assessee had failed to substantiate that the interest income in question was offered by him for tax in his return of income filed in U.S.A. As observed by us hereinabove, the very basis of rejection of the assessee‟s claim for applying of special rate of tax as per the India-USA DTAA by the A.O is absolutely misconceived and in fact misplaced. As stated by the ld. A.R, and rightly so, the assessee was not seeking credit of taxes paid on his income abroad, but was seeking taxing of his interest income as per the special rates on the basis of the India-USA DTAA. Considering the fact that the assessee had filed the TRC with the A.O though after the conclusion of the assessment, coupled with the reasons that had led to delay in obtaining of the same alongwith the Form 10F, we are unable to persuade ourselves to the summarily rejection or in fact discarding of the same by the CIT(A). We, thus, in the backdrop of our aforesaid deliberations, are of the considered view, that as the assessee had filed the TRC and Form 10F, therefore, there was no justification in declining the applying of the special rate of tax qua the interest income on fixed deposits &amp; bank interest...
</blockquote>
Accordingly, the Tribunal allowed the appeal of the assessee and finds Assessee's reasons behind filing of TRC before CIT(A) instead of Assessing Officer is justifiable.
</div>

Delay in furnishing TRC justifiable. ITAT Allows benefit of India-USA DTAA

TRC, non availability of TRC, India US DTAA

The Hon'ble Supreme Court in it's recent decision in the case of DIT vs. Samsung Heavy Industries (Civil Appeal No. 12183 of 2016) dismissed the appeal of the department and held that project office of the assessee is not permanent establishment within the meaning of the Article 5 of India-Korea DTAA. Although, it is settled position of law that the Project Office is PE (subject to threshold of numbers of days as per relevant DTAA), however, looking the facts of the case, the Hon'ble Supreme Court held that the Project Office in the question is not a PE withing the meaning of the Article 5(1) of DTAA rather it would fall within Article 5(4)(e) of the DTAA. Lets the discuss the facts of the case and findings of the each authority.
 
The critical fact of the case are that the ONGC awarded a &ldquo;turnkey&rdquo; contract to a consortium comprising of the Assessee, i.e. Samsung Heavy Industries Co. Ltd. (a Company incorporated in South Korea), and Larsen &amp; Toubro Limited, being a contract for carrying out the &ldquo;Work&rdquo;, inter alia, of surveys, design, engineering, procurement, fabrication, installation and modification at existing facilities, and start-up and commissioning of entire facilities covered under the &lsquo;Vasai East Development Project&rsquo;
 
The Assessee set up a Project Office in Mumbai, India, which, as per the Assessee, was to act as &ldquo;a communication channel&rdquo; between the Assessee and ONGC in respect of the Project. Accordingly for the AY 2007-08 the assessee filed nil return and claimed the losses.
 
During the assessment proceedings, the AO concluded that "the Project in question is a single indivisible &ldquo;turnkey&rdquo; project, whereby ONGC was to take over a project that is completed only in India. Resultantly, profits arising from the successful commissioning of the Project would also arise only in India."
 
The DRP also concluded that "the Assessing Officer has given a specific finding that the assessee had a project office in India, when it was given the contract. The assessee has not contested the existence of the Project office in India but it has only contested that the project was used merely for preparatory and auxiliary activities. This submission of the assessee does not hold merit because if it wanted to perform only preparatory and auxiliary activities then it could have opened a liaison office. The opening of a project office clearly shows that the assessee was doing something more than what would have been done through liaison office. In any case nature and purport of activities undertaken in India determine the existence of PE. Considering the nature of activities undertaken in India it is clear that PE existed in the case of assessee."
 
During the hearing before the ITAT, the Ld. DR bought on record the resolution of Board of Directors meeting dated 3rd April, 2006. The opening para of said resolution provides that "the company hereby open one project office in Mumbai, India for coordination and execution of Vasai East Development Project for Oil and Natural Gas Corporation (&ldquo;ONGC&rdquo;), India". Based on such resolution, the Ld. DR concluded that these documents make it clear that all the activities to be carried out in respect of impugned contract will be routed through the project office only. However, it is noteworthy to state here that the Ld. DR only reproduce the first para of the Board Resolution, the second para of said resolution provides that "That the Company hereby does make and constitute Mr. Sangsoon Park Yard General Manager of the Company, as the Company&rsquo;s true and lawful representative with full power and authority for the purpose of establishing a project office and coordinating and executing delivery of documents in connection with construction of offshore platform modification of existing facilities for ONGC above."
 
On other hand, the assessee before the ITAT argued that the Project Office was only an auxiliary office, and did not involve itself in any core activity of business, as accounts that were produced would show that there was no expenditure which related to execution of the project. The Hon'ble Tribunal disposed off that argument of the assessee by stating that "the way the terms of the contract are described and the way the work on contract has to proceed clearly describe that in all the activities of contract there will be the role of Mumbai project office as the same has to work as a channel between assessee company and ONGC. If PE of the assessee exists within the meaning of Article 5.1 and 5.2 and assessee claims that despite there being PE in terms of clause 5.1 and 5.2, it falls under exclusionary Article 5.4 then onus is on assessee to prove that activities of its PE are in the nature of preparatory or auxiliary in nature. No material has been brought on record by the assessee to prove the said fact. The arguments put forward in this respect are only by inference such as the accounts maintained by the assessee in India through which it is the argument of the ld. Counsel of the assessee that it does not contain any expenditure relating to execution of the contract. But such argument is not acceptable as the maintenance of account is in the hands of assessee and mere the mode of maintaining the accounts alone cannot determine the character of PE as the role of PE only will be relevant to determine what kind of activities it has carried on." However, the ITAT found that there was a lack of material to ascertain as to what extent activities of the business were carried on by the Assessee through the Mumbai Project Office, and therefore it was considered just and proper to set aside the attribution of 25% of gross revenue earned outside India &ndash; which was attributed as income earned from the Mumbai project office &ndash; the matter being sent back to the Assessing Officer to ascertain profits attributable to the Mumbai project office after examining the necessary facts.
 
Surprisingly, the Hon'ble High Court pronounced its decision on entire different footing. The core grievance of the assessee was regarding considering the PO as PE by the lower authorities looking to the peculiar facts and circumstances of the case. However, the High Court re-framed the question of law as "can it be said that the Agreement permitted the India Taxing Authority to arbitrarily fix a part of the revenue to the permanent establishment of the appellant in India?&rdquo;
 
Accordingly, the Hon'ble High Court held - "that being the situation we allow the appeal, set aside the judgment and order under appeal as well as the assessment order insofar as the same relates to imposition of tax liability on the 25% of the receipt upon the appellant in the circumstances mentioned above, and observe that the questions of law formulated by us, while admitting the appeal, have not, in fact, arisen on the facts and circumstances of the case, but the real question was, whether the tax liability could be fastened without establishing that the same is attributable to the tax identity or permanent establishment of the enterprise situate in India and the same, we think, is answered in the negative and in favour of the appellant."
 
However, the Supreme Court while pronouncing its decision, gone into details and considered the findings of the all lower authorities. The critical findings of the Hon'ble Supreme Court are with regards to documents filed by the assessee before the RBI and which was heavily relied by the ITAT also. The Hon'ble quote the Board Resolution of the assessee company and held that "A reading of the Board Resolution would show that the Project Office was established to coordinate and execute &ldquo;delivery documents in connection with construction of offshore platform modification of existing facilities for ONGC&rdquo;. Unfortunately, the ITAT relied upon only the first paragraph of the Board Resolution, and then jumped to the conclusion that the Mumbai office was for coordination and execution of the project itself. The finding, therefore, that the Mumbai office was not a mere liaison office, but was involved in the core activity of execution of the project itself is therefore clearly perverse. Equally, when it was pointed out that the accounts of the Mumbai office showed that no expenditure relating to the execution of the contract was incurred, the ITAT rejected the argument, stating that as accounts are in the hands of the Assessee, the mere mode of maintaining accounts alone cannot determine the character of permanent establishment. This is another perverse finding which is set aside."
 
The Hon'ble Supreme Court further observe that "Though it was pointed out to the ITAT that there were only two persons working in the Mumbai office, neither of whom was qualified to perform any core activity of the Assessee, the ITAT chose to ignore the same. This being the case, it is clear, therefore, that no permanent establishment has been set up within the meaning of Article 5(1) of the DTAA, as the Mumbai Project Office cannot be said to be a fixed place of business through which the core business of the Assessee was wholly or partly carried on. Also, as correctly argued by Shri Ganesh, the Mumbai Project Office, on the facts of the present case, would fall within Article 5(4)(e) of the DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the Assessee and ONGC."
 
Therefore, it is rightly to conclude here that for the purpose of applying the DTAA, the legal form is not much relevant where the facts says something different. In this case, even the office of the assessee was registered as Project Office with the RBI, however, the Supreme Court went on the facts, considered the actual activities carried out by such office, considered the purpose of such office and concluded that the Project Office in question is not a PE rather it would fall within Article 5(4)(e) of the DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the Assessee and ONGC.
 
(views are personal, for more details, it is advisable to go through with the order of the SC)

Project Office is not PE; SC affirm substance over legal form

project office, LO PO BO FEMA, Permanent Establishment Income tax

Mumbai ITAT allowed the appeal of assessee by relying upon the judgement in the assessee's own cases for the AY 2003-04 to AY 2011-12.
 
During the course of assessment proceedings, it was submitted by the assessee that the Tribunal in its own case for A.Y 2003-04, A.Y 2005-06, A.Y 2006-07, A.Y 2007-08, A.Y 2009-10 &amp; A.Y 2011-12, had held the receipts earned by the assessee under similar fact pattern as its &ldquo;business income&rdquo;, which in the absence of its &ldquo;Permanent Establishment&rdquo; (PE) in India were not taxable in India. Further, the assessee drawing support from the &ldquo;Software Distribution Agreements submitted, that the distributors/resellers sold the shrink-wrap software bought in the fully packaged condition, as received from the assessee to the end users in India i.e without opening the package. It was further submitted by the assessee, that the SolidWorks software was given to the customers in India along with and pursuant to an end user license agreement. Although the end user license agreement was not physically signed, it was buit-in-as a part of the installation process and would &lsquo;pop up&rsquo; on the computer screen, and had to be indispensably &lsquo;accepted&rsquo; by the user, as it was only then the user could operate the software. It was further submitted by the assesee, that the end-user had limited rights to use the software for internal purposes, right to copy the software on hard disk or to make copies for archive purpose. It was the clam of the assessee, that the end-user was divested of any right to transfer the software or reproduce the same, as the same per the terms of the license agreement were specifically prohibited. The assessee also made submissions before the A.O on the scope of the term &lsquo;royalty&rsquo; as per &lsquo;Explanation 2&rsquo; to Sec. 9(1)(vi); the meaning of the term &lsquo;copyright&rsquo; under the Copyright Act, 1957; the amendment introducing &lsquo;Explanation 4&rsquo; below Sec. 9(1)(vi) and its impact on software distributor and on the DTAA; and the definition of &lsquo;royalty&rsquo; under the India-USA tax treaty.
 
A.O after deliberating on the contentions advanced by the assessee, therein observed, that as per the &lsquo;License and Subscription Service Agreement&rsquo;, SolidWorks granted the end-user a non-exclusive nontransferable license to use the software and the printed or electronic documentation. I was observed by the A.O, that in lieu of the single user license which entitled the end-user to use one copy of the software or a multiple user or network license, as the case may be, the end-user would pay license fees. Admittedly, as claimed by the assessee, it was observed by the A.O that the software was owned by SolidWorks and the copyright, trademark and proprietary rights were retained by it and not transferred to the end-user. At the same time, the A.O held a conviction that the software was not goods or tangible property but was an intangible intellectual property, which being similar to patent, invention, design, secret formula etc. would fall within the meaning of &lsquo;process&rsquo; as mentioned in &lsquo;Explanation 2&rsquo; to the definition of &lsquo;royalty&rsquo; under the Act. In support of his aforesaid view, the A.O relied on the CBDT Circular No. 621 of 19/12/1991 to hold that payment for acquisition of software was to be held as &lsquo;royalty&rsquo;. Insofar the claim of the assessee that the issue was covered in its favor by the orders of the Tribunal in its own case for the preceding years, the A.O observed that the same had been assailed by the revenue before the Hon&rsquo;ble High Court, and thus had not yet attained finality.
 
Also, it was observed by the A.O, that the Hon&rsquo;ble High Court of Karnataka in the case of CIT Vs. Samsung Electronic Co. Ltd (2012) 345 ITR 494 (Kar), had concluded, that the payments received by the assessee from the resellers in India for the acquisition of computer software was in the nature of &lsquo;royalty&rsquo;, and thus chargeable to tax. Also, the A.O in order to drive home his aforesaid conviction relied on the amendment to &lsquo;Explanation 4&rsquo; to Sec. 9(1)(vi) of the Act, that was made available on the statute vide the Finance Act, 2012, w.r.e.f 01.06.1976.
 
The Tribunal concluded that the factual situation pertaining to the year under consideration had not witnessed any change as in comparison to the immediately preceding year, therefore, respectfully following the view taken by the Tribunal in the assesses own case for A.Y 2015-16 in ITA No. 7027/Mum/2018, dated 10.01.2020, we herein conclude that the addition made by the A.O by treating the sale receipts of shrink-wrap software as &lsquo;royalty&rsquo; cannot be sustained, and is hereby vacated.
 
Citation: ITA No. 7313/MUM/2019
 
Author, Manish Harchandani, CA
 
Disclaimer:&nbsp;The contents of this article are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Harchandani &amp; Associates does not accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.

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