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_____________________________________________

BEFORE THE HON’BLE INCOME TAX APPELLATE TRIBUNAL, BANGALORE

                                           SPECIAL BENCH

 

ITA No.99/Blr/2010

Assessment Year 2005-06

 

In The Matter of:

 

ABC Advertising Limited, LLC………………….Appellant

Delaware

 

                                                          Versus

 

Income Tax Officer………………………..……Respondent

Company Circle, Bangalore

 

 

 

ON SUBMISSION TO THE HON’BLE INCOME TAX APPELLATE TRIBUNAL, BANGALORE

MEMORIAL FILED ON BEHALF OF APPELLANT


TABLE OF CONTENTS

 

 INDEX OF AUTHORITIES.....................................................................................3

STATUTES REFERRED...............................................................................3

INTERNATIONAL AUTHORITIES……………….……………………..3

CASES REFERRED.......................................................................................3

BOOKS REFERRED………………………………………………………..5

LIST OF ABBREVIATIONS......................................................................................6

FORM NO.36………………………………………………………………………...7

STATEMENT OF JURISDICTION..........................................................................9

SYNOPSIS OF FACTS..............................................................................................10

STATEMENT OF ISSUES........................................................................................11

SUMMARY OF ARGUMENT..................................................................................12

BODY OF ARGUMENTS………………………………………………………….13

 

I.THE ASSESSEE IS ENTITLED TO THE BENEFITS OF THE TREATY AND

IS TO BE TRIED UNDER THE TREATY ALONE AND NOT ALSO UNDER THE ACT ……14

II.THE INCOME IS NOT TO BE TREATED AS ROYALTY INCOME NEITHER

UNDER THE TREATY NOR UNDER THE ACT…………………………………………………..15

III. THE INCOME RECEIVED BY THE ASSESSEE IS NOT FEES FOR

INCLUDED SERVICES NEITHER UNDER THE INDIA-US DTAA NOR THE ACT…………19

III. THE ASSESSEE COMPANY NEITHER HAS A PERMANENT ESTABLISHMENT

UNDER THE TREATY NOR A BUSINESS CONNECTION UNDER THE ACT……………….22

IV. THE ASSESSEE IS NOT THE “BENEFICIAL OWNER OF THE ROYALTIES

OR FEES FOR INCLUDED SERVICES” AS PER ARTICLE 12(2) ……………………………..26

 

PRAYER.......................................................................................................................28


INDEX OF AUTHORITIES

Statutes Referred:

Income Tax Act, 1961

Finance Act, 1976

Finance Act, 2001

Income Tax Rules, 1962

Foreign Exchange Management Act, 1999

 

International Authorities

India-USA Double Taxation Avoidance Agreement

India-Australia Double Taxation Avoidance Agreement

India-Netherlands Double Taxation Avoidance Agreement

India-Mauritius Double Taxation Avoidance Agreement

Technical Advisory Group Report of OECD

 

Cases Referred

Asia Satellite Telecommunications Co. Ltd Vs Dy CIT  (2003)78 TTJ (Delhi)489………15,25

Blue Star Engg. Co.(Bom)(P) Ltd v CIT.(1969) 73 ITR 283 (Bom)…………………………..24

Bharat Sanchar Nigam Ltd. Vs. Union of India [2006]282 ITR 273(SC)……………………16

CIT Vs. Bharti Cellular Ltd. [2009]319 ITR 139(Delhi) ………………………………………21

CIT (TDS) Vs. Escotel Mobile Communications Limited [2009]319 ITR 139(Delhi)……...21

CIT XVII Vs. Hutchison Essar Telecom Ltd. [2009]319 ITR 139(Delhi)……………………21

CIT v National Mutual Life Association of Australasia. (1933)1 ITR 350 ,361 (Bom)……….24

CIT Vs  Kulandagan Chettiar [2004] 267 ITR 654 SC…………………………………………...13

CIT v Visalakshi  achi ,(1937) 5 ITR 448,453-4(Rang)…………………………………………..24

CIT v. Neyveli Lignite Corporation Ltd. [1999] 243 ITR 459 (Mad)……………....................15

CIT v. Ahmedabad Manufacturing and Calico Printing Co., [1980] 139 ITR 806 (Guj)……20

Commissioner of Income Tax Vs.: Siemens Aktiongesellschaft [2009]310 ITR 320(Bom)….14

CIT Vs Nelliappan [1967] 66 ITR 722 SC     ……………………………………………………...13

CIT Vs. Chintamanrao Balaji AIR 1971 MP 30…………………………………………………...13

CIT(AP) Vs. Visakhapatnam Port Trust [1983]144 ITR 146(AP)………………………………22

DIT(Int’lTaxation Mumbai) Vs. Morgan Stanley & Co. Inc  [2007]292 ITR 416(SC)……….23

Dy DIT Vs. Scientific Atlanta (2010)130 TTJ (Mum)142……………………………………...…19

Dell International  2008 305 ITR 37 (AAR)………………………………………………………..16

Expeditors International India ( P) Ltd Vs. Additional CIT (2008)118 TTJ (Delhi)652……..19

G V K Industries Ltd v ITO reported in [1997] 228 ITR 564 (AP)……………………………..24

HMS Real Estate Pvt. Ltd. Vs. CIT-I (2010)230CTR(AAR)340……………………………….20

ISRO Satellite Centre Vs. Commissioner concerned DIT(Int’l Taxation) [2008]307 ITR 59(AAR)…………………………………………………………………………………………………17

Ishikawajma-Harima Heavy Industries Ltd. Vs.DIT, Mumbai [2007]288 ITR 408(SC)…….22

Jaora Sugar Mills Pvt. Ltd. Vs. CIT [1980] 124 STC 345 (Mad)]………………………………13

Mckinsey and Co. Inc. Vs. Assistant DIT [2006]6 SOT 186(Mum)……………………………..20

Panamsat International Systems LLC Vs. Dy CIT (2006)103 TTJ (Delhi)861…………….17,20

Raj Television Network Ltd Madras Vs. Dy CIT Circle II(I) .T.A. Nos. 1827 and 1828(Mds)/1998……………………………………………………………………………………..…18

Raymond Ltd. v. Dy. CIT (2003) 80 TTJ (Mumbai) 120………………………………………….20

R.D.Aggarwal Vs. CIT (1965) SCR 1 660…………………………………………………………..24

Skycell Communication Ltd  Vs. Dy. CIT  [2001]251 ITR 53(Mad)………………………...19,21

Western Union Financial Services Inc. Vs. Additional DIT  [2007]291 ITR 176(Delhi ITAT) ……………………………………………………………………………………….............................23

Union of India Vs. Azadi Bachao Andolan [2003] 263 ITR 706 SC…………………………….13

Books Referred

Income Tax law- Chaturvedi and Pithisaria

The Law and Practice of Income Tax- Kanga, Palkhivala and Vyas

Indian Tax Laws- A.N.Aiyar’s

Corpus Juris Secundum, Vol. 77, at p. 542

Income Tax Rules,2005- A.N.Aiyar

 

 


LIST OF ABBREVIATIONS

 

Hon’ble ..............................................................................................................Honourable

Art...............................................................................................................................Article

V.................................................................................................................................Versus

HC ......................................................................................................................High Court

SC ................................................................................................................Supreme Court

AIR...........................................................................................................All India Reporter

SCC ....................................................................................................Supreme Court Cases

ITR…………………………………………………………………..Income Tax Reporter

Treaty………………………………………………………..India-USA Double Taxation                                                                                                              Avoidance Agreement

DTAA…………………………………………………………Double Taxation Avoidance                                                                                                            Agreement

DTAC………………………………………………………….Double Taxation Avoidance                                                                                                                       Convention

the Act………………………………………………………………..Income Tax Act,1961

ITO……………………………………………………………………..Income tax Officer

CIT(A)………………………………………………..Commissioner of Income Tax(Appeals)

US/ USA…………………………………………………………….United States of America
FORM NO.36

(SEE INCOME TAX RULE 47(1))

Form of appeal to the Appellate Tribunal

In the Income Tax Appellate Tribunal Bangalore Special Bench

Appeal no. 99/Blr/2010

 

ABC Advertising Limited, LLC         Versus                                    Income Tax Officer

Delaware, USA                                                                       Company Circle, Bangalore

 

Appellant                                                                                Respondent

 

 

1. The State in which the assessment was made:                    Karnataka

           

2. Section under which the order appealed against   

 was passed:                                                                Section 250 of the Income Tax  Act    

 

3. Assessment year in connection with which           

appeal is preferred:                                                      2005-06

 

 

3A.Total income declared by the assessee for the

assessment year referred to in item 3:                         NIL

 

3B. Total income as computed by the

Assessing Officer for the A/Y referred to in item 3: Rs.10,00,00,000/-

 

4. The Assessing Officer passing the original order: Income Tax Officer,Company Circle,

                                                                                    Bangalore

 

5. Section of the Income Tax Act,1961 under

which the Assessing Officer passed the order:           Section 143 of the Income Tax Act

 

 

 

6. The Deputy Commissioner (A), Commissioner (A)  

passing the order under Section 154/250/271/271A/272-A: The Commissioner of Income Tax

                                                                                                Appeals, Bangalore

 

7. Deputy Commissioner or the Deputy Director in

Respect of orders passed before 1-10-1998, or the

Joint Commissioner or the Joint Director passing the

Order under Section 154/272A/274(2):                                  Not Applicable

 

8. The Chief Commissioner or Director General or

Director or Commissioner, passing the order under

Sections 154(2), 250/263/271/271A/272A:                            Not Applicable

 

9. Date of Communication of the order appealed against:     -----

 

10. Address to which notices may be sent to the Appellant:             ------

 

11. Address to which notices may be sent to the Respondent:-----

 

12. Relief Claimed in Appeal:                                                As per Memo filed

 

GROUNDS OF APPEAL

(AS PER ATTACHED MEMORIAL)

 

 

Signed                                                                                                             Signed

(Authorised Representative if any)                                                                 (Appellant)

 

                                                            VERIFICATION

I, ______, the appellant, do hereby declare that what is stated above is true to the best of my information and belief.

Verified today the ________________________ day of ___________________.

                                                                                                _________________

                                                                                                            Signed


 

STATEMENT OF JURISDCITION

 

The appellant here in has approached this Hon’ble Income Tax Appellate Tribunal, Bangalore on appeal under Section 253(1) of the Income Tax Act, 1961 against the order of the Commissioner of Income Tax (Appeals) which was passed under Section 250 of the Act.

 


SYNOPSIS OF FACTS

                                                                        I

The assessee is incorporated in Delaware, USA and is a wholly owned subsidiary of ABC Limited which is incorporated in Cayman Islands. The assessee is involved in marketing services and neither owns the satellites nor the undersea cables/servers through which the communication signals are transmitted. The assessee only enters into agreement with customers as per the laws of United States both signed and executed in the U.S., to provide the telecommunication services. The right to provide telecommunication services by the assessee is by way of lease agreements with its parent company. The assessee has a liaison office in Bangalore, India from which no effective operations occurred.  It is to only monitor the effectiveness of the signals  The office has recently filed its application with the RBI for closing down its operations and the same is under consideration.

                                                                        II

The assessee company filed its return of income for the Assessment Year 2005-06 with NIL income.  The ITO levied tax on the assessee’s income as royalty income at the rate of 10 percent after giving it the benefit under the treaty.  On appeal to the CIT (A), there was an observation that the income of the assessee could also be taxed as business profits as it had a permanent establishment and business connection in India by way of its liaison office and certain equipments. There was no enhancement but mere confirmation of the order.

The assessee has now preferred the present appeal before the ITAT. The department also has made a cross appeal contending that the CIT(A) after having satisfied himself that the income is also liable to be taxed as business income, he ought to have either remanded the matter to the ITO for assessing the income as business income or enhanced the demand.

 

STATEMENT OF ISSUES

 

I.       Whether the assessee is to be tried for liability under both the Act and the treaty or treaty alone?

II      Whether the income received by the assessee company is to be treated as royalty income as under Section 9(1)(vi) of the Act or  under Article 12(3) of the India-US DTAA?

III     Whether the income received by the assessee company is to be treated as fees for technical/included services as under Section 9(1)(vii) of the Act or under Article 12(4) of India-US DTAA respectively?

IV     Whether the liaison office of the assessee company situated in India is to be treated as permanent establishment under the treaty or as business connection under the Act?

V      Whether the assessee is the beneficial owner of the royalties or fees for included services as per Article 12(2) of the treaty?

                                   


                                          SUMMARY OF ARGUMENTS

I.THAT THE ASSESSEE IS ENTITLED TO THE BENEFITS OF THE TREATY AND THEREFORE IS TO BE TRIED UNDER THE TREATY ALONE AND NOT ALSO UNDER THE ACT

II.THE INCOME IS NOT TO BE TREATED AS ROYALTY INCOME NEITHER UNDER THE TREATY NOR UNDER THE ACT.

  • THERE IS NO USE OR RIGHT TO USE THE SATELLITE/SERVERS BY THE CUSTOMERS. THERE IS NO SECRET PROCESS INVOLVED IN THE TRANSMISSION.

III.THE INCOME RECEIVED BY THE ASSESSEE IS NOT FEES FOR INCLUDED SERVICES NEITHER UNDER THE INDIA-US DTAA NOR THE ACT

  • THE SERVICES DO NOT “MAKE AVAILABLE” ANY TECHNOLOGY

IV.THE ASSESSEE COMPANY NEITHER HAS A PERMANENT ESTABLISHMENT UNDER THE TREATY NOR A BUSINESS CONNECTION UNDER THE ACT

  • THE LIAISON OFFICE IS NOT PERMANENT ESTABLISHMENT.THE MONITORING ACTIVITIES ARE SAVED BY ART.5(3)(E) OF THE TREATY
  • THERE IS NO BUSINESS CONNECTION OR ATTRIBUTABLE INCOME

V.THE ASSESSEE IS NOT THE “BENEFICIAL OWNER OF THE ROYALTIES OR FEES FOR INCLUDED SERVICES” AS PER ARTICLE 12(2) AND IS THEREFORE NOT TAXABLE


ARGUMENTS ADVANCED

I. THAT THE ASSESSEE IS ENTITLED TO THE BENEFITS OF THE TREATY AND THEREFORE IS TO BE TRIED UNDER THE TREATY ALONE AND NOT ALSO UNDER THE ACT

There is no bar under law prohibiting an appellant to raise a new ground before the Tribunal that was never raised before the lower authorities but the Tribunal has the discretion and power to permit the Appellant to raise a new ground of appeal not set forth in the memorandum of appeal[1]. Also, where an additional ground is raised on the basis of a decision of the Supreme Court, the Tribunal should entertain such additional ground[2]. The submission is that the provisions of the treaty alone are to be considered to determine assessee’s liability whereas the Act applies only to the extent of the assessee’s benefit[3].

An assessee governed by a treaty can opt for being gov­erned by the provisions of the treaty rather than the Act. Section 90 and the Agreements executed pursuant to the power conferred there under were provisos or exceptions to the charge of tax levied by sections 4 and 5[4]of the Act .

The total income specified in Sections 4 and 5 chargeable to income tax is subject to the provisions of the DTAA as under Section 90.Such an agreement operates as a bar on the Government of India and also on Sections 4 and 5 of the Act[5]. Where a DTAA provides for a particular mode of computation of income, the same should be followed irrespective of the provisions in the Act[6]. Hence, in the instant case, it is only under the Articles of the treaty that is to stand as a test to determine if there is any liability at all, if yes, the rate at which the assessee is liable. Taxability and the extent of liability need not be tested under Section 9 of the Act as well unless they are more beneficial. Otherwise, the very purpose for which the agreement was entered into with US by virtue of Section 90 becomes futile.

Hence, it is submitted that if once it may be found by this Hon’ble Tribunal that the income is not royalty under the treaty, its taxability under royalty under the Act is not to be considered[7].

  1. THE INCOME IS NOT TO BE TREATED AS ROYALTY INCOME NEITHER UNDER THE TREATY NOR UNDER THE ACT.

It is humbly submitted to this Hon’ble Tribunal that the income of the assessee for the A.Y 2005-06 of Rs.10,00,00,000/- does not satisfy the definition of royalty as laid down under the Act or the treaty. It is the case of the assessee that the income falls under business profits as under Art.7 of the treaty which is earned without any permanent establishment in India and is hence, not taxable in India but in the US.

A.MEANING OF ROYALTY AS COVERED BY ART.12 OF THE DTAA IS NOT SATISFIED:

The ITO vide his assessment order held the assessee liable under Art.12 of the treaty for which the meaning of royalty is to be satisfied as under Art.12(3). The assessee, through satellites taken on lease, is providing transponder capacity to the telecasting companies. In effect, what is provided to them is the capacity of a transponder exclusively to each customer without interpolation with other customers.

There must be consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment[8] to mean royalty. The question whether transponders fall within the meaning of equipment has been answered in the negative and has been held that they are not equipment[9].

The term "royalty" normally connotes the payment made by a person who has exclusive right over a thing for allowing another to make use of that thing. The exclusivity of the right in relation to the thing for which royalty is paid should be with the grantor of that right[10]. In the instant case, there is no parting of any right by the assessee in favour of the customer. If any right was parted, it is in no way exclusive as exclusivity lies with the owner, ABC Ltd. Generally, the word royalty means a share of the product or profit reserved by the owner for permitting another to use the property; the share of the production or profit paid to the owner[11]. The assessee is not the owner of the satellite/transponder and hence cannot be brought under the genesis of royalty.

 

 

A1. THERE IS NO “USE” OR “RIGHT TO USE” OF THE EQUIPMENT BY THE TELECASTING COMPANIES

The causa causans of the consideration is the use or right to use which will make it fall within the purview of 'Royalty.' The transponder is not used by the customers. In order to "use" anything it was necessary that there should be physical contact between the user and the thing to be used[12]. There will be no "right to use" involved while providing a tele-communication service. The customers of the assessee merely avails a service and is neither interested in the fact that how the services are rendered nor intent to use the assessee's infrastructure or the processes involved therein[13].Connectivity payments are neither in the nature of royalty nor fees for technical services. Similarly, in the case of assessee, the customer merely makes use of the facility and does not itself use the equipment[14].

A2.THE TELECASTING COMPANIES DO NO CONTROL, MAINTAIN OR POSSESS THE SATELLITES OR SERVERS

Payments made for the "use" or "right to use" presupposes that customers should themselves be in the control or possession of the said right, while they utilize the asset for the purpose of their business. The scope of payments made for the use of equipment in the context of electronic commerce related issues has been considered and laid down that the customer must be in physical possession and control of the property[15].The recipient of the service in the case of satellite services cannot be said to have a control or possession of the transponder or any equipment in satellite which is a pre-requisite for concluding that the receipts are in the nature of royalty.[16]

It is evident from the fact file that the control of the satellites and servers is done from outside India.. Also, from the modus operandi of the servers and satellites, it is clear cut that the maintenance/ trouble shooting of the satellites/servers is all done by ABC Ltd, Cayman Islands. Hence, there is no way by which the telecasting companies can control the satellites

A3.THERE IS NO “SECRET PROCESS” THAT IS INVOLVED IN THE TRANSMISSION OF THE DATA

Art.12(3)(a) while laying down the provision, has used a comma after the phrase “secret formula or process” which is in clear distinction from clause (iii) of explanation 2 to Section 9(1)(vi). The punctuation-the use of the comma-coupled with the setting and words surrounding the words under consideration were accounted for and consequently held that under the treaty even the process should be a secret process[17]. While holding that provision of transponder capacity was not held to be royalty payments, it was observed:

In Asia Sat’s case, the Tribunal pointed out, while repelling the argument that the word "secret" also qualifies the word "process" that there is no comma after the word "secret" till the end of the clause and had the intention been to qualify the word "process" also with the word "secret" there would have been a comma after the word "process" (by mistake mentioned in the order as "formula"). However, the comma is present after “process” in the provision of the treaty which implies that it has to be given effect by qualifying the word “secret”. In case of difference between the provisions of the Act and of the agreement, the provisions of the agreement prevail over the provisions of this Act and can be enforced by the appellate authorities and the court[18].The modus operandi of and the technology contained in satellites and server management is an open market process which is available off the shelf. On similar facts regarding satellites and transponders, payments to non-residents for provision of satellite services were not held to be royalty[19]

B.MEANING OF ROYALTY AS UNDER SECTION 9(I)(VI) OF THE ACT IS NOT SATISFIED

Under Section 9(1)(vi) of the Act, the assessee’s case may be treated only under Clause (iii) or (iva) of explanation 2 as other clauses are regarding imparting information which is squarely inapplicable in the instant case. It is submitted that the definition of royalty under Art 12(3) of the treaty and the aforementioned clauses of the Act are almost identical with no difference except there being the usage of comma after the phrase “secret formula or process” which has to be accounted for. Hence, the reasoning set forth with respect to inapplicability of royalty under treaty may be considered under the Act as well.

III. THE INCOME RECEIVED BY THE ASSESSEE IS NOT “FEES FOR INCLUDED SERVICE S NEITHER UNDER THE INDIA-US DTAA NOR THE ACT

It is submitted that there is an act of acquiescence on part of the ITO by dropping the course of action to proceed under the ground of fees for included/technical services by ignoring it while making the charge under royalty. However, to prove beyond doubt that the income is not taxable under any of the clauses of Section 9, it is contended as under.

A.THE INCOME IS NOT FEES FOR INCLUDED SERVICES AS PER ART.12(4)OF  THE INDIA-US DTAA

The services rendered are in no way ancillary or subsidiary to the application or enjoyment of the right, property or information for which a payment described in Art.12(3) and as presented above, the case is not covered under the meaning of Art.12(3).

It was expressly stated by the Hon’ble High Court of Madras that the provision of telecommunication services cannot be considered as technical in nature. The court observed that "technical service" referred in Section 9(1)(vii) contemplates rendering of a "service" to the payer of the fee. Mere collection of a "fee" for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been received for technical services[20]. The Hon’ble Court also observed that satellite television has become ubiquitous and when a person receives such transmission of television signals it cannot be said that the person is receiving a technical service. Services provided whereby a global communication network was made available to all the associated concerns of a company’s group was not held to be rendering of any technical service and the same were paid merely for availing communication facility for transmitting data[21].

A1. THE SERVICES DO NOT “MAKE AVAILABLE” ANY TECHNOLOGY 

It is sine qua non that the services must “make available” the technical knowledge to attract Art.12(4)(b)of the Act[22].Technology will be considered “made available” when the person acquiring the service is enabled to apply the technology[23]. In order that technical knowledge, etc. can be said to be "made available" to the user of the services it is necessary that after the service has been rendered, the user of the service should be enabled to apply the technical knowledge etc. by himself for the purpose of his business without reference to the person who provided the technical service[24].

Although communication through satellite is given as example in the MoU of the treaty, in which transfer of technology is possible, that is the instance where one entity who is engaged in the activity of communicating through transponders agrees to transfer technology relating to communication through satellite to another and if this is coupled with the rendering of technical services the case would fall under Article 12(4)(b)of the Treaty[25].

It is submitted that the assessee here in has not “made available” any technology that is transferred by the assessee and absorbed by the Indian telecasting companies such as to be capable of applying them after the contract expires with the assessee.

B.THE INCOME IS NOT FEES FOR TECHNICAL SERVICES AS UNDER SECTION 9(1)(vii) OF THE ACT

As mentioned above, it is relied upon the judgement of the Hon’ble High Court of Madras in the Skycell case to contend that the telecommunication services rendered by ABC Advertising Ltd. are not to be considered as fees for technical services as the facts of the cases are similar[26].

In interpreting “technical services” as under Section 9(1)(vii) of the Act, the High Court of Delhi[27] applied the rule of noscitur a socii and held that “technical services” required the presence of a human element as both managerial and consultancy services entail human intervention. The case was on similar facts and was held that the assessee there in did not provide any technical services. In the facts of the present case, the services rendered qua separate point/portal through satellites and under-sea cables do not involve any human interface. Therefore, by the application of the above authority on similar facts, the assessee’s service cannot be regarded as “technical services”.

 IV. THE ASSESSEE COMPANY NEITHER HAS A PERMANENT ESTABLISHMENT UNDER THE TREATY NOR A BUSINESS CONNECTION UNDER THE ACT

A. THE LIAISON OFFICE CANNOT BE CONSTRUED AS PERMANENT ESTABLISHMENT AS PER ART. 5(1) OF THE TREATY

Liaison Office means a place of business to act as a channel of communication between the principal place of business or head office by whatever name called and entities in India but which does not undertake any commercial /trading/ industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel[28].

A1.THE LIAISON OFFICE IS SAVED BY ART.5(3)(E) OF THE INDIA-US DTAA

The words 'permanent establishment' postulate the existence of a substantial element of an enduring or permanent nature of a foreign enterprise in another country, which can be attributed to a fixed place of business in that country. It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country[29]. Permanent establishment means a fixed place business through which the business of an enterprise is wholly or partly carried on[30].

The asseessee here in does not carry out business wholly or in part which facilitate and conduct his business in India. What is to be taxed is profit of the enterprise in India, but only so much of them as is directly or indirectly attributable to that permanent establishment[31]. The operations carried out by the liaison office are activities which are preparatory or auxiliary character which are covered under the Art 5(3)(e). The monitoring of effectiveness of signals is for scientific research and even otherwise, they are merely of auxiliary/ancillary character and are in no way imperative or integral for the conduct of the business operations. Also, no income is generated through the activity for the assessee and thus, the contention of attribution of income to the liaison must fall. From the fact file, it can be gathered that there were no “effective operations” carried out from the liaison office.

In a case decided by the Supreme Court, back office functions performed by a subsidiary in India falls under Article 5(3) (e) of the DTAA. Stewardship activities, which included monitoring of the outsourcing operations, undertaken therein to protect the interest of the customer and the company in the competitive world by ensuring quality was not held to constitute effective operations so as to be attributable to a permanent establishment[32]. Placing reliance on the judgment of the apex court where the activities in the nature of quality-control for the company and customer are not construed as effective operations, then mere monitoring of effectiveness of signals with no succeeding control measures cannot be construed as effective operations which attribute income to a permanent establishment. In Morgan Stanley’s case, where similar monitoring operations took place, the apex court observed thateven if some income is treated having derived by assessee in India, then the same will be miniscule or negligible portion of its booing income.

Further, to argue that having equipment in India does not constitute permanent establishment under subject DTAA, assessee would place reliance on India Australia DTAA wherein equipment permanent establishment has been specifically incorporated under Article 5(3)(a) thereof, which provisions are missing in subject DTAA[33].

The assessee has also filed for closure of the liaison office which implies the disposition of the assessee which is that the operations therein are not substantial for carrying out the business. If they were, it would not have been possible to carry out business after closure of the liaison office.

B. THERE IS NO BUSINESS CONNECTION AS PER SECTION 9(1)(i) OF THE ACT

The word business connection is not defined in the Act. It has a wide though uncertain meaning. It admits of no precise definition and the solution of the question depends upon the facts and circumstances of the case[34].

The expression “business connection“ must denote something which produces profits and gains and not a mere state or condition which is favourable to the making of profit .The word  “business” must have the significance indicated in Section 2(13) of the Act which defines profit. The word “connection” must have been used in the sense of that with which one is connected[35]. A relation to be a “business connection” must be real and intimate and through or from which income must accrue or arise whether directly or indirectly to the non resident[36].All that is necessary is that there should be a business in India, a connection between non resident person or company and that business and that the non resident person or company has earned income through such a connection[37]. The essence is the existence of close, real, intimate relationship and commonness of interest between the non-resident and the Indian person. To constitute business connection, there must be continuity of activity or operation of the non resident with the Indian party and a stray or isolated transaction is not enough to establish a business connection. Further, such activity must be one, which contributes to the earnings of profits by the non-resident in his business[38].

 In the instant case assessee contends that there exists no business connection in India and it is agreed that there is a connection between assessee activities carried out in India by way of liaison office and activities carried outside India but such a connection cannot be called as business connection because there is no profit or any gain from liaison office in India.

In a case of similar facts, it was held that income earned business connection may be taxable only when effective operations are carried out in India. When no office, agent or subsidiary is situated in India for facilitating the receipt of satellite signals, business operations are held not to be carried out in India. Also, no machinery through which signals are reaching India is present[39]. Similarly, in the instant case, even if business connection is held to be there are no operations carried out by the assessee which stem from the business connection. The equipment and earth station which monitor signals are in no way facilitating the receipt of signals or helping them in reaching India which was the important requirement laid down in the Asia Sat case.

IV. THE ASSESSEE IS NOT THE “BENEFICIAL OWNER OF THE ROYALTIES OR FEES FOR INCLUDED SERVICES” AS PER ARTICLE 12(2) AND IS THEREFORE NOT TAXABLE

A.ABC LTD., CAYMAN ISLANDS IS THE OWNER OF EQUIPMENT, NOT THE ASSESSEE

From the fact file, it is gathered that the assessee is not the owner of the satellites/servers through which telecommunication services are rendered to the telecasting companies.

The right to provide such telecommunication services through the channels is by way of lease agreements that the assessee enters with its parent company.

As submitted earlier, the income is not to be treated as royalties or fees for included/technical services under the treaty or the Act. The assessee cannot be construed as the beneficial owner of the royalties or fees for included services as there is no instance of that nature of income. Even if considered to fall under the category of that income, the provisions of Art.12(2) are applied to the beneficial owner such income.

Beneficial owner is a term derived by the common law “equity” regime. It means the person, who is entitled to enjoy the economic rights stemming from the ownership, although the ownership has been registered in the name of someone else (the legal owner), who holds the object in his own name but on behalf of the beneficial owner. The beneficial owner is the “indirect” owner.

The assessee is not enjoying economic rights stemming from ownership as the yearly payments received would be utilized to pay charges for the lease agreement with the parent company. The premise of the meaning indicates that the legal owner should hold the object in his name on behalf of the beneficial owner. That is not the case here as the parent company, ABC Ltd. holds the satellite for its own benefit. The assessee is the real recipient of the payments and there is no question of beneficial ownership.In the case of Sterling Abrasive Ltd[40], the assessee therein was held not the beneficial owner of the services rendered. Since the assessee is not a beneficial owner, the jurisdiction of Art.12(2) is ousted and cannot be taxed thereunder.

B.INCOME IS COVERED UNDER BUSINESS PROFITS AS PER ART.7 OF THE INDIA-US DTAA

The income of the assessee is covered under Art.7 of the DTAA which is business profits. The Article envisages that business profits of an enterprise are taxable in its own State unless it carries on business in the other State through a permanent establishment. Since it was already urged to this Hon’ble Tribunal that there is no permanent establishment in the preceeding ground, the income of the assessee  maybe taxed in its own State i.e USA and not India.

 

 

 

 

 

 

 

 

 

 

 

 

PRAYER

 

Wherefore in the light of the facts stated, issues presented, arguments advanced and authorities cited, the counsel for the appellant humbly prays and implores this Hon’ble Income Tax Appellate Tribunal, Bangalore that it may be pleased to ser the aside the assessment order and adjudge and declare that

  • The income received by the assessee is not royalty as under the Act or the treaty
  • The income received is not fees for included/technical services as under the treaty or the Act respectively
  • The assessee does not have any permanent establishment in India as under the treaty nor any business connection through which income is attributable under the Act
  • The assessee is not the beneficial owner of any royalties or fees for included services

 

And pass any order/orders this Hon’ble Tribunal may deem fit in the interest of justice, equity and good conscience.

And for this act of kindness and grace, the Appellant as in duty bound, shall forever pray in gratitude.

Respectfully submitted on behalf of the Appellant,

                                                                                                                                                                                                                                                                                    Sd-

                                                                                                Counsel for the Appellant

 



[1]CIT Vs Nelliappan [1967] 66 ITR 722 SC         CIT Vs. Chintamanrao Balaji AIR 1971 MP 30

[2]Jaora Sugar Mills Pvt. Ltd. Vs. CIT [1980] 124 STC 345 (Mad)]

[3]Section 90(2)  of  the Act

[4]Commissioner of Income Tax v. P.V.A.L. Kulandagan Chettiar [2004] 267 ITR 654 SC

[5]Union of India Vs. Azadi Bachao Andolan [2003] 263 ITR 706 SC , CIT Vs  Kulandagan Chettiar [2004]267 ITR 654 SC

[6]CIT Vs. Davy Ashmore 190 ITR 626

 
 
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