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The Tax Publishers JC Bamford Investments Ltd. v. DCIT [ITA No. 738/Del/2016 & Stay Application No. 79/Del/2016, dt. 8-4-2016] : 2016 TaxPub(DT) 2148 (Del-Trib) Service PE and force of attraction rule *Facts:* Assessee UK company had an intelletual property agreement with JCB India by virtue of which certain royalty was payable as technical fees to the UK company. Parallel another Technology transfer agreement based on which some employees were seconded to JCB India. A service PE under article 5(2)(k) of Indo-UK DTAA arose and was read into for the secondment of the employees. Thus the royalty income which arose out of the secondment was treated as business income under force of attraction rule and taxed in India as business income. In the earlier years the ITAT in its own order had categorized the seconded employees as in first category and then those doing stewardship activities. The service PE arose from the first category. In the subsequent assessment year under appeal similar reading was done by the assessing officer/upheld by the DRP thus came up in appeal from the assessee: Held in favour of revenue that there was no interference called for on facts to reverse the earlier assessment year ruling of the same assessee. The tripartite agreement newly entered into does not substantially change the facts. Service PE exists, royalty income will be partly business income and partly royalty thus the royalty income needs apportionment to business income and royalty, thus goes back to the assessing officer. Under such circumstances and following the precedent, we hold that all the requisite conditions for attracting the mandate of Article 5(2)(k) are satisfied inasmuch as (i) there is furnishing of services including managerial services; (ii) such services are other than those taxable under Article 13 (royalties and fees for technical services); (iii) such services are rendered out of India; (iv) such services are rendered by 'other personnel'; and (v) such activities continued for a period of more than 90 days within 12 months' period. It is thus held that the service PE of the assessee is established in India. These grounds are, therefore, not allowed." "5. The next major issue raised through various grounds is against the holding by the assessing officer that the royalty earned by the assessee was effectively connected with the service PE of the assessee in India. We find that similar issue was there and has been elaborately discussed in therefore stated order of the tribunal for the earlier years. The tribunal has held that the total amount consisting Lump-sum Licence/Know-how Fees and also royalty as mentioned in para 2.2 of TTA was consideration for the transfer of IP rights simplicitor and also the service rendered by the employees of the second category. The Tribunal further held that in so far as the question of royalty representing consideration for the transfer of IP rights simplicitor was concerned, the service PE representing the deputationists had no role to play either in creating or making it available to JCB India. That is how the Tribunal came to hold that the same was not effectively connected with the service PE of the assessee in India. The amount of royalty and consideration for rendering of services by the employees of second category has been held to be not falling in para 6 of Article 13 and hence chargeable to tax as per para 2 of Article 13 of the DTAA. However, as regards the fees for technical services resulting from the rendering of services by the employees of the second category, the Tribunal has held that the same did not fall in para 6 of Article 13 and was, hence, chargeable to tax as per para 2 of the Article 13 of the DTAA. As regards the consideration for the employees of the first category, the Tribunal has held that the fees for technical services in relation to such employees was covered within para 6 of Article 13 of the DTAA. That is how, the Tribunal concluded that the consideration for rendering of services by the employees of first category was chargeable to tax under Article 7 of the DTAA. The assessing officer was directed to determine the amount of income in terms of Article 7. As the facts for the instant year are admittedly similar to those of the preceding years on this issue, respectfully following the precedent for assessment year 2006-07, we set aside the impugned order and send the matter back to the file of assessing officer for determining income in consonance with the directions given for the earlier year." *Note:* The decision makes a good read as it has based the Morgan Stanley case principle that secondment can bring in service PE. Income attributable to the service PE will be business income thus on force of attraction principle.

The Tax Publishers

JC Bamford Investments Ltd. v. DCIT [ITA No. 738/Del/2016 & Stay Application No. 79/Del/2016, dt. 8-4-2016] : 2016 TaxPub(DT) 2148 (Del-Trib)

Service PE and force of attraction rule

Facts:

Assessee UK company had an intelletual property agreement with JCB India by virtue of which certain royalty was payable as technical fees to the UK company. Parallel another Technology transfer agreement based on which some employees were seconded to JCB India. A service PE under article 5(2)(k) of Indo-UK DTAA arose and was read into for the secondment of the employees. Thus the royalty income which arose out of the secondment was treated as business income under force of attraction rule and taxed in India as business income. In the earlier years the ITAT in its own order had categorized the seconded employees as in first category and then those doing stewardship activities. The service PE arose from the first category. In the subsequent assessment year under appeal similar reading was done by the assessing officer/upheld by the DRP thus came up in appeal from the assessee:

Held in favour of revenue that there was no interference called for on facts to reverse the earlier assessment year ruling of the same assessee. The tripartite agreement newly entered into does not substantially change the facts. Service PE exists, royalty income will be partly business income and partly royalty thus the royalty income needs apportionment to business income and royalty, thus goes back to the assessing officer.

Under such circumstances and following the precedent, we hold that all the requisite conditions for attracting the mandate of Article 5(2)(k) are satisfied inasmuch as (i) there is furnishing of services including managerial services; (ii) such services are other than those taxable under Article 13 (royalties and fees for technical services); (iii) such services are rendered out of India; (iv) such services are rendered by 'other personnel'; and (v) such activities continued for a period of more than 90 days within 12 months' period. It is thus held that the service PE of the assessee is established in India. These grounds are, therefore, not allowed."

"5. The next major issue raised through various grounds is against the holding by the assessing officer that the royalty earned by the assessee was effectively connected with the service PE of the assessee in India. We find that similar issue was there and has been elaborately discussed in therefore stated order of the tribunal for the earlier years. The tribunal has held that the total amount consisting Lump-sum Licence/Know-how Fees and also royalty as mentioned in para 2.2 of TTA was consideration for the transfer of IP rights simplicitor and also the service rendered by the employees of the second category. The Tribunal further held that in so far as the question of royalty representing consideration for the transfer of IP rights simplicitor was concerned, the service PE representing the deputationists had no role to play either in creating or making it available to JCB India. That is how the Tribunal came to hold that the same was not effectively connected with the service PE of the assessee in India. The amount of royalty and consideration for rendering of services by the employees of second category has been held to be not falling in para 6 of Article 13 and hence chargeable to tax as per para 2 of Article 13 of the DTAA. However, as regards the fees for technical services resulting from the rendering of services by the employees of the second category, the Tribunal has held that the same did not fall in para 6 of Article 13 and was, hence, chargeable to tax as per para 2 of the Article 13 of the DTAA. As regards the consideration for the employees of the first category, the Tribunal has held that the fees for technical services in relation to such employees was covered within para 6 of Article 13 of the DTAA. That is how, the Tribunal concluded that the consideration for rendering of services by the employees of first category was chargeable to tax under Article 7 of the DTAA. The assessing officer was directed to determine the amount of income in terms of Article

7. As the facts for the instant year are admittedly similar to those of the preceding years on this issue, respectfully following the precedent for assessment year 2006-07, we set aside the impugned order and send the matter back to the file of assessing officer for determining income in consonance with the directions given for the earlier year."

Note: The decision makes a good read as it has based the Morgan Stanley case principle that secondment can bring in service PE. Income attributable to the service PE will be business income thus on force of attraction principle.