India: Ruling on availability of treaty benefits to a non-beneficial owner recipient
The Delhi Income Tax Appellate Tribunal (Tribunal) recently ruled in the case of JC Bamford Investments, England (taxpayer) on whether the benefit of lower tax rate under the India – UK tax treaty is available on royalty paid to a UK resident which is not a beneficial owner (BO) of such royalty income. In the facts of case, the taxpayer was a UK-incorporated and UK-resident company. JC Bamford Excavators (JCBE), also a UK resident and a group company of the taxpayer, had entered into a technology transfer agreement (TTA) with an Indian group company, JC Bamford India (JCBI). Under the TTA, JCBE licensed certain intellectual property (IP) to JCBI along with an exclusive right to manufacture and market excavator loaders in India. The consideration towards exploitation of IP was paid by JCBI to JCBE and was characterised as royalty. By virtue of a subsequent tripartite agreement, JCBE sub-licensed the IP to the taxpayer subject to the right of JCBI to continue to exploit IP. Consequently, royalty was paid by JCBI to the taxpayer and in turn the taxpayer remitted 99.5% of the royalty received to JCBE.
The India-UK treaty provides for a lower rate of tax on royalty income of UK resident, arising in India as compared to the rate under Indian Tax Laws (ITL). The Indian tax authorities denied this benefit, on the premise that the taxpayer was merely a conduit and not the BO of royalty received from JCBI.
The Tribunal examined the meaning of the phrase BO which is not otherwise defined under the ITL or the treaty. It was observed that, in common parlance, a BO is one who is entitled to the income in its own right. It is the person who is free to decide (a) whether or not the capital or other assets should be used or made available for use by others or (b) on how the yields therefrom are used or (c) both of the above. Sometimes, a BO may turn out to be a person different from the immediate recipient or formal owner or recipient of the income.
In the given facts, it was JCBE and not the taxpayer, who was the BO of the royalty income from JCBI. However, the requirement as per the treaty for applicability of lower rate in India is that the BO, not the formal recipient of royalty income, is a resident of the UK. Accordingly, since the BO being JCBE is also a UK tax resident, it was held that the taxpayer can avail the benefit of the lower rate under the treaty, despite the fact the taxpayer is not the BO of the royalty.
The present ruling attempts to clarify the meaning of one of the most significant phrases, 'beneficial owner' and its application in the context of royalty taxation under the India-UK tax treaty.
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