Article 13(2), India-UK DTAA – though recipient of royalty was not beneficial owner, DTAA benefit cannot be denied since the beneficial owner as well as recipient of income was resident of UK.
Facts:
The taxpayer was a company incorporated in, and tax resident of, the UK. The taxpayer was a member of a group of companies. Another UK company (“UKCo”), also a member-company of the group, had entered into a Technology Transfer Agreement (“Agreement”) with a third group company incorporated in, and a tax resident of, India (“IndCo”) for grant of license to certain intellectual property (“IP”).
Subsequently, UKCo, IndCo and the taxpayer entered into a tripartite agreement under which UKCo sub-licensed IP to the taxpayer in consideration of the payment of royalty by the taxpayer to UKCo. Hence, IndCo was required to pay royalty to the taxpayer. The taxpayer, in turn, paid 99.5% of the royalty to UKCo and retained merely 0.5% with it.
According to the taxpayer, the payment received by it was subject to concessional tax rate of 15% in terms of Article 13(2) of India-UK DTAA . According to the tax authority, Article 13(2) applied only if the recipient of royalty was “beneficial owner” of the royalty whereas the taxpayer was merely a conduit between UKCo and IndCo and not a “beneficial owner” and hence, the normal tax rate of 20% was applicable.
Held:
In terms of section 90(2) of the Act, between the provisions of the Act and DTAA, whichever is more beneficial should apply. In case of the taxpayer, since provisions of DTAA are more beneficial, they should apply. However, the relevant DTAA provision is subject to the condition that the recipient of the royalty should be “beneficial owner”.
The phrase “beneficial owner” is not defined under the Act or DTAA. In common parlance, a “beneficial owner” is one who is entitled to income in his own right. Also, “Beneficial owner” is one 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 there from be used; or (c) both. Sometimes, a “beneficial owner” may turn out to be a person different from the immediate recipient or formal owner or recipient of the income.
The benefits of DTAA are meant to be given only to the resident of either State and not to a resident of a third State. Benefit of lower rate under Article 13(2) should not be given if the “beneficial owner” is not a resident of UK. However, the benefit is not lost merely because the formal recipient, a resident of UK, is not the beneficial owner. The underlying intention is to give benefit only to a resident of UK. In the present case, since the recipient as well as the beneficial owner were both resident of UK, benefit of lower rate of tax under DTAA cannot be denied.
