We are pleased to release a Tax Alert which summarizes a recent ruling of the Delhi Income Tax Appellate Tribunal (ITAT) in the case of JC Bamford Investments, England (Taxpayer), wherein the issue adjudicated was whether benefit of lower rate of tax, as provided in India-UK Double Taxation Avoidance Agreement (DTAA), is available on royalty paid to a resident of UK (who is not the beneficial owner), where however, the beneficial owner of such royalty, is also a resident of UK. The ITAT ruled that the underlying purpose of a DTAA is to grant benefit to a “resident” of any of the DTAA contracting States though not to a resident of a third State. In the present case, as both, the recipient of royalty income as well as beneficial owner of such income were residents of UK, the benefit of lower rate of tax should apply to royalty income earned by the recipient.
The present ruling attempts to clarify the meaning of one of the most significant phrases, “beneficial owner.” The ITAT has ruled that the phrase “beneficial owner” indicates the right of the taxpayer to make available capital/ other assets for use by others or decide the manner/mode of disposal of the income so earned.
The history of the OECD Model Convention and the Commentary thereto, indicates that the intention of the “beneficial ownership” requirement was to provide greater certainty that agents and nominees could not avail benefits of a DTAA on behalf of persons not resident in the relevant DTAA State.
The ITAT has accepted that at times, the “beneficial owner” may not be the same person as the recipient of income. Where this is the case, one is required to further evaluate whether the “beneficial owner” of income is resident of the DTAA State. Where both the parties are residents of the same State, the ITAT has ruled that the DTAA benefit is available on the underlying principle that resident of that State are entitled to the DTAA and not the residents of a third State.
The present ruling attempts to clarify the meaning of one of the most significant phrases, “beneficial owner.” The ITAT has ruled that the phrase “beneficial owner” indicates the right of the taxpayer to make available capital/ other assets for use by others or decide the manner/mode of disposal of the income so earned.
The history of the OECD Model Convention and the Commentary thereto, indicates that the intention of the “beneficial ownership” requirement was to provide greater certainty that agents and nominees could not avail benefits of a DTAA on behalf of persons not resident in the relevant DTAA State.
The ITAT has accepted that at times, the “beneficial owner” may not be the same person as the recipient of income. Where this is the case, one is required to further evaluate whether the “beneficial owner” of income is resident of the DTAA State. Where both the parties are residents of the same State, the ITAT has ruled that the DTAA benefit is available on the underlying principle that resident of that State are entitled to the DTAA and not the residents of a third State.
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