2018 (11) TMI 201 - AT - Income Tax

Foreign Company Wins Tax Case on RDCA and MSSA Payments

The Tribunal ruled in favor of the assessee, a foreign company, in a tax case involving payments received under a Research and Development Cooperation ... Taxability of receipts under Research and Development Co-operation Agreement - Income taxable under the head ‘Royalty’ - income deemed to accrue or arise in India - assessee is a tax resident of the Netherlands entered into Research and Development Cooperation agreement (RDCA) with Philips India (PEIL) - India-Netherlands DTAA - Held that:- So far as the transaction between the assessee and PEIL India is concerned, it is simply in the nature of reimbursement of expenses incurred by KPENV, on behalf of the group companies and it is not an income for the KPENV. During the course of hearing before us, when we put this position to the ld. DR, he did not have much to say beyond placing reliance on the stand of the Assessing Officer. Hence, the payment received by the assessee company from various group companies are in the nature of reimbursement as evident from the details taken from various terms and conditions of RDCA agreement. The RDCA agreement has no income element, hence a cost sharing agreement cannot be converted into the terminology of ‘royalty’. Article 5 of the RDCA clearly shows that all the assistance, information and advice given under the RDCA are for the exclusive use only by all participating Philips Group entities and the only reason for restriction on sharing with the third parties is to protect the interests of the Philips Group as a whole. Therefore, we are of the view that the receipts under RDCA are not taxable as the same is not ‘Royalty’ under Article 12(4) of the India-Netherlands DTAA, and it is a cost sharing agreement, in nature of reimbursement, hence we delete the addition. Taxability of receipts under Management Support Services Agreement (MSSA) received by Koninklijke Philips Electronics N.V (Assessee), as per MSSA agreement between assessee and Philips Electronics India Limited (‘PEIL’) - Held that:- As per sub section 2 of section 90 of the Act DTAA entered into with the foreign company is a statutory document recognized under the Income Tax Act and by sub section 2, the provisions of the Income Act would apply only to the extent that they are more beneficial to the assessee. We note that as per Article 12 of India-Netherland DTAA these receipts do not fall in the definition of ‘Royalty’ or ‘Fees for technical services therefore, the assessee is not liable to pay tax on these receipts in India and this way, the DTAA provisions will prevail. Hence, assessee can change its stand at any point of time if it seems to him that the receipts are not taxable in his hand as per the provisions of law. Therefore, we do not agree with ld DR for the Revenue, so far this issue is concerned. Entitlement of TDS credit - Held that:- We note that assessee is entitled to take the credit of TDS certificate submitted by it during the assessment proceedings. Therefore, we direct the Assessing Officer to provide credit for tax deducted at source after verification of the TDS certificate filed by the assessee, as per the provisions of law. Therefore, we allow this ground of appeal raised by the assessee for statistical purposes. Issues Involved:1. Taxability of receipts under Research and Development Co-operation Agreement (RDCA).2. Taxability of receipts under Management Support Services Agreement (MSSA).3. Change in position regarding non-taxability of receipts under RDCA and MSSA.4. Granting full credit for tax deducted at source (TDS).Issue-wise Detailed Analysis:1. Taxability of Receipts under RDCA:The assessee, a foreign company incorporated in the Netherlands, entered into a Research and Development Cooperation Agreement (RDCA) with Philips Electronics India Limited (PEIL). The core issue was whether the payments received under RDCA were taxable in India. The assessee argued that these payments were reimbursements for costs incurred on research and development activities, not fees for technical services or royalties. The Assessing Officer (AO) and Dispute Resolution Panel (DRP) held that the payments were in the nature of 'royalty' under section 9(1)(vi) of the Income Tax Act and Article 12(4) of the India-Netherlands DTAA. However, the Tribunal found that the payments were reimbursements and not taxable as royalties or fees for technical services. It was concluded that the RDCA was a cost-sharing agreement, and the receipts under it were not taxable in India.2. Taxability of Receipts under MSSA:The assessee also entered into a Management Support Services Agreement (MSSA) with PEIL. The AO and DRP treated the payments under MSSA as fees for technical services (FTS) under section 9(1)(vii) and Article 12(5)(b) of the India-Netherlands DTAA. The assessee contended that these payments were reimbursements for services provided in commercial, financial, and legal matters, and did not 'make available' any technical knowledge, experience, skill, or know-how. The Tribunal agreed with the assessee, concluding that the MSSA was a cost-sharing arrangement, and the payments were not taxable as FTS or royalties. The services provided did not 'make available' technical knowledge or skills to PEIL, thus not falling under the definition of FTS in the DTAA.3. Change in Position Regarding Non-taxability of Receipts:The assessee had previously declared the receipts under RDCA and MSSA as taxable but changed its stance in the revised return for AY 2008-09, citing better interpretation of law through judicial precedents. The Tribunal upheld the assessee's right to change its position, emphasizing that there is no estoppel against law. The Tribunal noted that the payments under RDCA and MSSA were not taxable based on the provisions of the India-Netherlands DTAA and the nature of the agreements.4. Granting Full Credit for TDS:The assessee claimed that the AO did not grant full credit for TDS amounting to Rs. 163,028,554, despite submitting all original certificates. The Tribunal directed the AO to verify the TDS certificates and grant the appropriate credit as per the law.Conclusion:The Tribunal allowed the appeals filed by the assessee, concluding that the receipts under RDCA and MSSA were not taxable in India as they were reimbursements under cost-sharing agreements. The Tribunal also directed the AO to grant full credit for TDS after verification. Other grounds raised by the assessee were either not pressed or consequential in nature and did not require adjudication.