2020 (12) TMI 1157 - AT - Income Tax

Tribunal Rules Management Service Fees Not Royalty Under India-Netherlands DTAA; Prior Rulings Affirmed.

The Tribunal partly allowed the assessee's appeal, determining that the management service fees did not qualify as Royalty under Article 12(4) of the ... Income accrued in India - Management services fee claim - royalty receipt - eligibility for benefits of Indo-Netherland DTAA - assessee claimed the same as managerial services, as it did not make available any technical knowledge, experience, skill, know-how or process - HELD THAT:- We fallow the judicial precedence and ratio of the decisions the Hon’ble Tribunal [2017 (11) TMI 1912 - ITAT MUMBAI] payments received by the assessee as per the service agreement dated 01.04.2004 does not come into the nature of royalty as defined Article 12(4) India Netherlands Tax Treaty. Accordingly, we set aside the order passed by the Assessing officer and allow the grounds of appeal of the assessee. Issues Involved:1. Taxability of Management Service Fees of Rs. 21,27,77,100/-.2. Non-following of the order of the Jurisdictional Income Tax Appellate Tribunal, Mumbai for A.Y 2009-10.3. Set-off of management service fees treated as royalty with brought forward business loss not allowed.Issue-Wise Analysis:1. Taxability of Management Service Fees of Rs. 21,27,77,100/-:The assessee contended that the management service fees received constituted a pure allocation of cost without any markup, and hence, should be considered as reimbursement of cost. Therefore, it should neither be taxable as Royalty nor as Fees for Technical Services under the Act or the Double Taxation Avoidance Agreement (DTAA) between India and the Netherlands. The Assessing Officer (A.O.) treated the management service fees as Royalty under Article 12(4) and as Fees for Technical Services under Article 12(5) of the India-Netherlands DTAA, thereby making an addition of Rs. 21,27,77,100/- to the income of the assessee. The Dispute Resolution Panel (DRP) upheld the A.O.'s view, leading to the appeal before the Tribunal.2. Non-following of the order of the Jurisdictional Income Tax Appellate Tribunal, Mumbai for A.Y 2009-10:The assessee argued that the A.O. did not follow the order of the Jurisdictional ITAT, Mumbai, for A.Y 2009-10, where it was held that the management service fees could not be assessed as Royalty in terms of the India-Netherlands DTAA. The Tribunal noted that in earlier assessment years (2009-10, 2013-14, and 2014-15), the management service fees were not considered as Royalty, and the assessee was granted relief. The Tribunal referred to the observations and findings from the previous orders, emphasizing that the services provided did not impart any know-how or technical knowledge to the recipient, and thus, did not qualify as Royalty.3. Set-off of management service fees treated as royalty with brought forward business loss not allowed:The assessee also contended that the A.O. erred in not setting off the brought forward business loss against the addition of management service fees treated as royalty. The DRP directed the A.O. to verify the claim regarding the set-off of management service fees treated as royalty with the brought forward business loss from earlier years. However, the DRP upheld the A.O.'s view on the taxability and treatment of the management service fees as Royalty income.Tribunal's Decision:The Tribunal, after hearing the rival submissions and perusing the material on record, noted that the facts of the present case were similar to those in earlier years. The Tribunal reiterated that the services provided by the assessee did not impart any know-how or technical knowledge to the recipient and thus did not qualify as Royalty under Article 12(4) of the India-Netherlands DTAA. The Tribunal followed the judicial precedence and the ratio of decisions from earlier years, setting aside the A.O.'s order and allowing the grounds of appeal of the assessee.Conclusion:The appeal filed by the assessee was partly allowed, with the Tribunal holding that the payments received by the assessee as per the service agreement dated 01.04.2004 did not fall under the definition of Royalty as per Article 12(4) of the India-Netherlands DTAA. The Tribunal set aside the order passed by the A.O. and allowed the grounds of appeal of the assessee. The stay applications were dismissed as infructuous. The order was pronounced in the open court on 24.12.2020.