2022 (4) TMI 1062 - AT - Income Tax

Tribunal rules in favor of assessee: Management fees and labor charges not taxable under India-USA DTAA

The tribunal ruled in favor of the assessee on all counts. The management fee and IC Labour Charges were not taxable as Fees for Included Services (FIS) ... Income accrued in India - treatment to management fee and IC Labour Charges as fee for technical services/fee for included services - FTS / FIS - inclusion of managerial services within the scope of FTS/ FIS - taxability of management fee received by the assessee on account of management support services rendered to Everest India under the provisions of the Act and/or under India-USA DTAA - DR strongly relied on the order of the CIT(A) / AO and submitted that the management services rendered by the assessee to Everest India fall within the scope of the definition of FIS under the India-USA DTAA as these services satisfy the make available requirement enabling Everest India to make use of these services on its own in future - HELD THAT:- As considering the services provided by the assessee (listed above), in our view, these are not technical services nor do they require any technological knowledge, skill or experience. There is no transfer of technology involved. Everest India is not enabled to apply any technology on its own without recourse to the service provider i.e. the assessee. These services have not resulted in any enduring benefit to Everest India by way of any knowledge which could be applied by it on its own in future without depending on the assessee. These are general managerial services which are received by the assessee on recurring basis. Therefore, the test laid down under Article 12(4)(b), in our considered view, are not satisfied in the present factual scenario. Thus, management fee received by the assessee from Everest India is not taxable as FIS under the provisions of India-USA DTAA. Accordingly, this ground is allowed in favour of the assessee. Taxability of IC Labour Charges received by the assessee on account of supply of manpower to Everest India under the provisions of the Act and/or under India-USA DTAA as FTS/FIS - HELD THAT:- Admittedly, the manpower is supplied by the assessee under an Inter-Company Sharing Agreement. Under this agreement, if any group entity is in shortage of a manpower resource, any other group entity which has excess manpower resource lends the same and in consideration charges 60% of standard fee rate of employee lent to compensate itself for the salary cost of the employee lent. The assessee does not satisfy the make available requirement as per the provisions of Article 12(4) of the India-USA DTAA so as to make it taxable in India as FIS. This is for the reason that there is no rendition of technical or consultancy services by the assessee through the supply of manpower which has enabled Everest India to apply any technical knowledge, experience, skill, know-how on its own without the recourse to the manpower supplied by the assessee. The agreement is continuous in nature and the lending entity is free to withdraw the manpower resource if it requires the resource for its own business. The objective of agreement is not to make Everest India self equipped/self sufficient for future. Accordingly, in our view, the IC Labour Charges received by the assessee from Everest India are not taxable as FIS under the provisions of Article 12(4)(b) of the India-USA DTAA. Hence, this ground is allowed in favour of the assessee. Addition on account of miscellaneous services rendered to third party clients - These services comprises of two components i.e. access to published research reports by subscribing to the same and customized research advisory - HELD THAT:- By allowing access to database what assessee grants to customers is only a right to use a copyrighted material (i.e. published report). The assessee does not grant the right to use the copyright. Hence, consideration (subscription fee) received by the assessee is not taxable as royalty under the provisions of Article 12(3) of the India-USA DTAA. Similarly in customized research advisory services the assessee is providing only advisory services through emails or presentations. The output of custom research advisory is not provided through subscription mode or data base access mode and, therefore, the question of access to data base does not arise at all. Further there is no transfer of any copy right to the customers. Thus, the considerations received by the assessee towards customized research advisory services are not taxable under the head Royalty. This ground of appeal is allowed. Levy of interest under section 234B and 234C - HELD THAT:- It is worth noting that the Ld. CIT(A) has himself not levied interest under section 234B/C for AY 2011-12 and AY 2012-13. Respectfully following the judgment of the Hon’ble Supreme Court in ZTE Corporation [2021 (7) TMI 1336 - SC ORDER] this ground of appeal is allowed. Issues Involved:1. Taxability of management fee received by the assessee under the provisions of the Income Tax Act, 1961 and/or India-USA Double Taxation Avoidance Agreement (DTAA) as Fees for Technical Services (FTS) / Fees for Included Services (FIS).2. Taxability of IC Labour Charges received by the assessee under the provisions of the Act and/or India-USA DTAA as FTS/FIS.3. Taxability of miscellaneous services rendered to third-party clients.4. Levy of interest under sections 234A and 234B of the Income Tax Act, 1961.Detailed Analysis:1. Taxability of Management Fee:The main issue revolves around whether the management fee received by the assessee from its subsidiary in India, Everest Business Advisory India Pvt. Ltd., qualifies as FTS/FIS under the Act and/or India-USA DTAA. The assessee argued that these services are managerial in nature and do not make available any technical knowledge, skill, or experience to Everest India, thereby not satisfying the 'make available' clause under Article 12(4)(b) of the India-USA DTAA. The tribunal agreed with the assessee, citing the jurisdictional Delhi High Court judgment in Steria (India) Ltd. vs. CIT, which excluded managerial services from the definition of FTS under the DTAA. Therefore, the management fee was not taxable as FIS under the provisions of India-USA DTAA.2. Taxability of IC Labour Charges:The assessee received IC Labour Charges for supplying manpower to Everest India. The tribunal examined whether these services satisfied the 'make available' requirement under Article 12(4)(b) of the India-USA DTAA. The tribunal concluded that the supply of manpower did not involve any transfer of technical knowledge or skill that Everest India could utilize independently in the future. The services were akin to recruitment or placement services rather than technical services. Hence, the IC Labour Charges were not taxable as FIS under the DTAA.3. Taxability of Miscellaneous Services:The assessee rendered two types of services to third-party clients: access to published research reports (subscription services) and customized research advisory. The tribunal found that the subscription services granted clients a right to use copyrighted material (published reports) but not the copyright itself, thus not qualifying as royalty under Article 12(3) of the DTAA. For customized research advisory, the tribunal noted that these services were provided through emails or presentations and did not involve database access or transfer of copyright. Therefore, the customized research advisory services were also not taxable as royalty.4. Levy of Interest under Sections 234A and 234B:For AY 2010-11, the tribunal considered whether interest under sections 234A and 234B was applicable. The assessee argued that as a non-resident, tax was to be deducted at source on payments made by Everest India and third-party clients, negating the need for advance tax payments. The tribunal agreed, citing the Supreme Court judgment in CIT-International Taxation vs. ZTE Corporation, and ruled that interest under sections 234A and 234B was not applicable.Conclusion:The tribunal allowed the appeal in favor of the assessee on all counts, ruling that the management fee and IC Labour Charges were not taxable as FIS under the India-USA DTAA, and the miscellaneous services were not taxable as royalty. Additionally, the tribunal ruled that interest under sections 234A and 234B was not applicable to the assessee for AY 2010-11.