2023 (1) TMI 327 - HC - Income Tax

Court rules payments not subject to treaty as fees for technical services. Revenue's appeal dismissed.

Commissioner Of Income Tax (International Taxation & Transfer Pricing) Versus M/s. The Timken Company

The High Court affirmed the Tribunal's decision that the services provided were not fees for included services under the Indo-US Treaty. It was held that ... Income deemed to accrue or arise in India - Fees for Technical Services (FTS)/Fees for Included Services (FIS) under Article 12 of the Indo-USA Treaty (Convention between the Government of United States of America and Government of Republic of India for the Avoidance of Double Taxation - services provided by the assessee to Timken India Limited (TIL) - fee received is for included services as provided in Article 12 of the Indo-US Treaty and, therefore, liable to tax in India - Effect of the ruling rendered by the Authority of Advance Ruling (AAR) - HELD THAT:- It is important to note that in terms of paragraph 4(b) of Article 12 of the Indo-US Treaty, the scope of Article 12 was explained by pointing out that generally speaking technology will be considered made available when the person acquiring the services is unable to apply the technology. The fact that the provision of service may require technical input by the person providing the service does not par se mean that technical knowledge, skill etc. are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not par se be considered to make the technology available. This aspect was considered by CIT(A) and it was found that by virtue of the said agreement there is no transfer of a technical plan or technical design and what was transferred through the agreement was commercial information. Upon analysis of the agreement it was found that the agreement is purely advisory services and such advisory services cannot be treated as fees for included services under Article 12(4)(b) of the Indo-US Treaty since there is no technology which is made available. Tribunal upon reconsideration of the factual position found that the clauses in the agreement would clearly show that the nature of services is advisory in nature and nothing has been made available to TIL by the assessee. As not in dispute that the assessee does not have any permanent establishment in India and, income so arising to them in India cannot be taxed under Article 7 as ‘business profits’ either. The assessee and the TIL had filed a writ petition before this Court challenging the vires of Section 44D(b) of the Act. The Hon’ble Court while framing the issue for consideration by its judgment reported [2016 (4) TMI 592 - CALCUTTA HIGH COURT] held that the issue pertains to machinery of presumptive tax provided for in the provision and the contention of the petitioners that apparent shutting out of an assessee’s option to claim deduction from the gross income in respect of matters covered by the provisions is unreasonable and as such, falls foul of Article 14 of the Constitution. The above decision has attained finality as the revenue had not carried the matter in appeal. This aspect was also noted by the learned Tribunal but in its view, as having come to a factual conclusion that the assessee is rendering only advisory service and it cannot be treated as included services under Article 12(4)(b) and held that the contention of the assessee with regard to the binding nature of the ruling of the AAR has become academic. The agreement between the parties had been properly interpreted by the CIT(A) and on re-examination, the Tribunal also concurred with the CIT(A). Thus, we find no different view is possible than the interpretation given by the CIT(A) as approved by the Tribunal. Therefore, the order passed by the learned Tribunal is affirmed on this aspect and, accordingly, substantial questions of law nos.(a) and (b)are answered against the revenue. Services rendered by the assessee and the other is service rendered by third party - Once again going back to the agreement between the parties in Section 1.2 (quoted above), it has been clearly mentioned that each invoice shall be submitted no later than 15th day following the end of each calendar month; each invoice shall identify the compensation that is due to provider to compensate it for all costs for providing such services; only costs without any mark-up shall be invoiced. This aspect was rightly taken note of by the CIT(A) as well as the Tribunal and the issue was decided in favour of the assessee. So far as the services rendered by the third parties, on facts, the CIT(A) and the Tribunal had found that the actuals billed by the third parties were paid by the assessee in USA and were later on reimbursed by TIL to the assessee in India and, therefore, there was no basis for the assessing officer to conclude that the payments of reimbursement were in the nature of fees for technical services. Assessee is not the ultimate beneficiary of the sum in question nor did it render any service to TIL. Further, there was no evidence which was brought on record to show that the technical skill, knowledge etc. were made available to TIL by the assessee. Transfer Pricing Officer (TPO) scrutinised the details of reimbursements while examining the international transaction of reimbursement by TIL to the assessee under Section 92 of the Act and found that the assessee made no profit on such reimbursements and that the reimbursements were at Arm’s Length. Thus, the finding having been rendered after thorough examination of the factual position as well as the terms and conditions of the agreement qua Article 12(4)(b) of the Indo-US Treaty, we find no ground to take a different view. Consequently, the substantial question of law nos.(c) and (d) are also answered against the revenue. Issues:1. Interpretation of the ruling by the Authority of Advance Ruling (AAR) in relation to the Income Tax Act, 1961.2. Taxability of consideration for services under Article 12 of the Indo-USA Treaty.3. Applicability of fees for Technical Services (FTS)/Fees for Included Services (FIS) under the treaty.4. Tax treatment of Charge Back receipts.Analysis:1. Interpretation of AAR Ruling:The appeal filed by the revenue under Section 260A of the Income Tax Act, 1961 challenged the order of the Income Tax Appellate Tribunal Kolkata. The Tribunal had dismissed the appeal of the revenue for the assessment years 2002-03 to 2007-08. The Tribunal considered the agreement between the assessee and Timken India Limited (TIL) for services, emphasizing that the services provided were advisory in nature and did not involve the transfer of technical knowledge. The Tribunal upheld the CIT(A)'s interpretation that the services were not fees for included services under the Indo-US Treaty.2. Taxability under Article 12 of the Treaty:The revenue contended that the consideration for services provided by the assessee to TIL fell under Article 12 of the Indo-US Treaty and was taxable in India. However, the Tribunal found that the agreement did not involve the transfer of technical knowledge but was purely advisory. The Tribunal referred to Example no.7 in the MoU between India and the US on DTAA to support its decision that consideration for advisory services cannot be treated as fees for included services under the treaty.3. Charge Back Receipts Tax Treatment:The revenue also raised a substantial question concerning the relief granted to the assessee on account of Charge Back receipts. The Tribunal found that the payments made by TIL to the assessee in India were reimbursements for services rendered by third parties in the USA. The Transfer Pricing Officer confirmed that the reimbursements were at Arm's Length and the assessee made no profit on such reimbursements. Consequently, the Tribunal held that the payments were not in the nature of fees for technical services.In conclusion, the High Court affirmed the Tribunal's decision on all issues, stating that the interpretation of the agreement by the CIT(A) and the Tribunal was correct. The Court found no grounds to take a different view on the taxability of services provided and the treatment of Charge Back receipts. Therefore, the appeal filed by the revenue was dismissed, and the application for stay was closed.