2024 (5) TMI 1605 - AT - Income Tax

Management fees held taxable as FTS under India-France DTAA; s.90(1) notification needed for DTAA changes; guarantees not FTS

JCDECAUX S.A, C/o. JCDecaux Advertising India P Ltd. Versus ACIT, Circle 2 (1) (2), New Delhi

JCDECAUX S.A, C/o. JCDecaux Advertising India P Ltd. Versus ACIT, Circle 2 (1) (2), New Delhi - [2025] 125 ITR (Trib) 430 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the management/functional support fee received by a non-resident holding company from its Indian associate enterprise is taxable in India as 'fees for technical services' (FTS) under domestic law and the India-France DTAA, having regard to the Protocol/MFN clause and the 'make available' requirement. 1.2 Whether corporate guarantee fees charged by the non-resident for guaranteeing loans of its Indian associate constitute FTS under section 9(1)(vii) of the Act and Article 13 of the India-France DTAA (including consideration of the 'make available' test and prior Tribunal findings). 1.3 Whether reimbursements of social security contributions paid by the non-resident on behalf of employees of the Indian associate are taxable as FTS (i.e., are the receipts genuine cost-to-cost reimbursements or disguised payments for services), in light of relevant authorities on secondment/reimbursement and the doctrine of diversion/overriding title. 1.4 Whether surcharge and education/cess levied on income taxed at a special gross rate under the India-France DTAA are chargeable in addition to the DTAA rate or are subsumed within the DTAA rate. 1.5 (Raised but not substantively decided in the judgment) Issues as to allowance of TDS credit, levy of interest under section 234B and initiation of penalty under section 270A - noted as grounds but not the subject of detailed adjudication in the order excerpt. 2. ISSUE-WISE DETAILED ANALYSIS 2.1 Issue 1 - Taxability of Management/Functional Support Fee as FTS; applicability of Protocol/MFN and 'make available' Legal framework: 2.1.1 Article 13 of the India-France DTAA (Royalties and Fees for Technical Services) and the Protocol/MFN clause permitting invocation of beneficial provisions of treaties with third states; the 'make available' concept as limiting scope of FTS under certain other DTAAs (e.g., Indo-UK text). Precedent treatment: 2.1.2 The Tribunal and High Court decisions (e.g., Steria jurisprudence) have construed MFN/Protocol clauses to import more favourable definitions from third-country DTAAs where applicable, and have treated managerial services as outside FTS where adopted text so provides. Conversely, the Apex Court's decisions (referred to in the judgment) emphasize that a notification under section 90(1) is necessary to give effect to a DTAA or protocol amendment that alters existing law and caution against automatic integration of third-party treaty terms absent such formal amendment. Interpretation and reasoning: 2.1.3 The Bench examined the nature of services (management/HR/policy support) and the assessee's reliance on the MFN/Protocol to avail the Indo-UK DTAA's narrower FTS definition (which excludes managerial services and includes a 'make available' limitation). The Tribunal weighed prior High Court authority (Steria) favouring MFN invocation against the Apex Court pronouncements (Nestle SA v. AO) which require statutory notification for integration of changed treaty terms or caution against automatic assimilation of third-party treaty benefits. Ratio vs. Obiter: 2.1.4 The decision to dismiss the appeal on this ground rests on the higher court authority cited (Apex Court) concerning the necessity of notification under section 90 and the limits on automatic MFN application; this operative holding is ratio for the factual contest before the Tribunal. Discussion of Steria and other Tribunal authorities is treated as precedent considered and distinguished in consequence of the Apex Court ruling. Conclusions: 2.1.5 The Tribunal dismissed the assessee's challenge: the management fee was held taxable as FTS under the DTAA/domestic law because the claim to import the Indo-UK FTS definition via the Protocol/MFN could not be sustained in view of the controlling Apex Court guidance; the 'make available' argument and MFN invocation were rejected on that basis. 2.2 Issue 2 - Taxability of Corporate Guarantee Fee as FTS Legal framework: 2.2.1 Section 9(1)(vii) of the Act and Article 13 of the India-France DTAA (FTS); the 'make available' test and the nature of corporate guarantee services-whether managerial/technical/consultancy services that transfer know-how/skills to the recipient. Precedent treatment: 2.2.2 A co-ordinate Bench of the Tribunal in earlier assessments for the same assessee held that corporate guarantee services are not managerial/technical/consultancy services and therefore do not constitute FTS. That finding was applied by the Tribunal in the present assessment year. Interpretation and reasoning: 2.2.3 The Tribunal examined the record and previous findings; it noted absence of evidence by Revenue showing that the guarantee fee represented managerial/technical services or that any technical know-how was 'made available' to the Indian AE. The Tribunal relied on the coordinate bench's persuasive, directly relevant earlier determination for the same factual matrix and accepted that corporate guarantees are not services of the managerial/technical/consultancy nature within the meaning of FTS. Ratio vs. Obiter: 2.2.4 The holding that the corporate guarantee fee is not FTS (on facts and on interpretation of Article 13) is ratio and dispositive for the present assessment year, as the Tribunal expressly allowed the assessee's ground on this issue following the earlier Tribunal conclusion. Conclusions: 2.2.5 The Tribunal allowed the appeal on the corporate guarantee fee ground and held that the corporate guarantee fee is not taxable as FTS under the Act or the India-France DTAA. 2.3 Issue 3 - Reimbursement of Social Security Contributions: reimbursement vs. payment for services Legal framework: 2.3.1 Principles distinguishing genuine cost-to-cost reimbursements (not constituting taxable income) from payments that are, in substance, consideration for services; relevant tests include character of agreements, employment/secondment arrangements, presence/absence of mark-up, control/supervision, and whether amounts accrue as income to the foreign entity. Precedent treatment: 2.3.2 Authorities considered include Centrica (High Court ruling treating certain recharges as not merely reimbursement where substance shows provision of services/secondment), and other AAR/tribunal and Supreme Court decisions (GE India, Maersk) concerning diversion of income and reimbursement characterisation. The Tribunal relied on Centrica and follow-on jurisprudence as binding for the jurisdictional position. Interpretation and reasoning: 2.3.3 The Tribunal evaluated agreements, invoices, employment letters and the factual matrix. While the assessee contended pure cost-to-cost reimbursements (no markup, obligation of Indian AE to pay, assessee as disbursing agent), the Tribunal followed the High Court precedent that mere labelling as 'reimbursement' does not control; substance and surrounding contractual scheme (secondment/real employer analysis, and whether payments effectively remunerate services of foreign entity) determine taxability. Applying Centrica, the Tribunal found that the facts did not establish the receipts as non-taxable reimbursements. Ratio vs. Obiter: 2.3.4 The reliance on Centrica and the consequent dismissal of the assessee's ground on reimbursements is ratio: the Tribunal applied binding jurisdictional precedent to the facts and held that the recharge was taxable (i.e., appeal on this point dismissed). Conclusions: 2.3.5 The Tribunal dismissed the assessee's appeal on the reimbursement ground, treating the reimbursements as chargeable (following Centrica and related authorities), rather than as non-taxable cost recharges. 2.4 Issue 4 - Surcharge and education cess on income taxed at special DTAA rate Legal framework: 2.4.1 Article 2 (Taxes Covered) and Article 13(2) of the India-France DTAA: Article 2(1)(a) expressly includes income-tax 'including any surcharge thereon'; Article 13(2) prescribes a maximum withholding tax rate (10%) on gross amount of royalties/fees/FTS. Precedent treatment: 2.4.2 Tribunal decisions (BOC Group Ltd. and others) have held that surcharge and education cess are subsumed within the DTAA-prescribed tax where Article 2 and related provisions exist; such authorities were relied upon and followed. Interpretation and reasoning: 2.4.3 The Tribunal construed Article 2(1)(a) and Article 2(2) to conclude that the DTAA's reference to income-tax inclusive of surcharge extends to subsequent identical or similar levies (education cess being treated as an additional surcharge). Given Article 13's prescribed rate, the Tribunal held that surcharge and cess are deemed included within the DTAA 10% withholding ceiling and directed deletion of the surcharge and education cess levied on the income taxed at the special rate. Ratio vs. Obiter: 2.4.4 The holding that surcharge and education cess are subsumed in the DTAA-rate for the specified categories of income is ratio for determining the tax computation in this assessment year and is consistent with co-ordinate Tribunal precedent. Conclusions: 2.4.5 The Tribunal directed deletion of surcharge and education cess levied on income taxed at the DTAA special rate and allowed the assessee's ground in part on this issue. 2.5 Issues noted but not finally adjudicated in the excerpt - TDS credit, interest under section 234B, penalty under section 270A 2.5.1 These grounds were advanced by the assessee but the excerpted order does not contain reasoned pronouncements resolving these aspects; they are recorded as grounds without substantive adjudication in the provided text.