2024 (6) TMI 1510 - AT - Income Tax

Borrowed services fees not royalty or included services; identical facts and MAP require grant of relief in appeals

The Deputy Commissioner of Income-tax (IT) -3 (2), Mumbai Versus M/s. McKinsey & Company Singapore Pte Limited C/o. S.R.B.C. & Associates LLP, Mumbai

ITAT held that fees for borrowed services received by the foreign Singapore-incorporated assessee are governed by the Tribunal's earlier finding that such ... Borrowed services fees received - Income deemed to accrue or arise in India - business profit under Article 7 of the India -Singapore Double Taxation Avoidance Agreement - assessee is a foreign company, incorporated in Singapore - HELD THAT:- This Tribunal in a bunch of appeal of the group companies of the assessee [2016 (12) TMI 1136 - ITAT MUMBAI] has considered the quarrel of the assessee and held stand of the Competent Authority India on the such loan service charges collected by the assessee and the same were held as neither 'royalty' nor 'FIS'. If the facts are similar over the other AYs and also the other assessees of the group, the ratio of the order of the Tribunal for the AY 2007-2008 in the case of other assessees becomes relevant for adjudicating the similar issue of the ten appeals under consideration. As such, the assessee's MAP is pending in all these cases before the authorities. Further, we find that it is not the case of the AO that the facts are not similar to that of the AY 2007-2008 and others. Therefore, the argument that the MAP relevant for the other AY has no application to the facts of the present AY 2010-2011 is not sustainable. Considering the above settled nature of the issue under consideration, we direct the AO to grant relief accordingly to the assessee after verification of the fact that the issues have already been resolved under the Mutual Agreement Procedure. Accordingly, all the grounds raised by the assessees in all the ten appeals are allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts characterized as 'borrowed services charges' paid to a non-resident constitute 'fees for technical services' (FTS) or 'royalty' under the relevant India-Singapore Double Taxation Avoidance Agreement (DTAA) or are taxable as business profits under Article 7 of the DTAA. 2. Whether business receipts from borrowed services performed outside India by the non-resident, in the ordinary course of its business and in the absence of a permanent establishment (PE) in India, are taxable in India. 3. The legal effect of prior Tribunal decisions and Mutual Agreement Procedure (MAP) resolutions on the present assessment - i.e., whether the AO/DRP may treat the issue differently despite consistent Tribunal rulings and MAP outcomes (issue of precedent, finality and year-specificity of MAP). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of borrowed services charges: FTS/royalty vs. business profits Legal framework: The DTAA provisions governing allocation of taxing rights over cross-border receipts are Article 12 (royalties/FTS) and Article 7 (business profits). The scope of 'fees for technical services' and 'royalty' under the treaty governs whether amounts received are deductible as passive/technical payments taxable regardless of PE, or are part of business profits taxable only if attributable to a PE in India. Precedent Treatment: The Tribunal, in a series of decisions relating to the same group and the same issue across multiple assessment years, has consistently held that borrowed service charges do not constitute royalty or FTS and thus are not taxable in India where services are rendered outside India and no PE exists. Those Tribunal decisions were followed by MAP resolutions and, in some instances, withdrawal of departmental appeals to the High Court. Interpretation and reasoning: The Court examined the factual matrix - services were performed outside India, were in the ordinary course of the non-resident's business (strategic consultancy), and receipts therefore represented business income. The absence of a PE in India or any nexus establishing attribution of such receipts to a PE was determinative. The Tribunal and MAP findings that borrowed service charges are neither royalty nor FTS (expressly recorded in MAP language) support the treaty interpretation that such cross-border consultancy/borrowed services fall within business profits, not Article 12 categories. Ratio vs. Obiter: The finding that borrowed service charges are not FTS/royalty but business profits when performed outside India and not attributable to a PE is ratio decidendi of the Tribunal's prior orders and of the present appellate decision; it is applied as binding precedent on substantially similar facts. Conclusion: Borrowed services charges in the factual circumstances (services rendered outside India; in the ordinary course of business; no PE in India) do not constitute FTS/royalty and qualify as business profits under Article 7 of the DTAA - therefore not taxable in India absent a PE. Issue 2 - Taxability where no PE exists and services rendered outside India Legal framework: Under Article 7 of the DTAA, business profits of a resident of one Contracting State are taxable in the other Contracting State only if attributable to a PE in that other State. The threshold for taxability requires both source of profits within the State and connection/attribution to a PE. Precedent Treatment: Coordinated Tribunal decisions for multiple assessment years concluded that the receipts from borrowed services were business income earned outside India and, in the absence of a PE, not taxable in India. MAP outcomes reinforced that treatment for certain years. Interpretation and reasoning: The Tribunal and CIT(A) assessed that the services were performed outside India and were part of the non-resident's ordinary business. Consequently there was no attribution to any Indian PE. The absence of any factual contention by Revenue that the service performance or attribution facts differed for the year in question led to application of the established principle that business profits not connected to a PE are not taxable under the DTAA. Ratio vs. Obiter: The determination that business receipts from services rendered abroad without attribution to a PE are not taxable in India is central (ratio) to the decision. Conclusion: Where the facts establish that borrowed services were performed outside India and are not attributable to any PE in India, such receipts constitute non-taxable business profits under Article 7 of the DTAA. Issue 3 - Binding effect of prior Tribunal decisions and MAP outcomes; year-specificity of MAP Legal framework: Principles of stare decisis and consistency in tax adjudication; MAP outcomes as expressions of competent authority resolution between Contracting States. The relevance of prior Tribunal rulings on identical issues between the same parties and the force of MAP agreements or accepted MAP resolutions in departmental conduct. Precedent Treatment: Multiple co-ordinate Bench Tribunal decisions and an explicit MAP resolution concluded that borrowed service charges are not taxable as royalty/FTS. Departmental appeals in several instances were withdrawn post-MAP; the Tribunal directed AOs to give effect to MAP resolutions where facts are common. Interpretation and reasoning: The Court recognized that the issue had been consistently adjudicated in favour of the taxpayer by the Tribunal across several years and that the Competent Authority had, in MAP proceedings, recorded that borrowed service charges would not be taxable as royalty or FTS. Given the factual similarity across years and the Department's own course (withdrawal of appeals where MAP resolved the issue), the AO could not take a contrary view without distinguishing facts. The contention that MAP is year-specific was rejected where the facts across assessment years were similar and where Tribunal precedent and MAP outcomes were applicable; the AO had not demonstrated material factual differences to justify deviation. The Tribunal directed verification that MAP outcomes apply and then grant relief accordingly. Ratio vs. Obiter: The holding that prior Tribunal decisions and MAP resolutions, where the facts are similar and no distinguishing features are shown by the assessing officer, bind subsequent assessments on the same issue is ratio. The Court's emphasis that MAP resolutions must be given effect unless facts differ is integral to the decision. Conclusion: Prior Tribunal decisions and MAP resolutions resolving the taxability of borrowed service charges in favour of non-taxation are binding on subsequent similar assessments absent distinguishing factual differences; the AO must verify applicability of MAP findings but cannot ignore them simply because MAP is said to be year-specific where facts are the same. Cross-References and Interaction of Issues The issues are interlinked: the treaty characterization (Issue 1) depends on factual findings about where services were rendered and the existence of a PE (Issue 2); prior adjudications and MAP resolutions (Issue 3) establish authoritative interpretations of the treaty provisions as applied to those facts and constrain the AO from making contrary additions unless material factual distinctions are shown. The Tribunal applied this integrated reasoning to decline interference with the CIT(A) and to dismiss the Revenue's appeal.