2024 (11) TMI 1292 - AT - Income Tax

Foreign entity's management service fees to Indian subsidiary without mark-up are cost reimbursements, not royalty under India-Netherlands DTAA Article 12(4)

M/s. Van Oord Dredging And Marine Contractors BV Versus ACIT Circle 4 (3) (2), Mumbai

ITAT Mumbai held that management service fees charged by foreign entity to Indian subsidiary without mark-up constitute cost reimbursements and do not ... Taxability of income in India - Taxability of Management Service Fees - “royalty” receipts treatment under Article 12(4) of India-Netherland DTAA - ‘services fees’ are charged as a percentage of turnover carried out by VOIPL during the year without any mark up - Indian entity/VIOPL is totally dependent upon the foreign enterprise for its experience in industrial, commercial and scientific field - assessee’s main contention had been that, the services rendered in pursuance of the ‘service agreement’ are not in the nature of ‘FTS’ under the DTAA, because there is no “make available” of any technical knowledge, experience, skill, know how or process, etc HELD THAT:- As in own case (A.Y. 2003-04) [2012 (6) TMI 483 - ITAT, CHENNAI], (A.Y. 2009-10) [2016 (11) TMI 1249 - ITAT MUMBAI] and (A.Y. 2017-18) [2023 (10) TMI 1181 - ITAT MUMBAI] we hold that none of the services provided by the assessee in the term of 'service agreement' falls within the scope and ambit of 'royalty' as defined in Article 12(4) of the DTAA. 16. Here again, Management services fees charged is an allocation of cost which is without mark-up, hence it has been stated that the same being in nature of reimbursements do not constitute Royalty as per India-Netherlands Double taxation avoidance agreement (DTAA'). Once this issue consistently have been allowed in favour of the assessee, holding that none of the services provided by the assessee in terms of service agreement falls within the scope of Royalty as defined in Article 12(4) of the India Netherlands DTAA and also that the payments received by the assessee are in the nature of reimbursement without any mark-up and therefore, the same cannot be held to be ‘Royalty’ and not taxable in India. Further, Management Services if represents the allocation of the actual cost incurred which has been certified by the auditors and the Tribunal has held that Management Services Fee are not taxed in India. Accordingly, this issue is decided in favour of the assessee. Short grant of tax deducted at source - As it has been stated that in the return of income filed for A.Y.2017-18, assessee had claimed credit of TDS of Rs. 3, 89, 05,708/-, however, the ld. AO has not granted any credit, despite the fact that the same amount appearing in form no. 26AS. Accordingly, we direct the ld. AO to examine the issue and grant appropriate credit of tax after verification. Issues Involved:1. Taxability of Management Service Fees as Royalty.2. Set-off of Management Service Fees treated as Royalty with current year and brought forward business losses.3. Non-grant of Tax Deducted at Source (TDS) credit.4. Erroneous levy of interest under sections 234A and 234B, surcharge, and education cess.5. Initiation of penalty proceedings under section 270A.Detailed Analysis:1. Taxability of Management Service Fees as Royalty:The primary issue was whether the Management Service Fees received by the appellant constituted 'Royalty' under Article 12(4) of the India-Netherlands DTAA. The appellant argued that these fees were a pure allocation of cost without any markup and thus should not be considered taxable as royalty. The appellant contended that the services provided did not involve the transfer of any know-how or technical knowledge, which is a prerequisite for classification as royalty. The Tribunal noted that in previous years, similar fees were not treated as royalty, as decided in the appellant's own case for various assessment years. The Tribunal held that the services did not impart any knowledge or experience and were purely advisory, thus not falling under the definition of royalty. Consequently, the Tribunal ruled in favor of the appellant, allowing the appeal on this ground.2. Set-off of Management Service Fees treated as Royalty with Current Year and Brought Forward Business Losses:The appellant also challenged the denial of set-off of the management service fees against current year business losses and brought forward business losses. Since the Tribunal ruled that the fees did not constitute royalty, this issue became academic. The Tribunal dismissed this ground as it was no longer relevant.3. Non-grant of Tax Deducted at Source (TDS) Credit:The appellant claimed that the full credit of TDS amounting to INR 3,89,05,708 was not granted, despite the amount being reflected in the Form 26AS. The Tribunal directed the Assessing Officer to verify the claim and grant appropriate credit for the TDS after due examination.4. Erroneous Levy of Interest under Sections 234A and 234B, Surcharge, and Education Cess:The appellant contested the levy of interest under sections 234A and 234B, as well as the surcharge and education cess calculated based on the tax computed under the DTAA rates. The Tribunal noted that with the primary issues resolved in favor of the appellant, these computations became consequential. Therefore, the Tribunal deemed these grounds as consequential and did not require separate adjudication.5. Initiation of Penalty Proceedings under Section 270A:The appellant argued against the initiation of penalty proceedings under section 270A, which pertains to underreporting or misreporting of income. The Tribunal found these grounds premature and directed that they be adjudicated by the Assessing Officer in light of the Tribunal's findings. Hence, no separate adjudication was conducted by the Tribunal on this issue.Conclusion:The appeal was allowed in favor of the appellant, with the Tribunal ruling that the management service fees did not constitute royalty and directing the Assessing Officer to grant TDS credit after verification. Other issues were deemed either academic or consequential based on the primary rulings.