TaxTMI 
TaxTMI 
2016 (7) TMI 580
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....e Subsidiaries would fall within the ambit of 'Fees for Technical Services' and if so whether the disallowance u/s 40(a)(i) of the Act could be made in the facts and circumstances of the case. 3. The facts in Asst Year 2008-09 are considered here for adjudication in respect of this issue and decision rendered thereon would apply with equal force for Asst Year 2009-10 also as the issue involved is identical in Asst Year 2009-10 also. The brief facts of this issue are that the assessee company is a stockbroker company. The assessee carries on business of brokerage on behalf of institutional clients. During the previous year relevant to the assessment year under consideration, the assessee had made payments to two of its wholly owned subsidiaries namely, M/s B&K Securities Ltd. (U.K.) and M/s. B&K Securities Pvt. Ltd. (Singapore). M/s B&K Securities Ltd (U.K.) is engaged in business of providing marketing support services for clientele in U.K. The services rendered by B&K (U.K) were for expansion of assessee's business. For this purpose a 'Representation Agreement' was entered between the assessee and B&K on 15.11.2006. As per the terms of the said agreement lump sum pa....
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....elow:- M/s. Batlivala & Karani Securities (India) P. Ltd. DETAILS OF PAYMENTS MADE TO B&K SECURITIES LTD. SINGAPORE ON ACCOUNT OF MARKETING SUPPORT SERVICES Sr. No. Period Nature of expenses Amount Remarks 1. 01.04.2007 to 30.09.2008 I) Reimbursement of actual expenses as per agreement dated 01.04.2007 1,59,18,988 i)No TDS was deducted from the said payment since it was reimbursement of actual expenses ii) Mark up @ 29% on expenses reimbursed as per agreement dated 01.04.2007 52,07,491 ii) tax was deducted and paid and there is no dispute on this payment. ON ACCOUNT OF RESEARCH SERVICES Sr. No. Period Nature of expenses Amount Remarks 2 01.04.2007 to 31.08.2007 Payment made as per agreement dated 01.04.2007 46,19,765 There is no dispute on this payment 4. It was submitted before the Assessing Officer that the assessee had deducted TDS on the service fee paid by the assessee to its subsidiaries but not deducted TDS on reimbursement of expenditure since it was not in the nature of income. The Assessing Officer was of the view that the assessee should have deducted TDS on the entire am....
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....uly complied with the requirements of section 195 as well as section 40(a)(ia) of the Act by deducting tax from fees payable to the said disburses under the contract for services and therefore, there was no scope for invoking the provisions of section 40(a)(ia) of the Act." 6. Payments to Singapore Subsidiary Ld. AR. Argued that Singapore subsidiary is engaged in business, inter alia, of research and marketing services for securities/markets locally and overseas. B&K had provided various services, such as research and marketing services to the assessee. The services rendered by Singapore company were for expansion of assessee's business not only in Singapore but also in entire South East Asian countries. For this purpose a 'Business Services Agreement' was entered between the assessee and B&K on 01.04.2007 stipulating the terms and conditions. The services to be rendered by Singapore company to the assessee, and which were in fact rendered about which there is no dispute forming part of Clause 4.1 of this Agreement, which reads as under: "The provision of research/Marketing services in Singapore in a form that may be mutually agreed upon by the Parties from tim....
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....will reimburse the actual expenses incurred by the U.K. company and in addition will pay a service fee @ 29% for the services rendered by U.K. company. It is submitted that no TDS was deducted while making the payment for reimbursement of cost since it was reimbursement of actual expenses and there was no element of income in the said payment. 8. In essence, it was argued that the services rendered by both the subsidiaries are in the nature of marketing support services and not in the nature of 'fees for technical services' as alleged by the lower authorities. The Learned AR made his arguments based on the following propositions:- (a) The payments are not for fees for technical services within the meaning of Article 13 / 12 of DTAA with UK and Singapore as the case may be. (b) As there is no permanent establishment of UK and Singapore Subsidiaries in India, payments made to them are not taxable in India under Article 7 of DTAA with UK and Singapore. (c) In any case, payments are not for fees for technical services as per the provisions of the IT Act. (d) Explanation to section 9(2) has been inserted retrospectively w.e.f. 1.6.1976 vide Finance Act, 2010 and hence, ca....
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....uding the provision of services of technical or other personnel) which; (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this Article is received; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or (c) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design." He argued that with regard to Singapore Treaty, the payments made would admittedly not fall under Article 12(4)(a) and 12(4) (c ). Similarly in respect of U.K. Treaty, the payments made would admittedly not fall under Article 13 (4)(a) and 13(4)(b). He argued that as could be seen from the above definition of 'fees for technical services' that in order to fall under Article 12(4)(b) of Singapore Treaty and Article 13(4)(c ) of U.K. Treaty, any consideration paid for services of managerial, technical or consultancy services would be covered under the said definition only if such services make available any technic....
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....d on the order of the lower authorities. 11. In defence, the Learned AR stated that the revenue had not disputed the contents of the supplementary agreement entered into by the assessee and they have grievance only on the limited aspect of the compliance with TDS provisions in respect of payments made pursuant to such supplementary agreement. In this scenario, the argument of the Learned DR that the said agreement was entered into to circumvent TDS provisions is to be rejected. He further argued that no technical services, if any, have been made available to the assessee and there was no transfer of technology by the subsidiaries to the assessee in India in order to fall within the ambit of fees for technical services as per the treaty. 12. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee comprising of copy of agreement with B&K Securities Ltd, UK (pages 1 to 6 of PB) ; copy of agreement with B&K Securities Pte ltd (Singapore) (pages 7 to 16 of PB) ; copy of computation of income of assessee (pages 19-21 of PB) ; copy of financial statements of the assessee (pages 22-24 of PB) ; relevant pages of ....
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....technology available to the person acquiring the service. It further explains that generally speaking, technology will be considered made available when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, 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 per se be considered to make the technology available. The Memorandum further explains with examples as to how Article 12(4)(b) has to be understood as follows: "Typical categories of services that generally involve either the development and transfer of technical plants or technical designs, or making technology available as described in paragraph 4(b), include : 1. Engineering services (including the sub-categories of bio-engineering and aeronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical, and industrial engineering) ; 2. Architectural services ; and 3. Computer software development. ....
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....ation by employing a team of travelling salesmen to travel around the countryside selling the companys wares. The company wants to modify its software to permit the salesmen to assess the companys central computers for information on what products are available in inventory and when they can be delivered. The Indian firm hires a U.S. computer programming firm to modify its software for this purpose. Are the fees which the Indian firm pays treated as fees for included services ? Analysis : The fees are for included services. The U.S. company clearly performs a technical service for the Indian company, and it transfers to the Indian company the technical plan (i.e., the computer programme) which it has developed. Example 6 Facts : An Indian vegetable oil manufacturing company wants to produce a cholesterolfree oil from a plant which produces oil normally containing cholesterol. An American company has developed a process for refining the cholesterol out of the oil. The Indian company contracts with the U.S. company to modify the formulas which it uses so as to eliminate the cholesterol, and to train the employees of the Indian company in applying the new formulas. Are ....
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.... DTAA with Finland towards this end. 12.2.2. The Mumbai Bench of the Tribunal in the case of Raymond Ltd. Vs. DCIT 86 ITD 791 (Mum) had to deal with a case of payment of commission by an Indian company to a non resident in connection with Public Issue of Global Depository Receipts (GDR) for services rendered outside India. The question before the Tribunal was whether the commission so paid can be said to be "Fees for included services" i.e., Fees for Technical Services under Article 13(4)(c) of the Indo-UK DTAA which is the same as that of Article 12(4)(b) of the treaty between India and Singapore. After considering Article 12(4)(b) of the Indo-US DTAA (which are similar to Article 12(4) and 13(4) of the treaty between India and Singapore / UK (as the case may be)), and after referring to the Memorandum of understanding to the Indo-US DTAA, the Tribunal held as follows: " Whereas section 9(1)(vii) of the Act stops with the "rendering" of technical services, the DTAA goes further and qualifies such rendering of services with words to the effect that the services should also make available technical knowledge, experience, skills etc. to the person utilizing the services. These ....
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....y of the provisions of section 40(a)(i) of the Act for short deduction of tax at source also becomes academic in nature and no decision is hereby rendered thereon. The question as to whether the payment by the assessee to its subsidiary in UK and Singapore comprised partly of reimbursement of expenses or not also does not require any consideration, in view of the conclusion that the payment in question does not, even otherwise, attract the provisions of Sec.40(a)(i) of the Act. 12.5. Since the payment made by the assessee to its subsidiaries is not fees for technical services, then the same would be construed as only business income in the hands of the subsidiaries which would get taxed in India only in the event of existence of permanent establishment (PE) in India. We find that the Learned AO had categorically stated in more than one place in his order that the Singapore and UK subsidiaries do not have any PE in India. The retrospective amendment in this regard in Explanation 2 to section 195(1) of the Act with effect from 1.4.1962 was inserted by the Finance Act 2012. The obligation to deduct tax at source has to be complied only as per the law that it prevails on the date of....
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....in India to assume jurisdiction in India. In the instant case, it is proved beyond doubt that the subsidiaries do not have any income chargeable to tax in India and hence the decision rendered by the Hon'ble Apex Court in the case of GE India Technology Centre P Ltd vs CIT reported in 327 ITR 456 (SC) supports the case of the assessee. This decision has been rendered after duly considering the case law vehemently relied upon by the Learned AO on the decision of the Hon'ble Apex Court in the case of Transmission Corporation of A.P. Ltd vs CIT reported in 239 ITR 587 (SC) vide para 10 of the judgement at pages 465 & 466. We are also in complete agreement with the arguments advanced by the Learned AR that the various case laws relied upon by the Learned CITA in his order vide paras 7 to 12 were rendered prior to rendering of Hon'ble Supreme Court decision in GE India Technology case on 9.9.2010. Hence we don't deem it fit and appropriate to discuss those case laws for the purpose of adjudication of this issue. 12.7. In view of the aforesaid findings , we have no hesitation in directing the Learned AO to delete the disallowance made u/s 40(a)(i) of the Act in respect of payments mad....
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....anies was to acquire controlling stake for the purpose of business and not to earn any exempt income. It is submitted that no disallowance u/s 14A of the Act can be made when investment is in subsidiary companies since the purpose of investment is to gain controlling stake. In response to this, the Learned DR relied on the decision of Hon'ble Calcutta High Court in the case of Dhanuka & Sons reported in (2011) 12 taxmann.com 227 (Cal HC). 15. We have heard the rival submissions. We hold that the investments made in subsidiary companies are to be treated as strategic investments and hence the disallowance u/s 14A of the Act would not operate at all as the investment made thereon is not with an intention to earn any exempt income in the form of dividend but only for obtaining controlling interest in the said companies and to further the business interests of the assessee in the said company. Reliance in this regard is placed on the decision of the co-ordinate bench of Delhi Tribunal in the case of Interglobe Enterprises Ltd vs DCIT reported in (2014) 40 CCH 0022 DelTrib in ITA No. 1362 & 1032 /Del/ 2013 , ITA No. 1580/Del/2013 dated 4.4.2014 for Asst Years 2008-09 & 2009-10, where....
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....age of the numerator B in Rule 8D(2)Iii). This has to be calculated on the same lines as mentioned earlier in respect of Numerator B in the Rule 8D(2)(ii). Thus, not all investments become the subject matter of consideration when computing disallowance u/s 14A read with Rule 8D. The disallowance u/s 14A read with Rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. (A.Y.) (I.T.A. No.1331/Kol/2011 dated 29.7.2011." Following the above judicial precedents, we held that value of strategic investments should be excluded for the purpose of disallowance under Rule 8D)iii) facts, we direct the Assessing Officer to calculate the disallowance under Rule8D(iii) by excluding the value of strategic investments in the calculation of disallowance. As regards disallowance under Rule 8D(i) and 8D(ii) we have already held that no disallowance is warranted." We find that the Co-ordinate Bench of this Tribunal in the case of DCIT vs Selvel Advertising P Ltd reported in (2015) 58 taxmann.com 196 (Kolkata Trib.) ....