TaxTMI 
TaxTMI 
2017 (12) TMI 299
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....y same order of CIT(A). The only issue that arises for consideration in Revenue's appeals for AY 2002-03 & 2003-04 is as to whether the CIT(A) was justified in deleting an addition of Rs. 87,65,928 in AY 2002-03 & a sum of Rs. 1,65,07,400/- in AY 2003-04 on the ground that the aforesaid sums paid by Timken India Limited (TIL) a subsidiary of the Asssessee by way of reimbursement of certain expenses incurred out of India which were paid by the Assessee and which were reimbursed by TIL to the Assessee in India without any mark up. The only issue that arises for consideration in the Cross-Objections filed by the Assessee is as to whether the CIT(A) was justified in taxing a sum of Rs. 1,11,74,863 in AY 2002-03 and Rs. 73,19,280 (wrongly mentioned as Rs. 1,11,74,863 In CIT(A)'s order) in AY 2003-04 treating the same to be payment of "Fees for Technical Services" rendered or "Fees for Included Services" (FTS). In AY 2002-03, the Assessee has also raised issues challenging the validity of initiation of reassessment proceedings. The issues on merits will be taken up for consideration as it is common in AY 2002-03 & 2003 -04. 3. We shall first take up for consideration the issue raised in....
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.... marketing, sales and customer services, advertising services, human resources services, procurement services, benefits and payroll administration, finance and accounting services, tax services and legal services as well as any materials related to any of these functions which are necessary. Provider may provide these services through its own employees, who may provide the services either at recipient s facilities and place of business on a temporary or expatriate assignment, or by a shorter visit, or at Provider's facilities or place of business, or it may engage independent service providers or consultants who may also provide these services or materials. Custodial/Stewardship/Governance cost incurred by Provider shall not be invoiced to Recipient and shall remain expenses of Provider. In addition, Provider's costs related to research and development activities will not be invoiced to Recipient pursuant to this Agreement so long as Recipient compensates Provider for the use of any intangible asset produced by virtue of Provider's research and development; activities pursuant to a technology license." 5. TIL paid a sum of Rs. 1,11,74,863 in AY 2002-03 to the Assessee for various....
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.... Rs. 1,11,74,863 was payable by TIL to the Assessee during the previous year relevant to AY 2002-03. TIL had to deduct tax at source on the aforesaid payment. TIL was of the view that since there was no income chargeable to tax in the hands of the Assessee it was not under any obligation to deduct tax at source on the sums payable to the Assessee. It therefore moved the Authority for Advance Ruling(AAR) for a ruling under Sec.245Q of the Act as to whether it had any obligation to deduct tax at source. The claim of TIL before AAR was that the sum payable to the Assessee under the Agreement dated 2.8.2000 represents only recovery or reimbursement of costs or expenses actually incurred by the Assessee while rendering the said services. Therefore there is no element of profit or income for the Assessee in respect of such payments. The payments by TIL to the Assessee are not chargeable to tax under the Double Taxation Avoidance Agreement entered into by the Government of India with the Government of USA (hereinafter referred to as 'DTAA'). It was the further plea of TIL before AAR that even assuming that the payment by TIL to the Assessee constitutes "fees for technical services" within....
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....R dated 6.12.2004 is important because the revenue authorities have based their conclusions regarding taxability of the sum in question by relying on the ruling of the AAR. 9. In the return of income filed by the Assessee for AY 2002-03 in response to notice u/s.148 of the Act dated 27.5.2004, the Assessee declared the same income as was declared in the return of income originally filed. In the return of income, the Assessee specifically pointed out in Note No.1 & 2 to the computation of income (copy at page-17 of the paper book) that the sum of Rs. 1,11,74,863 received by it from TIL was not in the nature of income for the following reason: "Note : 1. The aforesaid payments do not constitute fees for included services within the meaning Article 12(4) of the Indo-US Double Taxation Avoidance Agreement (DTAA) since the company does not make available technical knowledge, experience, skill etc. It represents business profits, which is not taxable in India as such profits are not derived or attributable to a PE in India as defined in Article 5 read with Article 7 of the Indo-US Double Taxation Avoidance Agreement (DTAA) 2. The receipts representing profits and gains of business....
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....is regarded as income from business, cannot be brought to tax since under Article 5 read with Article 7 of DTAA, because business income can be brought to tax only if the Assessee has a Permanent Establishment (PE) in India. Since the Assessee did not have a PE in India, the sum in question cannot be taxed as "Business Income". 12. The CIT(A) did not deal with the above specific submissions of the Assessee but nevertheless confirmed the order of the AO by concluding that the receipt in question was FTS in the hands of the Assessee and therefore chargeable to tax. The following were the relevant observations of the CIT(A). "I have carefully considered the above. At the outset it must be mentioned that the amounts of Rs. 11174863/- and Rs. 7319280 for the A. Yrs.2002-03 and 2003-04 respectively stated to be reimbursement of cost of services is actually the consideration for various services rendered to the Timken India, like Management services ; Management Information services, System Development Communication Services, Engineering Services Tool design services, manufacturing services, capital planning and inventory managing services, procurement services, advertisement service....
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....rining to tax the sum of Rs. 1,11,74,683/- as FTS. 14. We have heard the rival submissions. The issue for consideration is as to whether the receipt by the assessee from TIL can be said to be in the nature of FTS. We have already set out the details of services rendered by the Assessee to TIL. We shall now examine the relevant clauses of the DTAA to see if the sum received by the Assessee a tax resident of USA can be brought to tax as FTS under the Treaty. The relevant articles in the treaty are as follows: ARTICLE 12: Royalties and fees for included services : (1) Royalties and fees for included services arising in a Contracting State and paid to a resident of the other contracting State may be taxed in that other state. (3) The term 'royalties' as used in this Articles means : (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematography films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning indu....
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.....T. Act, 1961 is as follows :- "Explanation 2 : For the purposes of this clause, 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provisions of services of technical or other personnel) but does not include consideration for nay construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'salaries'. Section 9(1)(vii) Explanation 2, 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, skill etc. to the person utilizing the services. The meaning of the expression make available were considered by the Tribunal in the case of Raymond Ltd. Vs. DCIT (2003) 80 TTJ (Mum) 120. The Tribunal after elaborate analysis of all the related aspects observed that :- "The words 'making available' in Article 13.4 refers to the stage subsequent to the 'making use of' stage. The qualifying words is 'which' the use o....
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....ng the technical services in question. The Tribunal also referred to with approval the extracts from protocol to the Indo-US tax treaty to the effect that 'generally speaking, technology will be considered made available, when the person acquiring the service is enabled to apply the technology. 18. We have already set out the nature of services to be rendered by the assessee to TIL. A perusal of the clauses of Agreement dated 2.8.2000 between the assessee and TIL clearly shows that they are purely in the nature of advisory services. Nothing is made available to TIL by the assessee. As to whether or not giving advisory services can be considered to be making available included services, example No. 7 given in the MOU between India and USA on the DTAA throws some more light on the understanding of the Government s of India and the USA on the subject. This example is as follows :- "Facts : the India vegetable oil manufacturing firm has mastered the science of producing cholesterol free oil and wishes to market this product worldwide. It hires an American Marketing consultancy firm to do computer simulation of the world market for such oil and to advise it on marketing strategies. A....
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....s not have any permanent establishment in India, the incomes so arising to them in India cannot be taxed under Article 7 as 'business profits' either. Therefore, we direct the Assessing Officer to delete the impugned additions. 21. The learned counsel for the Assessee brought to our notice that as against the ruling of the AAR in the case of TIL (supra), the Assessee filed a writ petition before the Hon'ble Calcutta High Court in WP 13932 (W) of 2005 in M/S Timken India Limited And Others v. Deputy Commissioner of Income Tax, Circle - 8, KOLKATA AND OTHERS. The Hon'ble Calcutta High Court by its judgement dated 28.3.2016 was pleased to hold that s. 44D r/w s. 115A of the Act, provide for a gross basis for taxation of such FTS in the hands of the Assessee, being a non-resident corporate assessee, at the rate of 20 per cent of such fees. A similar presumptive basis of taxation on gross basis is contained in Sec.44AC of the Act and the Hon'ble Supreme Court in the case of Union of India vs. A. Sanyasi Rao & Ors. 219 ITR 330 (SC) held that in case of presumptive basis of taxation an option for computation of profits under ss. 28 to 43C of the Act should be read in s. 44D. Similar opti....
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.... without having any element of income is not taxable in India. The sum so received/receivable by the Assessee from TIL for AY 2002-03 & 2003-04 was Rs. 87,65,928 and Rs. 73,19,280 respectively. These are referred to as "Charge Back Receipts" in the orders of the revenue authorities as well as the submissions made before the Tribunal. 23. As mentioned earlier these expenses are for the services that are provided by various third parties who rise invoice on the Assessee directly. The same are charged back to back by the Assessee to the service recipients including TIL. The break of the reimbursement and heads under which expenses were incurred for AY 2002-03 are given in Annexure-3 (Page-1 to 3) to this order. The kind of services that are availed by TIL inter alia, includes Legal, Inspection and survey, Global Cargo Insurance, Internet usage, courier, vehicle leasing and rental, usage of various application software, travelling etc. The Legal expense forms the major head under which most of the expenses are booked. The in-house attorneys provide services on Indian law, antitrust advice, affiliation and assistance risks, advice on intellectual property etc. The second main head is ....
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.... sum received for included services as reimbursement of expenses incurred and doing so was not permissible. Accordingly the AO brought to tax the sum of Rs. 87,65,928 as fees for included services. The break of the reimbursement and heads under which expenses were incurred for AY 2003-04 are given in Annexure-4 (Page-1 to 3 ) to this order. 26. Before CIT(A) the Assessee submitted that no services were rendered by the Assessee in consideration of the sum paid as reimbursement by TIL. The Assessee reiterated that the sum in question was merely recovery of actual expenditure incurred by the Assessee on behalf of TIL's employees. The Assessee was not the ultimate beneficiary of the sum in question. There is no basis on which the AO came to the conclusion that the sum in question was FTS in the hands of the Assessee. Without prejudice to the above submission, the Assessee pointed out that under Article 12(4)(b) of the DTAA it is only when technical or consultancy services rendered by the Assessee makes available technical knowledge, experience or skill that the sum in question can be taxed in the hands of the Assessee. Without prejudice to the above submissions, the Assessee submitted....
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....y not a tax resident of India and if TIL subsequently reimburses those expenses, then TIL would avoid tax deduction at source under the garb of reimbursements. According to him therefore the claim of the Assessee should not be accepted. In this regard he made reference to the following decisions CU Inspections 42 ITD 761 (ITAT), Cochin Refineries Vs. CIT 222 ITR 354 (Kerala). We are of the view that this argument of the learned DR cannot be accepted because, we are not deciding the case of TIL in the context of obligation to deduct tax at source. For the very same reason we are of the view that the reliance placed by the learned DR on ITAT Kolkata Bench decision in the case of Ershisanye Construction ITA No.756/Kol/2015 cannot be accepted. 30. The learned DR relied on the decision of the Chennai ITAT in the case of Van Ord ACZ Marine Limited Vs. ADIT ITA No.1733/Mds/2011 for AY 2003-04 in which similar claim of the Assessee that monies received were not accepted by the Tribunal for the reason that the Assessee did not establish that the services were rendered by the parent company to the subsidiary company on a cost to cost basis. This decision in our view is also not applicable b....
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....e, we are of the view that Gr.No.1 to 3 raised in CO No.32/Kol/10 for A.Y.2002-03 challenging the validity of initiation of reassessment proceedings, is academic and does not require any adjudication for the present. 33. In the result, ITA No. 397 & 398/Kol/2010 are dismissed while CO No.32/Kol/2010 is partly allowed, while CO No.31/Kol/2010 is allowed. 34. ITA No.2139/Kol/2013, ITA 1268/Kol/2014, ITA No.2140 & 2141/Kol/2013: (Appeals by Assessee for AY 2004-05 to 07-08): ITA No.2139 is an appeal by the Assessee against the order dated 22.4.2013 of CIT(A)-VI, Kolkata, relating to AY 2004-05. ITA No. 1268/Kol/14 is an appeal by the Assessee against the order dated 31.3.2014 of CIT(A)-VI, Kolkata, relating to AY 2005-06. ITA No.2140 & 2140/Kol/13 are appeals by Assessee against order dated 22.4.2013 and 25.4.2013 of CIT(A)-VI, Kolkata, relating to AY 2006-07 & 2007-08 respectively. The issues involved in all these appeals are identical to the issues which we have already dealt with in ITA No. 397 & 398/Kol/2010 and CO No.32/Kol/2010 & CO No.31/Kol/2010 for AY 2002-03 & 2003-04. 35. Ground No.1.0 to 1.5 in all the appeals by the Assessee are with regard to the action of the Revenu....
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....2 to 97 of the paper book filed for AY 2006-07. For AY 2007-08 Annexure-8 Annexure-8 gives the details of the Debit Notes and the dates. The detailed bill giving description of services is at page-86 to 98 of the paper book filed for AY 2007-08. 37. The case of the revenue for regarding the payments received from the Assessee from TIL as FTS is the same reason as was given in AY 2002-03 & 2003-04. We have perused the details and the nature of the expenses set out in Annexure 5 to 8 and the relevant bills in the paper book filed by the Assessee for AY 2004-05 to 2007-08. We find the nature of services is identical as the services rendered in AY 2002-03 and 2003-04. We have already dealt with this issue elaborately in the earlier paragraphs of this order and have concluded that the sums in question cannot be brought to tax as FTS nor as business income. The facts and circumstances in AY 2004-05 to 2007-08 are also identical as the facts and circumstances that prevailed in AY 2002-03 & 2003-04. The reasons given by us for regarding the sum in question as not taxable will equally apply for AY 2004-05 to 2007-08. For the reasons stated therein, we allow the relevant grounds of appea....
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....s claimed as reimbursement by the Assessee which were considered as FTS by the AO/CIT(A) in AY 2004-05 to 2007-08. 41. In AY 2004-05, the AO considered certain items payment towards reimbursements as falling within the ambit of services contemplated under the service agreement dated 2.8.2000. The AO therefore added the aforesaid sums to the total income of the Assessee treating the same as payment of FTS by TIL to the Assessee. The following were the relevant observations of the AO. "5.4. Details of the receipts under this category were called for. On analysis of the items, it was found that. the amounts received under this head included the following: Table -II Sl. No. Item Description Amount (Rs.) (i) Equipment Maintenance 3,15,453.34 (ii) Purchase of Software 5,54,288.94 (iii) Consultancy Charges 9,941.96 (iv) Salary payments 4,14,579.30 (v) Training Expenses 75,923.89 Total 1,37,0187.90 Items as noted above are such that they indicate that some services were rendered by Timken USA to Timken India within the holistic framework of the Service Agreements, The items shown above are also not in the nature of ' day to day expenses as claimed by the ....
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.... taxed in its hands is not correct. Though from the standpoint of appellant, the said receipts could only be reimbursement but the taxability in its hands needs to be checked based on taxability of the receipts in the hands of ultimate recipient and the appellant. 23. The Assessing Officer in the remand report has observed that the above payments made by Timken India Ltd. are not in the nature of day to day activities and the payments stand in same footing as home office allocation as taxable in India as fees for included services. The observations of the Assessing Officer that the chargeback payments stand in same footing as home office allocations and hence liable to tax as fees for technical services does not appear to be fully true & correct since the chargeback payment represents services provided by third party in which appellant acted as conduit and claimed as reimbursement by the appellant in some cases and in others it is the allocation of expenses on proportionate basis whereas home office expenses represented services given by the appellant directly under service agreement dated 02-08-2000 to TIL. 24. In the facts and circumstances the taxability in the hands of appe....
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....05 Items as noted above are such that they indicate that some services were rendered by Timken USA to Timken India within the holistic framework of the Service Agreements, The items shown above are also not in the nature of ' day to day expenses' as claimed by the Authorised Representative, Again, such receipts are covered within the ambit of 'Fee for Included Services' as per Article 12 of the DTAA between India and USA, From the standpoint of taxability, such receipts as listed in Table -II shown under the description 'Chargeback stands on the same footing as 'home office allocation .Therefore out of the total amount of R.s. 4708040/-, Rs. 5554005/- is held to be taxable as 'Included Services'." 46. On appeal by the Assessee, the CIT(A) confirmed the order of the AO. The relevant observations of the CIT(A) are contained in para 4.3 to 4.8 of his order. 47. We have perused the orders of the revenue authorities on this issue. The AO has not given any basis as to how and why the sum of Rs. 5,55,405 is considered as part of Home office expenses relatable to Agreement dated 2.8.2000. In this regard the AO has not given any opportunity of being heard to the Assessee and this ground ....
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....ails of the receipts under this category were called for. On analysis of the items, it was found that. the amounts received under this head included the following: Table -II Sl. No. Item Description Amount (Rs.) (i) Equipment Maintenance 95,985 (ii) Purchase of Software 1,52,349 (iii) Consultancy Charges 1953 (iv) Salary payments 70,28,407 (v) Training Expenses 2,70,131 Total 75,48,825 Items as noted above are such that they indicate that some services were rendered by Timken USA to Timken India within the holistic framework of the Service Agreements, The items shown above are also not in the nature of ' day to day expenses as claimed by the Authorised Representative, Again, such receipts are covered within the ambit of 'Fee for Included Services' as per Article 12 of the DTAA between India and USA, From the standpoint of taxability, such receipts as listed in Table -II shown under the description 'Chargeback stands on the same footing as 'home office allocation .Therefore out of the total amount of R.s. 16,046,673//- Rs. 75,48,825/- is held to be taxable as 'Included Services'." 50. On appeal by the Assessee, the CIT(A) confirmed the order of the....
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....imate recipient/service provider. The Assessing Officer has failed to consider the taxability of each item of receipts in India under the Income Tax Act or under the provisions of Treaty (DTAA) and has considered the specified receipts as taxable as fees for technical services generally. Hence, taxability of each of the items is to be examined specifically." 52. From the above observations of the CIT(A) it is clear that the Assessee is not the recipient of the sums in question and it was only a conduit for payment by TIL to a third party service provider. In such circumstances, we fail to see how it can be charged to tax in the hands of the Assessee. In this regard in Ground No.2.0 of the grounds of appeal the Assessee has specifically challenged the action of the CIT(A) in taxing the sum in question in the hands of the Assessee and that taxability of the said sum should be considered only in the hands of the service provider. We agree with the submission of the Assessee and are of the view that on this short ground the addition sustained by the CIT(A) should be deleted and the same is hereby deleted. In view of the aforesaid conclusion, we are of the view that there is no need to....
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.... be taxable as "Included Service." 54. On appeal by the Assessee, the CIT(A) confirmed the order of the AO partially to the extent of Rs. 1,23,90,515 and another sum of Rs. 5,14,705. The relevant observations of the CIT(A) are contained in para 16 to 79 of his order. 55. We have perused the orders of the revenue authorities on this issue. The AO has not given any basis as to how and why the sum of Rs. 2,42,68,627 is considered as part of Home office expenses relatable to Agreement dated 2.8.2000. In this regard the AO has not given any opportunity of being heard to the Assessee and this ground of appeal of the Assessee before CIT(A) is not found by the CIT(A) to be wrong or incorrect. The CIT(A) agrees that this item of expenses are not part of the payments under the service agreement dated 2.8.2000. The following observations of the CIT(A) are relevant in this regard: "17. The appellant has submitted its submissions supporting non-taxability of the said amounts in the remand proceedings as well as in the submissions filed during appellate proceedings. I have considered the details submissions made by the appellant and the observations in the remand report. The appellant conten....