TaxTMI 
TaxTMI 
2019 (8) TMI 1264
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....(3) read with section 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act') on the following grounds, each of which are without prejudice to one another: Ground 1: General 1. On the facts and in the circumstances of the case and in law, the Learned AO/ Dispute Resolution Panel - I New Delhi (hereinafter referred to as the 'DRP') erred in assessing the total income at Rs. 2,21,02,821 as against income of Rs. 32,48,463 computed and returned by the Appellant; Ground 2: Taxing of reimbursements of Rs. 1,88,54,358 as Fees for Technical /included service ('FTS/FIS) and Royalty under the Act and Double Taxation Avoidance Agreement between India and USA ('DTAA') 2. On the facts and in the circumstances of the case and in law, the Learned AO/ DRP erred in holding that the cost reimbursements of Rs. 1,88,54,358 received by the Appellant towards providing support services to its group affiliates are taxable as FTS both under section 9(1)(vii) of the Act as well as Article 12(4) of the DTAA; 3. On the facts and in the circumstances of the case and in law, the Learned AO erred in holding that the Appellant has made available tec....
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....read with section 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act') on the following grounds, each of which are without prejudice to one another: Ground 1: General 1. On the facts and in the circumstances of the case and in law, the Learned AO/ Dispute Resolution Panel - I, New Delhi (hereinafter referred to as the 'DRP') erred in assessing the total income at Rs. 10,17,16,750 as against an income of INR 5,18,235 computed and returned by the Appellant; Ground 2: Taxing of reimbursements of Rs. 9,82,61,852 as Fees for Technical I included service ('FTS/FIS) and Royalty under the Act and Double Taxation Avoidance Agreement between India and USA ('DTAA') 2. On the facts and in the circumstances of the case and in law, the Learned AO/ DRP erred in holding that the cost reimbursements of Rs. 9,82,61,852 received by the Appellant towards providing support services to its group affiliates are taxable as FTS both under section 9(1 )(vii) of the Act as well as Article 12(4) of the DTAA; 3. On the facts and in the circumstances of the case and in law, the Learned AO erred in holding that the Appellant has made available t....
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.... the Heinz Group. The assessee company stated to have entered into a global agreement dated 3rd May 2007 with its group entities including Heinz India Pvt. Ltd. As per the agreement, the entire costs incurred by the assessee for undertaking the support activities for affiliates are allocated/shared between the affiliates based on an allocation key. No mark up is charged by the assessee on the cost allocated of its affiliates. Heinz India, a private limited company, incorporated under the Indian Companies Act, 1956 is an indirect and independent subsidiary of the assessee. Pursuant to the Agreement entered into with Heinz India, the assessee allocated cost of $ 367,603 equivalent to Rs. 18,854,358/- without any mark up to Heinz India and received a reimbursement towards the same during the subject year. Based on the facts and circumstances of the case, the Assessing Officer taxed receipts of Rs. 18,854,358/- received by the Assessee under the aforesaid agreement as FTS. The assessee Company, resident of USA filed its return of income on 30/09/2009 declaring a total income at NIL. The case was selected for scrutiny and notice u/s 143(2) was issued. In response to the notice Authorize....
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....r each cost centre an appropriate allocation factor is identified. The above costs are allocated by the assessee to its Affiliates without charging any mark up/profit element. The cost contribution/payments made by Heinz India as a participant to the Agreement merely represents a reimbursement of the costs incurred by the assessee towards the above activities. In substance and in form the payment cannot be considered as income earn by the assessee. The same can be seen from the agreement itself that there is a zero percent mark up. Expenses incurred by the assessee and reimbursement by Heinz India are mere recoupment of expenses and would not constitute income of the assessee. The assessee merely allocates the costs and does not charge any mark up. In view of the above, the Ld. AR submitted that reimbursement of expenses received from Heinz India is not taxable in the hands of the assessee in India under the provisions of the Act. The Ld. AR further submitted that the addition is liable to be deleted on this ground alone as there are various judgments on this issue where it is held that when there is only recoupment of expenses, there is no element of income and held the same ca....
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....de available to the person charging services. Similarly the use of product which embedded technology is not part to be considered to make the technology available further, even if the services are considered to be managerial in nature, the same would not be taxable in India US Tax Treaty because under the US Tax Treaty, the Treatment Managerial Services is not included under the definition of Fees of Included Services. In view of the above, by a draft Fee for Technical Knowledge etc is made available to a purchaser any fees generated would not be FIS under Article 12(4) of the DTAA. Services rendered may not make available any technical knowledge skill knowhow or service processed if the service provider is able to show that; (i) such services do not enable the service recipient to apply the technology if any contained therein under independent manner in future. (ii) Such services also do not contemplate development or transfer of a technical plant or technical design. (iii) The payment to the service provider is for service simplicter and not for making available any technology knowledge, experience etc. Accordingly, the service recipients should be a....
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....e submissions and the relevant case laws in favour of the assessee, the Ld. AR submitted that the said services cannot be held to be FIS and hence are not taxable in India. 8. The Ld. AR submitted that the receipts of Rs. 1,88,54,358/- from Heinz India do not fall within the ambit of ancillary and subsidiary clause. The amount received is not ancillary and subsidiary to the payment of royalty under TTLA. At the outset itself, the Ld. AR submitted that the parties of both the agreements, TTLA and SA are entirely different. While one aims to provide license on which royalty is being earned, the aim of the assessee is to ensure uniformity, consistency and international standards across all group companies, for the purpose of which these services and activities have been identified and support services are accordingly being provide which are of the nature of General Management, Human Resources, Finance, Data Processed, Quality Control, Purchase, Business Development, Law and other related areas. Moreover, the service charges under the SA are not paid only for sales covered under TTLA. License is only for specified products and Royalty under TTLA is paid only for Licensed Products. S....
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....eral Management, Human Resources, Finance, Data Processing, Quality Control, purchasing, business development, law and other related areas which nowhere fall within the ambit of royalty has been defined under Article 12. The Ld. AR relied upon the decision of Marck Bio Sciences Ltd. (2017) 164 ITD 205 Ahmedabad Tribunal and Vanoord Dredging & Marine Contractors BV ITA 7589/Mum/2012, Mumbai ITAT. The Ld. AR submitted that the decisions relied upon by the Assessing Officer are not applicable in the present case as the same are distinguishing in the factual aspect with the present assessee's case. 11. The Ld. DR submitted that the arguments of the Ld. AR are focused entirely on coverage of the fees paid under Paragraph 4(b) of Article 12 which is narrower than the category described in Paragraph 4 (A) because which excludes any service that does not make technology available to the present acquiring the service. The question is whether the assessee is covered under Paragraph 4(A) of Article 12. The Ld. DR submitted that the DRP held that the services provided are clearly, ancillary and subsidiary to the application or enjoyment of the right, property or information for which royalt....
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.... from the fact that it is the most elaborate and exhaustive of the above three control systems. The entire agreement provides for quality claim control measures and includes inspection of facilities, equipment and materials used for preparing, processing, packaging, advertising, selling and distributing the products manufactured. The other clauses of the agreement identify the areas where the license need to be confirmed with the quality control programmes of the assessee. These are (i) Personnel management (ii) Resources Management including internal quality audit (iii) Documentation data control and quality system management (iv) Purchase Management (v) Production process control (vi) Handling, storage, packaging, preservation and delivery (vii) Maintenance of quality control records (viii) Training and (viii) Auditing. The Ld. DR further submitted that as against above support services as defined under Article 1.8 of SA include (but not limited to) (1) General Management (2) Human Resources (3) Finance (4) Data Processing (5) Quality Control ....
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.... services is the same person as the person receiving the royalties described in Paragraph 3 of the agreement and the answer is yes according to the Ld. DR. Thus, the Ld. DR submitted that all the test stated under the memorandum are specified and the service fee can be considered ancillary and subsidiary to the application or enjoyment of rights for which royalty was paid and hence covered under Paragraph 4(a) of Article 12. The Ld. DR further submitted that the assessment order and the DRP directions/order of the CIT(A) are emphatically relied upon by the Revenue Authorities. The Ld. DR submitted that the undisputed facts before us are that: (i) Characterization of the services as technical services and it is not at all disputed. (ii) Services are ancillary and subsidiary to the application or enjoyment of the right, property or information for which royalty is paid. The Ld. DR further submitted that the assessee conveniently ignored and overlooked the applicability of the provisions of Article 12(4) (a) to it. In its letter dated 2/12/2011 to the Assessing Officer in Para 16, the assessee itself had quoted the said provision. (iii) The services provided....
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....icle 9 (An associated enterprises or if person providing the service is doing so in connection with and over all arrangements which includes the payer and recipients of the royalties. 12. The Ld. DR further submitted that the Facilitation Test as envisaged in the Memorandum, when applied to the obligations and services as enumerated in the above table leaves no uncertainty. Quality Control is central to the TTLA. Its importance can be seen from the fact that it is the most elaborate and exhaustive of the above three control systems. In-fact Exhibit-E is the most elaborate exhibit of the entire agreement providing for a variety of quality control measures including "inspection of facilities, equipment and materials used for preparing, processing, packaging, advertising, selling and distributing the products manufactured(Cl-4.2) Exhibit-E identifies the areas where the licensee needs to confirm with the quality control parameters of the appellant. The licensee has been entrusted with the obligation of maintaining quality and any shortcomings in these areas will seriously and adversely affect the effective application or enjoyment of the rights granted to it under TTLA. The assesse....
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....us, the facilitation test is satisfied. The second test as per the Memorandum is whether such services are customarily provided in the ordinary course of business arrangements involving royalties described in paragraph 3. It can't be said that services as envisaged in SA are customarily provided in the ordinary course of business arrangements involving royalties. Thus, the answer to this in the present case is in negative since a separate agreement was necessitated for the provision of these services. 13. The Ld. DR further submitted that the assessee has put a lot of emphasize on the zero mark up on the services rendered and argued that these being pure reimbursement does not have any element of profit in it and hence cannot be brought under taxation. The Ld. DR submitted that the contentions of the Ld. AR cannot be accepted as no evidence in support of the claim was placed by the assessee before the Revenue Authorities. There is no embedded profit element furnished before the Revenue by the assessee. As per the provisions in the TTLA, there is a provision and for independent reimbursement also. The zero marker as provided in Article 5.2 (D) of the SA has to be appreciated with....
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....he DRP be sustained and the assessee's appeal be dismissed. 14. In rejoinder, the Ld. AR submitted that that the services rendered under the Service Agreement (SA) dated 3 May 2007 entered between Heinz US and its various other associated companies including Heinz India is ancillary and subsidiary to the Technology Transfer and License Agreement (TTLA) entered between Heinz US and Heinz India is misplaced in view of the following reasons: (i) Heinz US is the ultimate parent of Heinz India whereas Heinz Italia is the holding company of Heinz India. The SA cannot be ancillary and subsidiary to the TTLA entered with Heinz US as the sales of the licensed products manufactured by Heinz India under the TTLA with Heinz US is only approximately 1 to 3% of the total sales of all the products manufactured/ traded by Heinz India. (ii) The services rendered under the SA are for the benefit of all the products (not only restricted to TTLA) manufactured by Heinz India. (iii) During the course of hearing on 10 December 2018. As could be perused from the submission of DR filed on 16 January 2019, the above fact as stated in point 2 above is undisputed. Amount of royal....
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.... is no overlap between the TTLA and SA Agreement and, therefore, SA in India manner assist in the enjoyment of the TTLA. Services under SA do not cover any product specific technology assistance or products specific quality control. The very fact that SA is for the business as a whole and not restricted to the license products established that SA is in the ordinary course of business. The total sale of Heinz India during Assessment Year 2009-10 is Rs. 748.20 crores out of which sales from tomato ketch up is only Rs. 13.43 crores. Accordingly, the sales from tomato ketch up constitutes only 1-3% of total sales made by Heinz India. The service charges paid are approximately six times the amount of royalty paid as the services charges received are Rs. 1.88 crores and the royalty received is Rs. 32.48 lakhs. 16. The Ld. AR further submitted that 5 factors (though not conclusive) are outlined in the Memorandum of Understanding in the India-US treaty to determine whether service fee is ancillary and subsidiary to application or enjoyment of right, property or information for which royalty payment is received. The services under SA are not linked to TTLA since, the TTLA related solely ....
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....ng, finance and information systems. Costs incurred by the Assessee in terms of time and effort of its employees for carrying out the activities are shared amongst the various affiliates on a uniform and consistent basis using appropriate allocation factor in the manner specified in SA. Clause 5.2 of SA specifically deals with allocation of costs and provides for the mechanism for the same an accounting method consistent with US Generally Accepted Accounting Principles and Assessee's accounting policies would be used to identify all direct and indirect costs associated with the activities carried out by the Assessee for each affiliate for each cost centre an appropriate allocation factor is identified. The above costs are allocated by the Assessee to its Affiliates without charging any mark up/ profit element. The cost contribution/ payments made by Heinz India as a participant to SA merely represents a reimbursement of the costs incurred by the Assessee towards the above activities. In substance and in form the payment cannot be considered as income earned by the Assessee. As can be seen from the agreement itself, there is 0% markup. The definition of Support Services in the SA me....
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....that for any payment to qualify as FIS under the DTAA, the following criteria are essential. The services need to be of technical or consultancy nature; and the services need to make available technical knowledge, experience, skill, knowhow or processes, or consist of the development and transfer of a technical plan or technical design. These are essentials a 'technical or consultancy service' is taxable only if the services 'make available' technical knowledge, experience, skill, know-how, or processes, or consist of development and transfer of a technical plan or technical design. The technology is considered to be '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. Similarly, the use of a product, which embodies technology, is not per se considered to make the technology available. Further, even if the services are considered to be managerial in nature the same would not be taxable under India US tax treaty because under ....
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....AR • Invensys Systems Inc [2009] 183 Taxman 81 - AAR • KPMG Ltd. [2013] 142 ITD 323 (Mumbai- Trib • Renaissance Services BV. [2018] 94 taxmann.com 465 - Mumbai ITAT • Veeda Clinic Research (P) Ltd. [2013] 144 ITD 297 (Ahmedabad - Trib • Reliance General Insurance Co. Ltd. [2018] 97 taxmann.com 350-Mumbai ITAT Further, the case laws specific on the proposition that managerial services are not covered under FIS article in India-US treaty are as follows:- • Raymond Ltd. [2003] 86 ITD 791-Mumbai ITAT • Koninklijke Philips Electronics N.V- [2018] 99 taxmann.com 23 - Kolkatta ITAT • Steria (India ) Ltd. [2016] 386 ITR 390 - Delhi- HC • Cummins Ltd. [2016] 381 ITR 44-AAR HC • Measurement Technology Ltd. [2015] 376 ITR 461 - AAR • Invensys Systems Inc [2009] 183 Taxman 81 - AAR Further, the case laws specific on the proposition that since support services are rendered year-on-year, they do not satisfy make available test and hence is not taxable as FIS: • ExxonMobil Company India (P) Ltd. (2018) 92 Taxmann.com 5- Mumbai ITAT ....
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.... (Heinze India) for the provision of support activities. The underlying objective of the agreement is to achieve consistency of approach and economies of scale for the group entities. The activities carried out by the Heinz, USA under the agreement are broadly in the area of supply chain Human Resources, Strategic Planning and marketing, Finance and information systems from the DTAA as well as the agreements entered into by the assessee company as well as Heinz, India Novel Define but services are coming while claiming the reimbursement. The approach of the assessee is that the services should not be considered as taxable contending that they are merely reimbursements and reimbursement cannot be taxed. But to come under the category of reimbursement of certain receipts of service, the same has to fulfill certain criteria for which the services have to be provided by the assessee to its affiliated companies. The assessing officer has observed that the services provided by the assessee are in the area of supply chain, human resources, strategic planning and marketing, finance and information systems under the agreement which is an admitted fact. Thus, services have been utilized by t....