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TaxTMI 
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2020 (3) TMI 470
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....rvices rendered by Vice President Manufacturing. 2. The learned CIT(Appeals) erred in fact and in law in not considering the argument of the Appellant that the AO had not provided reasonable opportunity to the Appellant to submit the documentary evidence and to present the facts of the case. 3. The learned CIT(Appeals) erred in fact and in law in confirming the action of the AO in computing tax by applying the provision of Section 44D of the Act in complete disregard to the facts of the Appellant's case and also the provisions of the Double Tax Avoidance Agreement with USA *"the DTAA"+. 4. The learned CIT(Appeals) also erred in fact and in law in completely ignoring the provisions of Article 12 Para 6 of the DTAA in levying tax as "Fees for Technical Services", while holding that the Appellant has permanent establishment in India and the said services are attributable to the said permanent establishment. Adjustment under Section 92 of the Act : 5. The learned CIT(Appeals) erred in confirming the action of the AO in invoking the provisions of Section 92 of the Act and adding 10% mark up on the invoices billed by the appellant to GMIL. 6. The learned CIT(Appeals) erred in....
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....(AAR). V. it was the submission of The AR that AAR vide its order dated August 19, 1997 specifically negated that the amounts constitute fee for technical services ('FTS') but held that GMOC (referred to as XYZ in the ruling) constitutes Permanent Establishment ('PE') in India and any amount received by it will be taxable as business profits under Article 7 of the India USA Tax Treaty ('DTAA') VI. It was the contention of the AR that out of expatriates mentioned above, during the subject year only following two personnel were assigned to GMIL under the provisions of MPA. President and Managing Director - Mr. Aditya Vij; and Vice President manufacturing - Mr. Satyasree Veerpaneni VII. In relation to above, the Appellant raised invoices for US$ 284,288.28 on GMIL. In view of the ruling delivered by AAR, such amounts were disclosed as business receipts in the Return of Income (Rol). Further, given that these amounts as invoiced to GMIL were on "cost as incurred basis", therefore in absence of any profit element, no business income was computed in the ROI ( return of Income ) filed. VIII. Accordingly, the Appellant filed it ROI for the subject year 2004-05....
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....ineering - will be responsible for overall management of GMI facilities to manufacture and assemble products of GMI according to required standards and for production of such products according to those standards." 7. It was submitted that the services rendered by above persons deputed to India are in the nature of managerial services and not in the nature of technical or consultancy services. It was further contended by appellant that as per article 12 of the India-US double tax avoidance agreement, the services provided by employees deputed to India are not in the nature of "fees for included services". From the definition of "fees for included services", it will be observed that fees for included services" means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. 8. The appellant further contended that the services provided by Mr. Aditya Vij and Mr. Satya Veerapan....
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....s services were made available to the Indian subsidiary. His technical experience was utilized by the Indian subsidiary in its day today production activities. Hence, the payment will come under the purview of fees for included services." XII. Feeling aggrieved by the order passed by the CIT(A), the assessee is in appeal on the grounds mentioned hereinabove. In fact , grounds raised by the assessee in all the assessment years are common. Therefore, we are taking the appeal No. 1282/M/09 as the lead case with the consent of both the parties and deciding the appeals by passing a composite and common order in all the appeals mentioned in the cause title. SUBMISSIONS OF THE AR XIII. Firstly, learned AR submitted that once a finding has been given by the Authority for Advance Ruling (AAR) in respect of the services rendered by the President, Managing Director, Vice President of Marketing, holding that the services rendered by these persons would not fall within the definition of fees for included services (FIS in short) then, the lower authorities and the Tribunal are precluded from taking a contrary view and decision of the AAR is binding on the tribunal. In support of the above sai....
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....ent. In the circumstances, the authority has no option but to conclude that the services of the nominees of "XYZ" are "managerial" and not "technical or consultancy" services within the meaning of Article 12. The authority, however, leaves it open to the concerned authorities, in appropriate proceedings, to examine the factual position and take appropriate action if they find that the factual situation is otherwise. 30.In the result, the Authority finds, on the facts available to it, that the Services of the five nominees of `XYZ' are not covered by the expression 'included services' in art. 12. The consideration received by `XYZ' for these serv ices is therefore, assessable not under art. 12 but as business profits under art. 7 r/w 5(2)(1) of the DTAA. There was some discussion before the authority as to the manner in which the business profits attributable to the PE(i.e the services) should be computed and whether in computing such profit and deduction of expenses incurred to earn them is permissible or not. The Ld. counsel stated that he was not praying for a ruling on that aspect and that he would be satisfied with a ruling on the first ques tion set out in th....
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....purpose of invoking the FIS and in the absence of making available the technology, FIS cannot be charged/assumed. Learned AR in support of the above contention had filed the written submissions to the following effect : " 15.4. Without prejudice to the above, the Appellant wish to submit that the amounts charged by GMOC under the MPA were not in nature of FTS either under the Act or the DTAA. In support, it is reiterated that under the MPA, the Appellant had only assigned personnel to GMIL and not rendered any services per se. In support, attention is invited to the clause 8 of the MPA. Relevant extract is reproduced below for your Honor's ease of reference. (Refer para 8 on page 6 of Convenience Set) "No guaranty or warranty of any nature is expressly or impliedly extended by GMOC with respect to the provision of services, personnel, information, or other assistance under this Agreement. Further, GMOC will not be liable to GMT or anyone else for direct, consequential, or other damages of any kind or nature arising out of or alleged to result from the furnishing of such services, personnel, information, or other assistance." Basis the above, it cannot be alleged that the ....
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.... the same were offered to tax by such personnel as Salary income in their India tax return. 15.9. Thus, exception (b) above is applicable in instant case. In support, reference is invited to following judicial precedents. * Morgan Stanley Asia (Singapore) Pte (ITA No. 8595/Mum/2010) (Mumbai-Tribunal). The relevant extract of the judgment is reproduced below for your reference. (Refer page 45 of Convenience Set) "10 ...It is a fact that there is contractual agreement between MSAS and assessee, which clearly provides that salary is paid b_y assessee on behalf of MSAS and the same is recharged by assessee to MSAS. According to our view, the amount received/receivable by assessee is in the nature of reimbursement of cost incurred by assessee on behalf of MSAS because the same cannot be brought within the definition of FTS as defined in explanation to section 9(1)(vii) of the Act provided in exception. The exception provided clearly stated that the income of the recipient chargeable under the head salary' in view of the expenses will not be considered as falling under the definition of FTS. The payment by MSAS being a pure reimbursement of salary cost incurred by the assesse....
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.... as per clause 2 of the MPA, the executive personnel to be provided were to render services connection with development of general management, finance, purchasing, sales, service, marketing and assembly/ manufacturing activities. Such services were 'managerial' in nature only. This fact has been accepted by the AAR also in its ruling rendered in case of Appellant itself. The relevant extract of the AAR is again reproduced hereunder. (Refer para 29 on page 54 ofpaper book). 'The Agreement sets out the duties of these employees which seem to cover (except probably in one case, viz., the Vice President of Manufacturing Engineering) only duties of management Of various kinds - overall, sales, finances and purchases. It is true that four out of five of the deputationists are engineers. But these are days in which even engineers have to qualified, in management skills. The Authority has no information or material on record to indicate that the employees were rendering services of a nature falling beyond the terms of the agreement. In the circumstances, the Authority has no option but to conclude that the services of the nominees of `XYZ' are 'managerial' and not....
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....year (FY) 2003-04 to FY 2009-10. It is thus submitted that the Appellant constituted a PE in India under provisions of Article 5. 15.17. Further, on a combined reading of Article 5 and 7 of the DTAA it is evident that taxable income of the taxpayer having a PE in India is to be computed on net basis as per provisions of Article 7 of the DTAA. 15.18. The position that Appellant constitutes a PE in India and that the consequent profits are taxable under Article 7 of the DTAA has been held in the AAR ruling passed in case of Appellant itself. As stated above, this position has also been accepted in past year assessment order(s) (Reference is invited to pages 61 to 72 of paper book). Relevant extract of assessment order for AY 2001-02 is also reproduced hereunder for ease of Your Honour's reference. "Since the issue regarding the existence of Permanent Establishment has already been decided by the Hon'ble Authority for Advance Ruling (242 ITR 208), the income of the assesse from the activities carried on in India as per the management provision agreement is taxable as business income." 15.19. Without prejudice to the above and even in case it is assumed (without admissi....
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....dered by jurisdictional Mumbai ITAT in the case of Morgan Stanley International Incorporated (supra). The relevant extract of the judgement is reproduced hereunder. (Refer para 8 on page 66-67 of Convenience Set) "Thus, in our conclusion, the payment made by the Indian entity to the assessee on account of reimbursement of salary cost of the seconded employees will have to be seen and examined under Article 7 only, that is, while computing the profits under Article 7, payment received by the assessee is to be treated as revenue receipt and any cost incurred has to be allowed as deduction because salary is a cost to the assessee which is to be allowed. Accordingly, the AO is directed to compute the payment strictly under terms of Article 7 and not under Article 12 of the DTAA." 15.23. In view of the above and given that the amounts charged by GMOC were on 'cost to cost basis', therefore no income is taxable in the hands of GMOC. In support, reference is invited to the following: a. As per the extant regulations, the MPA was approved by Ministry of Industry ('MO!'). The approval letter issued by such ministry categorically acknowledged that the amounts to be char....
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....ide any opportunity in this respect to the Appellant. The Appellant came to know about such adjustment on receipt of assessment order. Further your Honour's would also appreciate that the Ld. AO did not refer the matter to TPO for computation of ALP in respect of transactions undertaken under the MPA but imputed a mark-up of 10% on reasonable basis (without giving any basis). 16.4. The Appellant would like to reiterate that no service per se were provided by GMOC under MPA except for the assignment of the personnel. In view of the same, the cost to cost reimbursements did not call for any mark-up in the instant case. 16.5. Moreover, as said above in para 11.2, the Ld. AO is bound to follow the principle of consistency while passing its order. In this context, the Appellant would again like to bring your Honour's attention on the fact that the Appellant has been filing its Rol in India since financial year 1995-96 on similar facts and such returns have been a subject matter of assessment by tax authorities and cost to cost nature of aforesaid receipts has been duly accepted all throughout (refer page 61 to 72 of paper book wherein past assessment orders have been attache....
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....roduced herewith for your reference: "234B. (1) Subject to the other provisions of this section, where, in any financial year, an assessee who is liable to pay advance tax under section 208 has failed to pay such tax or,where the advance tax paid by such assessee under the provisions of section 210 is less than ninety per cent of the assessed tax, the assessee shall be liable to pay simple interest at the rate of one per cent for every month or part of a month comprised in the period from the 1st day of April next following such financial year to the date of determination of total income under subsection (1) of section 143 and where a regular assessment is made, to the date of such regular assessment, on an amount equal to the assessed tax or, as the case may be, on the amount by which the advance tax paid as aforesaid falls short of the assessed tax". 18.3. As evident from above, the provisions of section 234B are attracted in the following two circumstances: Where in any financial year, taxpayer who is liable to pay advance tax under section 208 has failed to pay such tax; and * Where the advance tax paid by such taxpayer under the provisions of section 210 is less than 9....
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....hiron Bearing Gmbh & Co. (UK) Ltd [2013] 29 taxmann.com 199 (Born HC) L * Sedco Forex International Drilling [2004] 134 taxman 109 (Uttaranchal HC) 18.9. It is further submitted that Finance Act, 2012 has brought an amendment in section 209 of the Act by providing that the taxpayer would be liable for payment of advance tax in respect of the income which has been received without deduction of tax at source. However, this amendment is prospective and is effective only from April 1, 2012. Accordingly, the said amendment is also not applicable to the subject year(s). SUBMISSIONS OF REVENUE 2. Per contra, the learned DR relied upon the order passed by the Assessing Officer and also the Tribunal and our attention was drawn to the Memorandum of Management Provision Agreement wherein the functions of the President, Managing Director, Vice President of Manufacturing Engineering, Vice President of Marketing, Vice President of Supplier Development and Material Management were given. For the sake of convenience, we are reproducing hereinbelow the functions of the above stated authorities at pages 84-85, which are to the following effect :- i) President and Managing Director - will be ....
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...." for these services is, therefore, assessable not under article 12 but as business profits under article 7 read with article 5(2)(I) of the DTAA". After that the Hon'ble AAR again states that "that the Authority would, however, like to reiterate that, in case the authorities find that, in fact, the five nominees of "XYZ", or any of them, are found, in appropriate proceedings, to be rendering "technical or consultancy" services, they will be at liberty to treat the case as one governed by article 12 and invoke the provisions of article 12(1) and (2) to charge them to income tax." 2.2 Further, the learned DR drew our attention to the order of CIT(A) wherein at para 6 to 8, the CIT(A) has dealt with the issue of characteristics of the services rendered by these employees. It was submitted that on appreciation of the documents and evidences available on record, the lower authorities had come to the conclusion that the services rendered by these persons were in the nature of technical services and, therefore, the lower authorities have rightly taxed them as 'FIS'. We are reproducing herein below para 6 to 9 of the order passed by the CIT(A), which is to the following effect :- ....
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....the services to apply the same. But in the case of appellant company, no expertise or knowhow has been 'made available' to the Indian company by reason of rendering the said services. In this connection the appellant relied on the following decisions : 1) Raymond Ltd. v. Deputy Commissioner of Income Tax (86-ITD-791) 2) Intertek Testing Services India Pvt. Ltd. (AAR 760 of 2007) 3) ISRO Satellite Centre [ISAC] (AAR 765 of 2007) 4) De Beers India Minerals Pvt. Ltd. (297 ITR 176) 5) M/s. Cushman & Wakefield (S) Pte. Ltd. (218 CTR 238) 8.1 The appellant further submitted that GMIL has a separate "Technical Information & Assistance Agreement" with M/s. Adam Opel AG, a company incorporated in Germany. As per the said agreement, M/s. Adam Opel AG is to provide technology license and technical assistance, technical personnel and training to the employees of GMIL to produce vehicles at GMIL's production facilities in India and distribute those vehicles in the Territory, as per the engineering standards and designs established thereof by Adam Opel AG. 8.2 As per the aforesaid agreement, Adam Opel AG is to receive inter alia royalty and fees for services rendered from GMIL. 9....
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....cable to the facts of the present case. 2.5. On other grounds the Ld DR relied upon the order passed by the lower authorities. 3. We have heard the rival contentions of the parties and perused the materials on record. The Ld.CIT(A) had granted the partial relief to the assessee as the Ld. CIT(A) after examining the facts and circumstances of the case had came to the conclusion that the President and Managing director of the assessee was only rendering the managerial services, hence was not liable to be taxed under the provisions of DTAA of Indo US treaty, as the services rendered by said managing director were in the nature of managerial and not technical or consultancy services. Infact there is no provision for charging the assessee on account of rendering the managerial services as it did not figure in the Indo-US DTAA under Article 12. The revenue is not in appeal against the above finding of fact . 4. The assessee is in appeal in respect of the finding recorded by CIT(A) in respect to VP (Manufacturing) holding that the VP (manufacturing) was rendering the services which were in the nature of technical or consultancy services within the meaning of Article 12 of Indo-Us tre....
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....by `XYZ' for these services is therefore, assessable not under art. 12 but as business profits under art. 7 r/w 5(2)(1) of the DTAA. There was some discussion before the authority as to the manner in which the business profits attributable to the PE(i.e the services) should be computed and whether in computing such profit and deduction of expenses incurred to earn them is permissible or not. The Ld. counsel stated that he was not praying for a ruling on that aspect and that he would be satisfied with a ruling on the first question set out in the application . The authority therefore refrain from going into the question of expressing any view thereon." ( emphasis supplied by us by underlining) 8. From the perusal of the above said paragraphs, it is abundantly clear that the ruling of AAR was not an absolute and unqualified ruling. The ruling clearly gave the mandate to the authorities to examine the factual situation in appropriate proceedings ,as AAR clearly mentioned in the order that it did not have information or material to show/ examine what services were actually rendered by the employees. The AAR ruling on the services rendered by the VP (manufacturing) , in our unders....
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....hnology/ experience for the assembly of product and knowing the standards of company , for setting the bench mark and implementing the standards of assessee in India. 12. The experience of an expert lies in the mind of an expert and if an expert having knowledge and expertise is transferred from one tax jurisdiction to the another tax jurisdiction, then it cannot be said that only the employees were per se transferred and not the technology . In our understanding, the technology /expertise lies in the technical mind of an employee/s not in the company and if key employee/s having the requisite knowledge, experience and expertise of technology are transferred from one tax jurisdiction to the another tax jurisdiction, then it is transfer of technology and not transfer of employees. In other words, technology is made available by one entity situated in one tax jurisdiction to another entity situated in another tax Jurisdiction, through the transfer on deputation of its experienced/ expert technical employees. This can also be understood by example , if a pharmaceutical company XYZ which is into manufacturing of drugs and is having scientist AA who had experience to manufacture and de....
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....n the revenue or on the tribunal. 14. Ld.AR for the assessee had further made the submission that there was no make available of the technology in India by the assessee and therefore the amount remitted by the assessee towards the salary/ reimbursement is not required to be treated under FIS. The Ld.AR had also drawn our attention to memorandum of understanding concerning the fees for included services dated May 15, 1989 and submitted as per paragraph 4 b, the services rendered by the vice president manufacturing should not be considered as fees for included services/ fees for technical services. Our attention was drawn to the decision of Delhi tribunal , in the matter of Rolls Royce , 42 SOT 264 ( supra) paragraph 44-45 to the following effect: "40. When we look at Article 7.1, then it is manifest that as the assessee carries on business in India through a permanent establishment situated in India, the "profits" of the assessee may be taxed in India "but only so much of them as is directly or indirectly attributable to that permanent establishment." There is no dispute to the legal proposition that Article 7 speaks of profits and not gross receipts. The Revenue cannot misinterp....
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....being caused to the assessee by following the restriction contained in 44D(b) in the interpretation of Article 7.5. 41. Applicability of tax on gross receipt versus net profit basis is on the proposition that Article 13.4(c) of the DTAA would prevail over the definition u/s 9(1)(vii) Explanation 2 and as the income of the assessee is not fees for technical services, then in that case the limitation contained in Article 7.5 will not in any case apply as 44D(b) only applies to FTS. In the course of hearing before us, the learned CIT-DR has disagreed with learned AR insofar as Article 13(4)(c) would be applicable to the facts of the case and that even under the DTAA the receipts would not be FTS. Article 13.4(c) reads as under:- "ARTICLE 13 - Royalties and Fees for Technical Services. 4. For the purposes of paragraph 2 of this Article, and subject to paragraph 5 of this Article, the term "fees for technical services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which: (a)are ancillary and subsidiary to the application or enjoyment of the....
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....T(A) were correct in taxing FTS under 44D read with 115A of the Income Tax Act. 48. Since we found that the assessee is liable to tax on net basis, under Art. 26 of the Indo-UK Treaty, the assessee which is a non-resident company and is undertaking the Works Contract is being discriminated against and subjected to tax on gross basis @ 30% by artificially invoking section 44D read with section 115A of the Income Tax Act, whereas a domestic company doing exactly the same works contract would be taxed @ 2% under section 194C of the Act and also would be subject to tax on its net profits without the application of section 44D. 15. It was submitted that there was no make available of the technology to the Indian counterpart, therefore the assessee is not liable for taxation on fees for included services. If we look into the paragraph 4(b) of the Explanation of Memorandum of Understanding, then it is abundantly clear that the technology will be considered as made available when the person acquiring the service is enable to apply the technology. As stated above, the vice president manufacturing was knowing the technology and was having the experience to implement the standards of the....
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....t the services rendered by the vice president manufacturing was in the nature of managerial service. There was complete silence on this issue by the assessing officer and in our view , there is no purpose of perpetuating the illegality/irregularity either by the assessing officer or by the tribunal. There cannot be consistency of decisions but when there is no decision by the revenue for the earlier years, then there cannot be consistency for no-decisions. In view thereof, we don't find any reason to grant the benefit of consistency to the assessee. Accordingly argument of the assessee to give the benefit of consistency is devoid of merit and is accordingly dismissed. 17. During the course of argument the assessee has not raised any argument in support of ground No. 2, therefore the same is required to be dismissed . 18. In the result the Ground 1 and 2 raised by the assessee are dismissed. Ground No.3 and 4 19. With respect to ground No. 3 and 4, we may at the outset point out that the AAR has not given any finding on this issue as is clear from paragraph 30 reproduced hereinabove with emphasis supplied by us through underlining. The authorised representative appearing be....
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....d against and the protection under Art. 26 of the DTAA be provided to the assessee. We have also considered the other aspects of the case that the agreement did not envisage any training of personnel or making available any skill, know-how, development and transfer of any design etc. as envisaged u/s 9(1)(vii) Explanation 2 or Article 13.4(c) of the DTAA between India and UK by the assessee to Spectrum. The training in the pre-operational stage was of the assessee own work force. That was done prior to February 1997 which does not fall within this period. The training as cited by the CIT DR on plant of Spectrum personnel at the second stage was only at the time the contract was go come to an end after 10 years, i.e. February 2007. We do not know whether any such training was actually conducted by the assessee for Spectrum. For the years under our review, i.e. assessment years 1998-99 to 2004-05, there is no provision and the CIT DR has not been able to point out any provision in the contract wherein the assessee was to train Spectrum personnel. In the absence of any such training to be provided, it cannot be said that anything was made available by the assessee to Spectrum. W....
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....6 - Non discrimination: 1.The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. 2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on the enterprises of that other State on the same activities in the same circumstances or under the same conditions. This provision shall not be construed as preventing a Contracting State from charging the profits of a permanent establishment which an enterprise of the other Contracting State has in the first mentioned State at a rate of tax which is higher than that imposed on the profits of a similar enterprise of the first mentioned Contracting State, nor as being in conflict with the provisions of paragraph 4 of Article 7 of the Convention." 54. In view of the above provision taxing of a non-resident U.K. company in a manner which is m....
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....upon the provisions of the DTAA and has submitted that the assessee is not entitled to any deduction. 22. We have heard the rival contentions and perused the material available on record. Article 7(3) of the DTAA provides as under :- 3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including a reasonable allocation of executive and general administrative expenses, research and development expenses, interest, and other expenses incurred for the purposes of the enterprise as a whole (or the part thereof which includes the permanent establishment), whether incurred in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return f....
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....ction 9; (b) "foreign company" shall have the same meaning as in section 80B; (c) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9; (d) royalty received from Government or an Indian concern in pursuance of an agreement made by a foreign company with Government or with the Indian concern after the 31st day of March, 1976, shall be deemed to have been received in pursuance of an agreement made before the 1st day of April, 1976, if such agreement is deemed, for the purposes of the proviso to clause (vi) of sub-section (1) of section 9, to have been made before the 1st day of April, 1976." From a conjoint reading of the above two provisions, it is abundantly clear that the benefit of Article 7(3) is subject to the limitation provided under the domestic law (44D of the Act). Section 44D of the Act clearly provides that for the purpose of computation of income by way of Royalty, FIS, etc., assessee is not entitled to any deduction. Once the domestic law prohibits allowing any deduction for the purpose of calculating 'fees for technical services/fees for included services', then, the same is not an allowable deduction and, the....