AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2020 (3) TMI 1075
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....efore, these both appeals have been heard together and disposed off by way of this consolidated order for convenience. 2. The grounds raised in ITA No. 1630/Del/2015 for assessment year 2011-12 are reproduced as under: 1. On the facts and in the circumstances of the case and in law, the Ld. Assessing Officer ('AO') erred in assessing the income of the appellant at Rs. 1,14,66,317 as against returned income of Rs. 34,36,830. 2. On the facts and in the circumstances of the case and in law, the Ld. AO and Ld. Dispute Resolution Panel ('DRP'), have grossly erred in holding that the 'Management Fee' is taxable as 'Fees for Technical Services' ('FTS') under Article 13 of Double Taxation Avoidance Agreement between India-France ('DTAA') read with Protocol to the DTAA. 3. On the facts and in the circumstances of the case and in law, the Ld. AO and DRP erred in holding that Corporate Guarantee Fee is taxable as 'Fee for Technical Services' under Article 13 of India France DTAA on extraneous and vague reasons. 4. On the facts and in the circumstances of the case and in law, the Ld. AO, pursuant to directions of the DRP, grossly erred in confirming the a....
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....-12 on 28/09/2012 showing income of Rs. 34,36,830/-, which was taxed at the rate of the 10% on gross basis. Similarly, the return of income for assessment year 2012-13 was filed on 28/09/2012, declaring income of Rs. 68,26,471/- and taxed at the rate of 10% on the same on the gross basis. The returns filed for both the years were selected for scrutiny assessment. The Assessing Officer issued draft assessment orders for assessment year 2011-12 on 28/03/2014. Similarly, the draft assessment order for assessment year 2012-13 was issued on 10/03/2015. In both the draft assessment orders, identical additions were proposed. The assessee filed objection against the draft assessment orders before the learned Dispute Resolution Panel (DRP). The learned DRP issued directions to the Assessing Officer in both assessment years and pursuant to those directions, the Assessing Officer issued impugned final assessment year in assessment year 2011-12 and 2012-13. 3.2 During the years under consideration, the assessee entered into certain transaction with its Associated Enterprises (AE), namely, JCD Advertising India Private Limited ('JCD India') for providing various functional and management sup....
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....ecialized nature, therefore, the sums received in lieu thereof by the assessee were nothing but Fee for Technical Services (FTS) as per section 9(1)(vii) as well as under the India France DTAA. 5.2 In assessment year 2011-12, before the learned DRP, the assessee submitted that combined reading of Article 13 and clause 7 of the MFN clause of India France DTAA makes it clear that where India has entered into DTAA with the third state (which is a member of the OECD) after 01/09/1989 and India limits its scope for taxation of fee for technical services: A) to a rate lower or; B) a scope more restricted than the rate of the scope provided for in India France DTAA then, such lower rate or restricted scope as provided for in such of the DTAA shall also apply to the DTAA between India and the France. The assessee has relied upon the restricted scope of Article-13 of India-UK, DTAA [since, UK is an OECD member and the India-UK DTAA has been entered into force on 26th October, 1993 (i.e. after 1- 9-1989)], wherein the scope of 'Fee for Technical Services' is more restricted. 5.3 The Assessee submitted that 'management fees' is not covered within ....
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....AA was entered on 18th December 1990 (i.e. after 1 September 1989)], and in that case also captioned payment would not be covered within the scope of Article 12 of India-USA DTAA. 5.6 The assessee relied on the decision of Mumbai ITAT in the case of DDIT vs. IATA BSP India (2014) 64 SOT 290 wherein the benefit of make available clause under India USA DTAA has been allowed and held that services provided to the Appellant were not in the nature of 'fees' for included services' within the meaning of Article 13 of India-France DTAA, read with clause 7, of protocol thereto. 5.7 The learned DRP, rejected the contention of the assessee that management fee does not fall in restrictive definition of the FTS in DTAA read with protocol. According to the learned DRP, the managerial, technical and counseltancy services are bound to be given through the employees of JCD India and therefore in such circumstances, the managerial, technical and consultancy services would develop the skill of the employees of the JCD India and thus it would remain available to a large extent with them. 5.8 In assessment year 2012-13, the DRP disputed the invoking of protocol into the India France DTAA. ....
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....Avion Systems Inc. Vs Deputy director of income tax (IT) - 1(1) , Mumbai 138 ITd 57 (Mumbai) 2012 (vi) Guangzhou Usha International Ltd AAR No. 1508 of 2013 vide order dated 28th day of Sep. 2015. 5.10 In view of the above, the learned DRP rejected the objection of the assessee observing as under: "Perusal of the services performed by the taxpayer under the Functional and Technical Support Agreement" (FTSA henceforth) with JCD India and the updated jurisprudence supra, leave no doubt that the services rendered "make available" technical knowledge, experience, skill, know-how or processes, which enable the person acquiring the services to apply the technology contained therein; even within the meaning of Article 12(4) of the India UK DTAA on a without prejudice basis and are thus taxable as FTS. It is, however, the affirmed contention of the DRP that the India France DTC quite simply states that fees for technical services means for technical services means payments of any kind to any person, in consideration for services of a managerial, technical or counseltancy nature and the nature of services provided under the "Functional and Technical Support Agr....
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....ervice provider, on the basis of both its own resources and such resources as made available and charged to the service provider by some customer companies, centralizes functional and technical capabilities that are not likely to be procured from third parties under satisfactory conditions of specialization, confidentiality and price: Whereas, due to the expertise thus acquired by the service provider, it appeared that shared use of services would result in cost saving, economies of scale method rationalization for each customer company. The purpose of this Agreement is to formalize and set forth in writing previous oral agreements between the service provider and the customer in relation to the nature, content, and performance/ payment procedures for the services (as defined below) the service provider will supply to the customer and likely to fall within the following areas. Now therefore, THE PARTIES HAVE AGREED AS FOLLOWS: ARTICLE 1 GENERAL SUPPORT: -Management; resource optimization; recommending an organization to support corporate management; assistance in defining and implementing strategy and development (advice, recomm....
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....ement. - Preparation of answers to calls for tenders; analysis of calls for tenders; preparation of bids. 1.2. Technical support Support by technical services centralized or coordinated by the service provider in the following fields: - Operational use and maintenance of advertising means and operating tools; - Preparation of bids in their technical aspects, as part of calls for tenders and competitive bidding. - Setting-up, follow-up and coordination of technical alternatives in relation with the customer's business; - Computer support, in particular: management of computer projects; software/hardware selection, maintenance and servicing; application development. ARTICLE 2- SPECIFIC SUPPORT 2.1 The parties agree that the customer may use the service provider's services both for itself and on behalf o f a panel of economic operations having legal entity status and active in the same geographic are as the customers. 2.2 Furthermore, the service provider may perform, on customer's request and behalf, specific assignments outside the usual scope of the services listed in Article 1. Such specif....
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....k, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. 4. The term "fees for technical services" as used in this Article means payments of any kind to any person, other than! payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 15, in consideration for services of a managerial, technical or consultancy nature. 5. The term "payments for the use of equipment" as*used in this Article means payments of any kind received as ;V consideration for the use of, or the right to use, industrial, commercial or scientific equipment. 6. The provisions of paragraphs I and 2 shall not apply if the beneficial owner of the royalties, fees for technical services or the payments for the use of equipment being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties, fees for the technical services or the payments for the use of equipment arises, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services....
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....ervices of a managerial, technical or consultancy nature." 5.16 The corresponding provision in the DTAA between India and the UK 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 repayments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a 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 knowhow or processes, or consist of the development and transfer of a technical plan or technical design. 5. The definition of fees for technical services in paragraph 4 of this Article shall not include am....
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....e been rendered to impart the "advice" to the Indian AE resources in order to give them to meet the policies, standards and procedures developed by the assessee. The service contain element of development of policies and strategies and therefore the same were imparted to ensure its effective implementation throughout the organization. In support of the contention, the Learned DR relied on the decision of the Hon'ble Supreme Court in the case of Central Board of direct taxes versus Oberoi Hotels (India) (P) Ltd 231 ITR 148, wherein the Hon'ble High Court has hold that professional services provided in the hotel industry are technical in nature. The relevant finding of the Hon'ble Supreme Court is reproduced as under: "There is no gain-saying that running a well equipped modern hotel is no ordinary affair. One needs a great deal of expertise skill and technical knowledge for the purpose. In the instant case, the agreement provided for rendering of technical services and also professional services for operation of hotel, a foreign enterprise. The CBDT fell into an error in considering particularly the clause in the agreement which provided for operation of the hotel by the....
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.... foreign enterprise it was to be held that CBDT was not right in not granting approval of the agreement to the respondent under section 80-0. Therefore, the High Court was justified in holding that the services rendered by the assessee would fall within the purview of section 80-0 and the CBDT was wrong in not approving the agreement as required under section 80-0." 5.20 The learned DR also referred to MOU to India USA DTAA where technical services and consultancy services have been described as services requiring expertise in the technology and advisory services respectively. The learned DR submitted that services which involves advice and recommendation is in the nature of the consultancy service and thus services in the instant case are in the nature of technical/consultancy. 5.21 Further, in view of article 13(4)(a) of the India UK DTAA, reproduced above, the learned DR submitted that the assessment order specifically mentioned that royalty was received in this case by the assessee from the Indian AE , therefore going by the clause of India UK DTAA, the services ancillary and subsidiary to the application or enjoyment of the right are in the nature of fee for tec....
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....iver the quality of services in line with the quality standards maintained at group level. Agreement Clause-Financial and accounting matters, in particular: * General financial matters; relations with financial institutions and the financial press; * Reviewing financing requirements et resources; * Statistic and economic information regarding trends in exchange rates and exposure; * Analysis and research for setting up guarantees for customer transactions; * Information and advice in matters of international accounting regulations, in particular for the customer's line of business. Comments: 18. The aforesaid service has element of "review" of financing requirements. It also includes element of ,advice/in accounting regulations. It is a case where the 'advice'is with an intention to ensure its implementation in the organization at global level to ensure uniformity of standards and practices. It is reiterated that the appellant is providing services to its group company and the services are to ensure its implementation as against mere submission of a report. Thus, it is a case where the parent entity is ....
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....ations made in the document by the second resource." 5.23 Lastly, the learned DR further submitted that it was not possible to decide whether the services are capable of "Make available" or not, without looking at the whole gamut nature of the services rendered by the assessee to the service recipient. He further submitted that one needs to first examine with respect to the nature of the services, various correspondence, conduct of the assessee, conduct of the service recipient and the services involved. He submitted that in the case, the assessee has not provided any documentation to demonstrate that services are not in the nature of make available, the claim of the assessee might be rejected, relying on the decision of the Tribunal in the case of Ceva Asia Pacific Holdings Vs DDIT New Delhi (ITA No. 1503/Del/2014 - assessment year 2010-11). 5.24 In view of the above arguments of the Learned DR, it is evident that the assessee has not provided the entire correspondence regarding the services rendered by the assessee to the Indian entity and in absence of which lower authorities has decided all the three issues on the basis of agreement only i.e. firstly, whether the servi....
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....y if there exist some debt-claim between the payee and the payer. According to the assessee, the remuneration for facilitating or guarantying a credit facility cannot be characterized as "interest". The assessee submitted that by any stretch of interpretation, fee for corporate guarantee cannot be characterized as fee for technical services under article 13 of the DTAA. The learned DRP, however, directed the Assessing Officer to verify whether the assessee has charged any corporate guarantee fee from any of its other AE and if so then any sum received over and above the average rate of foreign guarantee fee should be held taxable by way of adjustment under the transfer pricing. In case, no corporate guarantee fee has been charged from any of it AE, then the action of taxing the said corporate guarantee fee was held to be justified. In the final assessment order, the Assessing Officer held the corporate guarantee fee as 'FTS' on the ground that the assessee failed to submit duly signed agreements with other AEs. The relevant finding of the Assessing Officer is reproduced as under: "6.4 The submission of the assessee having regard to corporate guarantee fee is duly considere....
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....We have heard the rival submission and perused the relevant material on record. The Assessing Officer held that corporate guarantee fee was in lieu of the services rendered for assisting the AE in providing loan from foreign banks, but no detail of kinds of services and evidence in this regard have been brought on record by the Assessing Officer and therefore this contention of the Assessing Officer that the guarantee fee was received in lieu of the services rendered, is rejected. In our opinion, services of corporate guarantee by the assessee not being in the nature of services of managerial, technical or consultancy, the corporate guarantee fee received by the assessee cannot be termed as fee for technical services either under the section 9(1)(vii) or under article of the DTAA. The ground No. 3 raised in both the appeals are accordingly allowed. 7. The ground No.4, in both the appeals relates to characterizing reimbursement of Social Security Contribution to the assessee as fee for technical services under article 13 of India France DTAA. 7.1 The brief facts qua the issue in dispute are that during the period relevant to assessment year 2011-12, the 'JCD India' had certain....
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....d of. 5.5 As regards the case law relied upon by the assessee, it may be mentioned that these case laws are distinguishable on facts and do not apply to the assessee's case. The question is one of applicability of the principles to the facts in a given case. It has been a wellsettled view that the ratio of any decision must be understood in the background of that case. What is of essence in a decision is its ratio and not every observation found therein nor what legally follows from the various observations made in it. It is not a profitable task to extract a suitable sentence here and there from a judgement and to build upon it (Ambica Quarry Works AIR 1987 Supreme Court 1073)." 7.2 In final assessment order, however, the Assessing Officer retained the addition on the ground that no records were produced by the assessee to verify the directions of the learned DRP. The relevant finding of the Assessing Officer is reproduced as under: "6.6 The submission of the assessee having regard to social security contribution is duly considered and cannot be accepted for the following reasons: The assessee has produced nothing on record to prove that the said ....
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....cussed in some detail for ready reference supra. Perusal of the broad principles laid down by the Hon'ble High Court and approved by the Hon'ble Supreme Court will show that where employees are seconded and continue to retain their lien with their parent organization, on terms where they transfer and makes available their technical knowledge, then, the reimbursements of salaries of seconded employees are in the nature of FTS in the hands of the Parent organization taxable on source basis. To apply the principles laid down by the Hon'ble High Court to the case on hand, the secondment agreement was required to be examined by DRP and the relevant clauses have been reproduced in a tabular format vis-a-vis the relevant principles laid down by the Delhi High Court for easy reference. Centrica Reference Secondment Agreement Reference Seconded employees duties and functions were dictated by the instructions and directions of the CIOP. However crucially they retained their entitlement to participate in the overseas entities retirement and social security plans and other benefits in terms of its applicable policies, and their salary was properly payable by the oversea....
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....rly whether the employees have been released from their work and subsequently entered into a separate local employment agreement with India AE etc. But the documents not having been filed by the taxpayer the taxpayer has then failed to discharge its evidentiary onus. In absence of contractual evidence to the contrary, DRP thus has no option but to conclude that the attachment of the secondees was not fleeting as concluded by the Honble High Court in Centrica and that employees seconded, continued to retain their lien with their parent organization, on terms where they transferred and made available their technical knowledge, and the reimbursement of salaries of seconded employees was thus in the nature of FTS in the hands of the taxpayer on source basis. This truly is a difficult situation wherein avoiding the FTS could mean yielding ground on a PE. In a recent case of Morgan Stanley the Mumbai ITAT considered and held that where there existed a PE and FTS had been rendered through the said PE, there, profit would need to be determined under Article 7 of the Treaty. The taxpayer has relied upon several judicial pronouncements which are not taken up since the discussion is ....
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....f the Hon'ble Delhi High Court came up before the learned DRP in assessment year 2012-13 for the first time. But we find that agreements with regard to secondment of the employees between the assessee and the JCD India, agreement between the expatriate employee and the assessee and employment agreement between the JCD India and expatriate, have not been examined either by the Assessing Officer or by the learned DRP and therefore in the interest of the justice, we feel it appropriate to restore this issue to the file of the Assessing Officer for verifying various agreements mentioned above and then decide the issuein-dispute in accordance with law after providing an adequate and sufficient opportunity of being heard to the assessee. The ground No. 4 of both the appeals, is accordingly allowed for statistical purposes. 8. In ground No. 5 in both the appeals the assessee has raised the issue that education cess and secondary and higher education cess is not applicable while taxing the income on gross basis under the India France DTAA. 8.1 Before us, the learned Counsel of the assessee relied on the decision of the Tribunal, Kolkatta bench in the case of DCIT Vs BOC Group Ltd rep....
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....p Ltd 4 taxes to which this Convention applies or which represents a penalty imposed relating to those taxes; ARTICLE 13- Royalties and fees for technical services -1. Royalties and fees for technical services arising in a Controlling State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed: (a) In the case of royalties within paragraph 3(a) of this Articles, and fees for technical services within paragraphs 4(a) and ( c) of this Article, (i) During the first five years for which this Convention has effect; (aa) 15 per cent of the gross amount of such royalties or fees for technical services when the payer of the royalties or fees for technical services is the Government of the first mentioned Contracting State or a political sub-division of that State, and (bb) 20 per cent of the gross ....
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....th January 1994. In view of the specific provisions to the effect, that the scope of Article 2 shall also cover "any identical or substantially similar taxes which are imposed by either Contracting State after the date of signature of the present Agreement in addition to, or in place of, the taxes referred to in paragraph 1", and in view of the fact that education cess is essentially of the same nature as surcharge, being an additional surcharge, the scope of article 2 also extends to the education cess." 6.1. We find that the Article 2 of the India UK Treaty provides that income tax including any surcharge thereon and it further provides that this convention shall also apply to any identical or substantially similar taxes which are imposed by either contracting state after the date of signature of this convention in addition to or in place of the taxes of the contracting state referred to in paragraph 1 of this article. Hence by this , it can safely be concluded that the levy of education cess though introduced from Finance Act, 2004 which is much after the date of signing of this convention would also be made applicable while determining the tax rates under the conventio....
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....o the conclusion that education cess is nothing but an additional surcharge, it is only corollary thereto that the education cess will also be covered by the scope of Article 2. Accordingly, the provisions of Article 11 and 12 must find precedence over the provisions of the Income Tax Act and restrict the taxability, whether in respect of income tax or surcharge or additional surcharge - whatever name called, at the rates specified in the respective article. In any case, education cess was introduced by the Finance Act 2004, with effect from assessment year 2005-06 which was much after the signing of India Singapore traty on 24th January 1994. In view of the specific provisions to the effect that the scope of Article 2 shall ITA No. 571/Kol/2013-C-AM The BOC Group Ltd 7 also cover "any identical or substantially similar taxes which are imposed by either Contracting State after the date of signature of the present Agreement in addition to, or in place of , the taxes referred to in paragraph 1", and in view of the fact that education cess is essentially of the same nature as surcharge, being an additional surcharge, the scope of article 2 also extends to the education cess. ....
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....hi). 5. We have heard both the parties and their contentions have carefully been considered. We found that the issue raised by the assessee is covered in favour of the assessee by the aforementioned decisions of Tribunal in the case of Sunil V. Motiani (supra)." d) ITO (Intl Taxn) vs M/s M Far Hotels Ltd in ITA Nos. 430 to 435 / Coch / 2011 dated 5.4.2013 (Cochin Tribunal) This judgement was rendered in the context of India France treaty. Issue involved was taxability of management fees and interest income under the relevant article of the treaty and the levy of surcharge and education cess to the tax prescribed under DTAA in the relevant article. It was held that :- "If the provisions of DTAA are more beneficial to the taxpayer, then the provisions of DTAA would prevail over the Indian Income Tax Act. Since the DTAA is silent about the surcharge and education cess for the purpose of deduction of tax at source, this tribunal is of the considered opinion that the taxpayer may take advantage of that provision in the DTAA for deduction of tax. The CITA has only deleted the tax component to the extent of surcharge and education cess at the rate applicable und....