AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2021 (1) TMI 323
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....ty and since there is no profit element the same is not taxable in India. 1.2. Without prejudice to the ground no. 1.1 above, on the facts and in the circumstances of the case and in law, the learned DCIT and DRP has erred in holding that the amount received by the Appellant from SCA Hygiene Products India Private Limited ('SCA India') in respect of SAP license charges amounting to INR 1,30,04,613 is taxable as Royalty under Article 12(2) of the India -Sweden Double Taxation Avoidance Agreement ('DTAA'). 3. To adjudicate on this issue, only a few material facts need to be taken note of. The assessee before us is a company incorporated, and fiscally domiciled, in Sweden. It has a subsidiary in India by the name of SCA Hygiene Products India Pvt Ltd (SCA-India, in short). Under a service agreement dated 29th September 2014, a copy of which was placed before us at pages 7 to 16 of the paper-book, the assessee was under an obligation to render services, which included "providing hardware and software for various ERP systems, CRM Systems and other business system" (Annexure B: IT Services, at page 14 of the paper-book) to its India subsidiary "at cost". It wa....
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....ir hotel expenses. However, it is also equally accepted that a transaction of the Indian party with a third party cannot be given a cover of reimbursement by routing this transaction with the AE. In the present case, the AE has purchased licence on behalf of the assessee and then charged the assessee for these amounts. In such a scenario, the amount cannot be treated as reimbursement. This is a case of routing SCA India's expenses the AE and is not cost reimbursement but cost allocation (AMD Research and Development Centre India Pvt Ltd [(2015) 53 taxmann.com 300 (Hyd-Trib)]. 4. It was in this backdrop that the Assessing Officer taxed an income of Rs. 1,30,04,613 under article 12(3)(a) of Indo Swedish tax treaty. The assessee is aggrieved and is in appeal before us. 5. We have heard the rival contentions, perused the material on record, and duly considered facts of the case in the light of the applicable legal position. 6. We find that it is a case in which the assessee has purchased the SAP software licence from a third party- namely "Be One Solutions, Switzerland," and even a copy of one of the purchase invoices is placed before us at page 17 of the paper-book. The f....
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....simple, it will not be taxable as income of that group entity. It is quite elementary that what can be taxed in the hands of an assessee is not a receipt, by itself, but only the income element, and, therefore, when a receipt by the assessee is bereft of income element, as a pure reimbursement inherently is, it cannot be brought to tax in the hands of that assessee. Hon'ble jurisdictional High Court, in the case of CIT Vs Siemens AG [(2009) 310 ITR 320 (Bom)], have accepted this proposition and observed as follows: That leaves us with the last contention as to whether the amounts by way of reimbursement are liable to tax. To answer that issue, we may gainfully refer to the judgment of a Division Bench of the Delhi High Court in Industrial Engineering Projects (P.) Ltd.'s case (supra). The learned Division Bench of the Delhi High Court was pleased to hold that reimbursement of expenses can, under no circumstances, be regarded as a revenue receipt and in the present case the Tribunal had found that the assessee received no sums in excess of expenses incurred. A similar issue had also come up for consideration before the Division Bench of the Calcutta High Court in Du....
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....A India would be taxable as FTS under DTAA in spite of the fact that such services do not make available technical knowledge, experience, skill, know-how or processes or consists of the development and transfer of technical plan or technical design. On the facts and in the circumstances of the case and in law, the learned DCIT/DRP has erred in holding that the protocol granting. Most favored Nation benefit available in India - Sweden DTAA can be granted only through Government notification disregarding the fact that no such notification is required as per DTAA. Ground No. III- Taxability of IT Support services as Fees for Technical Services (FTS)/ Royalty 3.1 On the facts and in the circumstances of the case and in law, the learned DCIT/DRP has erred in not considering the fact that Appellant has only recharged the actual cost it incurred for providing the IT Support services and since there is no profit element the same is not taxable in India. 3.2 Without Prejudice to the ground no. 3.1, on the facts and in the circumstances of the case and in law, the learned DCIT/DRP has erred in holding that the amount received by the Appellant for IT Suppor....
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....rope to secure communication and good flow of information between people within the company directly or indirectly involved in the project. * Preparation of monthly project reports. * Informing progress to project steering group as well as management of SCA India. 11. Yet another receipt by the assessee, under the said agreement, was for Information Technology Services. These payments aggregated to Rs. 57,47,684 during the relevant financial period. The nature of these services, as set out in Annexure B to the said agreement, is as follows: 1. Object and Term of the Services SCA Sweden shall perform the following Services for SCA India; - Providing hard and software for various ERP systems, CRM systems and other business systems - Providing hard and software for various internet services - Providing data communication services - Providing management of workplace environment  Providing data processing of above systems - Providing operations, support and consulting services for the above - Providing support for implementation of ERP system [SAP 81) for project Vindaloo which ....
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....39; under article 12 of the Indo Swedish tax treaty, as read with "most favoured nation (MFN) clause" in protocol thereto and read with India Portugal Double Taxation Avoidance Agreement [(2016) 244 ITR (Stat) 57; Indo Portuguese tax treaty, in short], unless a technical service "makes available" technical knowledge, experience, skill, knowhow or process, it cannot be brought to tax as fees for technical service. The Assessing Officer, however, did not accept this contention. When the matter travelled to the Dispute Resolution Panel, on objections being raised by the assessee, learned Dispute Resolution Panel did reject the invocation of MFN clause and observed that "with regard to automatic application of the MFN clause available in the India Sweden Treaty, the DRP has its own reservations and feels that both the states are required to invoke the MFN clause through issuance of notifications" and that "in the absence of such notifications, benefits of other treaties cannot be extended automatically to a third state". Without prejudice to this stand, on merits of applicability of "make available" clause, learned Dispute Resolution Panel observed as follows: 4.17 The relevan....
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....e of service rendered by the assessee as detailed by it has been reproduced above. Admittedly, these vacancies are effectively connected with the SAP system implemented by the Group as a whole and have been made towards effective utilisation and efficient working of the SAP system. The assessee admits that these services are required on an annual basis and are meant for maintenance and upkeep of the system. The procurement of licences for SAP system has been held to be in the nature of royalty. 5.15. The assessee is not correct in claiming that the services so rendered are covered by Article 12(4)(b) of the India Portugal Treaty, even if the claim of automatic application of MFN clause is allowed to the assessee. The services is found to be intrinsically linked with enjoyment of the SAP system and hence, would fall within the ambit of Article 12(4)(a) of the Article where there is no requirement of making available of any knowledge, skill or experience. 5.16. In light of the above discussion, the DRP is of the view that these services constitute. FTS under the Act as well as under India Sweden DTAA and are required to be taxed in India under Article 12 of the Indi....
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...., carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply. 5. Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanen....
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....racting State may be taxed in that other State. 2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the royalties and fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. 3. The term "royalties" as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes or any other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial, or scientific experience. 4. For the purposes of this article, "fees for included servi....
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....isions of article 7 or article 14, as the case may be, shall apply. 7. Royalties and fees for included services shall be deemed to arise in a Contracting State where the payer is that State itself, a political or administrative subdivision thereof, a local authority or a resident of that State. Where, however, the person paying the royalties and fees for included services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or fixed base in connection with which the obligation to pay the royalties and fees for included services was incurred, and such royalties and fees for included services are borne by that permanent establishment or fixed base, then such royalties and fees for included services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 8. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties and fees for included services, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed u....
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....nder any Convention, Agreement or Protocol with a third State which is a member of the OECD, restricts the scope in respect of royalties or fees for technical services than the scope for these items of income provided for in Article 12 of this Agreement, then Switzerland and India shall enter into negotiations without undue delay in order to provide the same treatment to Switzerland as that provided to the third State" (Emphasis, by underlining, supplied by us). Similarly, in the case protocol to the India Philippines Double Taxation Avoidance Agreement [ (1996) 219 ITR Statutes 60 @ 83 ; Indo Philippines tax treaty, in short], all that provided is in the MFN clause is that the treaty partners inform the other party so that the matter is appropriately revied as is evident from the protocol observation to the effect that "With reference to Articles 8 and 9 if at any time after the date of signature of the Convention the Philippines agrees to a lower or nil rate of tax with a third State the Government of the Republic of the Philippines shall without undue delay inform the Government of India through diplomatic channels and the two Governments will undertake to review these Articles ....
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....oncerned, it is a situation in which the action of limiting the source taxation, for dividends, interest, royalties or fees for technical services, to any other OECD member jurisdiction, by itself, is enough to trigger that the same provisions "shall also apply" under Indo Swedish tax treaty. No further actions on the part of India are envisaged in the Indo Swedish tax treaty to trigger the application of the same provisions in Indo Swedish tax treaty as well. 19. Elaborating upon the scope of this peculiar manner in which MFN clause operates in India France Double Taxation Avoidance Agreement [(1994) 209 ITR Statues 130 @ 159; Indo French tax treaty, in short) the relevant portion of protocol clause in which is identically worded in effect as in the case of Indo Swedish tax treaty, a coordinate bench of this Tribunal, speaking through one of us (i.e. the Vice President), in the judgment reported as DCIT Vs ITC Ltd [(2002) 82 ITD 239 (Kol)] made following observations around two decades back, in late 2001, and these observations, as we will see a little later, hold good even today: ......in our considered view, the benefit of lower rate of or restricted scope of 'fe....
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....otification issued in the case of India Netherland Tax Treaty whereby the Protocol was given effect to. The changes in the Treaty on the basis of the Protocol were given effect by Notification only. We do not see any reason as to why different treatment will be given in the present case. 21. In other words, it was thus held, as has been held by the learned DRP in the impugned order, that the effect of the protocol clause is to be given by a formal notification, and unless that happens, the protocol is toothless. That legal position has, however, been reversed in the case of Steria India Ltd Vs CIT [(2016) 72 taxmann.com 1 (Del)] and Their Lordships have, referred to, with approval, the decision of a coordinate bench in the case of ITC Ltd (supra) and concluded as follows: .........The Court is ........ unable to agree with the conclusion of the AAR that the Clause 7 of the Protocol, which forms part of the DTAA between India and France, does not automatically become applicable and that there has to be a separate notification incorporating the beneficial provisions of the DTAA between India and UK as forming part of the India- France DTAA ...........................
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....Court decisions, namely Hon'ble Delhi High Court in the case of DIT v. Guy Carpenter & Co Ltd. [(2012) 346 ITR 504 (Del)] and Hon'ble Karnataka High Court in the case of CIT v. De Beers India (P.) Ltd. [(2012) 346 ITR 467 (Kar)] in favour of the assessee, and there is no contrary decision by Hon'ble jurisdictional High Court or by Hon'ble Supreme Court. In De Beers India (P.) Ltd. case (supra), their Lordships posed the question, as to "what is meaning of 'make available'", to themselves, and proceeded to deal with it as follows: '......The technical or consultancy service rendered should be of such a nature that it "makes available" to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology "making available", the technical knowledge, skill, etc., must remain with the person receiving the services even after the particular contract comes to an end. It i....
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....Just because the assessee renders these services does not mean, and by no stretch can imply, that the recipient can next time do all this work without recourse to the assessee. As regards learned DRP's observations that the project leading work "will include scheduling charts, timelines, bar charts which are contemplated in the case of the assessee under Project Administration....project and financing controls including necessary charts and controls for implementation of the project", that "the assessee is not executing the project but is rendering consultancy service to the AE", and that "when project implementation tools are provided to the employees of the AE, they are enabled to employ these tools in implementing their own project," these observations are factually incorrect inasmuch as the assessee's representative is executing the work and is the key person at the factory site who is doing all the needful and inasmuch as there is no mention anywhere of developing these tools and handing over the same to the recipient of services. In any case, just because the Indian entity is interacting with the project leader and getting inputs from him does not mean that the Indian....
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....ons not germane in this context. So far as these services being incidental to SAP system being the reason for taxation under article 12(4)(a) is concerned, we have noted that providing support services for SAP implementation is a small part of the services and in any case what article 12(4)(a) covers is the services which "are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received" and the information technology services, as set out in Annexure B to the agreement, cannot be described as ancillary and subsidiary to the SAP system. At best, a small part of these services could fall in that category, but that payment is not even separately identified. These things apart, 12(4)(a) would come into play when the assessee receives a payment in the nature of royalties under article 12(3) and the services ancillary and subsidiary to the application or enjoyment of that right, payment for which is described in article 12(3). In other words, the person receiving the money as royalty, such as the actual seller of the software in this case, and the person providing service ancillary or subsidiary to....