TaxTMI 
TaxTMI 
2022 (4) TMI 1279
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....f ITA No. 1165/Del/2019 for A.Y. 2013-14 to be representative. 1. Background : 1.1.1 The Appellant was incorporated under the laws of the United States of America ("USA") on September 29, 1969. The Appellant is engaged in the business of providing human resources advisory services to its clients, on recruiting and retaining senior level executives and further assisting them in mitigating the risks associated with senior level appointment. It also provides management support services to its group companies. 1.1.2 The Appellant filed its Income-tax return for relevant assessment showing income being royalty income received from Russell Reynolds Associates India Private Limited ('RRAIPL') in terms of 'Licensing Agreement' for use of Intellectual Property Rights ('IPRs') like trademarks / trade names and 'Information Technology Licensing Agreement' for use of databases, etc. as per Article 12(3) of the India- USA DTAA. 1.2 The Deputy Commissioner of Income-tax, Circle 3(1 )(1), International Tax, New Delhi (hereinafter referred to as the 'Ld. AO') passed the assessment order under section 143(3) of the Income-tax Act, 1961 ('the Act'), assessing the income inter alia adding....
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.... Russell Reynolds Associates India Private Limited ('RRAIPL') as per restrictive definition of FIS in Article 12 of India-US DTAA. 1.3. The Hon'ble CIT(A), has erred on the facts and circumstances of the case and in law, in categorizing the amount received for providing 'support services' from RRAIPL as fee for consultancy/technical services, without appreciating the fact that such services are rendered for day to day management of work of RRAIPL and qualify as 'managerial' services, which is not chargeable to tax as per Article 12 of India-US DTAA. 1.4. The Hon'ble CIT(A), has erred on the facts and circumstances of the case and in law, having failed to appreciate that receipts from support services is not 'income' per se in the hands of the recipient in absence of any profit element and accordingly is not chargeable to tax in India. 1.5. The Hon'ble CIT(A), has erred on the facts and circumstances of the case and in law, in not providing the Appellant any show cause or reasonable opportunity of being heard, while deeming receipt of Rs. 1,607,675, to be Appellant's taxable income under paragraph 4(a) of Article 12 of the India-US DTAA. 2. Reimbu....
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.... be ancillary and subsidiary to the applicable or enjoyment of a right, property or information for which payment for royalty is received [ Article 2(4)(a)], or iii. Such services should make available technical knowledge, experience, skill, know-how, etc. [Article 12(4)(b)]. 4.1 It was submitted that the definition of FIS under Article 12(4) does not include managerial services and is restricted to only technical or consultancy services and this definition of FIS under Article 12(4) of 'The Treaty' is narrower than the definition of FTS under section 9(1)(vii) of the Act. Ld. Counsel submitted that managerial services though fall in the definition of FTS under the Act. The same do not constitute FIS under 'The Treaty'. It was submitted that the nature of services were such which were required by the RRAIPL on day to day basis for running its business and are not managerial in nature. Ld. Counsel specially relied the observations of AAR in the case of Invensys Systems Inc. 317 ITR 438 (AAR) and referred to para 8.2 where AAR observed : " Though some of the services required to be performed under the agreement have the trappings of technical or consultancy servi....
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....evant to determine the satisfaction to consider a service to be ancillary and subsidiary to the application or enjoyment of some right, property or information for which the payment described paragraph 3(a)(b) is made. It was submitted that these five factors are not fulfilled in the case of assessee. 4.4 On the other hand the Ld DR submitted that before the Ld. First Appellate Authority the assessee had submitted that the services are not managerial in nature and he referred to paragraph 5.5.3 of the order of CIT(A). It was submitted that now the assessee claims that services were managerial in nature and wants to take shelter of Article 12. It was submitted that in the original return of the assessee and entire receipts were submitted to tax but the revised return only the revenue received under the head royalty has been offered to tax and which shows that there was change of stands without any justification. It was submitted that the ld. First Appellate Authority has given cogent reasoning while interpreting the services agreement in terms of the memorandum to the treaty. 5 At outset it is reasonable to hold that there is no substance in the arguments submitted on behalf o....
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....llary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or b. make available technical knowledge, experience, skill, know-how or processes, consist of the development and transfer of a technical plan or technical design." 7. The bare perusal and patent interpretation of para 4 of Article 12 of 'The Treaty' makes it explicit that it is only in regard to "rendering any technical or consultancy services" a finding can be given that they are ancillary and subsidiary for the purpose of para 4(a). Learned FAA has fallen in error in distinguishing para 4(a) and para 4(b) in a manner that as for para 4(a) there is no requirement that the services should be of the nature technical or consultancy and only receipt of Royalty as per para 3 of the Treaty, makes para 4(a) applicable. 7.1 In this context, in para No. 5.9 of its order, learned FAA has observed that "by implication", the consideration which are received by the assessee need to be tested for taxability under paragraph 4(a) of Article 12 in terms of memorandum to the Treaty. Again, for the convenience, para 5.5.9 is reproduced ....
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....de : 1. The extent to which the services in question facilitate the effective application or enjoyment of the right, property, or information described in paragraph 3; 2. The extent to which such services are customarily provided in the ordinary course of business arrangements involving royalties described in paragraph 3; 3. Whether the amount paid for the services (or which would be paid by parties operating at arm's length) is an insubstantial portion of the combined payments for the services and the right, property, or information described in paragraph 3 ; 4. Whether the payment made for the services and the royalty described in paragraph 3 are made under a single contract (or a set of related contracts); and 5. Whether the person performing the services is the same person as, or a related person to, the person receiving the royalties described in paragraph 3 (for this purpose, persons are considered related if their relationship is described in Article 9 (Associated Enterprises) or if the person providing the service is doing so in connection with an overall arrangement which includes the payer and recipient of the royalties]. ....
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....fore in the nature of Fee for included services to be categorized within paragraph 4(a) of the Indo US treaty." 8. As the Bench gives thoughtful consideration to the aforesaid, what immediately strikes is that the example relied by the learned FAA was in regard to the contractual arrangement of US manufacturer who had agreed to provide certain "consultancy services" to the Indian company. Thus, there it was an admitted fact that nature of services was 'consultancy services' as those services were considered related to the application or enjoyment of tangible. However, that is not the case in the present matter. There is no categorical finding of the Ld.FAA that the support services were in the nature of consultancy or technical services. Rather it observed in Para 5.5.3 " In fact the receipts from services clearly indicate that the same cover a large spectrum of area and would necessarily qualify as managerial services.". As managerial services are not mentioned in Article 12 of the Treaty, so certainly by classifying the receipts to be from managerial services and then to include them in FTS, on basis of sub-clause 4(a) of Article 12, the Ld. FAA has committed the error. 9. ....
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....om RRAIPL on cost to cost basis so the same cannot be classified in the nature of technical or consultancy services. It was submitted that the training and workshops organized on behalf of the Indian Associate was essentially and on boarding programming for its new joiners to understand these job profile and business model. The costs incurred on boarding, travelling upon the trainees was recovered. Therefore, there was no income elements embedded in the receipts. He relied the judgments in (i) Renaissance Services BV v. Deputy Director of Income-tax (International Taxation)-2(1), Mumbai [2018] 94 taxmann.com 465(Mumbai-Trib.) (ii) HITT Holland Institute of Traffic Technology B.V. v. Deputy Director of Income-tax (International Taxation)-1, Kolkata [2017] 78 taxmann.com 101 (Kolkata-Trib.) (iii) Lloyds Register Industrial Services (India) (P.) Ltd. v. Assistant Commissioner of Income-tax, 8(2), Mumbai [2010] 36 SOT 293 (MUM.) (iv) Income-tax Officer, International Taxation-II v. Veeda Clinical Research (P.) Ltd. [2013] 35 taxmann.com 577 (Ahmedabad-Trib.) (v) John Deere Equipment (P.) Ltd. v. Deputy Commissioner of Income-tax (IT)-1, Pune [2019] 108 taxmann.com 295 (Pune-Trib.) (vi)....
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....esearch P. Ltd. (2011) 13 taxmann.com21 (Bang), where Tribunal held that training services to the employees of the assessee company was general in nature, not involving any transfer of technology, the fees for providing such services was not taxable as FTS as per Article 13 of India-U.K tax treaty. (v). Wockhardt Ltd. Vs. ACIT (2011) 10 taxmann.com 208 (Mum) where Tribunal held that the services rendered by the employees of a non-resident company being in the nature of sharing management experiences and business strategies could not be termed as technical services. 12. Now coming to the case in hand as with regard to the training receipts, the learned FAA in para 5.4 of its order observed as below : "5.4. The examination of the aforesaid submission clearly shows that on boarding program annually enables the client to acquire the skills and extend the shop profile so that the are able to comfortably work as per the appellant's requirements. As a result, it is totally clear the training expenses clearly fall within the purview of Fee for included services as a skill is being imported to the receipt and at the same time to the Indian entity the service is being re....