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2025 (10) TMI 1299
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.... for technical services ('FTS' for short) under Article 12(3)(b) of India-Belgium Double Taxation Avoidance Agreement ('DTAA' for short) as also u/s. 9(1)(vii) of the Act. 3. Briefly, the facts relating to this issue are, the assessee, a non-resident corporate entity, is a tax resident of Belgium. As stated by the Assessing Officer ('A.O.' for short), the assessee is a chemical manufacturing company. It manufactures and distributes specialty polymers, essential chemicals and chemical materials amongst others. He has further stated that assessee serves customers operating in aeronautics and automotive, natural resources and environment, electrical and electronics, agro-chemical, food, consumer goods, building and construction, healthcare, industrial applications and other sectors. He has further stated that the assessee uses special chemicals made with ecofriendly materials to enhance product quality and performance. The assessee innovates and partners with customers worldwide in many diverse end markets. It has research and innovation centers and industrial sites in Europe, North America, Latin America and Asia. Whereas, its headquarter is in Brussels, Belgium. 4. For the ass....
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.... to the assessee to explain why the receipts should not be treated as 'FTS' in terms with Article 12(3)(b) of the tax treaty as well as u/s. 9(1)(vii) of the Act, as the fees received by the assessee were towards provision of managerial, technical and consultancy services. In response to the show cause notice issued by ld. DRP, the assessee furnished a detailed submission stating that under the Functional Service Agreement, the assessee has provided centralized services and standard facilities, which do not fall in the category of managerial, technical and consultancy services. To substantiate its claim, the assessee furnished the details relating to the real nature of services provided and the amounts received for various functions. The ld. DRP, however, was not convinced with the submissions of the assessee. Ultimately, the panel held that the services provided by the assessee are in the nature of managerial, technical and consultancy services, hence, receipts would qualify as FTS, both under the treaty provisions as well as under the Act. Without prejudice, ld. DRP also agreed with the view expressed by the A.O. that the receipts can also qualify as 'royalty' u/s. 9(1)(vii) of t....
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....arious compartments. He submitted, what is required to be looked into in an agreement is the pith and substance. He submitted, if the agreement is read as a whole, it can be seen that the intention was to provide routine standardized services to bring uniformity in functions. Finally, ld. Counsel for the assessee submitted, the Functional Service Agreement was entered between the parties on 26.03.2013. He submitted, prior to the impugned assessment year, the Department has never raised any question with regard to the assessee's claim in respect of similar receipts. Though, of-couse, the returns were processed u/s. 143(1) of the Act. However, he submitted, the department was not powerless in taking remedial measures to reopen those assessments had they been of the view that the receipts are in the nature of either royalty or FTS. Thus, he submitted, facts being identical, rule of consistency should be maintained. In support of his contention, ld. Counsel for the assessee relied upon the following decisions: 1. ACIT vs. Avenet International Hong Kong Ltd. (in ITA No.1283/Del/2023) 2. UPS SCS (Aisa) Ltd. vs. ADIT (in ITA No. 2426/Mum/2010) 3. Springer Verlag....
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....fy as 'FTS'. Keeping in perspective Article 12(3)(b) of the tax treaty, it is necessary to examine the Function Services Agreement, a copy of which has been placed in the paper book. On going through the recital of the agreement, it is evident, after acquisition of Rhodia Group, it was found necessary to reorganize and harmonise the functional departments of the enlarged Solvay Group and the services rendered including the pricing, invoicing and reporting of the same, with the objective of applying harmonised rule, conditions and procedure with respect to Function Services rendered and / or taken by Solvay Entities belonging to the former Solvay and Rhodia group. It further provides that the service provider under the Agreement is responsible for performing most of the Group Function Services and centralizes to a wide extent resources, technology, and expertise in order to render these services for the benefit of the Solvay Entities on a global scale and for the benefit of the group entities in every region. The definition of Function Services under the agreement means the services as stipulated under Article 3 of the Agreement, excluding R & D and Engineering and Construction acti....
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....up entity in India. 230,514,113 3 Shared Business Services function This includes costs for services received pertaining to accounts receivable, accounts payable, global contact services, supply chain, cash collection, credit management, data purchasing, end user partner, global contact center purchase, travel and expenses etc. 73,098,801 4 Industrial function This includes centralized function and costs for engineering & construction, ensuring compliance with Health, Safety & Environment (HSC), Industrial Regulations, process and technology, ensuring Solvay adhering to Safety standards. 54,505,477 5 Human Resource function This function includes costs towards setting up corporate compensation and benefit services, corporate international mobility, AP zone management and industrial relations services. Due to cross-border movement, global policies need to be made applicable at country level. The objective in performance of these routine and standard activities is for group companies to leverage on the centralized policies developed outside India. 51,200,837 6 Communication function This includes cost incurred at group level for communi....
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....scellaneous 103,621,487 Total 1,080,504,268 11. After examining the nature of services provided in the year under consideration, ld. DRP has observed that Information Technology, Industrial, Group shared services and communication are technical services. Whereas, services relating to facility, general management, human resources, human resource operations are managerial services. Services linked to finance, legal, purchasing, etc. are consultancy services. As could be seen from the actual nature of services described elsewhere in the order, Information Technology function includes centralized function and standard facility relating to information technology application and information technology infrastructure such as: a) Software applications for different work streams b) Global usage facility (cloud storage) c) IT Hardware facility such as different connectivity, network, equipment's, internet, etc. d) Global IT security protocols/guidelines implemented and controlled through access controls, etc. 13. Procurement function involves centralized functions relating to liasioning, vendor coordination, etc....
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....of managerial, technical or consultancy services. Ld. DRP referring to the decision of Hon'ble Supreme Court in the case of GVK Industries Ltd. [2015] 371 ITR 453 (SC) has observed that since the terms managerial, technical and consultancy are not defined in the Income Tax Act, the common and general meaning of these terms have to be taken into consideration. According to ld. DRP, managerial services in its ordinary meaning involve the application of knowledge, skill or expertise in the control or administration of the conduct of a commercial enterprise or organization. If the management of all or a significant part of an enterprise is contracted out to persons other than the directors, officers or employees of the enterprise, payments made by the enterprise for those management services would be FTS. 15. According to ld. DRP, Consultancy services would mean the provision of advice or services of a specialized nature. Professionals usually provide advice or services that fit within the general meaning of consultancy services although they may also constitute management or technical services. The expression "Consultancy" involves giving of an advice/opinion/recommendation or ....
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....emselves is not technical. Therefore, it is crucial to determine at what point the special skill or knowledge is useful. Where special skill or knowledge is used in developing or creating inputs for a service business, the fee received for provision of such service will not be a FTS, unless, that special skill or knowledge is required when the service is provided to the customer by the service recipient. 19. As far as consultancy services are concerned, the expression 'Consultancy' refers to services constituting advice by a professional who has acquired special knowledge and qualification to enable him to do so. Therefore, consultancy would require human interface as a machine cannot provide consultancy services. In this context, the following extracts from the order of the co-ordinate bench in case of Springer Verlag GmbH vs. DCIT vs. DCIT (supra) would throw some light on the issue: 12. The Hon'ble Jurisdictional High Court in the case of Panalfa Autoelektrik Ltd 227 Taxman 351, in relation to "Managerial, technical and consultancy services", has observed as under: "14. The expressions "managerial, technical and consultancy services" have not been define....
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....attached to it. To put it bluntly, a machine cannot be a manager." Reference can be also made to the decision of the Authority for Advance Rulings in In Re: Intertek Testing Services India Private Limited, [2008] 307 ITR 418, wherein it was elucidated:- "First, about the connotation of the term "managerial". The adjective "managerial" relates to manager or management. Manager is a person who manages an industry or business or who deals with administration or a person who organizes other people"s activity [New Shorter Oxford Dictionary]. As pointed out by the Supreme Court in R. Dalmia v. CIT [1977] 106 ITR 895, "management" includes the act of managing by direction, or regulation or superintendence. Thus, managerial service essentially involves controlling, directing or administering the business." 15. The services rendered, the procurement of export orders, etc. cannot be treated as management services provided by the non-resident to the respondent-assessee. The non-resident was not acting as a manager or dealing with administration. It was not controlling the policies or scrutinising the effectiveness of the policies. It did not perform as a primary exe....
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....t-assessee dictated and directed the non-resident. The Commissioner of Income Tax (Appeals) has also dealt with quantification of the commission and as per clause 4, the commission payable was the difference between the price stipulated in the agreement and the consideration that the respondent-assessee received in terms of the purchase contract or order, in addition to a pre-determined guarantee consideration. Again, an indication contra to the contention that the non-resident was providing management service to the respondent-assessee. 17. The Revenue, which is the appellant before us, has not placed copy of the agreement to contend that the aforesaid clauses do not represent the true nature of the transaction. The Assessing Officer in his order had not bothered to refer and to examine the relevant clauses, which certainly was not the right way to deal with the issue and question. 18. It would be incongruous to hold that the non-resident was providing technical services. To quote from Skycell Communications Ltd. and Anr. Vs. Deputy Commissioner of Income Tax and Ors. (2001) 251 ITR 53 (Mad), the word "technical" has been interpreted in the following manner:- ....
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....sult" which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as "ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from for a proposed action". It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant." The AAR in the case of In Re: P.No. 28 of 1999, reported as [1999] 242 ITR 208 had observed:- "By technical services, we mean in this context services requiring expertise in technology. By consultancy services, we mean in this context advisory services. The category of technical and consultancy services are to some extent overlapping because a consultancy service could also be technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in technology is required to perform it." 21. The word "consultant" refers to a person, who is consulted and who advises or from w....
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....e of services as a consultant to the Indian assessee. It included an element of advice and was certainly recommendatory in nature. 24. The OECD Report on e-commerce titled, Tax Treaty Characterisation Issues arising from e-commerce: Report to Working Party No.1 of the OECD Committee on Fiscal Affairs dated 01st February 2001, has elucidated:- "Technical services 39. For the Group, services are of technical nature when special skills or knowledge related to a technical field are required for the provision of such services. Whilst techniques related to applied science or craftsmanship would generally correspond to such special skills or knowledge, the provision of knowledge acquired in fields such as arts or human sciences would not. As an illustration, whilst the provisions of engineering services would be of a technical nature, the services of a psychologist would not. 40. The fact that technology is used in providing a service is not indicative of whether the service is of a technical nature. Similarly, the delivery of a service via technological means does not make the service technical. This is especially important in the ecommerce environment as the technology....
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....ted that this term should receive its normal business meaning. Thus, it would involve functions related to how a business is run as opposed to functions involved in carrying on that business. As an illustration, whilst the functions of hiring and training commercial agents would relate to management, the functions performed by these agents (i.e. selling) would not. 44. The comments in paragraphs 40 to 42 above are also relevant for the purposes of distinguishing managerial services from the service of making data and software (even if related to management), or functionality of that data or software, available for a fee. The fact that this data and software could be used by the customer in performing management functions or that the development of the necessary data and software, and the management of the business of providing it to customers, might itself require substantial management expertise is irrelevant as the service provided to the client is neither managing the client's business, managing the supplier's business nor developing that data and software (which may well be done by someone other than the supplier) but rather making the software and data available to th....
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.... be classified either under managerial or some other head. In such a situation, the test to be applied is whether they are predominantly managerial in nature. Whatever services are enumerated under the head "Administrative management" cannot automatically be brought within the purview of the managerial services. In fact, many of them may not appropriately fall under managerial services. To give some examples, the maintenance of trade marks register and arranging renewals, preparation and distribution of brochures and other promotional material, maintenance of central claims register or providing professional tax advice, are not predominantly managerial services. Yet, they were included under the head "Administrative management". To give few instances of managerial services, we may make mention of coordination of public relations issues and audit services and advice on global income-tax policies. Arrangement and coordination of global insurance can perhaps fall under this category, though in the absence of details, we do not want to express firm view. Another point we would like to clarify is that from the nomenclature used in the invoice i.e. 'management fee', it cannot be inferred....
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....the fee i.e. ITM, UK has given scope for this argument. The argument is evidently based on certain assumptions. It is not proper to proceed on the assumption that the ITM, UK is incapable of rendering any technical or consultancy services and that its role is merely that of a conduit, in the absence of definite material leading to such inference. The omission on the part of the applicant in furnishing the details of actual services cannot be stretched too far. On the basis of the facts appearing on the record, it is not possible to arrive at a finding in this proceeding that the beneficial owner of fee is someone else. 17. In view of the foregoing discussion, the first question defies a precise answer-either in the affirmative or negative. Many of the services catalogued in the agreement and in the note are technical/consultancy services which do not 'make available' technical knowledge, experience etc. and therefore do not fall within the ambit of cl. (c) of art. 13.4. But, some of them satisfy the test of making available 'technical knowledge' etc. and therefore taxable as FTS under art. 13.4 of Treaty. There are also services which can be categorized as managerial. Ther....
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....thin the meaning given in Explanation 2 to Sec. 9(1)(vii) of the Act. In the aforementioned case, the assessee had made payments to various overseas services providers belonging to U.K, Poland, Brazil, Canada & Australia for services availed in connection with the shooting of different films. The services rendered by the aforementioned non-resident service providers included arranging for extras, arranging for the security, arranging for locations, arranging for the accommodations for the cast and crew, arranging for necessary permissions from local authorities, arranging for makeup of the stars, arranging for insurance cover etc. The Tribunal after deliberating on the nature of the aforementioned services concluded, that as the same were purely commercial services falling in the category of logistic arrangement services, thus, the consideration received as regards rendering of such services would constitute business profits of the said overseas service providers. It was further observed, that as the said service providers had no Permanent Establishment (P.E) in India during the year under consideration, hence the business profits were not taxable in India in their hands as per Art....
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....context of different DTAA"s, as against that involved in the case of the assessee. We have deliberated at length on the aforesaid observations of the lower authorities and are unable to persuade ourselves to accept the same. We find that though it is an admitted fact that an P a g e | 16 ITA No. 1732/Mum/2016 AY 2012-13 M/s Endemol South Africa Vs. DCIT (IT),Circle-2(2)(1) "advance rulings" having been rendered on the basis of the facts of a particular case, thus, would only be binding on the applicant, and that too in respect of the transactions in relation to which the same was obtained, however, such ruling would still have a persuasive value in respect of other parties as well and accordingly, may be relied upon by the authority itself or by the applicant/department. We find that our aforesaid view is fortified by the judgment of the Hon'ble Supreme Court in the case of Columbia Sportswear Company Vs. DIT, Bangalore (2012) 346 ITR 161 (SC). We are further of the considered view, that though the lower authorities had declined to take cognizance of the observations of the Hon'ble AAR on the ground that the "tax treaties" involved in the said case were different as against that in....
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....the performance. In the absence of any ITA No.2426/Mum/2010 M/s.UPS SCS (Asia) Limited. 6 specific definition of the phrase "managerial services" as used in section 9(1)(vii) defining the "fees for technical services", it needs to be considered in a commercial sense. It cannot be interpreted in a narrow sense to mean simply executing the directions of the other for doing a specific task. For instance, if goods are to be loaded and some worker is instructed to place the goods on a carrier in a particular manner, the act of the worker in placing the goods in the prescribed manner, cannot be described as managing the goods. It is a simple direction given to the worker who has to execute it in the way prescribed. It is quite natural that some sort of application of mind is required in each and every aspect of the work done. As in the above example when the worker will lift the goods, he is expected to be vigilant in picking up the goods moving towards the carrier and then placing them. This act of the worker cannot be described as managing the goods because he simply followed the direction given to him. On the other hand, `managing' encompasses not only the simple execution of a work, ....
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....as not rendered any managerial, technical or consultancy services. In view of the above, we hold that export commission was neither royalty nor fee for technical services and, therefore, the assessee was not required to deduct tax at source on the payment of export fee. Once the assessee was not required to deduct the tax at source, it cannot be said that the assessee failed to deduct tax at source so as to apply Section 40(a)(ia)." 21. Similarly, the Hon'ble Madras High Court in the case of Farida Leather Company 238 Taxmann.com 473 has held as under: "11. In the instant case, it is seen, admittedly that the non-resident agents were only procuring orders abroad and following up payments with buyers. No other services are rendered other than the above. Sourcing orders abroad, for which payments have been made directly to the non-residents abroad, does not involve any technical knowledge or assistance in technical operations or other support in respect of any other technical matters. It also does not require any contribution of technical knowledge, experience, expertise, skill or technical know-how of the processes involved or consist in the development and tra....
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....ion does not atract the provisions of Section 9 of the Act, then there is no question of applying Explanation 4 to Section 9 of the Act. Therefore, the Revenue has no case and the Tax Case Appeal is liable to be dismissed." 22. In light of the above, we set aside the findings of the ld. CIT(A) and direct the Assessing Officer to delete the impugned addition. Ground Nos. 1 to 5 in Assessment Year 2014-15 and Ground No. 1 to 3 in Assessment Year 2015-16 are allowed. 20. In case of M/s. UPS SCS (Asia) Limited vs. The Asstt. Director of Income Tax (International Taxation) (supra), the co-ordinate Bench has held as under: 7. First we will consider the ambit of `managerial services' to test whether the instant services can qualify to be so called. Ordinarily the managerial services mean managing the affairs by laying down certain policies, standards and procedures and then evaluating the actual performance in the light of the procedures so laid down. The managerial services contemplate not only execution but also the planning part of the activity to be done. If the overall planning aspect is missing and one has to follow a direction from the other for executing parti....
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....ition of "fees for technical services", being `consultancy services', which has been pressed into service by the learned CIT(A) to fortify his view that the amount received by the assessee is covered within section 9(1)(vii). The word "consultancy" means giving some sort of consultation de hors the performance or the execution of any work. It is only when some consideration is given for rendering some advice or opinion etc., that the same falls within the scope of "consultancy services". The word `consultancy' excludes actual `execution'. The nature of services, being freight and logistics services provided by the assessee to Menlo India has not been disputed by the authorities below. There is nothing like giving any consultation worth the name. Rather such payment is wholly and exclusively for the execution in the shape of transport, procurement, customs clearance, delivery, warehousing and picking up services. That being the position, we opine that the payment in lieu of freight and logistics services cannot be ranked as consultancy services. 10. The only left over component of the definition of "fees for technical services" taken note of by the ld. CIT(A) is "technical ....
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.... exchange earnings for rendering technical / professional services to a US Multi International company. During the course of assessment proceedings, the A.O. required the assessee to furnish the nature of services rendered and also the calculation of deduction. The assessee did it. On being satisfied the A.O. granted deduction u/s 80-O. By exercising the power u/s 263, the learned CIT held the assessment order to be erroneous and prejudicial to the interest of the Revenue to the extent of granting deduction u/s 80-O. When the matter came up before the Tribunal, it was observed that the issue is debatable and hence outside the ambit of section 263. Apart from that, it was also observed that the assessee was engaged in integrated air and ground transportation of time sensitive packages to various destinations rendering commercial services. It was in this context that the assessee was held to be eligible for deduction u/s 80-O. At this juncture it will be useful to note that at the material time section 80-O provided for deduction on any `income by way of royalty, commission, fees or any similar payment received by the assessee from the Government of a foreign State or a foreign enter....
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....d that its `business structure is time bound service coupled with continuous real time transmission of information by using and also making available advanced technology in the form of sophisticated equipment and software.' He was swayed by the contention of the assessee that the Manlo India or the ultimate customer could track the movement of cargo with the help of computers. We have noted supra that the consideration received by the assessee did not include any consideration for the supply of any equipment to Manlo India. Now we will examine as to whether the use of computer in any manner for knowing the location of the cargo at a particular time, can be held as technical service. 14. Explanation to section 9(1)(vii) defines the expression "fees for technical services" as consideration for rendering `managerial, technical or consultancy services'. It is seen that there is no definition of the term "technical services" in the Act. 15. The principle of noscitur a sociis mandates that the meaning of a word is to be judged by the company of other words which it keeps. This rule is wider in scope than the rule of ejusdem generis. In order to discover the meaning of a....
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....vided by the assessee as discussed elsewhere in the order, it can be held that the services rendered do not fall in the category of managerial, technical and consultancy services. In fact, even applying the tests referred to by ld. DRP in pgs. 78 & 79 of the directions, the services rendered do not come within the ambit of managerial, technical and consultancy services. We are inclined to hold so because, in the first place, the A.O. has failed to examine the issue in the context of applicability of Article 13(3)(b) of the Act. Whereas, ld. DRP has reached its conclusion qua the nature of receipts as FTS without carefully examining the nature of services. We are constrained to hold so because most of the services as described in the preceding paragraphs do not satisfy the tests of managerial, technical or consultancy services. However, some of the services may satisfy the tests of technical and consultancy services. But, onus is on the Department to prove such fact on record through cogent material. In the facts of the present appeal, the Department has failed to do so. 22. Another fact which needs to be highlighted is, the Functional Services Agreement was executed between the ....