TaxTMI 
TaxTMI 
2026 (5) TMI 1058
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....sessee earned income from its Indian Associate, being FCI OEN Connectors Ltd./ Amphenol FCI India Pvt. Ltd. For all the years under consideration, the assessee earned royalty income from its Indian AEs out of which royalty on sale made in India has been offered to tax but royalty received from export sales has been claimed to be exempt u/s 9(1)(vi)(b) of the Income Tax Act, 1961 (hereafter as "the Act"). Secondly, management fee has been received and has been claimed as exempt following the beneficial provisions of Article 12 of the DTAA between India and Singapore (hereafter as "DTAA"). For AY 2022-23 an additional issue is regarding the taxability of expenses claimed to be in the nature of reimbursement. It is seen that the main grounds of appeal for assessment years 2018-19 to 2021-22 (4years) are on the taxability of royalty and management fee. For AY 2022-23, in addition to these two grounds the reimbursement of expenses is also a ground. Accordingly, it is proposed to deal with the two issues of royalty and management fee for all the five years and additionally the issue of reimbursement of expenses for AY 2022-23, on a thematic basis for the sake of convenience. 1.2 It de....
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....oduced to show that the earlier order of the Tribunal had not become final. Thus, it was not open to the revenue to reagitate the same question in the instant reference which was the subject-matter in the earlier order of the Tribunal. The Tribunal was correct in holding that the receipts for the visit of experts were not taxable within the meaning of section 9(1)(vi). As far as receipts for special engineering services were concerned, the issue arose only in the assessment year 1980-81 and there was no doubt that amount was paid under pre-1976 agreement. Since the receipt was a lump sum payment, the amount received was exempt under the proviso to section 9(1)(vi). As far as royalty on export sales was concerned, that amount was also exempt under section 9(1)(vi). Though the royalty was paid by a resident in India, it could not be said that it was deemed to have accrued or arisen in India as the royalty was paid out of the export sales and, hence, the source for the royalty was the sales outside India. Since the source for the royalty was from the source situated outside India, the royalty paid on export sale was not taxable." As against this case law, the Ld. ....
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....erms of the agreement. Thus, in our view, technical assistance and the ancillary services rendered by the assessee in connection with licensing of patents, trademarks, copyrights, know-how etc. cannot be equated with fees for management services, as both are governed under different set of agreements and have no connection with each other. Therefore, in our view, the finding of learned DRP that the fee received from management support services would qualify as FTS under Article 12(4)(a) of the tax treaty cannot be accepted." 2.3 Regarding the issue of taxability of expense reimbursement pertaining to AY 2022-23, it was averred that the DRP has no power to direct the Ld. AO to verify such expenses from the angle of their being any services element. It was argued by the Ld. AR that no show cause notice was issued for this proposed addition and in any case the payments where in the nature of reimbursement of costs with no embedded income or profit. The Ld. AR laid stress on the DRP directions as being violative of section 144C(8) of the Act. The Ld. AR read out the directions as under: - "6.3 The matter has been considered. There appears to be a discrepancy of the figure a....
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.... entity manufacturing and distributing in India. Royalty is on account of licensed intellectual property rights, licensed patents, and licensed know-how at 4% of the sales. Now the assessee has also accepted this position, but the only dispute is on the royalty charged for export sales wherein the assessee has disputed that the same is not taxable in India since there is an exemption allowable for the same under section 9(vi)(b) of the Income Tax Act. Now it is already held by the Hon'ble High Court of Delhi in the case of Havells India (2020-21 taxmann.com 476 (Delhi)) that in order to fall within the second exception provided in section 9(1)(vii)(b), the source of income, and not the source of receipt, should be outside India. The relevant portions of the judgement is reproduced below: 13. Section 90(vii)(b) contemplates a source located outside India. It is difficult to conceptualise the place/situs of the person who make payment for the export sales as the source located outside India from which assessee earned profits. The export contracts obviously are concluded in India and the assessee's products are sent outside India under such contracts. The manufacturing ac....
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....se wherein the entire business itself is carried outside India, and hence the test of whether it is a source of income or source of receipt becomes important. In this case, the AO has discussed this issue in detail in draft order para 7.2 (page 11 of 29) to para 7.4, where it has held that since the income is generated from manufacturing activities out of export sales, the royalty paid should also be for the export sales and should also be taxable." The Ld. DR argued that the case of Havells India (supra) directed taxability on the basis of source of income and not source of receipt. It was the submission that if the source of income was situated inside India, then section 9(1)(vi)(b) of the Act would come to the assessee's rescue but if only the source of receipt was outside India, then this section would not be of any help to the assessee. The Ld. DR stated that the Hon'ble Madras High Court judgment (supra) relied upon by the assessee, was specifically for assessment years 1978-79 to 1982-83, and it was relevant for the old provisions. It was the submission that since then the said section has evolved with amendments which were not before the Hon'ble Madras High Court at that....
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.... Court case by the Hon'ble Delhi High Court deserves to be extracted so that its inapplicability on the facts of the present case could be effectively brought out: "10. In support his this contention, the learned counsel for the assessee drew our attention to a judgment of the Madras High Court in CIT v, Aktiengesellschaft Kuhnle Kopp & Kausch W. Germany By BHEL, [2003] 262 ITR 513 /(2002) 125 Taxman 928 In this case it was held that the exports of goods represented a source outside India. The High Court was concerned with Section 9(1)(vi) which was concerned with payment of royalty by a person resident in India to a non-resident. Though that provision was concerned with royalty, the exceptions provided from taxability of the royalty income in the hands of the non-resident are the same as in the case of fees for technical services dealt with in Section 9(1)(vii)(b) of the Act. In that case the resident company paid royalty to a West German company. The royalty was payable on export sales effected by the resident-assessor The question before the High Court was whether the Tribunal was right in law in holding that the royalty on export sales was not taxable within the meanin....
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.... was carried on by the assessee only in Pondicherry, that no part of the manufacturing or selling activity of the assessee was carried on outside Pondicherry, that the import entitlements were relatable only to the export performance which took place in Pondicherry and that on the fulfilment of the export activity, a right to receive the export incentive accrued in favour of the assessee in the territory of the Pondicherry. The argument of the department was that the incentive was quantified and sent from Bombay from it the export activity, a right to receive the export incentive accrued in favour of the assessee in the territory of the Textile Commissioner and, therefore, the income arose within the taxalite (sic) territories. This argument was rejected by the Madras High Court by holding that "the right to receive the import entitlements arose when the export commitment was fulfilled by the assessee in Pondicherry, though such amount was subsequently ascertained or quantified. It was also argued on behalf of the Revenue before the High Court that the import entitlement should be regarded as a source of income in the taxable territories and under Section 9(1) of the Act, the incom....
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.... also needs to be mentioned by way of a caveat that there would not be many case laws in the entire body of judicial literature which could be perfectly applied on the facts of any case being adjudicated by any judicial authority. This matter is no difference, whether its the Hon'ble Madras High Court case (supra) or the Havells case (supra). However, the broad principle that emanates from the Havells case is worthy of consideration. In that case, it has been a clear directive that the importer of the assessee's product is no doubt situated outside India, but he cannot be regarded as a source of income. The importer of the assessee's product is merely the source of the receipts. The income component of the export receipts is located or situated in India. In this manner, the lordships of the Delhi High Court have distinguished between the source of income and the source of receipts. In this case also, we find that the source of receipts are outside India but the income is firmly arising from manufacturing activity within India. Thus, the situs of income, as against the receipts, could be considered to be the deciding factor in case any taxability u/s 9(1) of the Act has to be determ....
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....upra) would apply. We would refrain from trivializing the directive in that case law by applying the same to virtually all matters before us since invariably the Revenue and the assessee are contesting whatever issue may present itself. In any case more fact finding can determine if at all the balance of convenience can be regarded to be in favour of the assessee. 4.2 Regarding the reimbursement of management services, we find that this issue has been decided in favour of the assessee through the ITAT's order for AY 2015-16 (supra) and from a passage extracted (supra), it is clear that the assessee deserves to succeed on this issue for all the years under consideration before us. 4.3 Regarding the issue of reimbursement of expenses, being an issue only for AY 2022-23, we are persuaded by the Ld. AR's argument that section 144C(8) of the Act does not authorize the DRP to set aside any proposed variation or issue any direction under sub-section (5) of 144C for any further enquiry and thereafter passing of the assessment order. Even the explanation to section 144C(8) of the Act, inserted w.e.f. 01.04.2009, does not come to the rescue in this regard. Accordingly, it deserves to b....