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2022 (7) TMI 1302 - ITAT PUNEIncome accrued in India - addition towards intra-group services fees received by the assessee, having been claimed as Managerial services fees not chargeable to tax but treated AO as `fees for technical services' - Whether the receipt is FTS under the Act? - HELD THAT:- As e-mails exchanges between the assessee and the Indian entity read in conjunction with the services as described in the Agreement, it becomes overt that the services mainly envisage i) formulating the global policies in the spheres of the business, including, Administration, Purchases, and Human resources so as to have world-wide uniformity in compliance; ii) ensuring application of the such policies by all the global entities including the Indian AE; and iii) evaluating their compliance. The services also cater to giving expert advice on certain matters to the Indian entity, such as, Legal services (falling within the domain of consultancy services) and also giving expert technical opinion on Quality and environment, Research and I.T. Support (falling within the domain of technical services). Thus consideration received by the assessee is partly for the managerial and partly for the consultancy or technical services. Ergo, it satisfies the requirement of taxability under the Act. Whether the receipt is FTS under the DTAA? - AO held that the consideration for the services is FTS under the DTAA between India and Spain - Though the assessee, in principle, can seek the benefit of the India-USA DTAA, but the consideration for the `development and transfer of a technical plan or technical design’ in the terms discussed above, falling under the second part of the Article 12(4)(b) of the India- USA DTAA, would qualify for taxation. Since such amount is not readily ascertainable from the material on record, we set aside the impugned order pro tanto and direct the AO to work out such taxable amount on some rational basis, after allowing a reasonable opportunity of hearing to the assessee. CIT(A), after holding the amount falling under FTS and hence chargeable tax in India, did not examine the alternate viewpoints of the AO of taxing the same as Dividend under Article 11 or `Other income’ as per Article 23(3) of the DTAA. He held that: `Since I have confirmed the learned AO’s decision to tax the services, I do not discuss the Appellant’s arguments on the learned AO’s decision to tax the receipt on an alternative basis as either `dividend’ or as `other income’ under the relevant article of the DTAA. As the decision of the ld. CIT(A) on the intra-group services, being, in the nature of FTS stands partly modified, we need to examine if the amount can be considered as Dividend or Other income under the India Spain DTAA. Non-adjudication by the ld. CIT(A) on this issue has to be considered as determining the issue against the assessee and requiring adjudication by the Tribunal in the hue of CIT Vs. India Cements Ltd. [2019 (8) TMI 1485 - MADRAS HIGH COURT] which has been invoked by the ld. AR requesting our adjudication on the issue of Protocol to the DTAA, which was also not decided by the ld. CIT(A) and we have dealt with the same supra. On both the scores – Protocol; and taxability as Dividend/Other sources - the AO has returned the findings against the assessee. It is not a case in which such issues are being raked up for the first time and no discussion on them is available in the orders of the authorities below. We, thus, espouse these issues also for consideration and decision. Whether the receipt is Dividend under Article 11 of the DTAA? - Testing the facts of the case on the touchstone of the definition of the term `dividend’, it transpires that the consideration received by the assessee is for rendition of intra group services and not either as income from shares etc. or income from other corporate rights or from any participation in profits. Thus, the amount under consideration cannot be characterized as `dividend’ income falling under Article 11 so as to magnetize taxability. Whether the receipt is `Other income’ under Article 23(3) of the DTAA? - Para 3 of Article 23 starts with a non obstante clause qua paras 1 and 2 and states that the items of income of a resident of Spain not dealt with in the foregoing articles of this convention and arising in India may be taxed in India. The crucial words used in para 3 are the items of income “not dealt with in the foregoing articles of this Convention”. To put it simply, if a particular item of income is covered in an earlier Article of the DTAA, that cannot find place under Article 23(3). The item of income under view is consideration for rendition of services. If it is in the nature of FTS, then it falls under Article 12, otherwise it assumes the character of `Business profits’ under Article 7 of the DTAA. As the income from intra-group services falls either under Article 13 or Article 7, it cannot be covered within the purview of Article 23(3). The consideration of Rs.3.99 crore and odd is chargeable to tax u/s 9(1)(vii) of the Act, but the India USA DTAA will restrict the chargeable amount as discussed. It is neither dividend nor other sources income as per the DTAA. Addition of reimbursement on leased line charges amounting as Royalty u/s.9(1)(vi) of the Act and also under Article 13 of the DTAA - Is it covered under clause (iva) of Expl.2 to sec. 9(1)(vi)? - HELD THAT:- The facility of Telefonica does not process the data but simply facilitates its free flow between the group companies through its leased lines. Neither the processing of information is warranted nor is the essence of the transaction. The assessee and the group companies are not paying for using any industrial, commercial or scientific equipment of Telefonica but simply for getting the leased line provided by it with the help of its facility. As such, Explanation 2 (via) is not applicable to the facts of the instant case. Is it covered under Expls. 2/6 of sec. 9(1)(vi)? - On a perusal of the above definition under the DTAA, it can be seen that it has certain features of the definition of the term `royalty’ as given in section 9(1)(vi) of the Act. The term `process’ has been used in the definitions - both under the Act as well as the DTAA. However, the important point to accentuate here is that unlike the definition of the term ‘process’ as given in Explanation 6 amplifying the scope of the term `process’, applying to the Explanation 2 to section 9(1)(vi), there is no similar definition of the term `process’ as given in Article 13(3) of the DTAA. Coming to the Indo-Spain DTAA, it is axiomatic that the domestic law has not been linked with the definition of the term `royalties’ as given in the Article. The definition in the Article simply stops at receipt, inter alia, for use or right to use any ‘process’. In that view of the matter, we cannot read Explanation 6 to section 9(1)(vi) of the Act in the definition of the term `royalties’ under the Article. Though the term ‘process’ under the Act also includes payment for leased line charges in the light of Explanation 6, but absence of any analogous provision in para 3 of Article 13 of the DTAA, does not commend us to read the extended scope of the term `process’ in the DTAA. The contrary view espoused by the ld. CIT(A), ergo, cannot be accorded imprimatur. Addition towards reimbursement of software charges - HELD THAT:- As seen that there is no disputation on the nature of transaction, which is crystal clear inasmuch as the assessee purchased Norton Antivirus software for its entire group. The cost of such software, having been provided to Indian entity, was recovered as such without any mark-up. What the assessee procured from Norton was a software product and not any copyright in the software. Recently, the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd.[ 2021 (3) TMI 138 - SUPREME COURT] has reversed the decision in Samsung Electronics Pvt. Ltd.(2011 (10) TMI 195 - KARNATAKA HIGH COURT] by holding that payment for use of a software product does not constitute Royalty. This position was fairly admitted by the ld. DR as well. In view of the binding precedent available on this issue, we delete the addition. Charging of interest u/s.234B - levying interest for default in payment of advance tax - HELD THAT:- As an amendment has been carried out to section 209(1) by insertion of proviso w.e.f. 1.4.2012 providing, inter alia, that for computing liability for advance tax, income-tax calculated under clause (a) or clause (b) or clause (c) shall not be reduced by the aforesaid amount of incometax which would be deductible during the said financial year under any provision of this Act from any income, if the person responsible for deducting tax has paid or credited such income without deduction of tax. The essence of the amendment is that the earlier position of non-levy of interest u/s.234B where the income in question is otherwise liable for deduction of tax at source, irrespective of the fact that whether the tax was actually deducted or not, has been dispensed with. As the amendment is applicable from 1.4.2012, it will not administer the instant assessment year 2010-11 under consideration. We, therefore, direct not to charge interest u/s.234B.
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