2019 (5) TMI 1686 - AT - Income Tax

Income accrued in India - treating the receipt as fees for included services as Article-12 of India-US DTAA - HELD THAT - The service agreement executed between the assessee and the service provider. For services the assessee has not executed any contracted to make available any technical expertise so as to use those services independently by the licensee. All the services under taken by the assessee are either support services, IT enable services, coordination or tax services as referred above are not such which require transfer of technology, skill to the receipt company. The Hon ble Karnataka High Court in CIT Vs De Beers India Minerals (P) Ltd. 2012 (5) TMI 191 - KARNATAKA HIGH COURT while considering the similar question of law while considering the provisions of India- Netherland Double Tax avoidance Agreement (India- Netherland DTAA), while considering the facts that where a Netherland Company rendered technical services to the assessee, without making available any technical expertise so as to enable assessee use those services independently in future, payment made for such services cannot be termed as fee for technical services We hold that the assessing officer erred in taxing the service agreement receipt as fee for included services as per Article 12(4) of India USA DTAA for such services as mentioned in para 4 (supra), in absence of clause in the service agreement dated 09.01.2009, that the recipient would be able to perform these services of its own without any further assistance of the assessee. - Decided in favour of assessee Reimbursement of expenses as fee for included services - Revenue receipts - HELD THAT - The agreement is basically to share the product without paying the royalty but by paying the consideration which occurs only on the use of the product and not otherwise. The assessing officer taxed the said receipt as consideration for the use of process or formula and fall under the definition of royalty. CIT(A) confirmed the action of the assessing officer holding the assessing officer has assigned valid reason while taxing the receipt. AO has not examined the facts as per the reply and the explanation furnished by the assessee. Considering the facts that we have already allowed the Ground No. 2 holding that assessing officer erred in taxing the service agreement receipt as fee for included services as per Article 12(4) of India USA DTAA. Thus, on the same principles the receipt cannot be treated as royalty as there is no transfer of process or formula. In CIT Vs Siemens Aktiongesellschaft 2008 (11) TMI 74 - BOMBAY HIGH COURT while relying on the judgment of Industrial Engineering Projects (P.) Ltd.'s case 1992 (7) TMI 38 - DELHI HIGH COURT held that reimbursement of expenses can, under no circumstances, be regarded as a revenue receipt. Interest under section 234B and 234C - HELD THAT - We direct the assessing officer to compute the interest by taking in consideration of decision of Bombay High Court in Ngc Network Asia LLC 2009 (1) TMI 174 - BOMBAY HIGH COURT - In the result the Ground No. 5 of the appeal is allowed.

Summary

Issues Involved:

1. Non-adjudication and lack of opportunity to furnish reasons for taxability of GSA receipts.
2. Treatment of GSA receipts as 'fees for included services' under Article 12 of the India-US DTAA.
3. Apportionment of GSA receipts towards non-taxable services.
4. Treatment of reimbursements as 'fees for included services' under Article 12 of the India-US DTAA.
5. Charging of interest under sections 234B and 234C of the Income-tax Act.

Detailed Analysis:

1. Non-adjudication and Lack of Opportunity:
The appellant claimed that the CIT(A) erred by not adjudicating the ground that no show cause notice or opportunity was provided to furnish reasons why GSA receipts should not be taxable. However, this ground was not argued by the appellant and was treated as not pressed, resulting in its dismissal.

2. Treatment of GSA Receipts as 'Fees for Included Services':
The appellant contended that the services provided under the GSA agreement were not taxable in India as they did not make available any technical knowledge, skill, etc., as per Article 12 of the India-US DTAA. The services included development of business strategies, management coordination, human resources services, legal services, IT policies, market research, etc. The appellant argued that these were support services without transfer of technology or skill. The Tribunal examined the service agreement and relevant provisions of the DTAA, concluding that the services did not qualify as 'fees for included services' since they did not make available technical knowledge or skills to the Indian entities. The Tribunal relied on various judicial precedents, including the Karnataka High Court's decision in CIT vs. De Beers India Minerals (P.) Ltd., which clarified that for services to be considered as 'made available,' the recipient must be able to apply the technology independently. Consequently, the Tribunal held that the assessing officer erred in taxing the GSA receipts as 'fees for included services' and allowed the appellant's ground.

3. Apportionment of GSA Receipts:
Given that the Tribunal allowed the appellant's ground on the non-taxability of GSA receipts, the issue of apportionment of these receipts towards non-taxable services became academic and was not discussed further.

4. Treatment of Reimbursements as 'Fees for Included Services':
The appellant argued that reimbursements amounting to ?4,98,576 were not taxable as they were mere reimbursements of actual expenses incurred on behalf of the Indian entity without any markup. The assessing officer had treated these reimbursements as consideration for the use of a process or formula, thus falling under the definition of royalty. The Tribunal noted that the assessing officer did not examine the facts as per the appellant's explanation and held that the reimbursements could not be treated as 'fees for included services' or royalty, following the same principles applied to the GSA receipts. The Tribunal relied on the Bombay High Court's decision in CIT vs. Siemens Aktiongesellschaft, which held that reimbursements of expenses cannot be regarded as revenue receipts. Consequently, the Tribunal allowed the appellant's ground on the treatment of reimbursements.

5. Charging of Interest under Sections 234B and 234C:
The appellant contended that no interest should be charged under sections 234B and 234C prior to the amendment brought by the Finance Act 2012. The Tribunal directed the assessing officer to compute the interest considering the Bombay High Court's decision in Ngc Network Asia LLC, which supported the appellant's contention. Thus, the Tribunal allowed the appellant's ground on the charging of interest.

Conclusion:
The Tribunal allowed the appeal of the appellant, holding that the GSA receipts and reimbursements were not taxable as 'fees for included services' under Article 12 of the India-US DTAA, and directed the assessing officer to compute interest in line with the Bombay High Court's decision.