2016 (12) TMI 1136 - AT - Income Tax

Taxability of borrowed / loan services charges received - Indo-Singapore DTAA - AO treated it as Fees for Technical Services / Fees for Included Services (FTS / FIS) under Article 12 of the treaty - held that - On hearing both the parties we have perused paras 5 6 and 7 of the order of the assessment which are extracted above and find that it is obvious that the Assessing Officer relied heavily on the assessment order for the AY 2007-2008 and found the issue is one and the same ie if the borrowed service charges constitutes FTS under Article 12 of the Indo-Singapore DTAA. Since the language of Article 12 is common for Indo-US and Indo-Singapore DTAA the order of the Tribunal is equally relevant for all the US based companies as well. Issue involved regarding borrowed service charges was decided by this Tribunal in favour of the assessee and further the department has resolved that the issue under MAP and consequently withdrawn the appeals filed before the Hon ble High Court. Further the assessee has filed a letter dated 12/02/2014 thereby stated that the issue relating to taxability of firm function charges does not arise in case of these three appeals and the only issue involved in these appeals is the taxability of borrowed service charges which has been decided in favour of the assessee under the Mutual Agreement Procedure. In view of the above facts and circumstances when the issues involved in these appeals have already resolved under the Mutual Agreement Procedure we direct the AO to grant the relief accordingly to the assessee after verification of fact that the issues have already been resolved under the Mutual Agreement Procedure. - Decided in favour of assessee

Summary

Issues Involved:
1. Taxability of borrowed/loan services charges under Indo-US and Indo-Singapore DTAA.
2. Classification of these charges as Fees for Technical Services (FTS) or Fees for Included Services (FIS) under Article 12 of the treaty.
3. Applicability of the Mutual Agreement Procedure (MAP) order from previous assessment years to the current assessment year.

Detailed Analysis of the Judgment:

1. Taxability of Borrowed/Loan Services Charges:
The primary issue in these appeals is whether the borrowed/loan services charges received by the assessee should be treated as taxable under the Indo-US and Indo-Singapore DTAA. The Assessing Officer (AO) had treated these charges as Fees for Technical Services (FTS) under Article 12 of the treaty, resulting in additions to the income of the assessee for the assessment year 2010-2011. The AO's decision was based on the assessment order for AY 2007-2008 and was confirmed by the Dispute Resolution Panel (DRP).

2. Classification as Fees for Technical Services (FTS) or Fees for Included Services (FIS):
The AO considered the loan service income as FTS, which the assessee disputed. The assessee argued that these charges do not constitute FTS or FIS under Article 12 of the treaty. The Tribunal noted that the issue had been previously litigated and decided in favor of the assessee for AY 2007-2008, where it was held that such charges do not amount to FTS. This decision was also upheld for subsequent years (AYs 2008-09 to 2011-12).

3. Applicability of the Mutual Agreement Procedure (MAP) Order:
The assessee relied on the MAP order for AY 2007-2008, which concluded that borrowed service charges are not taxable in India as 'royalty' or 'FIS'. The Tribunal found that the MAP resolution for AYs 2008-09 and 2009-10, which held that such charges are not taxable, should apply to the current AY 2010-2011 as well. The Tribunal emphasized that the DRP and AO had erred in not recognizing the binding nature of the MAP order, which was accepted by the Department and should extend to the current assessment year due to the similarity of facts.

Tribunal's Conclusion:
The Tribunal concluded that the AO's reliance on the assessment order for AY 2007-2008 was misplaced, as the issue had been resolved in favor of the assessee in subsequent years under the MAP. The Tribunal directed the AO to grant relief to the assessee after verifying that the issues have been resolved under the MAP. The Tribunal also noted that the DRP and AO's argument that the MAP is year-specific was not sustainable, given the consistent facts across the assessment years.

Final Judgment:
The Tribunal allowed all ten appeals filed by the assessee, directing the AO to grant relief accordingly after verification of the facts. The Tribunal's order was pronounced in the open court on 21st October 2016.

Summary:
The Tribunal ruled in favor of the assessee, holding that the borrowed/loan services charges are not taxable as FTS or FIS under Article 12 of the Indo-US and Indo-Singapore DTAA. The Tribunal emphasized the binding nature of the MAP order from previous assessment years and directed the AO to grant relief accordingly. All ten appeals filed by the assessee were allowed.