2023 (9) TMI 685 - AT - Income Tax

Income taxable in India - taxability of receipts from business support services as Fee for Technical Services (FTS) under Article 13 of India France Double Taxation Avoidance Agreement (DTAA) read with paragraph 7 of its Protocol read with Article 12(4)(a) of India Portugal DTAA - assessee s claim of benefit under MFN Most Favoured Nation clause in terms of paragraph 7 of Protocol to India France DTAA and more restricted definition of FTS as per Article 12(4) of India Portugal DTAA would apply to the disputed receipts - Whether receipts will not fall in clause (a) of Article 12(4) of India-Portugal tax treaty? - HELD THAT - The business support service fee received by the assessee from the Indian entity cannot be considered to be ancillary and incidental to the royalty paid by the Indian entity to another group affiliate. Meaning thereby, the business support service fee under no circumstance can be covered under Article 12(4)(a) of India Portugal DTAA. Thus, in our view, learned first appellate authority has completely misconceived the facts while concluding that the fees are in the nature of FTS under Article 12(4)(a) of India Portugal DTAA. The judicial precedents cited before us by learned counsel for the assessee support this view. Therefore, we reverse the decision of learned first appellate authority on the issue. Whether the fee received by the assessee can be covered under Article 12(4)(b) of India Portugal DTAA ? - After considering the nature of services, mode and manner in which services were rendered and various other aspects, it is observed that the test of make available condition under Article 12(4)(b) of India Portugal treaty has not been satisfied. In fact, no material has been brought on record by the Revenue to establish that while rendering management services, the assessee has made available technical knowledge, know-how, skill etc. to the service recipient, which has enabled the service recipient to acquire the technical knowledge, know-how, skill etc. so as to enable it to apply them independently in future without requiring the aid and assistance of the assessee. As on analyzing the nature of services provided by the assessee under the agreement, it is very much clear that the services are provided on regular day-to-day basis for utilizing in various business operations of the assessee. It is further evident, the assessee has been rendering such services on regular basis and these are not one time services, which once availed, are to be used by the service recipient for their future purpose. Since, the Revenue has failed to demonstrate before us that in course of rendition of services, the assessee has made available technical knowledge, knowhow, skill etc. to the recipient of service, we are unable to upheld the nature and character of receipt as FTS, even under Article 12(4)(b) of India Portugal DTAA. Thus, in our view, the amount cannot be treated as FTS under the treaty provisions. Amount constituting reimbursement of expenses on cost to cost basis - We direct the Assessing Officer to examine the nature and character of reimbursement of expenses keeping in view the additional evidences and various other evidences filed by the assessee and determine whether such amount qualifies as FTS under Article 12(4) of India Portugal DTAA. However, before deciding the issue, the assessee must be provided a reasonable opportunity of being heard. Ground no. 2 is partly allowed.

Summary

Issues Involved:
1. Taxability of receipts from business support services as Fee for Technical Services (FTS) under DTAA.
2. Claim of Most Favoured Nation (MFN) status under India-France DTAA.
3. Treatment of cost-to-cost reimbursement of expenses.

Summary:

Issue 1: Taxability of Receipts from Business Support Services as FTS

The core issue is the taxability of receipts from business support services as Fee for Technical Services (FTS) under Article 13 of the India-France DTAA, read with Article 12(4)(a) of the India-Portugal DTAA. The assessee, a non-resident corporate entity from France, rendered IT support, management, engineering, and training services to its Indian group entity, Michelin India Pvt. Ltd. The Assessing Officer (AO) treated these receipts as FTS and taxed them at 10%, rejecting the assessee's claim that these services do not qualify as FTS under the DTAA.

Issue 2: Claim of MFN Status

The assessee claimed MFN status under paragraph 7 of the Protocol to the India-France DTAA, arguing that the more restricted definition of FTS under Article 12(4) of the India-Portugal DTAA should apply. The Commissioner of Income Tax (Appeals) accepted this claim but held that the services were ancillary and subsidiary to the use of trademarks and technology, thus falling under Article 12(4)(a) of the India-Portugal DTAA. However, the Tribunal found that the business support services were not ancillary to the royalty payments and thus did not qualify as FTS under Article 12(4)(a).

Issue 3: Treatment of Cost-to-Cost Reimbursement of Expenses

The assessee argued that an amount of Rs. 5,09,07,356/- was a cost-to-cost reimbursement and should not be treated as FTS. The Tribunal noted that the first appellate authority had not disputed the reimbursement nature of these expenses but still treated them as FTS. The Tribunal directed the AO to re-examine the nature and character of these reimbursements, considering additional evidence provided by the assessee.

Conclusion:

The Tribunal concluded that the receipts from business support services do not qualify as FTS under Article 12(4)(a) or 12(4)(b) of the India-Portugal DTAA. The issue of cost-to-cost reimbursement was remanded to the AO for fresh examination. The appeal was partly allowed.