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2024 (3) TMI 1066 - AT - Income TaxTaxability of income in India - assessee is a company based out of the Netherlands which provided various services to its group companies based in India - Taxability as royalty/fee for technical services - revenues received from rendering certain services were claimed by the assessee as non-taxable in India - AO held that the services were taxable as royalty/fee for technical services under the income tax act, read with the India-Netherlands tax treaty - HELD THAT - The payments do not qualify as royalty for several reasons. Firstly, the Department in the subsequent years (Assessment Years 2018-19, 2020-21 and 2021-2022) has itself not tax the aforesaid payments as royalty. Secondly, we observe that the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited 2021 (3) TMI 138 - SUPREME COURT has effectively overturned all the decisions, on which reliance was placed by the tax authorities to hold that the payments qualify as royalty. Tribunal in the case of mirror transaction, while dealing with the issue of non-deduction of tax at source with respect to the aforesaid payments made by the Indian group companies to the assessee, held that since the payments qualify as royalty under the Act, read with the Tax Treaty, and therefore, held that the Indian companies were not liable to deduct tax at source on such payments under Section 195 of the Act We are of the considered view that payments for providing HR Shell People Support Services do not qualify as Royalty under the Act, read with the Treaty - ground number 1 of the assessee s appeal is allowed. CHR Recruitment Fees, External Information Services (license for online databases) and IT Migration Support Services qualify as fee for technical services u/s 9(1)(vii) of the Act read with Article 12 of Tax Treaty - Scope of make available clause - HELD THAT - Given the wide interpretation to the term technical having been taken by the Courts, and looking into the nature of services which have been rendered by the assessee, we are of the considered view that the services involve extensive use of technology, and the same are technical in nature. We also observe that in the instant facts, the India- Netherlands Tax Treaty, contains a specific restriction in the form of make available clause, which restricts the definition of fee for technical services under the Treaty Law to only those cases where services have been rendered in a manner that the technology have been made available to the recipient of services, meaning thereby, the necessary information/knowledge has been imparted to the recipient of services in such manner, so that in the future, they have been enabled/ empowered to perform the services themselves, without any necessity of recourse to future services being provided by the assessee. The scope of the term make available came up for consideration recently before in the case of Star Rays 2023 (8) TMI 296 - GUJARAT HIGH COURT where the Assessee, a partnership firm, was engaged in business of cutting and polishing diamonds and export of diamonds. It had made remittances qua diamond testing service for certification of diamonds to GIA USA which set up a laboratory at Hong Kong as GIA Hong Kong and claimed that said sum was not tax deductible at source. AO held that assessee had made payment to GIA Hong Kong Laboratory and not GIA USA and, therefore, could not claim treaty benefit between India-USA and, that assessee was liable to deduct TDS from said remittance. Invoices for payment of fees were issued by GIA USA and accounts reflected that payment was received in offshore bank account of GIA USA. The High Court held that the assessee's case was protected under India- USA DTAA as mere rendering of services could not be roped into FTS when person utilizing services was unable to make use of technical knowledge etc. Looking into the nature of services, there is nothing on record to establish that during the course of rendering of services, the technology was made available to the recipient of services, in such a manner that the recipient of services were enabled to perform the services in the future, by itself, without any requirement of recourse/further assistance from the assessee company. From the contents of the nature of services, we observe that neither has technology be made available to the recipient of services, nor there is any such intention to render services in a manner that the recipient of services is enabled to perform the services itself without recourse to the assessee. Accordingly, we are of the considered view that the services have not made available technology to the recipient of services, so as to fall within the definition of FTS under the India-Netherlands tax treaty. Levy of interest u/s 234B in respect of non- residents - HELD THAT - As in light of the aforesaid decision by the Hon ble Supreme Court in Mitsubishi Corporation 2021 (9) TMI 875 - SUPREME COURT Ground No. 7 of the assessee s appeal is allowed. We must also add that recently, in the case of Shell Global Solutions International BV 2023 (10) TMI 1286 - GUJARAT HIGH COURT held that where during relevant Assessment Year assessee was a non-resident, entire tax was liable to be deducted at source on payment made by payer to the assessee u/s 195 and there was no question of advance tax payment by assessee and thus, no interest under Section 234B could be levied upon assessee. Payment received from affiliates - license to use the database maintained by EIG and such payment is treated as royalty - HELD THAT - Grant of right to access the online database would not amount to transfer of right to use the copyright, as alleged by the Assessing Officer - payments for grant of access to software database would not take the case of the assessee within the definition of royalty, as defined under the India-Netherlands tax Treaty. In the instant facts, access to the software has been granted to the Indian entities and there is no transfer of copyright, so as to fall within the definition of royalty under the India- Netherlands Tax Treaty. Taxability of Real Estate And Corporate Travel Services as fees for technical services under Section 9(1)(vii) of the Act read with article 12 of Tax Treaty - AO was of the view that under the Real Estate and Corporate Travel Services, the assessee provides consultancy and assists the regional team of the affiliates in managing real estate transactions and leveraging of global relationships and contract management with key suppliers and real estate information technology tool - HELD THAT - In respect of the aforesaid services, the condition of make available is not satisfied and the Department has not brought anything on record to demonstrate that in the instant case, the technology was made available to the recipient of services, so as to fall within the ambit/definition of FTS under the India-Netherlands tax treaty. Accordingly, in our considered view, the aforesaid services do not qualify as FTS under the India-Netherlands tax treaty. International Tax Administration - as observed that under the international tax administration services, the expertise and experience of the global support team of the assessee is being offered to its affiliates. The nature of tax administration work performed by the Shell group companies is highly technical in nature - HELD THAT - We are of the considered view that in respect of the aforesaid services, the condition of make available is not satisfied and the Department has not brought anything on record to demonstrate that in the instant case, the technology was made available to the recipient of services, so as to fall within the ambit/definition of FTS under the India-Netherlands tax treaty. Accordingly, in our considered view, the aforesaid services do not qualify as FTS under the India-Netherlands tax treaty. Levy of surcharge and cess over and above the taxable rate of 10% on royalty and FTS is not permissible as per the Treaty provisions.
Issues Involved:
1. Taxability of HR Shell People Support as royalty. 2. Taxability of CHR Recruitment Fees, External Information Services, and IT Migration Support Services as fee for technical services (FTS). 3. Levy of interest u/s 234A and 234B. 4. Initiation of penalty proceedings u/s 274 r.w.s. 271(1)(c). 5. Validity of reassessment proceedings u/s 147/148. 6. Taxability of Real Estate and Corporate Travel Services, HRIT-System Administration Services, International Tax Administration Services, IT Services, and Health Ecotox Services as FTS. 7. Levy of surcharge and cess on tax rates prescribed under the India-Netherlands tax treaty. 8. Short credit of TDS. Summary: 1. Taxability of HR Shell People Support as royalty: The assessee provided HR Shell People Support Services to its group companies in India. The AO held these services as royalty u/s 9(1)(vi) of the Act and Article 12 of the India-Netherlands tax treaty, based on the use of Shell HR software. The DRP confirmed this view. However, the Tribunal, relying on the Supreme Court decision in Engineering Analysis Centre of Excellence (P.) Ltd., held that the payments do not qualify as royalty under the Act or the Treaty. The Tribunal also noted that the Department had not taxed similar payments as royalty in subsequent years. (Ground number 1 of the assessee's appeal allowed) 2. Taxability of CHR Recruitment Fees, External Information Services, and IT Migration Support Services as FTS: The AO categorized these services as FTS u/s 9(1)(vii) of the Act and Article 12 of the Treaty, arguing that they involved specialized expertise and made technical knowledge available to the Indian affiliates. The Tribunal, however, found that these services did not "make available" technology to the recipients, as required by the Treaty. The Tribunal also dismissed the argument that the services were managerial and thus outside the scope of FTS. (Grounds 2, 3, and 4 of the assessee's appeal allowed) 3. Levy of interest u/s 234A and 234B: The Tribunal, citing the Supreme Court decision in Mitsubishi Corporation, held that no interest u/s 234B could be levied on the non-resident assessee as the entire tax was deductible at source. (Ground number 7 of the assessee's appeal allowed) 4. Initiation of penalty proceedings u/s 274 r.w.s. 271(1)(c): The Tribunal did not find it necessary to adjudicate on the initiation of penalty proceedings as the primary issues were decided in favor of the assessee. (Ground Nos. 8 and 9 not adjudicated) 5. Validity of reassessment proceedings u/s 147/148: The Tribunal did not specifically address the validity of reassessment proceedings as the primary issues were decided in favor of the assessee. (Ground number 1 for subsequent years not separately adjudicated) 6. Taxability of Real Estate and Corporate Travel Services, HRIT-System Administration Services, International Tax Administration Services, IT Services, and Health Ecotox Services as FTS: For these additional services, the AO held them as FTS under the Act and Treaty. The Tribunal, however, found that these services did not "make available" technology to the recipients, thus not qualifying as FTS under the Treaty. (Grounds 5 and 6 for respective years allowed) 7. Levy of surcharge and cess on tax rates prescribed under the India-Netherlands tax treaty: The Tribunal held that the levy of surcharge and cess could not exceed the tax rate of 10% as per Article 12 of the Treaty, which encompasses surcharge and education cess. (Ground number 10 allowed, Ground number 11 not separately adjudicated) 8. Short credit of TDS: The Tribunal restored the matter to the AO for verification and granting of TDS credit in accordance with the law. (Ground number 12 allowed for statistical purposes) Conclusion: The appeals for the impugned years are partly allowed for statistical purposes. The Tribunal ruled in favor of the assessee on the primary issues of taxability of services as royalty/FTS, levy of interest, and surcharge/cess, while some procedural grounds were not separately adjudicated.
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