2024 (8) TMI 1136 - AT - Income Tax

Accrual of income in India - FTS - PE in India or not? - treatment of network fees earned during the year by the assessee as fees for technical services and royalty under the Income-tax Act and u/A 13 of the India Netherland DTAA - HELD THAT The assessee has various business infrastructures such as IT network, E-commerce portal facilitating interface with customers, network pool of various service providers, such as freight insurance etc. - During the course of scrutiny assessment proceedings the AO noticed that, assessee has earned its income from services provided to its Indian AE i.e. Damco India Private Limited (DIPL), as network transportation fee. The transportation fee received from DIPL, was subjected to TDS treating the remittance as FTS but in the return of income was not offered to tax treating the same as business income on the ground that there was no PE in India. Since the payment was in the nature of FTS, a show-cause notice was issued proposing to treat the transportation fee as FTS. Assessee filed a detailed reply explaining that it is overall responsible for operation and maintenance of the business at global level and since DIPL is part of such network it makes use of facilities like integrated supply chain management, freight forwarding network, Group IT for common platform for integrated and efficient operations. As explained that, assessee does not charge any separate charge for use of such facilities. From the above chart it was explained that in FY 2013-14 and 2014-15, DIPL has received network income in which it failed to earn profits less than arm s length margin. It was clarified that network fee/network income is not a charge and hence it thus comes under the purview of FTS u/A 12 of India Netherlands Tax Treaty. It was strongly contended that such network fee receipts from DIPL are business income u/A 7 of India Netherlands Tax Treaty and in business of a PE, such network fee receipts are not taxable in India. The explanation of the assessee did not find favour with the AO who was of the firm belief that as per Explanation 2 to Section 9(1)(vii) FTS has been defined as any consideration for rendering any managerial, technical or consultancy services and the taxability of the FTS is also applicable in view of the treaty. Accordingly, the network fees was taxed as fees for technical services and royalty. Objections were raised before the DRP and the DRP after considering the facts and the submissions, was of the opinion that the DRP in AY 2016-17 had upheld the additions made by the AO to the total income of the assessee treating the impugned receipts as FTS. DRP further observed that the issues at hand is similar to those which were dealt by the DRP in AY 2012-13 and 2013-14. Though the DRP fairly conceded that identical additions were made in assessee s own case for AY 2013-14, 2017-18, 2019-20 and 2020-21 and the said additions were deleted by the Tribunal and since the decisions of the Tribunal were not accepted by the revenue, the DRP confirmed the action of the AO. Respectfully following the order of the Co-ordinate Bench AY 2017-18 and 2020-21 2023 (6) TMI 1428 - ITAT MUMBAI we direct the AO to delete the impugned addition on account of receipt of network fees from DIPL.

Summary

Issues Involved:
1. Treatment of network fees earned by the assessee as fees for technical services (FTS) and royalty under the Income-tax Act and under Article 13 of the India Netherlands DTAA.
2. Whether the network fees received by the assessee from Damco India Private Limited (DIPL) should be taxed as business income or as FTS/royalty.
3. Validity of the assessment order passed beyond the limitation period.

Detailed Analysis:

1. Treatment of Network Fees as FTS and Royalty:

The primary issue in both appeals is whether the network fees earned by the assessee during the year should be treated as fees for technical services (FTS) and royalty under the Income-tax Act and under Article 13 of the India Netherlands DTAA. The assessee argued that the network fees are business income and should not be taxed in India due to the absence of a Permanent Establishment (PE) in India. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) disagreed, treating the fees as FTS and royalty, thus subjecting them to tax.

2. Taxability of Network Fees from DIPL:

The assessee company is engaged in logistics and freight forwarding and has earned income from services provided to its Indian AE, DIPL, as network transportation fees. The AO noted that the transportation fee received from DIPL was subjected to TDS as FTS but was not offered to tax in the return of income. The assessee contended that the network fees are not a charge and hence do not come under the purview of FTS under Article 12 of the India Netherlands Tax Treaty. The AO, however, taxed the network fees as FTS and royalty, relying on Explanation 2 to Section 9(1)(vii) of the Act.

The DRP upheld the AO's decision, referencing similar cases from previous assessment years where the network fees were treated as FTS. Despite the Tribunal's decisions in favor of the assessee in identical cases for earlier years, the DRP confirmed the AO's action.

3. Tribunal's Findings:

The Tribunal reviewed the orders of the authorities and previous decisions in the assessee's own case. It noted that the network fees received by the assessee from Damco India were neither in the nature of royalty nor FTS. The Tribunal emphasized that the network fees are business income under Article 7 of the India Netherlands DTAA and are not taxable in India in the absence of a PE.

The Tribunal cited its previous judgments, including ITA No. 7447/Mum/2017 for AY 2013-14, ITA No. 545/Mum/2022 & ITA No. 2240/Mum/2022 for AYs 2018-19 & 2019-20, and ITA No. 909 & 937/Mum/2023 for AYs 2017-18 and 2020-21, where it had deleted similar additions. The Tribunal reiterated that the network fees do not fall within the definition of FTS or royalty under Article 12 of the DTAA, as they do not involve the rendering of technical or consultancy services or the making available of technical knowhow.

4. Validity of Assessment Order:

The assessee also challenged the validity of the assessment order on the grounds that it was passed beyond the limitation period provided under Section 144C read with Section 153 of the Act. However, the assessee later conceded that it did not want to press this ground, and the Tribunal dismissed it as not pressed.

Conclusion:

The Tribunal directed the AO to delete the impugned addition on account of receipt of network fees from DIPL, following the precedent set in the assessee's own case in previous assessment years. The appeals were partly allowed, with the Tribunal confirming that the network fees are not taxable as FTS or royalty under the Income-tax Act or the India Netherlands DTAA. The issue regarding the validity of the assessment order was dismissed as not pressed. The order was pronounced on 14th August 2024 at Mumbai.