India US DTAA is applicable when payment is made to USA and services rendered by Honk Kong entity

[Amit Jalan]

“Bill from – ship from” transactions in case of services are quite common where services are rendered by an entity and payment is made to another entity (the provider of services). Thereafter, of-course these two entities settle their own accounts separately. This time the question arose that where service was rendered by an independent corporate entity though a subsidiary, then can such payment made to the holding company be considered as “mere routing of payment” OR whether the payee would be considered as a service provider? Would the service rendered (not provider) be considered as a ‘beneficial owner of payment’?

The fact in the case was that on specific requirements by buyers, diamonds were sent for certification by Gemmological Institute of America (GIA for short). The assessee entered into a customer services agreement with the GIA Inc USA. Now GIA set up a laboratory at Hong Kong under a separate company called GIA Hong Kong Laboratory Ltd. However, the assessee had no direct relationship or any agreement with the GIA Hong Kong Laboratory, Hong Kong. The payment has been made to its offshore Bank Account of In Honk Kong owned by GIA, USA. The AO held that the assessee has made payment to GIA Hong Kong Laboratory and not GIA USA and therefore cannot claim the treaty benefit between India USA. However, the following facts were noted -

A. A customer service agreement has been entered into which clearly establishes that the agreement is with the GIA USA and not with Honk Kong entity.

B. The certification was done by the US entity.

C. Payment was also done to the USA Entity (and not the Honk-Kong entity) with offshore bank account in Honk Kong.

The state of source is not obliged to give up the taxing rights over the passive income in the nature of Fees for Technical Services (FTS) merely because the income was paid direct to recipient of a state which with the state of source had concluded / executed DTAA. Since, the assessee had furnished copy of tax residency certificate (TRC) from USA authority from USA in Form-10F as required under section 90(4) and 90(5) of the Indian Income Tax, the assessee is entitled to the benefits of DTAA between India and USA.

While questions have arosen on the basis of facts, the High Court of Gujarat in the case of COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION AND TRANSFER PRICING) VERSUS STAR RAYS - 2023 (8) TMI 296 - GUJARAT HIGH COURT, appreciated the factual position wherein there was a condition in the customer service agreement between Indian & USA entity, through the bank invoice and the Bank remittance advice a finding of fact had been arrived at that the assesses case was protected under the India-USA DTAA. Hence the same was not a question of law and the case was clear from facts itself. Therefore, the matter was disposed of in favour of the taxpayer. The ratio of the judgement can be applied to other cases also, even domestically in case of “Bill from – ship from” transactions in services.