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2012 (12) TMI 576 - AT - Income TaxFIS - article 12 of India-US DTAA - Marketing and management fees - Fees for included services (FIS) - the employees of the assessee visited India - held that - the scope of section 9(1)(vii) is somewhat different in comparison with the Article 12(4)(b). In order to rope in any amount within the purview of FIS under the Article 12(4)(b) of DTAA, which has been invoked by the AO, it is essential that the payment should be to 'make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.' On the contrary, there is no such requirement of 'making available' any managerial, technical or consultancy services'. Simple rendition of such services is sufficient. It is not the case of the Revenue that the assessee made available some managerial, technical or consultancy services to WNS India. The amount of ₹ 41.02 crore cannot be considered as FIS, naturally the amount received by the assessee on this score needs to be examined from the angle of taxability under other provisions. Royalty - reimbursement of international telecom connectivity charges - held that - the term royalty has been defined in the DTAA as per Article 12(3). Such definition of the term royalty as per this Article is exhaustive. Pursuant to the insertion of Explanation (5) by the Finance Act, 2012, no amendment has been made in the DTAA to bring the definition of royalty at par with that provided under the Act. Subject matter of the Explanation is otherwise not a part of the definition of Royalty as per Article 12. As such, it is clear that the contention of the learned Departmental Representative that the retrospective insertion of Explanation 5 to section 9(1)(vii) should be read in the DTAA also, cannot be countenanced. This amount can be considered as royalty only in the hands of the owner or lessor or any other person entitled to permit the use of equipment and earning income in his own right from allowing the use of such equipment to others. By no stretch of imagination an intermediary, who makes payment to the owner of equipment on behalf of some person and then gets reimbursed for the said payment, can be considered as an owner or lessor etc. of the equipment so as to be considered u/s 9(1)(vi). The said amount may be considered as royalty in the hands of MCI WorldCom and other international operations under the provisions of the Act, who own the equipment and allowed use or right to use such equipment to WNS India. The assessee in the instant case simply paid a sum of ₹ 6.14 crore to MCI WorldCom etc. in the first instance and then recovered the same from WNS India. Thus it is evident, the said sum is not royalty even as per section 9(1)(vi) of the Act. Determination of correct nature of reimbursement of international telecom connectivity charges - held that - The international telecom connectivity charges are not related in any manner with the rendering of marketing and management services. By no standard, such a claim for reimbursement of expenses can be considered as division of the contract price so as to gain some tax advantage. - Once it is held that there is no profit element in such reimbursement, it becomes manifest that the gross income of ₹ 6.14 crore recovered by the assessee from WNS India is equal to the same amount paid by it to MCI WorldCom etc., thereby leaving no surplus liable to tax under Article 7 of the DTAA.
Issues Involved:
1. Taxability of marketing and management fees under Article 12 of India-US Double Taxation Avoidance Agreement (DTAA). 2. Taxability of reimbursement of international telecom connectivity charges as royalty under Article 12 of DTAA. 3. Taxability of reimbursement of other expenses as fees for included services under Article 12 of DTAA. 4. Levy of interest under sections 234B and 234C of the Income-tax Act, 1961. Issue-wise Detailed Analysis: 1. Taxability of Marketing and Management Fees: The primary issue was whether the marketing and management fees received by the assessee from WNS India should be taxed as "Fees for included services" (FIS) under Article 12 of the India-US DTAA. The assessee, a US-incorporated company, provided marketing and management services to WNS India and received Rs. 41.02 crore. The Assessing Officer (AO) treated this amount as FIS under Article 12(4)(b) of the DTAA, subject to a 15% tax rate on a gross basis. However, the Tribunal noted that a similar issue had been decided in favor of the assessee for the assessment year 2004-2005, where it was held that such fees could not be considered as FIS under Article 12. The Tribunal reiterated that the AO's reliance on section 9(1)(vii) of the Act was misplaced as the provision of the Act or the DTAA, whichever is more beneficial to the assessee, shall apply. Since the assessee did not make available any technical knowledge, experience, skill, etc., to WNS India, the fees were not taxable as FIS under Article 12 of the DTAA. Consequently, the Tribunal reversed the AO's order and directed that the income should be taxed under Article 7 as business profits. 2. Taxability of Reimbursement of International Telecom Connectivity Charges: The second issue concerned the reimbursement of international telecom connectivity charges amounting to Rs. 6.41 crore, which the AO treated as royalty under Article 12 of the DTAA. The Tribunal observed that similar reimbursements in earlier years were not considered royalty. The Tribunal also addressed the Departmental Representative's argument that the insertion of Explanation 5 to section 9(1)(vi) by the Finance Act, 2012, with retrospective effect, changed the nature of such payments to royalty. However, the Tribunal held that the definition of "royalty" in the DTAA is exhaustive and not affected by the retrospective amendment to the Act. Moreover, the Tribunal found that the reimbursement was without any profit element and was merely a recovery of expenses incurred on behalf of WNS India. Therefore, the reimbursement could not be considered as royalty and was not taxable under Article 12 of the DTAA. 3. Taxability of Reimbursement of Other Expenses: The third issue involved the reimbursement of Rs. 4.10 crore for expenses incurred on employees of WNS India on their visits abroad, which the AO taxed as fees for included services under Article 12 of the DTAA. The Tribunal noted that similar issues in earlier years were remitted to the AO for fresh consideration. Following the precedent, the Tribunal set aside the impugned order and remitted the matter to the AO for a fresh decision after verifying the relevant details. 4. Levy of Interest under Sections 234B and 234C: The final issue was the levy of interest under sections 234B and 234C of the Act. The Tribunal referred to the judgment of the Hon'ble jurisdictional High Court in the case of Director of Income-tax (International Taxation) v. NGC Network Asia LLC, which held that when the duty to deduct tax at source is on the payer, and the payer fails to do so, no interest can be charged from the payee assessee under section 234B. Since the assessee was a non-resident and the amounts payable to it were subject to tax deduction at source, the Tribunal held that no interest could be charged under sections 234B and 234C. Conclusion: The appeal was partly allowed, with the Tribunal ruling in favor of the assessee on the major issues of taxability of marketing and management fees and reimbursement of international telecom connectivity charges, while remitting the issue of reimbursement of other expenses back to the AO for fresh consideration. The Tribunal also held that no interest could be charged under sections 234B and 234C.
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