2016 (3) TMI 964 - AT - Income Tax

Taxing receipts for Management Services to be in the nature of Fees for Technical Services ( FTS ) DTAA between India and Sweden - Held that - Identical issue arose before the Tribunal in assessee s own case in assessment year 2007-08 and 2008-09 wherein held on the principle of most favoured nation clause, that the payment received by the assessee company from its Indian subsidiaries could not be brought to tax. - Decided in favour of assessee

Issues Involved:
1. Taxability of receipts for Management Services as 'Fees for Technical Services' (FTS) under Article 12 of the India-Sweden Double Taxation Avoidance Agreement (DTAA) and Section 9(1)(vii) of the Income-tax Act, 1961.
2. Levy of interest under Section 234B of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Receipts for Management Services as 'Fees for Technical Services' (FTS):

The primary issue revolves around whether the receipts for management services amounting to Rs. 4,85,82,800/- should be classified as 'Fees for Technical Services' (FTS) under Article 12 of the DTAA between India and Sweden and Section 9(1)(vii) of the Income-tax Act, 1961. The assessee argued that the receipts were not taxable in India, citing previous Tribunal decisions in their favor for assessment years 2007-08 and 2008-09. The Tribunal had previously ruled that the payments received by the assessee company from its Indian subsidiaries could not be taxed under the principle of the most favored nation (MFN) clause, which was integral to the DTAA between India and Sweden.

The Tribunal's decision was based on the interpretation that the services provided did not 'make available' any technical knowledge, experience, skills, know-how, etc., to the Indian subsidiary, as required under the DTAA between India and Portugal, which had a more restrictive scope for taxing FTS. The Tribunal noted that the CIT(A) had upheld the Assessing Officer's view, which categorized the management services as FTS and taxable in India. However, the Tribunal found that the CIT(A) had not adequately considered the MFN clause and the precedent set by the Tribunal's earlier decisions.

The Tribunal reiterated its stance from the previous years, emphasizing that the payments for management services did not meet the criteria for FTS under the DTAA with Portugal, which should apply due to the MFN clause in the DTAA with Sweden. Consequently, the Tribunal reversed the CIT(A)'s order and allowed the assessee's claim, holding that the receipts could not be taxed in India.

2. Levy of Interest under Section 234B:

The second issue was whether the CIT(A) erred in upholding the Assessing Officer's action of levying interest under Section 234B of the Income-tax Act. The assessee contended that the entire income was subject to Tax Deducted at Source (TDS), and hence, the interest under Section 234B should not be levied. Given that the primary issue of taxability was resolved in favor of the assessee, the Tribunal did not find it necessary to delve deeply into this matter. As the principal amount was not taxable, the question of interest under Section 234B became moot.

Conclusion:

The Tribunal allowed the appeal of the assessee, holding that the receipts for management services could not be taxed in India under the principle of the most favored nation clause in the DTAA between India and Sweden. Consequently, the grounds of appeal raised by the assessee were allowed, and the interest levied under Section 234B was also set aside. The decision was pronounced on February 19, 2016.

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