2016 (11) TMI 1249 - AT - Income Tax

Taxability of Management Service Fees - whether amount received by the assessee from its Indian entity as royalty under Article 12(4) of Indian- Netherlands Treaty - Held that - As highlighted above, with regard to various streams of services like providing of information technology; operational support; marketing; quality, health, safety and environment; estimating and engineering; and personal and organization, administration and legal services, there is no imparting of any kind of knowledge, skill or experience by way of information concerning industrial, commercial or scientific which is made available to VOIPL.For rendering of these services, there is no element of imparting of any knowhow or there is transfer of any knowledge, skill or experience. Thus, in our opinion, none of the services provided by the assessee in the term of service agreement falls within the scope and ambit of royalty as defined in Article 12(4) of the DTAA. We ourselves have analyzed each and every aspect of services rendered by the assessee in terms of the service agreement and also analyzed the definition of royalty as given in Article 12(4) and have reached to a conclusion that the said services and reimbursement of cost does not fall under the realm of royalty . Moreover here in this case, the revenue s main thrust is that the payment received by the assessee from VOIPL is royalty and here it is not the case of FTS by the department and, therefore, we are refraining ourselves from going into the aspect of FTS qua the services rendered in terms of the service agreement. Taxability of reimbursement of salary as FTS under Article 12(5) - Held that - Assessee has given the employee-wise break-up of salary along with respective days of stay in India for the crew members on Volvox Atlanta and it is amply evident that stay of none of the crew members in India has exceeded 90 days. Similarly, with respect to reimbursement of salary of crew members Volvox Delta also it is seen that the days of stay again does not exceed 90 days. Rather it is only for the period of 35 days. This is evident from the certificate issued by the Director General of Shipping dated 10th September, 2009 given to VOIPL. Once that is so, then in terms of section 10(6)(viii) the salary paid to such non-resident cannot be taxed in India. Once the salary cannot be taxed in India the same cannot be brought in the ambit of FTS under Article 12(5). Thus, on this ground alone, we are of the opinion that the reimbursement of salary paid to the non-resident is exempt from taxability in India by virtue of section 10(6)(viii) and, therefore, same cannot be held to be FTS. Accordingly, the addition made by the Assessing Officer on this score stands deleted. Set off of unabsorbed depreciation and losses - Held that - In light of our finding given above, we direct the Assessing Officer to follow the provision of section 115A(3) and 32(2) after giving the effect to our decision as above.

Issues Involved:
1. Taxability of Management Service Fees of ?22,57,89,998 as "Royalty" under Article 12(4) of the India-Netherlands Treaty.
2. Taxability of Reimbursement of Salary of ?2,22,39,146 as "Fees for Technical Services" (FTS) under Article 12(5) of the India-Netherlands Treaty.
3. Set-off of Unabsorbed Depreciation of ?23,65,99,081 and Brought Forward Business Losses of ?5,55,14,086 against the additions made to the income.
4. Initiation of Penalty Proceedings under various sections of the Income Tax Act.

Detailed Analysis:

1. Taxability of Management Service Fees as "Royalty":
The primary issue was whether the management service fees received by the assessee from its Indian entity should be treated as "royalty" under Article 12(4) of the India-Netherlands DTAA. The assessee argued that the services provided were business support and administration services, not technical or consultancy services, and did not involve the transfer of any technical knowledge, experience, skill, know-how, or processes. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) held that the services provided were in the nature of sharing industrial, commercial, and scientific experience and thus taxable as "royalty."

The Tribunal analyzed the nature of services provided, including information technology support, operational support, marketing, quality, health, safety, and environment audits, estimating and engineering assistance, and administrative and legal support. It concluded that these services did not involve the transfer of any know-how or technical knowledge to the Indian entity. The Tribunal emphasized that for a payment to be considered "royalty," there must be an element of imparting know-how or the right to use such know-how, which was not present in this case. Therefore, the management service fees were not taxable as "royalty" under the DTAA.

2. Taxability of Reimbursement of Salary as "Fees for Technical Services":
The AO treated the reimbursement of salary expenses received by the assessee as FTS under Article 12(5) of the India-Netherlands DTAA. The assessee contended that the crew members provided on dredgers were non-residents, their stay in India did not exceed 90 days, and therefore, their salary was exempt from tax under section 10(6)(viii) of the Income Tax Act. The Tribunal found that the stay of the crew members did not exceed 90 days, making their salary exempt from tax in India. Consequently, the reimbursement of salary could not be treated as FTS and was not taxable in India.

3. Set-off of Unabsorbed Depreciation and Brought Forward Business Losses:
The AO had adjusted the unabsorbed depreciation and business losses against the additions made to the income. The Tribunal directed the AO to follow the provisions of section 115A(3) and 32(2) after giving effect to its decision on the taxability of management service fees and reimbursement of salary. The issue of unabsorbed losses was not pressed before the Tribunal and was dismissed.

4. Initiation of Penalty Proceedings:
The grounds related to the initiation of penalty proceedings under various sections of the Income Tax Act were deemed premature and infructuous by the Tribunal. Therefore, no adjudication was required on these grounds.

Conclusion:
The Tribunal partly allowed the appeal of the assessee, holding that the management service fees were not taxable as "royalty" and the reimbursement of salary was not taxable as FTS. The AO was directed to follow the relevant provisions for set-off of unabsorbed depreciation and business losses. The penalty-related grounds were treated as premature.

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