2017 (12) TMI 299 - AT - Income Tax

Nature of receipt from TIL - payment of reimbursements - receipt in nature of FTS - India USA DTAA - payment by TIL to a third party service provider - Held that - A perusal of the details in Annexure-3 & 4 to this order would go to show that it was third parties who had rendered services to TIL. The actuals billed by the third parties were paid by the Assessee in USA and were later on reimbursed by TIL to the Assessee in India. We are of the view that there is no basis for the AO to conclude that the payment of reimbursements were in the nature of FTS. As rightly contended on behalf of the Assessee, the Assessee was not the ultimate beneficiary of the sum in question nor did it render any service to TIL. There is no basis on which the AO came to the conclusion that the sum in question was FTS in the hands of the Assessee. Even assuming that the sum in question is in the nature of FTS, under Article 12(4)(b) of the DTAA it is only when technical or consultancy services rendered by the Assessee makes available technical knowledge, experience or skill that the sum in question can be taxed in the hands of the Assessee. There is no evidence brought on record to show that the technical skill, knowledge etc., were made available to TIL by the Assessee. At best the sum in question is taxable only in the hands of the persons who provided the services to TIL and not in the hands of the Assessee. The Transfer Pricing Officer scrutinized the details of reimbursements while examining the international transaction of reimbursement by TIL to the Assessee u/s.92 of the Act and found that the Assessee made no profit on such reimbursements and that the reimbursements were at Arm s Length. All these circumstances are sufficient to conclude that the order of the CIT(A) on this issue has to be upheld. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of taxing reimbursements as "Fees for Technical Services" (FTS).
2. Validity of initiation of reassessment proceedings.
3. Taxability of "Home Office Allocation receipts" and "Charge Back Receipts".

Detailed Analysis:

1. Validity of Taxing Reimbursements as "Fees for Technical Services" (FTS):
The primary issue was whether the reimbursements received by the Assessee from Timken India Limited (TIL) constituted "Fees for Technical Services" (FTS) under the Indo-US Double Taxation Avoidance Agreement (DTAA). The Assessee, a US-based company, received payments from TIL for various services rendered in the USA. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated these payments as FTS, making them taxable in India. However, the Tribunal found that the services provided were advisory in nature and did not "make available" technical knowledge, experience, skill, know-how, or processes to TIL, as required under Article 12(4) of the DTAA. The Tribunal concluded that these payments could not be taxed as FTS in India. The Tribunal also noted that the Assessee did not have a Permanent Establishment (PE) in India, and thus, the income could not be taxed as business profits under Article 7 of the DTAA.

2. Validity of Initiation of Reassessment Proceedings:
The Assessee challenged the validity of the reassessment proceedings initiated under Section 148 of the Income Tax Act, 1961, for the Assessment Year (AY) 2002-03. However, since the Tribunal decided the issues on merits, it deemed the challenge to the reassessment proceedings as academic and did not adjudicate on it.

3. Taxability of "Home Office Allocation receipts" and "Charge Back Receipts":
The Tribunal examined whether the sums received by the Assessee from TIL as reimbursements for expenses incurred on behalf of TIL could be taxed in India. The AO had treated these reimbursements as FTS, asserting that they included services rendered under a service agreement dated 2.8.2000. The Tribunal found that the Assessee acted merely as a conduit for payments made to third-party service providers and did not derive any income from these reimbursements. The Tribunal emphasized that the reimbursements did not contain any profit element and were at arm's length, as confirmed by the Transfer Pricing Officer. Consequently, the Tribunal held that these reimbursements could not be taxed in the hands of the Assessee.

Conclusion:
The Tribunal allowed the Assessee's appeals and cross-objections, concluding that the sums received from TIL did not constitute FTS and were not taxable in India. The Tribunal directed the AO to delete the additions made for AY 2002-03 to 2007-08. The appeals by the Revenue were dismissed, and the reassessment proceedings were deemed academic. The Tribunal's decision was based on a detailed analysis of the nature of services provided, the DTAA provisions, and the absence of a PE in India.