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2021 (1) TMI 211 - AT - Income TaxAccrual of income in India - taxability of receipts towards Human Resource and Leadership training provided by the assessee to its Indian affiliate having been treated as Fees for technical services within the meaning of Article 12 of the India and Sweden Double Taxation Avoidance Agreement - assessee is a Sweden based company who filed its original return declaring total income of ₹ 4.05 crore, being interest received on ECB loans - Whether benefit of India Portuguese DTAA can be allowed in terms of MFN clause in the Protocol to India Sweden DTAA? - HELD THAT - There is a substance in the contention of the ld. AR that once two sovereigns have added Protocol to the DTAA between India and Sweden, which contains the Most Favoured Nation (MFN) clause, inter alia, qua Article 12, the sequitur is that the beneficial provisions contained in the DTAA between India and Portuguese is to be read in the DTAA between India and Sweden. The view point of the A.O. in this regard is ex consequenti vacated. Is Training fee a consideration for rendering Managerial services as claimed by the assessee? - case of the assessee before the authorities below has been that the Training fee is a consideration for Managerial services and going by the Protocol to the DTAA read with the DTAA between India and Portuguese, the fee for managerial services does not fall within the scope of Article 12 - HELD THAT - Acquainting someone in a formal manner with techniques to boost sales does not stand at par with rendering marketing services. Rendition of marketing services takes place when marketing activities are actually undertaken for and on behalf of an organization by practically plunging into the field or doing some activity concerning the marketing. In fact, doing the activity is synonymous with rendering of service of that nature. Simply equipping or enabling the others for doing an activity is a step anterior to rendition of such services. Coming to the context under consideration, the case of the assessee - that it imparted leadership training to three employees of SAPL, which, in turn, helped them in managing the affairs of SAPL in a better way and hence, it rendered managerial services to SAPL - In our considered opinion is not correct. We are constrained to hold that rendering leadership training to employees of SAPL cannot be said as rendering managerial services so as to fall outside the ambit of fees for technical services under Article 12 (3) of the DTAA between India and Sweden read with its Protocol and the resultant Article 12 of India and Portuguese treaty. The contention of the assessee is ergo dismissed as devoid of any merit. Is Training fee a consideration for rendering Consultancy or technical services as held by the Revenue? - What is pertinent to note here is that the common connotation of Consultancy services as noticed herein does not hold good in the context of the language of Article 12 of the DTAA between India and Portuguese. Even a cursory reading of para 4 of Article 12 of India Portuguese Convention deciphers that the clause (b) is attached to both the technical and consultancy services. Thus the Consultancy services in the present context would not be of the nature as understood commonly, but draw their colour from the items mentioned after the term make available , more specifically, when these are also comprehended in the sense of making available experience or skill etc. to the recipient for using it at his own end. This shows that the technical knowledge, experience or skill etc., must be handed over to the acquirer for its later use by self as a pre-condition for falling within the purview of this Article. Coming back to the factual position prevailing before us, we find that the leadership training provided by the assessee did not result in making available any technical knowledge, experience or skill etc. to the employees of SAPL, which could enable them to use it later on. In that view of the matter, it is held that the Revenue authorities were not justified in considering Training fee as a consideration for rendering Consultancy or Technical services within the meaning of Article 12(4)(b) of the DTAA between India and Portuguese. If training fee is not FTS, does it become immune from taxation? - we find that the assessee characterized the receipt of Training fee as a consideration for managerial services within the overall ambit of Article 12 and the Revenue also accepted the same as falling under that Article but as consultancy or technical service. We have held supra that the Training fee received by the assessee does not fall within the purview of Article 12 of the DTAA with Portuguese inasmuch as it is neither fees for managerial services on one hand nor consultancy or technical services on the other. Thus, the taxability of the same is required to be tested within the meaning of Article 7 read with Article 5 of the DTAA. Since such an exercise of examining the case under Article 7 has not been undertaken by the AO, we would have ordinarily remitted the matter to the AO for its de novo adjudication. Contention of the assessee that the provisions of Article 7 of taxing the business receipts in India do not apply as the company does not have a PE in India and consequently the profits from receipts from SAPL cannot be taxed as Business Income is acceptable . Since the AO has himself accepted that the assessee did not have any PE in India, the amount of Training fee will also escape tax net as it cannot be taxed as Business profit under Article 7 in the absence of there being any PE in India in terms of Article 5. - Decided in favour of assessee.
Issues Involved:
1. Whether the benefit of India Portuguese DTAA can be allowed in terms of the MFN clause in the Protocol to India Sweden DTAA. 2. Whether the training fee is a consideration for rendering managerial services as claimed by the assessee. 3. Whether the training fee is a consideration for rendering consultancy or technical services as held by the Revenue. 4. If the training fee is not FTS, whether it becomes immune from taxation. Issue-wise Detailed Analysis: I. Whether the benefit of India Portuguese DTAA can be allowed in terms of the MFN clause in the Protocol to India Sweden DTAA: The assessee received ?22,43,630/- from SAPL for imparting 'Human resource leadership training' and claimed it was not chargeable to tax under the Protocol and DTAA between India and Portuguese. The AO, relying on the Perfetti Van ruling, held that the assessee could not claim the benefit of the Portugal Treaty. However, the Hon’ble Delhi High Court in Steria (India) Ltd. v. CIT and another and Perfertti Van Melle Holding B.V. v. AAR overturned the AAR's ruling, stating that the Protocol is part of the DTAA, and there is no need for separate notification. Hence, the beneficial provisions in the DTAA between India and Portuguese should be read into the DTAA between India and Sweden. Thus, the AO's viewpoint was vacated. II. Is Training fee a consideration for rendering Managerial services as claimed by the assessee: The assessee argued that the training fee was for 'Managerial services' and thus outside the scope of Article 12 of the DTAA read with the Protocol. The Tribunal examined the nature of the services rendered by the assessee, which included leadership training to SAPL employees. The Tribunal found that the training aimed at developing leadership skills did not equate to rendering managerial services. Training someone does not mean rendering the same nature of service. Thus, the Tribunal held that the training provided could not be considered managerial services under Article 12 of the DTAA between India and Sweden read with its Protocol and the resultant Article 12 of the India and Portuguese treaty. The assessee's contention was dismissed. III. Is Training fee a consideration for rendering Consultancy or technical services as held by the Revenue: The DRP held that the training services were in the nature of technical or consultancy services and satisfied the "make available" condition. The Tribunal noted that the terms 'technical' and 'consultancy services' were not defined in the relevant section or DTAA. Technical services generally require specialized knowledge, often in engineering, while consultancy services are advisory. However, under Article 12 of the DTAA between India and Portuguese, the consultancy services must make available technical knowledge, experience, or skill for later use by the recipient. The Tribunal found that the leadership training did not result in making available any technical knowledge, experience, or skill that could be used later by the SAPL employees. Thus, the Revenue's conclusion was unjustified. IV. If training fee is not FTS, does it become immune from taxation: The Tribunal noted that simply because the training fee does not fall under "fees for technical services" under Article 12 of the DTAA read with its Protocol, it does not become non-chargeable to tax. The taxability must be tested under Article 7 (Business profits) read with Article 5 (Permanent establishment). The AO had accepted that the assessee did not have any PE in India, making the training fee non-taxable as "Business profit" under Article 7 in the absence of a PE in India. Conclusion: The Tribunal allowed the appeal, concluding that the training fee received by the assessee was not taxable under the provisions of the DTAA between India and Sweden read with the Protocol and the DTAA between India and Portuguese. The training fee did not constitute managerial, consultancy, or technical services and, in the absence of a PE in India, could not be taxed as business profits.
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