2021 (6) TMI 667 - AT - Income Tax

Accrual of income in India - Income taxable in India - payments received by the assessee on account of Management Service Fees - Tax Treaty between India and Portual (referred to via protocol attached to Double Taxation Avoidance Agreement (DTAA) between India and Sweden - HELD THAT - The fact as on date is that the issue in respect of Management Service Fees is well covered in favour of the assessee. The Revenue has preferred appeal before the Hon ble jurisdictional High Court on the substantial question of law on the same issue. That however, the matter has not yet attained finality at the High Court level nor we find any contrary direction given by the Hon'ble High Court in respect of the issue of Management Service Fees vis- -vis the ITAT orders in favour of the assessee. Therefore, it is clear that as on date, the issue decided is in favour of the assessee. Tribunal had analyzed the DTAA between India and Portuguese Tax Treaty rendered to (via protocol) attached to the Tax Treaty between India and Sweden and had held that the payments received by the assessee on account of Management Service Fees cannot be brought to tax in view of the principle of most favoured nation (MFN) clause in the Tax Treaty. In view of the aforesaid discussion, we are of the considered view that Management Service Fees cannot be brought to tax in India. Thus, grounds 1 and 2 are allowed. Tax receipts towards Leadership Training Fee - HELD THAT - Since the assessee is a Sweden based company and SAPL has its registered office in India, basically they are covered by the India Sweden Tax Treaty. That however, in the said tax treaty, there is a special protocol with respect to the Most Favoured Nation (MFN) clause and there is DTAA entered into between India and Sweden and now the parties of original DTAA agreement between India and Sweden would be governed by the provisions of DTAA between India and Portuguese Republic which they entered into through MFN clause. As assessee submitted that let the matter be remanded to the file of Assessing Officer to re-adjudicate this issue after factual verification as per the legal proposition laid down by the order of the Tribunal 2021 (1) TMI 211 - ITAT PUNE The learned Departmental Representative did not raise any objection. In view of the above facts, we set aside the findings of the DRP on this issue of Leadership Training Service Fees to the file of Assessing Officer to re-adjudicate while complying with the principles of natural justice and as per law as indicated hereinabove. Appeal of the assessee is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Taxability of Management Service Fees (MSF)
2. Classification of MSF as 'Fees for Technical Services' (FTS) under DTAA
3. Taxation of receipts towards HRS services and leadership training as FTS

Detailed Analysis:

1. Taxability of Management Service Fees (MSF):
The primary issue was whether the Management Service Fees (MSF) received by the assessee, a non-resident foreign company incorporated in Sweden, from its Indian affiliate, Sandvik Asia Private Limited (SAPL), were taxable in India. The assessee argued that these fees were not liable to tax as FTS under the India-Sweden DTAA read with the India-Portugal DTAA (via protocol). The assessee contended that the services provided did not "make available" any technical knowledge, experience, skill, or knowhow to SAPL, thus falling outside the ambit of FTS as defined under Article 12 of the DTAA. The Tribunal noted that in previous assessment years (from A.Y. 2004-05 to A.Y. 2014-15), the issue had consistently been decided in favor of the assessee, establishing that MSF was not taxable in India since it was managerial in nature and did not satisfy the "make available" clause. The Tribunal upheld this view, emphasizing that the matter had not attained finality at the High Court level, and no contrary direction had been issued. Therefore, the Tribunal concluded that MSF could not be brought to tax in India, and grounds 1 and 2 were allowed.

2. Classification of MSF as 'Fees for Technical Services' (FTS) under DTAA:
The Tribunal examined whether the MSF could be classified as FTS within the meaning of Article 12 of the India-Sweden DTAA read with the India-Portugal DTAA (via protocol). The Tribunal reiterated that the services provided by the assessee did not "make available" technical knowledge, experience, skill, or knowhow to SAPL, which is a necessary condition for classification as FTS under the DTAA. The Tribunal referred to its previous decisions, where it had consistently held that MSF did not fall within the ambit of FTS as defined under Article 12 of the DTAA. The Tribunal also noted that the Revenue's appeal on this issue was pending before the High Court, but no final decision had been made. Therefore, the Tribunal upheld the view that MSF could not be classified as FTS, and grounds 1 and 2 were allowed.

3. Taxation of receipts towards HRS services and leadership training as FTS:
The third issue involved the taxability of receipts towards HRS services and leadership training provided by the assessee to its Indian affiliate. The assessee did not press the ground related to HRS services, so this part of the ground was dismissed as not pressed. The remaining issue was the taxability of leadership training fees amounting to INR 40,41,921. The Assessing Officer and the DRP had classified these receipts as FTS, arguing that the services provided were in the nature of technical or consultancy services and satisfied the "make available" condition. However, the assessee contended that the "make available" clause was not satisfied. The Tribunal referred to its previous decision in a similar case, where it had held that leadership training did not result in making available any technical knowledge, experience, or skill to the employees of SAPL, which could enable them to use it later. Therefore, the Tribunal concluded that the leadership training fees could not be considered as FTS under Article 12(4)(b) of the DTAA between India and Portugal. The Tribunal remanded the matter to the Assessing Officer for re-adjudication, directing compliance with the principles of natural justice and the legal proposition laid down in the Tribunal's previous order. Thus, this part of ground 3 was allowed for statistical purposes.

Conclusion:
The appeal of the assessee was partly allowed for statistical purposes, with the Tribunal ruling in favor of the assessee on the taxability of MSF and remanding the issue of leadership training fees for re-adjudication. The Tribunal reiterated that MSF could not be brought to tax in India and that the leadership training fees did not qualify as FTS under the relevant DTAA provisions. The order was pronounced on 17th June 2021.