2022 (7) TMI 1302 - AT - Income Tax

Income accrued in India - addition towards intra-group services fees received by the assessee, having been claimed as Managerial services fees not chargeable to tax but treated AO as fees for technical services' - Whether the receipt is FTS under the Act? - HELD THAT - As e-mails exchanges between the assessee and the Indian entity read in conjunction with the services as described in the Agreement, it becomes overt that the services mainly envisage i) formulating the global policies in the spheres of the business, including, Administration, Purchases, and Human resources so as to have world-wide uniformity in compliance; ii) ensuring application of the such policies by all the global entities including the Indian AE; and iii) evaluating their compliance. The services also cater to giving expert advice on certain matters to the Indian entity, such as, Legal services (falling within the domain of consultancy services) and also giving expert technical opinion on Quality and environment, Research and I.T. Support (falling within the domain of technical services). Thus consideration received by the assessee is partly for the managerial and partly for the consultancy or technical services. Ergo, it satisfies the requirement of taxability under the Act. Whether the receipt is FTS under the DTAA? - AO held that the consideration for the services is FTS under the DTAA between India and Spain - Though the assessee, in principle, can seek the benefit of the India-USA DTAA, but the consideration for the development and transfer of a technical plan or technical design in the terms discussed above, falling under the second part of the Article 12(4)(b) of the India- USA DTAA, would qualify for taxation. Since such amount is not readily ascertainable from the material on record, we set aside the impugned order pro tanto and direct the AO to work out such taxable amount on some rational basis, after allowing a reasonable opportunity of hearing to the assessee. CIT(A), after holding the amount falling under FTS and hence chargeable tax in India, did not examine the alternate viewpoints of the AO of taxing the same as Dividend under Article 11 or Other income as per Article 23(3) of the DTAA. He held that Since I have confirmed the learned AO s decision to tax the services, I do not discuss the Appellant s arguments on the learned AO s decision to tax the receipt on an alternative basis as either dividend or as other income under the relevant article of the DTAA. As the decision of the ld. CIT(A) on the intra-group services, being, in the nature of FTS stands partly modified, we need to examine if the amount can be considered as Dividend or Other income under the India Spain DTAA. Non-adjudication by the ld. CIT(A) on this issue has to be considered as determining the issue against the assessee and requiring adjudication by the Tribunal in the hue of CIT Vs. India Cements Ltd. 2019 (8) TMI 1485 - MADRAS HIGH COURT which has been invoked by the ld. AR requesting our adjudication on the issue of Protocol to the DTAA, which was also not decided by the ld. CIT(A) and we have dealt with the same supra . On both the scores Protocol; and taxability as Dividend/Other sources - the AO has returned the findings against the assessee. It is not a case in which such issues are being raked up for the first time and no discussion on them is available in the orders of the authorities below. We, thus, espouse these issues also for consideration and decision. Whether the receipt is Dividend under Article 11 of the DTAA? - Testing the facts of the case on the touchstone of the definition of the term dividend , it transpires that the consideration received by the assessee is for rendition of intra group services and not either as income from shares etc. or income from other corporate rights or from any participation in profits. Thus, the amount under consideration cannot be characterized as dividend income falling under Article 11 so as to magnetize taxability. Whether the receipt is Other income under Article 23(3) of the DTAA? - Para 3 of Article 23 starts with a non obstante clause qua paras 1 and 2 and states that the items of income of a resident of Spain not dealt with in the foregoing articles of this convention and arising in India may be taxed in India. The crucial words used in para 3 are the items of income not dealt with in the foregoing articles of this Convention . To put it simply, if a particular item of income is covered in an earlier Article of the DTAA, that cannot find place under Article 23(3). The item of income under view is consideration for rendition of services. If it is in the nature of FTS, then it falls under Article 12, otherwise it assumes the character of Business profits under Article 7 of the DTAA. As the income from intra-group services falls either under Article 13 or Article 7, it cannot be covered within the purview of Article 23(3). The consideration of Rs.3.99 crore and odd is chargeable to tax u/s 9(1)(vii) of the Act, but the India USA DTAA will restrict the chargeable amount as discussed. It is neither dividend nor other sources income as per the DTAA. Addition of reimbursement on leased line charges amounting as Royalty u/s.9(1)(vi) of the Act and also under Article 13 of the DTAA - Is it covered under clause (iva) of Expl.2 to sec. 9(1)(vi)? - HELD THAT - The facility of Telefonica does not process the data but simply facilitates its free flow between the group companies through its leased lines. Neither the processing of information is warranted nor is the essence of the transaction. The assessee and the group companies are not paying for using any industrial, commercial or scientific equipment of Telefonica but simply for getting the leased line provided by it with the help of its facility. As such, Explanation 2 (via) is not applicable to the facts of the instant case. Is it covered under Expls. 2/6 of sec. 9(1)(vi)? - On a perusal of the above definition under the DTAA, it can be seen that it has certain features of the definition of the term royalty as given in section 9(1)(vi) of the Act. The term process has been used in the definitions - both under the Act as well as the DTAA. However, the important point to accentuate here is that unlike the definition of the term process as given in Explanation 6 amplifying the scope of the term process , applying to the Explanation 2 to section 9(1)(vi), there is no similar definition of the term process as given in Article 13(3) of the DTAA. Coming to the Indo-Spain DTAA, it is axiomatic that the domestic law has not been linked with the definition of the term royalties as given in the Article. The definition in the Article simply stops at receipt, inter alia, for use or right to use any process . In that view of the matter, we cannot read Explanation 6 to section 9(1)(vi) of the Act in the definition of the term royalties under the Article. Though the term process under the Act also includes payment for leased line charges in the light of Explanation 6, but absence of any analogous provision in para 3 of Article 13 of the DTAA, does not commend us to read the extended scope of the term process in the DTAA. The contrary view espoused by the ld. CIT(A), ergo, cannot be accorded imprimatur. Addition towards reimbursement of software charges - HELD THAT - As seen that there is no disputation on the nature of transaction, which is crystal clear inasmuch as the assessee purchased Norton Antivirus software for its entire group. The cost of such software, having been provided to Indian entity, was recovered as such without any mark-up. What the assessee procured from Norton was a software product and not any copyright in the software. Recently, the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT has reversed the decision in Samsung Electronics Pvt. Ltd.( 2011 (10) TMI 195 - KARNATAKA HIGH COURT by holding that payment for use of a software product does not constitute Royalty. This position was fairly admitted by the ld. DR as well. In view of the binding precedent available on this issue, we delete the addition. Charging of interest u/s.234B - levying interest for default in payment of advance tax - HELD THAT - As an amendment has been carried out to section 209(1) by insertion of proviso w.e.f. 1.4.2012 providing, inter alia , that for computing liability for advance tax, income-tax calculated under clause (a) or clause (b) or clause (c) shall not be reduced by the aforesaid amount of incometax which would be deductible during the said financial year under any provision of this Act from any income, if the person responsible for deducting tax has paid or credited such income without deduction of tax. The essence of the amendment is that the earlier position of non-levy of interest u/s.234B where the income in question is otherwise liable for deduction of tax at source, irrespective of the fact that whether the tax was actually deducted or not, has been dispensed with. As the amendment is applicable from 1.4.2012, it will not administer the instant assessment year 2010-11 under consideration. We, therefore, direct not to charge interest u/s.234B.

Summary

Issues Involved:
1. Intra-group services fees as 'Fees for Technical Services' (FTS)
2. Leased line charges as Royalty
3. Reimbursement of software charges as Royalty
4. Interest under Section 234B

Analysis:

A. RENDITION OF INTRA-GROUP SERVICES

I. Whether the receipt is FTS under the Act?

The assessee, a non-resident company incorporated in Spain, received Rs.3,99,18,072/- from its Indian entity for rendering various services. The Assessing Officer (AO) treated this amount as 'fees for technical services' (FTS) under Section 9(1)(vii) of the Income-tax Act. The services rendered included General services, Financial services, Legal services, Human resources services, Quality and environment related services, Marketing services, Research services, Purchase services, and IT Support services. The Tribunal concluded that the consideration received by the assessee is partly for managerial and partly for consultancy or technical services, thereby satisfying the requirement of taxability under the Act.

II. Whether the receipt is FTS under the DTAA?

Under Article 13 of the Double Taxation Avoidance Agreement (DTAA) between India and Spain, 'fees for technical services' does not include consideration for managerial services. The assessee invoked the Protocol to the DTAA, seeking to apply the more restricted definition of FTS from the India-USA DTAA, which includes a 'make available' clause. The Tribunal held that the services rendered by the assessee, including defining research procedures and policies, quality and environment strategy, and IT support services, fall within the scope of 'development and transfer of a technical plan or technical design' under Article 12(4)(b) of the India-USA DTAA, thereby qualifying for taxation.

III. Whether the receipt is Dividend under Article 11 of the DTAA?

The AO alternatively treated the amount as Dividend under Article 11 of the DTAA. However, the Tribunal found that the consideration received was for the rendition of intra-group services and not as income from shares or other corporate rights. Hence, it cannot be characterized as 'dividend' income under Article 11.

IV. Whether the receipt is 'Other income' under Article 23(3) of the DTAA?

The AO also considered the amount under Article 23(3) of the DTAA as 'Other income.' The Tribunal noted that if an item of income is covered under an earlier Article of the DTAA, it cannot be included under Article 23(3). As the income from intra-group services falls under Article 13 or Article 7, it cannot be covered within the purview of Article 23(3).

B. LEASED LINE CHARGES

The assessee received Rs.52,16,989/- as reimbursement of leased line charges from its Indian entity, which the AO treated as Royalty under Explanation 2(iva) and Explanation 2 read with Explanation 6 to Section 9(1)(vi) of the Act, and also under Article 13 of the DTAA. The Tribunal held that the leased line charges paid for transmission by any technology get covered within the definition of 'process' under Explanation 6, thereby bringing the consideration within the ambit of 'Royalty' under the Act. However, the Tribunal found that the definition of 'royalties' under Article 13(3) of the DTAA does not include the extended scope of the term 'process' as per Explanation 6, and thus, it cannot be considered as Royalty under the DTAA.

C. REIMBURSEMENT OF SOFTWARE CHARGES

The assessee recovered Rs.1,42,270/- for the purchase of Norton Antivirus software for its Indian entity without any markup. The AO treated this amount as Royalty under Section 9(1)(vi) of the Act. The Tribunal, relying on the Supreme Court judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT, held that payment for the use of a software product does not constitute Royalty and deleted the addition.

D. INTEREST U/S 234B

The Tribunal held that the liability for payment of advance tax does not arise for a non-resident if the income is tax-deductible at source, irrespective of whether the tax was actually deducted. As the amendment to Section 209(1) by insertion of a proviso is applicable from 1.4.2012 and the assessment year under consideration is 2010-11, the Tribunal directed not to charge interest under Section 234B.

Conclusion:
The appeal is partly allowed, with the Tribunal directing the AO to work out the taxable amount of FTS under the DTAA and deleting the additions related to leased line charges and software charges. The interest under Section 234B is also not to be charged.