2024 (7) TMI 287 - HC - Income Tax

Income deemed to accrue or arise in India - FTS - Geographical shift of IPL matches from India to South Africa and UAE - receipts as be attributable to a Permanent Establishment PE in India - whether business income was divisible under the DTAA even though it arose out of a single contract having regard to Articles 7 and 13 of the Convention? - services provided by IMG to BCCI under the Service Agreement qualify as fee for technical services in terms of Article 13 (4) (c) of the DTAA between India and UK or not? - Tribunal proceeded to dismiss the appeal of IMG and allow the appeal of the Department holding that receipts would be governed by Article 13 of the DTAA and liable to be taxed as FTS on a substantive basis - whether the furnishing of those services would fall within the scope of the make available requirement as appearing in Article 13 (4) of the DTAA? According to the respondents, the services provided by IMG UK involved provision of specialized knowledge and skill with respect to researching into structuring, organizing and commercially exploiting sporting leagues and as submitted that since the work undertaken by the appellant largely involved researching and advising, the same would clearly fall within the meaning of technical and consultancy services - HELD THAT - Both the MoU as well as the Services Agreement unequivocally acknowledge the expertise of IMG to curate and conceptualize sporting leagues. Taking into account the requisite expertise required for conducting a sporting league of this magnitude, BCCI charged IMG with conducting research into and preparing the foundational charter which would inter alia cover the constitution of the IPL, the structure of the tournament, the rules and regulations for the league, franchisee agreements as also the estimated implementation budget. Besides these core responsibilities, IMG was also obligated to prepare a comprehensive outline for the exploitation of commercial rights and assets. This included franchise agreements, media rights, official suppliership, sponsorship, licensing and merchandising rights. Clause 4.1 significantly records that while IMG had carried out research and broadly advised the BCCI in connection with the formation and governance of the IPL, it would continue to advise and assist BCCI on areas enumerated therein. It is thus manifest that it was the technical expertise, specialized knowledge and extensive know-how available with IMG which formed the basis for the services which were extended to BCCI for the purposes of exploitation of the rights as defined and the provision of services throughout the territory and which as per Clause 1.1(x) of the MoU was not confined to India but covered the globe in its entirety. IMG appears to have established its India office and which came to constitute a Service PE in terms of Article 5 (2) (k) of the DTAA. This was also in light of the obligation of the IMG to depute adequate number of personnel for the purposes of effective administration of the league. IMG thus was to play a critical role in ensuring the successful conceptualization, execution and administration of the IPL. The global reach of IMG s obligations included managing international broadcasting rights, securing worldwide sponsorships and negotiating with corporations for official suppliership. What we seek to emphasise is that IMG s obligations required coordination and strategic planning on an international scale and thus travelling beyond the borders of India. As argued on behalf of IMG that once the Service PE had admittedly come into existence and the income attributable to that establishment subjected to tax, it would be impermissible for the respondents to assert that income other than that attributable to the Service PE would be liable to tax under Article 13 of the DTAA - It is essential to underscore that Article 5 of the DTAA neither serves as a head of taxation nor does it concern itself with a categorization or classification of income. Rather, Article 5 is specifically concerned with defining and delineating the concept of a Permanent Establishment and enumerating circumstances in which a PE could be said to have come into existence. The Article serves to enumerate the criteria and circumstances in which a non-resident entity s presence and activities in a Contracting State would be sufficient to constitute a PE. Thus, in terms of Article 5 (2) (k), the moment a resident of a Contracting State were to furnish services including managerial services within the other Contracting State through employees or other persons who had stayed in that State for a period or periods aggregating more than 90 days within a twelve month period, a Service PE would come into existence. DTAA characterizes profits and income under various independent Articles which form part of the Convention. This is evident from a perusal of Article 6 which defines the principles for taxation of income derived from immovable property, Article 7 which speaks of Business Profits, Articles 8 and 9 which deal with profits derived from the operation of aircrafts and ships, Article 11 which covers the subject of dividends and Article 13 which regulates the taxation regime with respect to royalties and FTS. We are thus of the firm opinion that merely because a part of the revenue earned by IMG was attributable to functions performed by the Service PE which came into existence by virtue of Article 5 (2) (k), the respondents were clearly not estopped in law from examining whether revenue other than that attributable to the Service PE could be subjected to tax under the separate and individual Articles of the DTAA. All that Article 5 (2) (k) regulated was whether a Service PE could be said to have been in existence in the relevant assessment year. The characterization of income, the extent to which it was attributable to the PE and the Article under which it was liable to be taxed were issues which were clearly open for examination. In our considered view, merely because IMG chose to treat the same as Business Profits, the respondents were neither estopped nor restrained from examining the issue independently and uninfluenced by the action of IMG offering a part of the revenue to tax albeit under the head of Business Income. Bifurcation of Income - whether sustainable? - Article 7 (9) of the DTAA must be interpreted and understood as incorporating a rule of interpretation which bids us to apply that Article pertaining to Business Profits only till such time as the revenue earned by the non-resident entity does not pertain to categories of income explicitly covered by the other Articles of the Convention. What needs to be emphasized is that Article 7, and when it speaks of Business Profits, is not intended to function as an overarching, all-encompassing provision that subsumes all forms of income or revenue irrespective of their intrinsic character. It is in fact intended to operate within a clearly defined scope respecting the distinct treatment accorded to various categories of income under the different Articles of the DTAA. The explanation provided by the commentaries on the OECD/UN Model Conventions as well as the authoritative texts noticed by us hereinabove reinforces this interpretative approach. The aspect of splitting of elements of a composite contract and the characterization of distinct heads of income have been succinctly explained by Vogel when it observes that the word profits would mean the aggregate of two or more items of income and the subsidiarity rule affecting those singular items. The bifurcation of income which is envisaged under Article 7 (9) itself and is in consonance with the scheme of the DTAA ensures that each type of income is subjected to the specific tax treatment it merits based on its intrinsic character and the particular circumstances under which it is earned. Bifurcation, where warranted would prevent an overgeneralization of income under a single category and which could potentially lead to inappropriate tax treatment. As apparent that by virtue of Article 7 (9) of the DTAA, it was incumbent upon the respondents to ascertain the true character of the income earned by IMG and the mere fact that it had chosen to offer up the revenue attributable to the Service PE as Business Profit was clearly not conclusive of the question which arose. The mere categorization of revenue by the taxpayer does not definitively resolve the issue of tax treatment. The authorities were clearly empowered and under an obligation to accurately determine the real nature and classification of income of IMG. Para 9 clearly envisages contingencies where profits earned may comprise of more than one item of income and which would consequently require the taxing authority to deduce and identify the most appropriate Article under which the item of income would be liable to be categorized. We thus find ourselves unable to sustain the submissions of the appellant addressed on this score. FTS - Whether the services rendered by IMG could be validly classified as FTS? - Mere rendition of technical or consultancy service would not lead to revenue, income or profits being placed under the broad head of FTS unless the taxing authority additionally finds that technical knowledge, skill, know-how or processes were made available. What we seek to emphasize is the impetrative of the make available condition being met and the imperative of the knowledge, skill, know how being made available to the payer. There appears to be no contestation on the nature of activities which were rendered by IMG and the respondents have not questioned those services falling within the scope of the expression technical and consultancy services . The principal issue of disputation was whether the make available test was satisfied. We come to the firm conclusion that there was no expertise, skill or know-how which could be said to have been made available to BCCI. The various functions which IMG was called upon to discharge was to be aided by the appellant drawing upon its expertise and special knowledge in the creation and conduct of leagues of the stature of the IPL. There was no discernible intent on the part of BCCI to absorb or internalise IMG s unique skills and knowledge in the curation of sporting leagues. No part of that knowledge or skill stood transferred to BCCI. Merely because research material would have been shared with BCCI or the service rendered by it been put to use and utilised cannot possibly lead one to conclude that the payer stood enabled or equipped with the special knowledge underlying the technical and consultancy service which was extended. The fact that IMG was retained to perform all of the aforenoted functions for a period of ten years is yet another indicator of BCCI having not been enabled or made available the special knowledge and skill possessed by IMG. The continued provisioning and rendering of service over a substantial period of time were factors which were duly recognised by the Court in Bio Rad as well when it observed that the same would clearly detract from an assumption that technical or consultancy services had been made available. We also bear in consideration the undisputable fact that the contractual arrangement contemplated a continued engagement and ongoing reliance on IMG s expertise without any transfer of know-how or skills to BCCI. Article 13(6) and Effective connections - While we have noticed the divergent views expressed in respect of the meaning to be assigned to the phrase effectively connected , in our considered opinion the scope of Article 13 (6) is an aspect which need not be answered or conclusively pronounced upon in these appeals bearing in mind the conclusions that we have arrived at on the issue of FTS. The phrase effectively connected , as would be evident from the preceding discussion, has been the subject of divergent and varying interpretations with different authorities and commentaries offering distinct perspectives on what would constitute a sufficient connection between income and PE or fixed base for tax purposes. However, in the context of these appeals, we find it unnecessary to delve into or definitively resolve the intricacies of Article 13 (6) given our determination on FTS and which sufficiently addresses the taxation issue. We consequently leave Article 13 (6) to be considered in a more appropriate case and where its interpretation and application may be central to the adjudicatory process. Section 9 (1) (vii) exception - Undisputedly, IPL in 2009 and 2014 though originally slated to be held in India, was, for exceptional reasons, shifted out and ultimately held in South Africa and UAE respectively. The services which were rendered by IMG in connection with those two events were clearly utilized outside India and were availed of for the purposes of earning income from a source outside India. The geographical shift meant that the services rendered by IMG were utilized outside India and were integral to earning income from sources outside India. The Tribunal clearly glossed over the significance of this relocation and which had fundamentally altered the context in which IMG s services were availed. The Tribunal thus clearly erred in failing to appreciate the significance of the event itself having shifted out of India and the services thus coming to be utilized in the nations noticed above and the same being indelibly connected to the earning of income from a source outside India. Explanation which has come to be incorporated in Section 9 neither erases nor overrides the exception which continues to exist in clause (vii). It is also pertinent to note that the exception forming part of clause (vii) existed on the statute book at the time when Finance Act, 2010 came to be introduced. Notwithstanding the above, Parliament in its wisdom chose not to delete or restructure clause (vii). According to us, while the Explanation does declare that FTS earned by a non-resident would be deemed to accrue or arise in India irrespective of whether it have a place of business or business connection therein or having rendered services in India, the same would not result in FTS paid by a resident for services utilized in connection with a business outside India or for the purposes of earning income from a source outside India becoming liable to tax. Conclusions - We find ourselves unable to uphold the findings of the Tribunal insofar as FTS is concerned. We are of the firm opinion that the Tribunal clearly erred in holding that the advice and consultancy services rendered by IMG enabled BCCI to absorb and apply the information and advice . It clearly failed to bear in mind the distinction that must be acknowledged to exist between the mere utilisation of technical or consultancy service in aid of business and the transfer, transmission and enablement which must occur in order for the twin conditions of Article 13 being satisfied. We, for reasons assigned hereinabove, also find ourselves unable to uphold the conclusions of the Tribunal on Section 9 (1) (vii) (b) of the Act. Insofar as Article 13 (6) and the issue of effectively connected is concerned we have, in light of our findings on FTS, desisted from expressing any final opinion. However and in light of the reservations expressed in the body of the judgment, this decision is not liable to be construed as an affirmation of the view in law as expressed by the Tribunal. Business income as divisible under the DTAA even though it arose out of a single contract - Tribunal has founded its decision on what appears to be an admitted dichotomy between the functions performed and services rendered by the IMG UK as distinguished from those discharged by its Service PE. However, the Tribunal has while dealing with the functions performed by IMG UK linked it to the issue of effectively connected which was relevant for the purposes of Article 13 The issue became further obfuscated with the appellant alternating between Articles 7 and 13 of the DTAA. In our considered opinion, the respondents while evaluating the attribution of income to the Service PE question were necessarily constrained to tread down this path and bear in consideration the nature of services rendered by IMG UK as distinguished from those discharged by the Service PE. In fact even the appellant does not appear to have seriously questioned the fact that a part of the advisory work was undertaken by its UK office without the involvement of the Service PE. In light of the admitted position of a Service PE existing in the relevant AYs , the income attributable to that entity was correctly offered to tax under Article 7 of the DTAA. This since the Revenue was concerned with revenue earned from the rendering of services in India and which services, concededly, fell outside the ambit of Article Revenue attributable to the UK office is concerned, we have already found that the same does not qualify for taxation under Article 13 since the make available test does not stand fulfilled. We consequently and on an overall analysis of all of the above, find no justification to interfere with the exercise undertaken by the Tribunal in this regard.

Summary

Issues Involved:

1. Whether the ITAT erred in holding that the business income was divisible under the India-UK DTAA, though it arose out of a single contract having regard to Articles 7 and 13 of India-UK DTAA?
2. Whether the ITAT erred in holding that services provided by IMG to BCCI under the Service Agreement dated 24.9.2009 qualify as fee for technical services in terms of Article 13 (4) (c) of the DTAA between India and UK?
3. Whether the income determined as FTS can be deemed to accrue or arise in India in terms of Section 9 (1) (vii) (b) of the Income Tax Act, 1961, especially when services provided by IMG, during the relevant year, were utilized by BCCI outside India?

Detailed Analysis:

A. Preface:

1. The appeals by International Management Group (UK) Limited (IMG) challenge the ITAT decisions for AY 2010-11 to 2018-19.
2. The three principal questions of law admitted were:
- Whether ITAT erred in holding business income divisible under the India-UK DTAA?
- Whether services provided by IMG to BCCI qualify as fee for technical services (FTS) under the DTAA?
- Whether income determined as FTS can be deemed to accrue or arise in India under Section 9 (1) (vii) (b) of the Income Tax Act, 1961?

B. IMG's Challenge:

23. Mr. Vohra argued that the receipts should be viewed as business profits, taxable only to the extent attributable to the Indian PE of IMG. He emphasized that Article 5 (2) (k) applies only where services other than those taxable under Article 13 are furnished.

24. He contended that the respondents were estopped from treating the residual receipts as FTS, asserting that the applicability of Article 5 (2) (k) depended on the services being other than those falling within Article 13.

25. He highlighted that the Services Agreement envisaged composite services, and neither the Agreement nor the DTAA empowers the Respondent to bifurcate the consideration received between business profits and FTS.

26. Mr. Vohra referred to the Memorandum of Understanding appended to the India-US DTAA and the Karnataka High Court's decision in CIT v. De Beers India Minerals P. Ltd to elucidate the meaning of "make available."

27. He also cited the Kerala High Court's decision in US Technology Resources (Pvt.) Ltd. vs. Commissioner of Income Tax to emphasize that "make available" envisages a transfer of technology or know-how.

28. He referred to the Delhi High Court's decision in CIT (IT) v. Bio-Rad Lab (Singapore) Pte. Ltd., highlighting that the real test is the transfer of technology and the recipient being enabled to use the technology independently.

29. He relied on recent decisions in Commissioner of Income Tax (International Taxation) vs. Relx Inc and Commissioner of Income Tax-International Taxation-3 vs. Salesforce.com Singapore.

30. Mr. Vohra argued that the continued engagement of IMG over ten years indicated no transfer of technical knowledge or skill.

31. He provided a comparative table of activities to demonstrate that the services rendered did not make available any technical knowledge to BCCI.

32. In the alternative, he argued that even if the services were considered FTS, the receipts should be taxed under Article 7 of the DTAA as they were effectively connected with the Service PE.

33. He cited the Supreme Court's decision in Ishikawajma Harima Heavy Industries Ltd. vs. Director of Income Tax, Mumbai to support his argument.

34. He referred to the Authority of Advanced Ruling's decision in Worley Parsons Services to emphasize that the contract should be effectively connected to the PE.

35. He cited Philip Baker's treatise on "Double Taxation Conventions" to support his argument that specific Articles should override Article 7.

36. He argued that the income earned from services rendered outside India should fall under the exception in Section 9 (1) (vii) (b) of the Income Tax Act.

C. Contentions of the Respondents:

37. Mr. Hossain identified the principal questions as whether the services rendered by IMG qualify as technical or consultancy services and whether they fall within the scope of the 'make available' requirement in Article 13 (4) of the DTAA.

38. He referred to the obligations placed upon IMG UK in the Services Agreement, emphasizing that a significant proportion of the services constituted advice provided from outside India.

39. He distinguished between the services performed by the UK office and the Indian PE, citing the transfer pricing study report.

40. He argued that the services rendered by IMG UK involved specialized knowledge and skill, falling within the ambit of technical and consultancy services.

41. He contended that the services provided by IMG UK involved provision of specialized knowledge and skill, making them technical and consultancy services.

42. He cited the UN Model Convention and its commentary to explain the terms "technical" and "consultancy."

43. He argued that the services rendered by IMG enabled BCCI to eventually organize the league on its own, fulfilling the 'make available' requirement.

44. He asserted that the Tribunal's findings were based on documentary evidence and should not be interfered with.

45. He contended that the services rendered by IMG involved technical knowledge, skill, and expertise, making them FTS under Article 13.

46. He argued that the tenure of the Services Agreement spanning over ten years did not detract from the 'make available' condition being fulfilled.

47. He emphasized that handholding by a consultant could continue for elongated periods, and the duration of the agreement was not relevant for determining the 'make available' condition.

48. He cited the Delhi High Court's decision in Centrica India Offshore Pvt. Ltd. vs. Commissioner of Income Tax & Ors. to support his argument.

49. He questioned the assertion that the contract was effectively connected to the PE, citing the transfer pricing study report.

50. He emphasized that the Indian PE's role was confined to subcontracted support services, and the effective connection test was not met.

51. He referred to the OECD Model Convention's commentary to argue that the effective connection test was not met.

52. He cited the UN Model Convention's commentary to support his argument that the effective connection test was not met.

53. He argued that the Indian PE did not undertake activities falling within the meaning of technical or consultancy services.

54. He contended that the mere acceptance of income attributable to the Indian PE as business income did not exempt IMG from paying tax on FTS under Article 13.

55. He emphasized that Article 5 (2) (k) deals with services rendered within a Contracting State and does not apply to services performed outside.

56. He argued that the acceptance of a Service PE's existence did not mean that services rendered outside India were not liable to tax under Article 13.

D. The Contract Structure:

57. The MoU and Services Agreement defined IMG's responsibilities, including conducting research, preparing foundational documents, and managing commercial rights.

58. IMG was tasked with conceptualizing and curating the IPL, leveraging its expertise and knowledge.

59. The Services Agreement defined the Representation Period and Territory, covering the globe.

60. Clauses 2.1, 3.1, 4, 4.1, and 4.2 outlined IMG's obligations, including providing advice, managing rights, and preparing marketing strategies.

61. The consideration for services was set out in Clause 6.1, with annual sums allocated for services provided in and outside India.

62. The MoU and Services Agreement acknowledged IMG's expertise in curating sporting leagues.

63. IMG was required to establish a Service PE in India, providing manpower and ensuring the successful execution of the IPL.

64. The global reach of IMG's obligations included managing international broadcasting rights and securing worldwide sponsorships.

E. The Article 5 (2) (k) Question:

67. The argument that the respondents were estopped from treating residual income as FTS was rejected.

68. Article 5 of the DTAA defines the concept of a Permanent Establishment and does not categorize income.

69. The DTAA characterizes profits and income under various independent Articles.

70. Article 5 (2) (k) defines the circumstances under which a Service PE would be deemed to exist and does not categorize income.

71. The respondents were not estopped from examining whether residual income could be taxed under separate Articles of the DTAA.

F. Bifurcation of Income - Whether Sustainable?:

72. Article 7 (9) of the DTAA envisages bifurcation of income, allowing distinct items of income to be taxed under specific Articles.

73. The DTAA ensures that each type of income is governed by specific Articles, preventing overlap or conflict.

74. Article 7 (9) respects the boundaries of the DTAA, ensuring that each type of income is taxed according to its specific attributes.

75. The OECD Model Convention's Article 7 (4) reflects the same intent, giving priority to specific Articles over Article 7.

76. The UN Model Convention's Article 7 (6) also reflects the same intent.

77. The authoritative commentaries on the OECD and UN Model Conventions clarify that Article 7 applies only to business profits not covered by specific Articles.

78. The term "profits" includes multiple items of income, and the subsidiarity rule affects these items.

79. Article 7 (9) ensures that each type of income is subjected to appropriate tax treatment based on its intrinsic character.

80. The bifurcation of income prevents overgeneralization and ensures fairness and transparency in international taxation.

81. The respondents were obligated to ascertain the true character of the income earned by IMG.

82. The bifurcation of income reflects a sophisticated understanding of economic realities, ensuring appropriate tax treatment for each type of income.

83. The respondents were empowered to determine the real nature and classification of IMG's income.

G. The FTS Issue:

84. Article 13 of the DTAA defines FTS as consideration for rendering technical or consultancy services, with an added condition of making available technical knowledge, experience, skill, know-how, or processes.

85. The mere rendition of technical or consultancy services is insufficient; the 'make available' condition must be met.

86. The UN Model Convention's commentary explains the terms "technical" and "consultancy" as involving specialized knowledge, skill, or expertise.

87. The term "technical" is understood to include specialized knowledge in any art, science, profession, or occupation.

88. The term "consultancy" involves the provision of advice or services of a specialized nature.

89. The 'make available' condition requires the transfer of technical knowledge, skill, or expertise, enabling the recipient to use it independently.

90. The Karnataka High Court's decision in De Beers provides a lucid explanation of the 'make available' condition.

91. The Kerala High Court's decision in US Technology Resources emphasizes the transfer of technology or know-how.

92. Vogel's treatise explains the concept of technical services and the importance of transferring ownership or alienation.

93. Article 13 (4) (c) of the DTAA requires both the rendering of service and the transfer of technical expertise.

94. The 'make available' condition ensures that only services imparting lasting technical benefits are classified as FTS.

95. The mere usage of technical or consultancy material does not meet the test of Article 13.

96. The Tribunal's assumption that know-how was transferred to BCCI was incorrect.

97. IMG's engagement was based on its expertise in curating sporting leagues, with no transfer of knowledge or skill to BCCI.

98. The continued engagement of IMG over ten years indicated no transfer of technical knowledge or skill.

99. The Tribunal failed to appreciate that the contractual arrangement required ongoing reliance on IMG's expertise.

100. The Tribunal's reliance on the Madras High Court's decision in Regen Powertech was misplaced.

101. The decision in Centrica India Offshore was distinguishable on facts and did not support the respondents' case.

H. Article 13 (6) and Effective Connection:

102. The argument that the revenue earned would fall under Article 7 if the services were considered FTS was noted.

103. The Commentary on the OECD and UN Model Conventions provides differing interpretations of "effectively connected."

104. Article 12A of the UN Model Convention introduces the concept of FTS being "borne by the permanent establishment or fixed base."

105. The Commentaries on the OECD and UN Model Conventions provide differing views on the effective connection test.

106. The economic ownership test was not appropriate for the allocation of assets to a PE.

107. The effective connection test should focus on whether the services were managed and controlled by the PE.

108. The issue of effective connection was not conclusively resolved in these appeals.

I. The Section 9 (1) (vii) Exception:

109. The appellants argued that income earned from services rendered outside India should fall under the exception in Section 9 (1) (vii) (b).

110. The Explanation inserted in Section 9 by Finance Act, 2010 does not override the exception in clause (vii).

111. The Tribunal failed to appreciate the significance of the event being held outside India and the services being utilized outside India.

112. The services rendered by IMG were integral to earning income from sources outside India.

113. The Supreme Court's decision in GVK Industries emphasized the territorial nexus required for taxability.

114. The Tribunal's reliance on the Explanation inserted in Section 9 was misplaced.

115. The Tribunal failed to appreciate the significance of the event being held outside India and the services being utilized outside India.

116. The Explanation does not override the exception in clause (vii).

117. The Supreme Court's decision in Ishikawajima emphasized the requirement of services being rendered and utilized in India.

J. Conclusions:

120. The Tribunal erred in holding that the advice and consultancy services rendered by IMG enabled BCCI to absorb and apply the information and advice.

121. The Tribunal's conclusions on Section 9 (1) (vii) (b) of the Act were incorrect.

122. The issue of effective connection under Article 13 (6) was not conclusively resolved.

123. The Tribunal's evaluation of income attribution to the Service PE was not questioned by the appellant.

124. The income attributable to the Service PE was correctly offered to tax under Article 7 of the DTAA.

125. The appeals were allowed, and the impugned orders of the Tribunal were set aside. The appellants were entitled to consequential reliefs.