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TMI Blog2012 (12) TMI 576X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee on this score needs to be examined from the angle of taxability under other provisions. Royalty - reimbursement of international telecom connectivity charges - held that:- the term "royalty" has been defined in the DTAA as per Article 12(3). Such definition of the term "royalty" as per this Article is exhaustive. Pursuant to the insertion of Explanation (5) by the Finance Act, 2012, no amendment has been made in the DTAA to bring the definition of royalty at par with that provided under the Act. Subject matter of the Explanation is otherwise not a part of the definition of Royalty as per Article 12. As such, it is clear that the contention of the learned Departmental Representative that the retrospective insertion of Explanation 5 to section 9(1)(vii) should be read in the DTAA also, cannot be countenanced. This amount can be considered as royalty only in the hands of the owner or lessor or any other person entitled to permit the use of equipment and earning income in his own right from allowing the use of such equipment to others. By no stretch of imagination an intermediary, who makes payment to the owner of equipment on behalf of some person and then gets reimburs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see received a sum of Rs. 41,02,61,224 towards Marketing and management fees from WNS India comprising of two parts viz., provision of marketing and management services outside India amounting to Rs. 36,88,13,733 and provision of marketing and management services in India amounting to Rs. 4,14,47,491.The assessee was called upon to explain as to why the entire marketing and management fees should not be treated as "Fees for included services" and assessed to tax as per Article 12(4)(b) of India-US Double Taxation Avoidance Agreement (hereinafter called the "DTAA"). The assessee stated that it entered into agreement with WNS India for providing marketing and sales services, inter alia, identifying customers and establishing contacts, soliciting inquiries from the customers, meeting with such customers and market the business of WNS India. The assessee also undertook to appoint advertising agencies to prepare, plan and execute advertising of WNS India's business in newspapers, magazines etc. It was stated that payment for rendering such marketing and management services was not in the nature of Fees for included services (hereinafter called the 'FIS') as defined under Article 12 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee's employees in India constituted a Service PE in India. That is how the assessee offered income for taxation under Article 7 of the DTAA. The short controversy before us is to decide the nature of Rs. 41.02 crore which has been treated by the Revenue as FIS under Article 12 and the assessee is claiming a part of it, representing consideration of Rs. 4.14 crore for rendering marketing and management services in India, as business profits under Article 7. 2.3. At the very outset we want to make it clear that identical issue came up for adjudication before the Tribunal in assessee's own case for the assessment year 2004-2005. The Tribunal vide its order dated 25.11.2011 in ITA Nos.1993 1994/Mum/2009 for the said assessment year has decided this issue in assessee's favour by holding that the fees received by the assessee for provision of marketing, management and services cannot be considered as fees for included services as per Article 12 of the DTAA. Despite that, the learned Departmental Representative forcefully argued that the relevant provisions of section 9(1)(vii) were not considered by the tribunal in right perspective and if such provisions had been correctl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S as per the DTA because of the language of Article 12(4)(b) which mandates that such services must be made available to the payer of the consideration. As the assessee in the instant case has not made available any technical knowledge, experience, skill etc. to WNS India, in our considered opinion, the same cannot be subjected to tax by considering the provisions of section 9(1)(vi) on stand alone basis. We will discuss infra in a little more detail that the provision of the Act or the relevant Double Taxation Avoidance Agreement, whichever is more beneficial to the assessee, shall apply. As the provisions of Article 12(4)(b) are beneficial to the assessee in comparison with section 9(1)(vi), it is the prescription of Article 12, which shall apply in supersession of section 9(1)(vi) of the Act. We, therefore, hold that the marketing and management services rendered by the assessee to WNS India are not chargeable to tax as FIS under Article 12 of the DTAA. The impugned order is, therefore, reversed to this extent. 2.6. As we have held in the foregoing para that the amount of Rs. 41.02 crore cannot be considered as FIS, naturally the amount received by the assessee on this score n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee for and on behalf of WNS India without any mark up. Similar submissions were also advanced before the DRP contending that the reimbursement of international telecom connectivity charges was without any profit element and hence the same could not be considered as its income. Not convinced with the assessee's submissions, the A.O. treated the payment received from WNS India towards reimbursement of international telecom connectivity charges amounting to Rs. 6.41 crore as royalty taxable as per Article 12 of the DTAA. In reaching this conclusion, the A.O. followed his order for the earlier year on this issue. The assessee is before us assailing the treatment given by the authorities below to such reimbursement of expenses as royalty. 3.2. The ld. AR relied on the order passed by the tribunal for the earlier year deciding such issue in favour of the assessee. Per contra, the learned Departmental Representative opposed such view taken by the tribunal and insisted that the same should not be followed due to insertion of Explanation 5 by the Finance Act, 2012 w.r.e.f. 1.6.1976 which gives proper meaning to clause (iva) to Explanation (2) below section 9(1)(vi). He submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old. First, that any retrospective amendment to the provisions of the Act is relevant for determining the taxability or deductibility of an amount even under the provision of the DTAA and second, the amount in question, when examined in the light of Explanation 5 to sec. 9(1)(vi) inserted retrospectively clearly, brings it in the scope of 'royalty'. 3.5. We espouse the first segment of the contention of the ld. DR that the retrospective amendment to the provisions of the Act per se should be considered for determining the taxability of the amount even under the DTAA. It is trite that under normal circumstances the retrospective amendment of any provision of the Act mandates it to be followed from the date from which such retrospective effect is given. In such a situation it is considered as if for all practical purposes the provision was there on the statute from such earlier date. Accordingly the assessments and other proceedings under the Act have to move with the presumption of existence of such provision from the earlier date. Any assessment order, which when originally passed in accordance with the law as prevailing at that point of time, shall require amendment if there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , is partly correct. Any amendment carried out to the provisions of the Act with retrospective effect shall no doubt have the effect of altering the provisions of the Act but will not per se have the effect of automatically altering the analogous provision of the Treaty. There are certain provisions in some Treaties which directly recognize the provisions of the domestic law. For example, Article 7 in certain Conventions provides that the deductibility of expenses of the permanent establishment shall be subject to the provisions of the domestic law. In such a case, if any retrospective amendment is made to the provisions of the Act governing the deductibility of the expenses, the same shall apply under the Treaty as well. 3.8. Article 23 in certain Treaties including that of India with Mauritius is 'Elimination of Double taxation'. Para 1 of Article 23 in Mauritius Treaty provides that: "The laws in force in either of the Contracting States shall continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this Convention". First part of para 1 of Article 23 makes out a general rule that if income of the perman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Any amendment to Treaty can be made bilaterally by means of deliberations between the two countries who signed it. If there is no amendment to the provision of the Treaty but there is some amendment adverse to the assessee in the Act, which provision has been specifically defined in the Treaty or there is no reference in the Treaty to the adoption of such provision from the Act, again the mandate of section 90(2) shall apply as per which the provisions of the Act or the Treaty, whichever is more beneficial to the assessee shall apply. Going by such rule, the amendment to the Act shall have no unfavorable effect on the computation of total income of the assessee. 3.10. Reverting to the facts of the extant case, we observe that the term "royalty" has been defined in the DTAA as per Article 12(3). Such definition of the term "royalty" as per this Article is exhaustive. Pursuant to the insertion of Explanation (5) by the Finance Act, 2012, no amendment has been made in the DTAA to bring the definition of royalty at par with that provided under the Act. Subject matter of the Explanation is otherwise not a part of the definition of Royalty as per Article 12. As such, it is clear that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er person entitled to permit the use of equipment and earning income in his own right from allowing the use of such equipment to others. By no stretch of imagination an intermediary, who makes payment to the owner of equipment on behalf of some person and then gets reimbursed for the said payment, can be considered as an owner or lessor etc. of the equipment so as to be considered u/s 9(1)(vi). The said amount may be considered as royalty in the hands of MCI WorldCom and other international operations under the provisions of the Act, who own the equipment and allowed use or right to use such equipment to WNS India. The assessee in the instant case simply paid a sum of Rs. 6.14 crore to MCI WorldCom etc. in the first instance and then recovered the same from WNS India. Thus it is evident, the said sum is not royalty even as per section 9(1)(vi) of the Act. 5.1. Having held that the amount is not in the nature of royalty in the hands of the assessee, the next question which arises for our consideration is as to what is the correct nature of this amount and whether it is taxable as business profits as per article 7 ? There is no dispute on the legal issue that the reimbursement of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenditure as reimbursement of expenses shall have bearing on the computation of deduction of head office expenditure as per section 44C of the Act. In the like manner, there are several provisions including Chapter X, which affect the amount of total income or the tax liability by wrong treatment of payment of expenses as reimbursement of expenses. The crux of the matter is that the payment of expenses is to be distinguished from and not intermingled with the reimbursement of expenses in the hands of payer as well as payee. In fact, it is the substance of the transaction which matters. The real character of a transaction cannot be cloaked under some superficial name. 5.4. Adverting to the facts of the instant case we find that the assessee undertook to carry out the marketing and sales promotion activities on behalf of WNS India by identifying the customers and establishing contact; soliciting inquiries from clients and rendering such services as may be required to present and market the business of WNS India. On the other hand, the payment claimed as reimbursement is admittedly for the use of international telecom connectivity paid by the assessee to the International teleco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al for was incorrect. In view of these facts, we are not inclined to accept the contention of the ld. DR for remitting the matter to the file of AO for verifying if there is any profit element in such reimbursement and then determine tax liability accordingly. Once it is held that there is no profit element in such reimbursement, it becomes manifest that the gross income of Rs. 6.14 crore recovered by the assessee from WNS India is equal to the same amount paid by it to MCI WorldCom etc., thereby leaving no surplus liable to tax under Article 7 of the DTAA. This issue is decided in assessee's favour and the consequential ground is allowed. 6.1. Next issue raised in this appeal is against taxability of reimbursement of other expenses amounting to Rs. 4,10,70,798 from WNS India. This amount represents reimbursement of expenses incurred on employees of WNS India on their visits abroad. The assessee claimed that since these amounts were pure reimbursement and hence not taxable. The A.O. held such amount as taxable under Article 12 as fees for included services. 6.2. Having heard the rival submissions on this issue and perused the relevant material on record, it is the common submis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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