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TMI Blog2016 (3) TMI 964X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Commissioner of Income-tax (Appeals) V, [ Ld.CIT(A) ] has erred in confirming the action of the Learned Assessing Officer ( Ld.AO ) of taxing receipts for Management Services amounting to ₹ 4,85,82,800/- to be in the nature of Fees for Technical Services ( FTS ) within the meaning of Article 12 of the Double Taxation Avoidance Agreement between In dia and Sweden ( tax treaty between India and Sweden ) read with the protocol thereto as well as under section 9(1)(vii) of the Income-tax Act, 1961 (the Act ). The Appellant prays that the receipts for management services amounting to ₹ 4,85,82,800/- are not taxable in India and hence, the addition in this regard be deleted. 2. Ground 2: Without prejudice to Ground 1, should the receipts be held taxable, the Ld. CIT(A) has erred in upholding the action of the Ld.AO levying interest under section 234B of the Act without appreciating that entire income of the Appellant is subject to TDS. The Appellant prays that the interest charged by the Ld.AO and confirmed by the Ld.CIT(A) be deleted. 3. The learned Authorized Representative for the assessee at the outset pointed out that the issue raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,85,82,800/- from Sandvik Asia Limited, Pune. The Assessing Officer was of the view that the said management service fees of ₹ 4.85 crores is to be assessed in the hands of assessee, rejecting the claim of the assessee that the said services were not taxable in India. The Assessing Officer was of the view that on joint reading of management services agreement and the definition of fees for technical services given in the DTAA with Sweden, it was apparent that the amount received by the assessee as per the said agreement with SAL was clearly in the nature of fees for technical services and therefore, was taxable in India. Another aspect noted by the Assessing Officer was whether the nature of services rendered by the assessee to SAL makes available any technical knowledge, experience, skills, know-how, etc. After considering the issue at length and taking note of the clauses of agreement and the correspondence between the parties, the Assessing Officer held that the amount was received by the assessee company for providing services as per the management services agreement dated 08.11.2002, which was covered not only by the definition of technical services as laid down in DT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee company from its Indian subsidies i.e. Sandvik Asia Pvt. Ltd. (SAPL) and WTIPL. The claim of the assessee is that the assessee received the said payment from its Indian subsidies for rendering the services which are in the nature of commercial, management, marketing and production services. The nature of the services as per the agreement are already mentioned here-inabove. In this case there is no dispute about the legal position that the amount received by the assessee from its Indian subsidies is taxable in India under normal provisions of Act more particularly u/s. 9(1)(vii) r.w.s. 5(2) of t he Income-tax Act. The main plank of the argument of the Ld. Counsel is that when the assessee is covered by the beneficial clauses in the treaty entered into as per the provisions of Sec. 90 (2) of the Income-tax Act then even if the assessee s income is taxable in the normal provisions still he can claim the exemption from the tax as per the clauses applicable in the treaty. 8.1 Ld. Counsel argues that the above payment received by the assessee company is not taxable in India in view of the beneficial provisions of the tax treaty between India and Sweden read with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e notification no. GR 705/E dated 17.12.1997. Article 12 of the India-Sweden DTAA provides the mode of taxation of the royalties and fees for technical services whether the same are to be taxed in the source country or in the residence country. The definition of the fees for technical services (FTS) is given in Article 12(3)(b) of the Act. It is true that it is a very conservative definition and there is no condition that the technical services should be made available. The India also entered into the treaty with Portuguese republic which was notified vide notification no. GR F42/E dated 16th June, 2000. In the said Treaty, mode of taxation of the fees for technical services (FTS) between two countries is also provided in the Article 12 but instead of fees for technical services the expression used is fees for included technical services . As per the Article 12(4) fees for included services means payment of fees of any kind other than those mentioned in article 14 and 15 of the said treaty, to any person in consideration of the rendering of any technical or consultancy services (including through the provisions of services of technical or other personal) if such services ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h (3)(f) that relate to equipment mentioned in sub-paragraph (3)(b) ; 10 per cent of the gross amount of the royalties; and (b) in the case of other royalties : (i) during the first 5 years of income for which this Agreement has effect : (a) where the payer is the Government or a political sub-division of that State or a public sector company: 15 per cent of the gross amount of the royalties; and (b) in all other cases: 20 per cent of the gross amount of the royalties; and (ii) during all subsequent years of income: 15 per cent of the gross amount of the royalties. 3. The term royalties in this Article means payments or credits, whether periodical or not, and however described or computed, to the extent to which they are made as consideration for : (a) the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trade mark or other like property or right; (b) the use of, or the right to use, any industrial, commercial or scientific equipment; (c) the supply of scientific, technical, industrial or commercial knowledge or information; (d) the rendering of any technical or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e may be, shall apply. 5. Royalties shall be deemed to arise in a Contracting State when the payer is that State itself or a political sub-division or local authority of that State or a person who is a resident of that State for the purposes of its tax. Where, however, the person paying the royalties, whether the person is a resident of one of the Contracting States or not, has in one of the Contracting States or outside both Contracting States a permanent establishment or fixed base in connection with which the liability to pay the royalties was incurred, and the royalties are borne by the permanent establishment or fixed base, then the royalties shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 6. Where, owing to a special relationship between the payer and the person beneficially entitled to the royalties, or between both of them, and some other person, the amount of the royalties paid or credited, having regard to what they are paid or credited for, exceeds the amount which might have been expected to have been agreed upon by the payer and the person so entitled in the absence of such relationship, the provisions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . For the technical services rendered by them the said assessee had paid consideration. The Assessing Officer applied Article 12 of the Indo- Netherlands Treaty and held that the same was taxable in the hands of the Netherlands Company. As the wordings of Article 12 in the Indo - Netherlands Treaty are analogous to Article 12 of the India Australia Treaty, as expression make available is also used while determining fiscal jurisdiction of the contracting state, the Hon'ble High Court explained the meaning of the expression make available which was appearing in the Indo-Netherlands Treaty, the Lordships explained the expression as under: 13. Under the Act if the consideration paid for rendering technical services constitute income by way of fees for technical services, it is taxable. However, Article 12 of the aforesaid India-Netherlands Treaty defines fees for technical services for the purpose of Article 12 which deals with royalties and fees for technical services. The fees for technical services means the payment of any amount to any person in consideration for rendering of any technical services only, if such services make available technical knowledge, expertise, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n who received service is enabled to apply the technology. The service provider in order to render technical services uses technical knowledge, experience, skill, know how or processes. To attract the tax liability, that technical knowledge, experience, skill, know how or process which is used by service provider to render technical service should also be made available to the recipient of the services, so that the recipient also acquires technical knowledge, experience, skill, know how or processes so as to render such technical Services. Once all such technology is made available it is open to the recipient of the service to make use of the said technology. The tax is not dependent on the use of the technology by the recipient. The recipient after receiving of technology may use or may not use the technology. It has no bearing on the taxability aspect is concerned. When the technical service is provided, that technical service is to be made use of by the recipient of the service in further conduct of his business. Merely because his business is dependent on the technical service which he receives from the service provider, it does not follow that he is making use of the technolog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me subject matter has been given more favourable treatment by way of a definition or mode of tax then the parties can claim the benefit on the recognized principle of MFN clause. In his introduction to Double Taxation Conventions (Third Edition) Klaus Vogel has explained the role of the protocol and its role in interpreting the treaty. The same has been considered by the ITAT, Calcutta in the case of DCIT V. ITC Ltd., 76 TTJ 323. 11.2 In the case of Maruti Udyog Ltd., Vs. ADIT reported in (2010) 37 DTR 85 (Delhi) explaining the scope of the protocol it is held as under : 11.1 It is settled position in law that protocol is an indispensable part of the treaty with the same binding force as the main clauses therein, as protocol is an integral part of the treaty and its binding force is equal to that of the principal treaty. The provisions of the aforesaid DTAA are, therefore, required to be read with the protocol clauses and are subject to the provisions contained in such protocol. Examined in the light of DTAAs between India and UK, USA and Switzerland, we find that in the case before us the assessee had not purchased any property from UTAC France. Therefore, none of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions of the Supreme Court in Union of India vs. Azadi Bachao Andolan (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC) at p. 751 that An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief, is that treaties are negotiated and entered into at a political level and have several considerations as their bases . So the argument of the Revenue that the protocol cannot be relied on to understand the scope of taxation cannot be accepted. 12. So far as the present case before us is concerned, on the basis of the protocol to the DTAA between the India and Sweden the assessee can claim the benefit of the conditions imposed for bringing to tax the fees for technical services in the treaty between the India and Portuguese. We, therefore, hold that on the principle of the most favoured nation (MFN) clauses the payment of ₹ 5.93 Crores received by the assessee company from its Indian subsidies cannot be brought to tax. We, therefore, allow the grounds taken by the assessee on the above reasons. 9. The Tribunal further in assessment year 2008-09 vide order dated 22.05.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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