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TMI Blog2019 (7) TMI 402X X X X Extracts X X X X X X X X Extracts X X X X ..... to tax in its hands as the same is in the nature of reimbursement of cost and does not fall within the purview of `Fees for technical services u/s. 9(1)(vii) of the Act. We, therefore, overturn the impugned order on this score and order to delete the addition. Taxability towards receipt of Support services - consideration for technical and managerial services - royalty or FTS - nature of services rendered by the assessee to Faurecia India in terms of Services Agreement - India UK DTAA - HELD THAT:- As adverted to the nature of services rendered by the assessee to Faurecia India and found them to be Managerial and also Technical in nature. Managerial services are concerned, the consideration for them goes out of the purview of `Fees for technical services , as the term managerial is absent in Article 13(4) of the DTAA with UK. Case of the AO rests on treating consideration for such services as `Royalty or `Fees for technical services only. Resultantly, payment for the Managerial services cannot be brought with in the scope of the term `Fees for technical services under Article 13 of the DTAA with France as read in conjunction with the DTAA with the UK. As far as the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1961 (hereinafter also called the Act ) in relation to the assessment year 2011-12. I. REIMBURSEMENT OF COST WHETHER TAXABLE AS FEES FOR TECHNICAL SERVICES (FTS)? 2. The first issue is against the inclusion of a sum of ₹ 47,30,250/- in the total income of the assessee. 3. Succinctly, the factual matrix of the case is that the assessee company is a tax resident of France. It is engaged in designing and building dashboards, door panels, floor coverings, sound proofing insulation installations and other moulded plastic parts for passenger car interiors. The assessee filed its return declaring NIL income. On perusal of the return, the AO observed that a sum of ₹ 47,30,250/- received by the assessee from Faurecia Technology Center India Limited (hereinafter called `Faurecia India or `Indian entity and also includes reference to its earlier name or its predecessor company) was not offered for taxation. On being called upon to explain the reasons for non-inclusion of such amount in the total income, the assessee stated that this amount was in the nature of reimbursement of expenses received from the Indian entity which was not chargeabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wance, Child education allowance and Special allowance etc. Para 13 of this letter states that: You will be required to become a member and will be entitled to the benefits of the Provident Fund and Superannuation Schemes of the Company . Para 14 states that: You shall be entitled to leave in accordance with the rules of the Company . Last para of the Offer states that: Your assignment entails Management/ Administrative/ Supervisory responsibilities . Before expiry of the term on 30-06-2008, Mr. Franck Euvrard was requested to extend his services as CEO of the Indian entity from 01-06-2008 to 31-05-2009 on the same terms and conditions except for hike in salary and other allowances. On 06-04-2009, Mr. Franck Euvrard was once again requested to extend his services as CEO of the company up to 31st May, 2010, which was once again renewed on 02-02-2010 for a period up to 31-05-2011. In the last offer letter, it has been mentioned that all other conditions of his contract remain unchanged. On going through the above documents, it emerges that Mr. Franck Euvrard was appointed by the Indian entity as its CEO way back in the year 2006 and thereafter he got extension from time to time. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fees for technical services if the consideration is income of the recipient chargeable under the head Salaries . Nitty-gritty of the relevant part of the Explanation is that any consideration received by a nonresident from rendition of managerial, technical or consultancy services shall be considered as fees for technical services. If however, such an amount in the hands of recipient is chargeable to tax under the head `Salaries , then it would shed the character of `Fees for technical services . 4.4. We have noticed supra that Mr. Franck Euvrard was engaged by Faurecia India as its CEO. Like any other employee, his remuneration was directly fixed by the Indian entity which included Basic salary, House rent allowance, Other allowances etc. He was also entitled to the Provident Fund and superannuation benefits. It is neither the case of the Revenue nor any material has been brought on record by the ld. DR to demonstrate that Mr. Franck Euvrard was actually working under control, supervision or direction of the assessee and not Faurecia India. The Indian entity deducted tax at source from total salary paid to M/s. Franck Euvrard, which also included the amount which was i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would have to be viewed in the hands of the real recipient, that is, the expatriate and not the non-resident entity. 4.6. While going through the factual details of the case, we have found out above that Mr. Franck Euvrard was engaged by the Indian entity as its own employee, subject to all the terms and conditions of its own employment. There is nothing like any cloak in the arrangement under which the real recipient of the amount has been suppressed and a fa ade has been shown. Once Mr. Franck Euvrard has been found to be the real recipient, the chargeability of the amount has to be seen in his hands only. Once the amount paid by the Indian entity is and has been actually charged to tax under the head `Salaries in the hands of real recipient, that is, the expatriate in the present case, then going by the command of the second exception in the Explanation, the same cannot be treated as `Fees for technical services in the hands of the non-resident entity. 4.7. More significantly, in order to fall within the domain of section 9(1)(vii), it is essential that the amount payable by the Indian resident to the non-resident should be for rendering of any managerial, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) held that payment made by the petitioner to the overseas entity was in the nature of income in view of the existence of Service Permanent establishment (PE) in India and hence liable for tax withholding. Overturning the view of the AAR that Service PE was constituted, the Hon ble High Court held that the payment to AE was in the nature of `fees for technical services and not reimbursement of expenses and further laid down that the nomenclature of reimbursement was not decisive. It noted that: Money paid by assessee to overseas entity accrues to overseas entity, which may or may not apply it for payment to secondees, based on its contractual relationship with them. It is perceptible that in that case money paid by the Indian entity accrued to overseas entities only, which could or could not have been paid to the secondees depending upon the terms of contract. Per contra, we are confronted with a situation wherein the money never accrued to the assessee. It initially paid money to Mr. Franck in advance and then recovered the same from the Indian entity without any mark-up. There can be no question of the assessee receiving money in its own independent right. Rather, it is a case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmative, their Lordships held that on the facts found by the authorities below a question of law arises (though not raised before the authorities) which bears on the tax liability of the assessee and the Tribunal has jurisdiction to examine the same. We find that the additional ground raised before the Tribunal involves a pure question of law and no fresh investigation of facts is necessary for its determination. We are, therefore, admitting such additional ground to be espoused for disposal on merits. 7. Briefly stated, the facts of this additional ground are that the assessee received a sum of ₹ 2,66,72,222/- from Faurecia India towards provision of Global Information Support services. The same was not offered to tax. On being called upon to explain as to why this amount was not declared as income, the assessee submitted that it provided assistance to run operations, giving technical support and providing studies for adaptation of Information System to meet users needs, which did not make available any technical knowledge, experience, skill or knowhow etc. to Faurecia India and hence, the same did not fall within the meaning of Fees for technical services under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to identify and negotiate the acquisition of businesses that reinforce the Company s existing businesses and/or enable it to enter new markets. It can be seen that the assessee is looking after several fields of Faurecia India s business, which even extend to negotiations and acquisition of new businesses as well. Under the head of `Sales and Marketing services:, `the service provider assists the Company in monitoring the market for Faurecia Interior Systems. It helps the Company to produce brochures on surveys, market share, sales techniques etc. for the use of the Company It also provides the Company with assistance in the field of the sale of Interior Systems . The service provider consults on behalf of the Company the car manufacturers and/or their subcontractors and it advises the Company on the pricing strategy regarding the car manufacturers purchases . It can be seen from the Sales and marketing services that the assessee is in full control of the marketing activity of Faurecia India. Not only this, it is also laying foundation for the future marketing plans of Faurecia Interior Systems. The assessee is also providing `Accounting, Controlling and Tax services. It has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n execution . Under the head `Quality services , it can be seen that: The service provider helps the Company to improve quality of Faurecia Interior Systems . by specially designing Global actions and by standardizing methodological tools and by preparing communications on HSE topics . 10. A perusal of the services referred to in the Exhibit to the Agreement reveals that these cater to various facets of business operations, such as, Management, Marketing, Accounting and finance, Human resources, Purchasing, Manufacturing and Quality, which fall in the overall realm of Managerial services. 11. In addition to the above, the assessee has also rendered IT support services that have been set out in paras 1.8 and 1.9 of the Services Agreement. Para 1.8 with the caption `General Management of Information System Organisation states that: `The service provider (i.e. the assessee) coordinates the Information System actions and/or the execution of specific projects, which are borne at a central level . Para 1.9 with the heading `Information System states that the service provider assists the Company in the computerization of systems, office automation and utilisation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T support services, which outnumber others, but also some part consists of managerial services. 14. The AO has characterized receipt of fees for the above services both as Royalty as well as Fees for technical services under the Act as well as the DTAA. 15.1. We will first examine if the receipt can be considered as Royalty ? Section 9(1)(vi) of the Act deals with income by way of Royalty payable, inter alia, by a resident. The term `Royalty has been defined in Explanation 2 which has six clauses. The case of the AO is that the assessee received Royalty in terms of clause (iv) of Explanation to section 9(1) of the Act, which provides that any consideration for (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill shall be considered as Royalty. On going through the prescription of clause (iv), it becomes pertinent to note that before the words technical, industrial, commercial or scientific knowledge, experience or skill , the legislature has used the expression imparting of any information concerning . The word imparting assumes significance in this context. This word does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services ? Section 9(1)(vii) deals with income by way of `Fees for technical services payable, inter alia, by a resident. Definition of the expression `Fees for technical services has been extracted in an earlier part of this order. On going through such provision, to the extent it is relevant for our purpose, it deciphers that fees for technical services means any consideration for rendering managerial, technical or consultancy services excluding any consideration for construction, assembly, mining etc. It is nobody s claim that the case is covered under the exception. We have hereinabove discussed the nature of services rendered by the assessee to the Indian entity and held these to be technical as well as managerial services. That being the position, the transaction is caught within the scope of `fees for technical services u/s.9(1)(vii) of the Act. 17. Section 90(1) of the Act provides that the Central Government may enter into an agreement with the Government of any other country for the granting of relief of tax in respect of income on which tax has been paid in two different tax jurisdictions. Subsection (2) of section 90 unequivocally provides that where the Ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r technical services , it becomes plain that the same refers to a consideration for services of managerial, technical or consultancy nature. It turns out that definition of the expression `Fees for technical services under Article 13 of the DTAA is by and large similar to that given in section 9(1)(vii) of the Act to this extent, which does not directly support the case of the assessee. 18.3. At this stage, it would be relevant to refer to the Protocol, which for all practical purposes, is considered as a part and parcel of the DTAA. Relevant part of para 7 of the Protocol dated 29-09-2012 between India and France, reads as under:- `In respect of Articles 11 (Dividends), 12 (Interest) and 13 (Royalties, fees for technical services and payments for the use of equipment), if under any Convention, Agreement or Protocol signed after 1st Sept., 1989, between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate of scope provided for in this Convention on the said items of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticle 13(4) of DTAA with the UK, it can be seen that the term Fees for technical services has three constituents. Clauses (a) and (b) deal with payment for services which are ancillary and subsidiary to the enjoyment of right, property or information for which payment has been described under paras 3 (a) and (b) of this Article. Para 3 of Article 13 defines `Royalties to mean payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work etc. or any industrial, commercial or scientific equipment etc. Thus, it is seen that clauses (a) and (b) of para 4 of the DTAA with the UK are not relevant for our purpose. Then there is clause (c) of para 4 which states that the term fees for technical services means payment of any kind for rendering any technical or consultancy services which make available technical knowledge, experience, skill, knowhow or processes or consists of the development and transfer of a technical plan or technical design. This clause bears usefulness in so far as interpretation of Article 13(4) of the DTAA with France is concerned. In view of the MFN clause in the Protocol, Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnical services under Article 13 of the DTAA with France as read in conjunction with the DTAA with the UK. 18.8. As far as the remaining Technical services rendered by the assessee to Faurecia India are concerned, it is seen that these are of coordinating the Information system and assisting Faurecia India in computerisation of systems, office automation and utilisation of personal computers which fall into the aforesaid three categories namely, Operations, Technical support and Studies. On going through the nature of such services, it is manifested that these do not result in making available any technical knowhow etc. to the Faurecia India. 18.9. The term make available has come up for consideration before the Hon ble Karnataka High Court in CIT Vs. De Beers India Minerals Pvt. Ltd. (2012) 346 ITR 467 (Kar.) in which it has been held that this term means that the payer of the services should be able to utilise the acquired knowledge or knowhow at his own in future without the aid of service provider. The Authority for Advance Ruling in Production resources group, in Re (2018) 401 ITR 56 AAR has also held that make available connotes something which result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 9(1)(vi) is not attracted. Albeit section 9(1)(vii) is attracted, but the amount ceases to be `Fees for technical services in the light of the DTAA. Thus, there is no quarrel on whether or not the assessee has a place of business or business connection in India or it has rendered services in or outside India. The position would have been otherwise if the assessee had been covered u/s 9(1)(vi) or (vii) and not getting immunity under the DTAA and then claiming that no income on this score should be included in its total income as either it had no place of business in India etc. or the services were not rendered in India. As such, the reliance of the ld. AO on the Explanation below section 9(2) of the Act, for fortifying his point of view that the amount in question be charged to tax, is pointless. 20. As the extant payment received by the assessee can neither be construed as `Royalty u/s 9(1)(vi) of the Act nor as `Fees for technical services under the DTAA, the same cannot be included in the total income of the assessee. Ex consequenti, we overturn the impugned order on this score and order the deletion of the addition. 21. In the result, the appeal is all ..... X X X X Extracts X X X X X X X X Extracts X X X X
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