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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 ..... NIL income. On perusal of the return, the AO observed that a sum of Rs. 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 chargeable to tax. The assessee stated that it received a sum of Rs. 47.30 lakh by way of reimbursement of salary cost of expatriate, Mr. Franck Euvrard, who was seconded to the Indian entity. It was explained that as per the secondment agreement, Mr. Franck was to render services to the Indian entity. A sum of Rs. 47.30 lakh from his salary was paid in France directly by the assessee company, which was later on reimbursed by the Indian entity without any mark up. Not convinced, the AO held that the assessee provided technical services through its staff and hence, the amount was liable to be considered as "Fees for technical services" in terms of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. It is an admitted position that in none of the earlier years, the reimbursement has been taxed in the hands of the assessee. The case of the assessee is that the Indian entity employed Mr. Franck Euvrard on monthly salary and a part of such salary, namely, a sum of Rs. 47.30 lakh was paid directly by the assessee to Mr. Franck Euvrard in France during the year, which was later on reimbursed by Faurecia India without any mark-up. On the contrary, the Revenue has made out a case that the assessee rendered managerial, consultancy or technical services to Faurecia India and hence, such a sum of Rs. 47.30 lakh paid as a quid pro quo represents fees for techni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded 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 initially paid by the assessee in France but later on reimbursed by Faurecia India on cost to cost basis, which constitutes filament of the extant controversy. A copy of Form 26AS, being, TDS certificate in relation to Mr. Franck Euvrard, has been placed at page 333 onwards of the paper book, which evidences deduction of tax at source from his total salary. A copy of statement of total income of Mr. Franck Euvrard is available at page 332 of the paper book, which specifically makes a mention of salary received from Faurecia India and the assessee. Then there is income tax return of Mr. Franck Euvrard, whose copy is available at page 331 of the paper book which again includes salary received f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, technical or consultancy services. In other words, the non-resident should provide such managerial, technical or consultancy services. If the services are not rendered by a nonresident either through its employees or other personnel, then the question of falling any consideration within the purview of section 9(1)(vii), does not arise. Here, we are confronted with a situation in which Mr. Franck Euvrard was employed by Faurecia India as its CEO. It is not as if Mr. Franck Euvrard was rendering services to Faurecia India on behalf of the assessee for which the amount in dispute was received by the assessee company. Rather, it is a case of Mr. Franck Euvrard working as an employee of Faurecia India. The assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of discharge by the Indian entity of its own liability towards salary payable to Mr. Franck. It is thus manifest that this decision has no application to the facts of the instant case. 4.11. In the oppugnation, the Hon'ble Summit Court in DIT (International Taxation) Vs. A.P. Mollar Maersk A.S. (2017) 392 ITR 186 (SC) has held that the payment made was in the nature of reimbursement of expenses and hence could not be construed as income chargeable to tax in the hands of recipient. Similar view has been canvassed by the Hon'ble jurisdictional High Court in DIT(I.T.) Vs. Wizcraft International Entertainment Pvt. Ltd. (2014) 364 ITR 227 (Bom.) by holding that: `payments were reimbursement of expenses and assessee was not obliged to deduct TDS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 Article 13 of the DTAA with France read with para 7 of the Protocol. The assessee made further detailed submissions which have been incorporated in the impugned order. The AO analyzed the nature of services rendered by the assessee to Faurecia India. Considering retrospectively inserted Explanation below section 9(2) of the Act and clause (iv) of Explanation 2 to section 9(1)(vi), the AO opined that the amount received by the assessee was in the nature of Royalty. He further held that the amount received by the assessee was also `Fees for technical services' as per Explanation 2 to section 9(1)(vii) of the Act. The DRP did not interfere with the impugned order which has brought the assessee before the Tribunal. 8. Having heard the rival submissions and perused the relevant material on record, we consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 been mentioned that: "The service provider assists the Company in the organization of accounting systems and in the implementation of procedures in compliance with the FCP standards. This assistance includes up-to-date costing accounting, inventories management systems, forecasting procedures etc..... This service also includes assistance for all tax matters related to the Company's business whether in the ordinary course of business, domestic, foreign ventures, or in specific projects such as investments, acquisitions or reorganizations, etc.' Narration of the above service indicates that the assessee is in full charge of the accounting, controlling and tax matters of Faurecia India, which also emerges from clause 1.7 of the Exhibit, which states that: "This department assists the Company with all legal matters (e.g. company law, commercial law, civil law or anti-trust law).' Then the next service is `Human resourc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 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 personal computers adapted to the Company and the Faurecia Interior Systems. It helps the Company to choose the equipment (software, hardware, networks). It also assists the Company in the implementation of systems. The Company might request help from the service provider to design tailored programs. This service neither includes the licensing, nor the sale of software, nor computer programs. The services provided by the service provider fall into three categories: Operations, Technical support and Studies.' Then there is a detailed amplification of such services under the above three heads, as submitted before the AO, which is as under :- "a. Operations - FAH helps the Indian entity to run the IT operations, which includes the organization, management of the IT Infrastructure and of the applications available on IT Infrastructure, upgrade of current applications from project phase to delivery production. b. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 connote rendering some services involving technical, industrial, commercial or scientific knowledge etc. Rather, it refers to imparting of information regarding some technical, industrial, commercial or scientific "knowledge, experience or skill". When we read the word `imparting' in the beginning of the provision in conjunction with "knowledge, experience, or skill" at the end of the provision, it becomes crystal clear that the same refers to providing some technical, industrial or commercial knowhow etc. to be used by the recipient and not consuming it as such as a service received. 15.2. At this stage, it is imperative to appreciate that we are dealing with the definition of the term `Royalty', which is primarily a consideration for use of intellectual properties, such as, patent, model or invention etc. or technical, industrial or scientific knowledge or specified types of industrial or commercial equipments etc. Placement of clause (iv) in the Explanation 2, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax or for avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, 'the provisions of this Act shall apply to the extent they are more beneficial to that assessee'. Crux of sub-section (2) is that where a DTAA has been entered into with another country, then the provisions of the Act shall apply only if they are more beneficial to the assessee. In simple words, if there is a conflict between the provisions under the Act and the DTAA, the assessee will be subjected to the more beneficial provision out of the two. If the provision of the Act on a particular issue is more beneficial to the assessee vis-a-vis that in the DTAA, then such provision of the Act shall apply and vice versa. The Hon'ble Supreme Court in the case of CIT v. P.V.A.L. Kulandagan Chettiar (2004) 267 ITR 654 (SC) has held that the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items income shall also apply under this Convention, with effect from the date on which the present Convention or the relevant Indian Convention, Agreement or Protocol enters into force, whichever enters into force later.' 18.4. A careful circumspection of para 7 of the Protocol indicates that the same contains a Most Favoured Nation (MFN) clause, as per which, if India enters into a DTAA after 01-09-1989 with a third state which is a member of the OECD and the rate of taxation or scope of fees for technical services etc. under such other DTAA with a third state is narrower than para 4 of Article 13 of the DTAA with France, then such lower rate or restricted scope shall apply under the DTAA with France. Net effect of the MFN clause in the present context is that if India has entered into a DTAA with a third state which is a member of the OECD and the scope of the term "Fees for technical services" under such DTAA with a third sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erpretation of Article 13(4) of the DTAA with France is concerned. In view of the MFN clause in the Protocol, Article 13(4) of the DTAA with the UK shall overshadow Article 13(4) of the DTAA with France and limit the scope of the DTAA with France to the extent provided in the DTAA with the UK. Following two things emerge on going through the ambit of "Fees for technical services" under Article 13(4)(c) of the DTAA with the UK. First is that unlike Article 13(4) of DTAA with France defining "Fees for technical services" as "consideration for services of managerial, technical or consultancy nature", Article 13(4) of the UK DTAA defines "Fees for technical services" as payment for rendering of only `technical or consultancy services'. The term `managerial' is missing in so far as the scope of "Fees for technical services" under the DTAA with the UK is concerned. The second departure in the DTAA with the UK from the DTAA with France is that the `scope' of technical or consultancy services in the DTAA with the UK has been restricted to `make available' any technical knowledge, experience, skill, knowhow or processes etc. In fact, the reason for omission of the word `managerial' from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Re (2018) 401 ITR 56 AAR has also held that "make available" connotes something which results in transmitting the technical knowledge so that the recipient could derive an enduring benefit and utilise the same in future on his own without the aid and assistance of the provider. On going through the above interpretation, it becomes palpable that in order to `make available' technical services, it is sine qua non that the payer of the services must acquire such technical know-how etc. which he can himself use in future without any assistance of the provider and the same is not any such act or service which vanishes or disappears on its provision by the payee itself. 18.10. When we advert to the nature of the Technical services rendered by the assessee, it gets axiomatic that no technical knowledge was made available by the assessee to Faurecia India for its use thereafter. Rather, it is a case of providing a service involving technical knowledge, which got consumed with its provision itself. Since such services simply involve use of technical knowledge and do not result into handing over some technical knowhow to Faurecia India, the same, in our considered opinion, cannot be terme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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