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TMI Blog2019 (8) TMI 1264X X X X Extracts X X X X X X X X Extracts X X X X ..... ance and information systems from the DTAA as well as the agreements entered into by the assessee company as well as Heinz, India Novel Define but services are coming while claiming the reimbursement. The approach of the assessee is that the services should not be considered as taxable contending that they are merely reimbursements and reimbursement cannot be taxed. But to come under the category of reimbursement of certain receipts of service, the same has to fulfill certain criteria for which the services have to be provided by the assessee to its affiliated companies. The assessing officer has observed that the services provided by the assessee are in the area of supply chain, human resources, strategic planning and marketing, finance and information systems under the agreement which is an admitted fact. Thus, services have been utilized by the Indian Company as well. The concept of make available requires that the fruits of the services should remain available to the service recipients in some concrete shape such as technical knowledge, experience, skills etc. which is met in the instant case as can be reflected from the nature and duration of the contract. The service recipien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Learned AO/ DRP erred in holding that the cost reimbursements of ₹ 1,88,54,358 received by the Appellant towards providing support services to its group affiliates are taxable as FTS both under section 9(1)(vii) of the Act as well as Article 12(4) of the DTAA; 3. On the facts and in the circumstances of the case and in law, the Learned AO erred in holding that the Appellant has made available technical knowledge, skill, experience, etc. to the recipient of services; 4. On the facts and in the circumstances of the case and in law, the Learned AO/DRP further erred in holding that the cost reimbursements are also taxable as 'Royalty' both under section 9(1)(vi) of the Act as well as Article 12 of the DTAA; 5. On the facts and circumstances of the case, the Learned AO/ DRP failed to appreciate that the amounts represented pure reimbursement of costs and hence does not result into any taxable income accruing in India; 6. Without prejudice to the above, the Learned AO/ DRP failed to appreciate that the income, cannot be both 'royalty' as well as 'FTS' and hence the order passed on account of non application of mind, needs to be quashed; Ground 3: Not granting credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received by the Appellant towards providing support services to its group affiliates are taxable as FTS both under section 9(1 )(vii) of the Act as well as Article 12(4) of the DTAA; 3. On the facts and in the circumstances of the case and in law, the Learned AO erred in holding that the Appellant has made available technical knowledge, skill, experience, etc. to the recipient of services; 4. On the facts and in the circumstances of the case and in law, the Learned AO/ DRP further erred in holding that the cost reimbursements are also taxable as 'Royalty' both under section 9(1 )(vi) of the Act as well as Article 12 of the DTAA; 5. On the facts and circumstances of the case, the Learned AO/ DRP failed to appreciate that the amounts represented pure reimbursement of costs and hence does not result into any taxable income accruing in India; 6. Without prejudice to the above, the Learned AO/ DRP failed to appreciate that the income, cannot be both 'royalty' as well as 'FTS' and hence the order passed on account of non application of mind, needs to be quashed; Ground 3: Not granting credit of taxes deducted at source ('TDS') of ₹ 1,19,35,314 7. On the facts and in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessee under the aforesaid agreement as FTS. The assessee Company, resident of USA filed its return of income on 30/09/2009 declaring a total income at NIL. The case was selected for scrutiny and notice u/s 143(2) was issued. In response to the notice Authorized Representative of the assessee Company appeared on various dates and filed details before the Assessing Officer. During the course of the proceedings, the assessee Company vide order sheet entry dated 25/11/2011 was given a show cause and was asked why the amount received in lieu of support activities given by the assessee should not be added back to the income of the assessee. The assessee vide letter dated 2/12/2011 submitted its reply. The Assessing Officer had taken cognizance of the reply of the assessee and draft assessment order was passed on 13/12/2011. Subsequently, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide its direction dated 24/9/2012, directed the Assessing Officer to tax the amount of ₹ 18,854,358/- at the rate of 10%. The taxable income of the assessee was computed by the Assessing Officer vide order dated 15/10/2012 as under:- Particulars Amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Ld. AR further submitted that the addition is liable to be deleted on this ground alone as there are various judgments on this issue where it is held that when there is only recoupment of expenses, there is no element of income and held the same cannot be held to be taxable in India. The decisions on reimbursements are as under:- * Dunlop Rubber 142 ITR 493 Kolkata High Court * DECTA 237 ITR 190-AAR * Siemens Aktiongesellschaft 189 Taxman 422-AAR Bombay High Court * ABB Ltd 189 Taxman 422-AAR * Ernst & Young Pvt. Ltd. 49 Taxmann.com 386 Kolkata ITAT 6. The Ld. AR further submitted that the assessee does not "Make Available" technical services of Heinz India and hence should not be taxable as Fees for Included Services (FIS) under the provisions of the DTAA. The Ld. AR submitted that in the present case factually no technical knowledge etc. was ever made available by the assessee to Heinz India. The fact that the assessee performs such activities on a year on year basis also supports the contention that no technical knowledge etc. was 'made available'. Heinz India has not acquired any knowledge which can be used by Heinz India in its operations in India. The Ld. AR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice provider is for service simplicter and not for making available any technology knowledge, experience etc. Accordingly, the service recipients should be able to make use of such technical knowledge, skill etc by means in his business or for his own benefit without recourse to the service provider in the future. The aforesaid principle has also been upheld in the following decisions wherein the concept of 'making available' has been discussed in detail and the issue is ruled in favour of the tax payers. i) US Technology Resources (P) Ltd. 407 ITR 327 ii) Guy Carpenter & Co. 346 ITR 504 (Del HC) iii) De Beers India Minerals (P) Ltd. 346 ITR 467 iv) Raymond Ltd. 86 ITD 791 v) Koninklijke Philips Electronics Pvt. N. V. (2018) 99 taxmann.com 23 vi) Exxon Mobil Company India (P) Ltd. (2018) 92 taxmann.com 5 vii) Bombardier Transportation India (P) Ltd. 162 ITD 586 viii) Timken Company (2017) 88 taxmann.com 21 ix) Outotec Oyj (2017) 162 ITD 541 x) Steria (India) Ltd. 386 ITR 390 xi) Cummins Ltd. 381 ITR 44 xii) Sandvik AB (2015) 61 taxmann.com 31 xiii) Measurement Technology Ltd. 376 ITR 340 - AAR xiv) Sandvik Australia Pty. Ltd. (2013) 31 taxmann.com 256 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd causes are alleged on several diverse criteria. The Ld. AR pointed out the sales break up chart which demonstrate that the sale of licensed products is only 1-2% of the total sales. If service charges are payable for total sales within the services charges cannot be said to be ancillary and subsidiary. 9. The Ld. AR relied on decision of International Tire Engineering Resources (LLC) 185 Taxman 209 and Spencer Stuart International Vs. ACIT 94 Taxman.com 380. There is no overlap between TTLA and SA Agreement and, therefore, SA in no manner assists in the TTLA. The Ld. AR submitted that the assistance under TTLA are specifically provided for technology assistance as provided under Clause 3.4 and 3.5 at the exclusive cost of Heinz India and services under SA which does not cover any product specific Technology Assistance or product specific Quality Control. The very fact that SA is for the business as a whole and not restricted to the Licensed Products establishes that SA is in the ordinary course of business. The total sales of Heinz India are ₹ 748.20 crores out of which sales from tomato ketchup is only ₹ 13.43 crores. Accordingly, the sales from tomato ketchup cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agraph 4 (a) of Article 12. There is no dispute that the nature of activities are covered under the exclusions under Paragraph 5 of Article 12. Thus, only issue to be decided whether the service fee is to be considered "Ancillary & Subsidiary". As has been stated in the Memorandum of understanding concerning Fees for Included Services under Article 12, the memorandum also identified several factors which may be relevant to such determination specially using the words facilitate, customarily provided, the amount paid is in substantial, single contract or set of related contracts person performing the services is the same person and the person receiving the royalties. The Ld. DR submitted that as regards the relation test the DRP has given a finding that services provider under SA dated 3/5/2007 flow from the terms of TTLA dated 21/2/2005 and there is a clear relation between the two. The DR's observation established that not only the services provider under SA are related to the application and enjoyment of rights granting under TTLA but the predominant purpose for the payment of service fees under SA is for the application and enjoyment of rights granted under TTLA. As per the TTL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arning of royalty, the Ld. DR pointed out that the quantum of value of royalty receipts is directly dependent upon the Net Sales Value of licensed products. Thus, any services resulting in enhanced sales, maximization of profits, increase in the efficiency and benefits of economies of scale of the licensee facilities the effective application or enjoyment of the rights granted under TTLA as well as mechanism of royalty receipts in the hands of the assessee. The Ld. DR further submitted that Quality Control is central to the TTLA. The licensee has been entrusted with the obligation of maintaining quality and any shortcomings in these areas will seriously and adversely affect the TTLA. All the above observations established that the services received by the licensee are not only related to the application or enjoyment of the rights granted to it under TTLA but the predominate purpose of the arrangement under which the payment of the service fee and such other payments are made to facilitate the effective application or enjoyment of such rights. Thus, the facilitation test is satisfied. The second test as per the memorandum is whether such services are customarily provided in the ordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nkage of such agreements have been elaborately discussed by the DRP. After examining the provisions of TTLA and S.A (GA), the DRP recorded a finding that TTLA is critical to its (i.e. assessee) earning of royalty & (GA) dated 3rd May 2007 only formalizes that arrangement for provision of support services in the areas listed on a commercial basis. The areas listed in GAR identical that and flow from the terms of the TTLA dated 21st February 2005 and are clearly ancillary and subsidiary to the application or enjoyment of the right, property or information for which royalty is paid. It would be out of contest, therefore, to highly the similarities and the interconnectedness of the obligations of the licensee under TTLA and services received by it under SA. The Services provided by the assessee by virtue of SA merely him to ensure that obligations exceeded upon the licensee by TTLA are fulfilled. The memorandum of understanding consisting Fees For Included Services in Article 12 ends further credence to the above findings of the DRP. The memorandum also identified several factors which may relevant to such determination although not ancillary controlling. These include three positive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "in accordance with the standards, specifications and instructions supplied by or approved by" the assessee (Cl-2.1) in a "factory approved by the assessee" [Cl.4.2] and as per the Quality Standards' provided in the agreement [Exhibit- E] or as approved by the assessee. [Cl.4.2] This provides the assessee to have a right of access to the factory to inspect the facilities, equipment and materials used in preparing, processing, packaging and records involving advertising, sale and distribution and operations and Quality Control.[Cl.4.2] The assessee is also obligated under TTLA to provide services of "technical specialists" [C1.3.5]and training [Cl.3.4 & 3.5]to the personnel of the licensee. It shall provide "Ongoing Technical Assistance" to the Licensee[C1.3.2] as well as 'instruction and training' to the employees of the licensee at its own factory in the areas involving manufacture/production and marketing of the products. [Cl.3.4] Assessee shall make available qualified technical specialists to work with and assist the licensee in the development of employee training and managerial skills and in the operation of the factory and the manufactur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 1.8 of the SA which defines support services as the services described in Article 3 & provided to the recipients on a commercial basis. The DRP on the basis of the assessee's submissions concluded that this arrangement is merely a basis for the recovery of the fees, charged on a commercial basis. Reimbursements to the non recipient enterprises have been held as taxable by courts under various other provisions of the Act i.e. u/s 44 BB. The Ld. DR further submitted that although purely academic in view of the application of the provisions of Article 12 (4) (a) of the DTAA, nevertheless and without prejudice; the assessee's claim that it does make available any knowhow or technology through it services also cannot be accepted. The Ld. DR further submitted that the SA is nothing but an extension and enable instrument of TTLA. Clause 3.1 of the TTLA provides for the licensee of proprietor information provided by the assessee mostly in writing. Moreover, the assessee through its technical specialized and trainee at its own factories enables the licensees employees develop and acquire managerial scales and scales in the operation of the factory and manufacture of licensee products in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia under the TTLA, between Heinz US and Heinz India, Heinz US has granted license to Heinz India to manufacture, distribute, market and sell only the Licensed products. 15. The Ld. AR submitted that Heinz US has entered into SA dated 3 May 2007 with its various associated companies including Heinz India for providing services in areas of general management, human resources, finance, data processing, quality control, purchasing, business development, law and other related areas and in turn to ensure uniformity, consistency and international standards across all group companies. The Ld. AR submitted that the purpose of both the Agreements TTLA & SA are entirely different. While one aims to provide license on which royalty is being earned, the aim of the SA is to ensure uniformity, consistency and international standards across all group companies, for the purpose of which these services and activities have been identified and support services are accordingly being provided which are of the nature of general management, human resources, finance, data processing, quality control, purchasing, business development, law and other related areas. The Ld. AR submitted that the Ld. DR was i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o one global function for efficiency purposes. The affiliates benefitted by obtaining greater operational and administrative coverage that previously didn't exist. Further, from Heinz India's perspective, several services under SA like legal, finance, ethics corporate communications, etc cannot be linked to only royalty paid to Heinz US under TTLA since the sales of tomato ketchup is only 1-3% (approx) of overall sales made by Heinz India during the year under consideration. The services under SA for the purpose of greater efficiency and optimum utilization of resources through centralized management and reduced costs, irrespective of whether any payment of royalty is received by parent company. The Assessee renders support services for central operations and administrative support functions. 17. Further, the Ld. AR in submitted that a separate support service agreement has already been entered by Heinz India under which the support services are rendered to various group entities of Heinz US Worldwide. In the instant case, amount paid for the services under SA is approximately six time amount paid under TTLA and, therefore, the payment could be constitute to be ancillary or su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided should be such that are provided between two unrelated parties. The expenses incurred by the assessee and reimbursed by Heinz India are mere recoupment of expenses and would not constitute income of Assessee. The Assessee merely allocates the costs and does not charge any mark-up. In view of the above, the Assessee wishes to submit that the reimbursement of expenses received from Heinz India is not taxable in the hands of the Assessee in India under the provisions of the Act. The Ld. AR further submitted that the addition is liable to be deleted on this ground alone as there are various judgments on these issues which have held when there is only recoupment of expenses, there is no element of income and held the same cannot be held to be taxable in India. The decisions are as follows:- * Dunlop Rubber 142 ITR 493 Kolkata High Court * DECTA 237 ITR 190-AAR * Siemens Aktiongesellschaft 189 Taxman 422-AAR Bombay High Court * ABB Ltd 189 Taxman 422-AAR * Ernst & Young Pvt. Ltd. 49 Taxmann.com 386 Kolkata ITAT 19. In respect of issue relating to make available technical services to Heinz India. The Ld. AR submitted that the assessee does not 'Make Available' Technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 12(4) of the DTAA. Typically, services rendered may not make available any technical knowledge, skill, know-how or processes if the service provider is able to show that such services do not enable the service recipient to apply the technology (if any) contained therein, in an independent manner, in future such services also do not contemplate development or transfer of a technical plan or technical design; and the payment to the service provider is for service simpliciter and not for making available any technical knowledge, experience, etc. 20. Accordingly, the service recipient should be able to make use of such technical knowledge, skill, etc by himself in his business or for his own benefit without recourse to the service provider in the future. The aforesaid principle has also been upheld in the following judicial precedents wherein the concept of "make available" has been discussed in detail and the issue has been ruled in favour of the taxpayers even in the cases of the support services rendered under a global agreement. The following decisions were relied by the Ld. AR * US Technology Resources (P) Ltd. (2018) 407 ITR 327 (Kerala) H.C * Guy Carpenter & Co. Ltd. [201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d hence are not taxable in India. 21. We have heard both the parties and perused all the relevant materials available on record. It is pertinent to note that taxability of the payment made by Heinz India towards the cost allocated by Heinz USA in respect of the activities carried out will depend upon the characterization of such payment. Such payment could be governed by Article 12 - 'Royalties and fees for included services' or Article 7 - 'Business Profits'. The term "fees for included services" (FIS) has been explained in Article 12(4) of the DTAA which reads as under: "4. For purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pients. Thus, the consideration qualifies as fees for technical services (FTS) both under the Income Tax Act and under the tax treaty as well. The Ld. AR relied upon the various decisions in respect of meaning of make available under DTAA and certain support services which do not satisfy make available clause under DTAA. The first case law of the Hon'ble Jurisdictional High Court is Guy Carpenter and Company Ltd. 346 ITR 504. After going through the decision in this particular case, the issue was whether the nature of reinsurance brokerage, commission which was paid by insurance companies operating in India to the assessee was assessable as fees for technical services within the meaning of Section 9(1)(vii) of the said Act read with Article 13 of the India United Kingdom Double Tax Avoidance Agreement or not. The Hon'ble Delhi High Court observed that a plain reading of Article 13(4)(c) of the DTAA indicates that fees for technical services would mean payments of any kind to any person in consideration for the rendering of any technical or consultancy services which inter alia makes available technical knowledge, experience, skill, know-how or processing or consist of the developm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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