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TMI Blog2022 (7) TMI 1302X X X X Extracts X X X X X X X X Extracts X X X X ..... echnical services). Thus consideration received by the assessee is partly for the managerial and partly for the consultancy or technical services. Ergo, it satisfies the requirement of taxability under the Act. Whether the receipt is FTS under the DTAA? - AO held that the consideration for the services is FTS under the DTAA between India and Spain - Though the assessee, in principle, can seek the benefit of the India-USA DTAA, but the consideration for the `development and transfer of a technical plan or technical design in the terms discussed above, falling under the second part of the Article 12(4)(b) of the India- USA DTAA, would qualify for taxation. Since such amount is not readily ascertainable from the material on record, we set aside the impugned order pro tanto and direct the AO to work out such taxable amount on some rational basis, after allowing a reasonable opportunity of hearing to the assessee. CIT(A), after holding the amount falling under FTS and hence chargeable tax in India, did not examine the alternate viewpoints of the AO of taxing the same as Dividend under Article 11 or `Other income as per Article 23(3) of the DTAA. He held that: `Since I have c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion for rendition of services. If it is in the nature of FTS, then it falls under Article 12, otherwise it assumes the character of `Business profits under Article 7 of the DTAA. As the income from intra-group services falls either under Article 13 or Article 7, it cannot be covered within the purview of Article 23(3). The consideration of Rs.3.99 crore and odd is chargeable to tax u/s 9(1)(vii) of the Act, but the India USA DTAA will restrict the chargeable amount as discussed. It is neither dividend nor other sources income as per the DTAA. Addition of reimbursement on leased line charges amounting as Royalty u/s.9(1)(vi) of the Act and also under Article 13 of the DTAA - Is it covered under clause (iva) of Expl.2 to sec. 9(1)(vi)? - HELD THAT:- The facility of Telefonica does not process the data but simply facilitates its free flow between the group companies through its leased lines. Neither the processing of information is warranted nor is the essence of the transaction. The assessee and the group companies are not paying for using any industrial, commercial or scientific equipment of Telefonica but simply for getting the leased line provided by it with the help of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this issue, we delete the addition. Charging of interest u/s.234B - levying interest for default in payment of advance tax - HELD THAT:- As an amendment has been carried out to section 209(1) by insertion of proviso w.e.f. 1.4.2012 providing, inter alia , that for computing liability for advance tax, income-tax calculated under clause (a) or clause (b) or clause (c) shall not be reduced by the aforesaid amount of incometax which would be deductible during the said financial year under any provision of this Act from any income, if the person responsible for deducting tax has paid or credited such income without deduction of tax. The essence of the amendment is that the earlier position of non-levy of interest u/s.234B where the income in question is otherwise liable for deduction of tax at source, irrespective of the fact that whether the tax was actually deducted or not, has been dispensed with. As the amendment is applicable from 1.4.2012, it will not administer the instant assessment year 2010-11 under consideration. We, therefore, direct not to charge interest u/s.234B. - ITA No.1442/PUN/2017 - - - Dated:- 28-7-2022 - Shri R.S. Syal, Vice President And Shri Partha Sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eated the amount of Rs.3.99 crore and odd as Dividend chargeable to tax in the hands of assessee under Article 11 of the DTAA and without further prejudice to the above, also chargeable under Article 23(3) of the DTAA as Other income . The ld. CIT(A) examined the nature of services rendered by the assessee and finally held them to be advisory in character and thus covered under Article 13 of the DTAA. In view of his decision upholding the treatment of the amount as FTS, the ld. CIT(A) did not go into the AO s alternate taxability either as Dividend or Other income under the DTAA. 4. We have heard both the sides and gone through the relevant material on record. The assessee rendered certain services to its group entities across the globe including the one in India, for which a sum of Rs.3.99 crore and odd was received. The AO treated such amount as chargeable to tax as `Fees for technical services under the Act as well as the DTAA; Dividend under the DTAA; and also `Other income under the DTAA. We will proceed to examine the view point of the authorities, one by one, under the following heads: I. Whether the receipt is FTS under the Act? II. Whether the recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the Agreement, it turns out that they refer to rendition of services by the assessee to its world-wide group entities and such services are aimed at formulating plans and policies in different spheres of the business to be followed by its world-wide entities so as to have consistency in approach. 5.3. Our attention has been drawn by the ld. AR towards certain e-mail exchanges between the assessee and the Indian entity, whose copies have been placed in the paper book. Pages 231 to 234 demonstrate e-mail exchanges between the assessee and the Indian entity discussing the stiffness of HDL s with Expanded foam having an acceptable strength. The assessee informing the Indian entity that the test was conducted and it was eventually found that fogging as per Tata specs was OK but for GM specs was not OK. Pages 240 and 241 are again e-mail exchanges between the assessee and Indian entity concerning with the running trials of materials AB 4235/50 and AB NS by the Indian entity on its Plant. The assessee responded by stating that it wants an urgent feedback for this issue as the samples were sent in mail and there was no feedback till November, by specifically mentioning that this s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the price with the suppliers. Pages 264 to 267 are certain e-mail exchanges on Human resources by which the Indian entity was directed by the assessee to furnish particulars of certain employees and also expressing its displeasure over the Indian entity not responding timely. Pages 268 and 269 are copies of e-mail exchanges between the assessee and Indian entity in connection with the IT services, discussing about difference in the information under SAP system and the report by which the Indian entity was questioned and called upon to change the information in SAP and report in uniform manner. Pages 270 and 271 again deal with email exchanges between Indian entity and assessee. The Indian entity attached monthly cost reduction plan duly updated for May 2009 for information of the assessee. The assessee required it to submit all information in new format which was attached in the e-mail. Similar is the position regarding other e-mail exchanges placed on record. 5.4. With the above understanding of the nature of services, we now proceed to determine the taxability of the amount under the Act, which encompasses consideration, inter alia, for managerial, consultancy or technic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n on Quality and environment, Research and I.T. Support (falling within the domain of technical services). Thus consideration received by the assessee is partly for the managerial and partly for the consultancy or technical services. Ergo, it satisfies the requirement of taxability under the Act. II. Whether the receipt is FTS under the DTAA? 6.1. The assessee made out a case that the sum is not chargeable to tax in the hue of the DTAA, which is more beneficial than the provisions of the Act and section 90(1) of the Act permits choosing a more beneficial provision. 6.2. The AO held that the consideration for the services is FTS under the DTAA between India and Spain. The assessee s contention for taking recourse to the Protocol to the DTAA and the consequential adoption of the relevant favourable Article of the DTAA between India and USA, was jettisoned by the AO. 6.3. Relevant part of Article 13 of the DTAA between India and Spain runs as under: Article 13 Royalties and fees for technical services 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or Agreement on the said items of income shall also apply under this Convention with effect from the date on which the present Convention comes into force or the relevant Indian Convention or Agreement, whichever enters into force later. This is the Most Favoured Nation (MFN) clause in the DTAA between India and Spain, which seeks to provide that if India has, inter alia, limited its scope of fees for technical services in a DTAA with any other OECD member country, then such limited scope will descend in here and substitute the clause as per the DTAA with Spain. The assessee harped on resorting to the Indo-USA DTAA before the AO. The USA is a founder member of the OECD, with which India has entered into a DTAA. That being the position, we do not find any reason, in principle, for not permitting the assessee to take recourse to the corresponding provisions of the India-USA DTAA. 6.6. The relevant part of the term fees for included services has been defined in the Article 12(4) of the DTAA between India and the USA, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ord `know-how and joined by commas between themselves, indicate that the term `make available is applying to the words starting from `technical knowledge and ending with processes . The second use of the word `or in clause (b) after the word `processes and before `consist of the development and transfer of a technical plan or technical design deciphers that a new independent context is starting after the second `or , which deals with the services that consist of the development and transfer of a technical plan or technical design. The sole requirement to rope in an amount within the ambit of `fees for included services under the second segment of para 5(b) of Article 12 is that the consultancy or technical services should consist of the development and transfer of a technical plan etc. to the payer. Unlike the first segment, there is no further requirement of satisfying the test of `make available . 6.9. We have noted above that the assessee rendered a mixed bag of managerial, consultancy and technical services. Obviously, managerial services are not covered even under the DTAA between India and Spain and also the India-USA and hence consideration for them gets exclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining the research procedures on the subject of technological policies under consideration means developing technical plan for the procedures on technological policies. As technical effort is involved in developing technological policies, the output is nothing but a technical plan. The very fact that the compliance of such a developed policy is also mandatory shows that it envelopes developing the plan and then transferring it for adherence. 6.11. Similarly, Quality and Environment Related Services encompass, inter alia, defining the quality and environment strategy to be followed also by the Indian entity. So defining a quality or environment strategy would mean developing technical plan of quality and environment strategy in detail and then transferring it for compliance. 6.12. In the like manner, IT Support services include defining the group information systems policy, strategy tools . It also provides for defining software and hardware standards to be applied within the group . This again divulges that the assessee developed technical plans of the information systems policy and strategy tools, meant to be followed also by the Indian entity, which is not po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the impugned order pro tanto and direct the AO to work out such taxable amount on some rational basis, after allowing a reasonable opportunity of hearing to the assessee. 7. The ld. CIT(A), after holding the amount falling under FTS and hence chargeable tax in India, did not examine the alternate viewpoints of the AO of taxing the same as Dividend under Article 11 or `Other income as per Article 23(3) of the DTAA. He held that: `Since I have confirmed the learned AO s decision to tax the services, I do not discuss the Appellant s arguments on the learned AO s decision to tax the receipt on an alternative basis as either `dividend or as `other income under the relevant article of the DTAA. As the decision of the ld. CIT(A) on the intra-group services, being, in the nature of FTS stands partly modified, we need to examine if the amount can be considered as Dividend or Other income under the India Spain DTAA. Non-adjudication by the ld. CIT(A) on this issue has to be considered as determining the issue against the assessee and requiring adjudication by the Tribunal in the hue of CIT Vs. India Cements Ltd. (2020) 424 ITR 410 (Mad) , which has been invoked by the ld. AR reque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... falls under Article 23(3) of the DTAA. It would thus be prudent to examine the mandate of Article 23(3) which is as under : `Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing Articles of this Convention, and arising in the other Contracting State may be taxed in that other State. 9.2. Para 3 of Article 23 starts with a non obstante clause qua paras 1 and 2 and states that the items of income of a resident of Spain not dealt with in the foregoing articles of this convention and arising in India may be taxed in India. The crucial words used in para 3 are the items of income not dealt with in the foregoing articles of this Convention . To put it simply, if a particular item of income is covered in an earlier Article of the DTAA, that cannot find place under Article 23(3). The item of income under view is consideration for rendition of services. If it is in the nature of FTS, then it falls under Article 12, otherwise it assumes the character of `Business profits under Article 7 of the DTAA. As the income from intra-group services falls either under Article 13 or Article 7, it cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Firstly, we examine the applicability or otherwise of clause (iva) of Explanation 2 to section 9(1)(vi), which provides that: `For the purposes of this clause, royalty means consideration for- (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB . Obviously section 44BB is not applicable in the extant case. The AO held it to be a case of use of the network of Telefonica indirectly by the Indian entity through the assessee, which made the amount fall under this provision. In order to categorize an amount within the ambit of consideration for use or right to use any industrial, commercial of scientific equipment, it is essential that there should be an equipment of the nature described, which should be used. 15.2. Leased line is a dedicated communication channel that easily interconnects two or more sites ensuring uninterrupted data flow from one point to another. It is a dedicated, fixed-bandwidth data connection, which allows users to have a reliable, high-quality internet connection. In the instant case, all the Grupo Antolin entities have been provided leased lines by Telefonica so as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecret . 16.2. The term process as usually understood in common parlance does not include transmission of data by cable, optic fibre or any other similar technology. However, on going through the Explanation 2 read in conjunction with the Explanation 6, it becomes clear that the expression process includes and shall be deemed to have always included consideration for transmission, inter alia, by cable, optic fibre or any other similar technology whether or not such process is secret. Explanation 5 has also been simultaneously inserted to further clarify that the royalty includes and has always included consideration in respect of any right, property or information, whether or not- (a) the possession or control of such right, property or information is with the payer; (b) such right, property or information is used directly by the payer; (c) the location of such right, property or information is in India. When we consider Explanations 5 and 6 read with Explanation 2 to section 9(1)(vi), it becomes graphically clear that the leased line charges paid for transmission by any technology get covered within the definition of term `process and thus bring the consideration wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act also includes payment for leased line charges in the light of Explanation 6, but absence of any analogous provision in para 3 of Article 13 of the DTAA, does not commend us to read the extended scope of the term `process in the DTAA. The contrary view espoused by the ld. CIT(A), ergo, cannot be accorded imprimatur. C. REIMBURSEMENT OF SOFTWARE CHARGES 17. The next ground is against the confirmation of addition of Rs.1,42,270/- towards reimbursement of software charges. The facts anent to this issue are that the assessee purchased software license of Norton Antivirus firewall on worldwide basis to be used by the group entities. The amount spent for procuring the Antivirus software for the Indian entity was recovered to the tune of Rs.1,42,270/-, as such, without any mark-up. The AO held such amount to be chargeable to tax as Royalty by considering retrospective amendment to section 9(1)(vi) of the Act. The ld. CIT(A) echoed the decision of the AO relying on the judgment of Hon ble Karnataka High Court in the case of CIT Vs. Samsung Electronics Pvt. Ltd. (2012) 345 ITR 494 by holding that import of shrink wrapped software/off-the-shelf software under a software ..... X X X X Extracts X X X X X X X X Extracts X X X X
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