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TMI Blog2023 (1) TMI 1207X X X X Extracts X X X X X X X X Extracts X X X X ..... provision of services by the assessee cannot be treated as royalty either under the provisions of the Act or under the India Singapore DTAA. An the present case, from the nature of services provided by the assessee, it is evident that the services are performed by the assessee s own personnel in France and the payment on account of search services was directly remitted by the Indian group companies to the assessee. As part of the TSIS Service Agreement, the Indian group companies only receive standard services and no licences in any software/right to use any software etc. is provided - there is no sharing of any confidential information by the assessee with the Indian group companies. The term Royalty is not as widely defined in India France DTAA as in the India Singapore DTAA, which was taken into consideration by the coordinate bench of the Tribunal in the case of sister concern. Since it has not been disputed that the facts of the present case are similar to the case of the assessee s group concern, wherein income arising from services of similar nature are held to be not taxable as royalty, therefore, we find merit in the plea of the assessee. Accordingly, respectfully followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the India USA DTAA, the services provided by the assessee are not taxable. In order to decide the claim of the assessee, it is relevant to note the provisions of the Protocol to the India France DTAA. In the present case, the assessee is a resident of France and thus in view of para-7 of the Protocol to the India France DTAA has sought the benefit of the restricted scope of the definition of fees for included services as provided under the India USA DTAA. We are of the considered view that CBDT Circular No. 3/2022 dated 03/02/2022 is not applicable to the present appeal. Therefore, in view of the aforesaid findings, we are of the considered opinion that the assessee is entitled to claim the benefit of the restricted definition under India USA DTAA in view of the Protocol to the India France DTAA. Since the assessee has been found not to have made available any technical knowledge, experience, skill, or know-how, therefore, Management Service Fees received by the assessee cannot be taxed under the provisions of Article 13 of the India France DTAA read with para 7 of the Protocol to the India France DTAA and Article 12(4) of India USA DTAA. In view of the above, the alternative clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y. 2012 13 3. In its appeal, the assessee has raised the following grounds: On being aggrieved by the order dated 30 December 2015 of the learned Deputy Commissioner of Income-tax (International Tax)-2(2)(1), Mumbai (AO) passed under section 143(3) read with section 144C of the Income tax Act, 1961 (Act) as also directions issued by the DRP, Mumbai dated 24 November 2015, the present appeal is being preferred on the following grounds amongst others which, it is prayed, may be considered without prejudice to one another. On the facts and circumstances of the case and in law, the learned AO, as per the directions of DRP has: 1 . General Grounds erred in assessing total income at INR 8,48,48,880 as against returned income of INR 87,03,089; 2. Technology and Strategic Information Systems ('TSIS') fees taxed as royalty erred in considering TSIS charges of INR 42,42,933 to be taxable as royalty under the provisions of Act and the India-France Double Taxation Avoidance Agreement ('DTAA'); 3. Management service fees taxed as royalty a) erred in characterizing and taxing management service fee amounting to INR 7,19.02,857 as royalty as against the characterization as Fees fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0, received on account of Management Service Fees and Technology and Strategic Information Systems ( TSIS ) Service Fees as not liable to tax in India as per Article 13 read with the Protocol to the India France Double Taxation Avoidance Agreement ( DTAA ) along with Article 13 of the India USA DTAA and the India Finland DTAA. The AO vide draft assessment order dated 31/03/2015, passed under section 143(3) r/w section 144C(1) of the Act treated the TSIS Service Fees of Rs. 42,42,933, as royalty within the meaning of Article 13(3) of India France DTAA as well as section 9(1)(vi) of the Act. As regards the Management Service Fees received by the assessee, the AO treated the same as fees for technical services under Article 13 of the India France DTAA. 5. The learned DRP vide its directions dated 24/11/2015, issued under section 144C(5) of the Act noted that in the case of the group company of the assessee viz. Edenred PTE Ltd. similar services provided for the assessment years 2011 12 and 2012 13 were held to be taxable in India. Finding the facts of the present case to be similar to the facts in the case of the group company of the assessee, the learned DRP directed that the conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s appealable by the Revenue before the Tribunal. Since, the Revenue has not challenged the aforesaid findings of the learned DRP and has accepted the same, therefore now in the present appeal we need to only examine whether the receipts under the aforesaid agreements are in the nature of royalty. On which issue, the assessee is in appeal before us. 9. Under the TSIS Agreement, the services provided by the assessee include IT infrastructure management and mailbox and web hosting services. During the year, the assessee received total consideration of Rs. 42,42,933, from its 3 group companies, namely, Edenred (India) Private Ltd, Royal Images Direct Marketing Private Limited, and SurfGold.com (India) Private Ltd. There is no dispute regarding the fact that under the agreement with each of the aforesaid entities the nature of services provided by the assessee is identical. Further, under the aforesaid agreement, services are broadly defined as any and all hosting services, support and maintenance services, development services, infrastructure and security services, and professional services proposed by the assessee to the Indian group companies. Vide draft assessment order, the AO held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arising from the provision of services by the assessee cannot be treated as royalty either under the provisions of the Act or under the India Singapore DTAA. The relevant findings of the coordinate bench of the Tribunal are as under: 7. As could be seen from the facts discussed herein before, the issue in dispute is, whether the payment received by the assessee from provision of IDC services can be treated as royalty under Article 12 of India-Singapore DTAA. As we find, identical issue came up for consideration before the Tribunal in assessee's own case for assessment years 2010-11 to 2012-13. In fact, learned DRP has decided the issue in favour of the revenue by relying upon its decision in assessee's own case in assessment year 2012-13. However, while deciding the appeals of the assessee on identical issue in assessment years 2010-11 to 2012-13 the Tribunal, in the order referred to earlier in the order, has held that the payment received by the assessee from provision of IDC services is not in the nature of royalty. The observations of the Tribunal in this regard are as under: 6. We have heard the rival submissions and perused the relevant materials on record. The reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case laws relied on by the Ld. counsel. A plethora of precedents on the subject in which we are presently concemed compels us, in order to avoid prolixity, to refer only a few decisions below. In the case of Bharati Axa General Insurance Co. Ltd. (supra), the appellant, an Indian company carrying on business of general insurance entered into a service agreement with a Singapore company AXA ARC for receiving assistance such as business support, market information, technology support services and strategy support etc. from the latter. The AAR held that (i) though the services rendered by AXA ARC may well be brought within the scope of the definition of FTS under the IT Act as they answer the description of consultancy services or some of them may be categorized as technical services but the qualifying words make available technical knowledge, experience, skill, know-how, which enables the recipient of services to apply the technology contained therein in Article 12.4 of the DTAA make material difference, (ii) all technical or consultancy services cannot be brought within the scope of this definition unless they make available technical knowledge, knowhow etc which in turn facili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the meaning of Article 12 of the treaty. In ExxonMobil Company India (P) Ltd. (supra), the assessee had paid certain amount to 'EMCAP', Singapore towards global support fees. The AO opined that payment made by the assessee was in the nature of FTS as defined in Explanation 2 to section 9(1)(vii) of the Act. The Tribunal observed that as per terms of agreement, EMCAP had to provide management consulting, functional advice, administrative, technical, professional and other supporting services to the assessee; however, there was nothing in agreement to conclude that in course of such provision of service, EMCAP had made available any technical knowledge, experience, skill, knowhow or process which enabled assessee to apply technology contained therein on its own. Therefore, the Tribunal held that payment made by the assessee could not be considered as FTS as defined under Article 12(4)(b) of the India-Singapore DTAA. In M/s Reliance Jio Infocomm Ltd. (supra) for AY 2016-17, the Tribunal observes that though the India-Singapore Tax Treaty is amended by Notification No. SO 935(E) dated 23.03.2017, however, the definition of 'royalty' therein has not been tinkered with a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om offering the particular subscription based service is taxable in India as 'royalty' in terms of paragraph 2 of Article 12 of the DTAC between India Singapore. However, we find that in the intense, the appellant in only providing DC service which includes administration and supervision of central infrastructure, mailbox hosting services and website hosting services and therefore, the ratio laid down in the above is not applicable to the facts of the appellant's case. 6.3 From the enunciation of law in Bharati Ax General Insurance Co Ltd. ExxonMobil Company India (P) Ltd., Standard Chartered Bank v. DDIT; DCIT v/s M/s Reliance Jio Infocomm Ltd. narrated at pare 6.1 hereinbefore, it is quite luculent that revenues under the IDC agreement ought not to be taxed in the hands of the appellant as royalty under the Act and/or India-Singapore DTAA. Therefore, we delete the addition of Rs.95,62,479/- made by the AO towards IDC charges and allow the 2nd ground of appeal. 8. Facts being identical, respectfully following the decision of the coordinate Bench in assessee's own case as referred to above, we hold that the amount received by the assessee from provision of IDC servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned DRP has held the fees received by the assessee under the Management Services Agreement to be taxable as royalty. As noted above, the Revenue has not filed any appeal against the appealable DRP s directions and therefore has accepted the findings of the learned DRP. From the perusal of the Management Services Agreement entered into by the assessee with the aforesaid Indian group companies, forming part of the paper book from page no. 280 324, we find that the scope of work is restricted to various services in the nature of public relations services, corporate social responsibility, partnership opportunities, networking coordination, financial services, legal services / advices, human resources. In support, the assessee has also filed copies of emails exchanged between the parties regarding the aforesaid services. As per the assessee, the services are provided only to support the Indian group companies in carrying on business efficiently and running the business in line with the business model, policies, and best practices followed by the Edenred group. From the perusal of documents available on record, it is evident that the services are general management services render ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order dated 31 October 2017 of the learned Deputy Commissioner of Income-tax International Tax)(2)(1)(2), Mumbai (AO) passed under section 1433) read with section 144C(13) of the Income-tax Act, 1961 (the Act) as also directions issued by the DRP, Mumbai dated 22 September 2017, the present appeal is being preferred on the following grounds amongst others which, it is prayed, may be considered without prejudice to one another On the facts and circumstances of the case and in law, the learned AO, as per the directions of DRP has 1. General Grounds Erred in assessing total income at INR 7,09,51,660 as against returned income of INR 77,18,773; 2. Technology and Strategic Information Systems (TSIS ) fees taxed as royalty Erred in considering TSIS charges of INR 33,30,780 to be taxable as royalty under the provisions of the Act and the India-France Double Taxation Avoidance Agreement (DTAA ); 3. Management service fees taxed as royalty a) Eared in characterizing and taxing management service fee amounting to INR 5,99,02,109 as royalty as against the characterization as Fees for Technical Services (FTS) as mentioned in the draft assessment order; b) Erred in characterizing and taxing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taxability of TSIS Service Fees and Management Services Fees received by the assessee as royalty. The learned DRP vide its directions, after noting that the facts for the year under consideration are similar to the preceding assessment year, held that both the receipts are taxable as royalty. Since a similar issue has been decided in assessee s appeal being ITA No. 508/Mum./2016, for the assessment year 2012 13, therefore, our findings/conclusion rendered in the said appeal shall apply mutatis mutandis. Accordingly, grounds No. 2 and 3 raised in assessee s appeal are allowed. 20. The issue arising in grounds No. 1 and 4 are general in nature and therefore need no separate adjudication in view of our aforesaid findings. 21. Ground no.5, raised in assessee s appeal is pertaining to a short grant of credit of TDS. This issue is restored to the file of the AO with the direction to grant TDS credit, in accordance with the law, after conducting the necessary verification. As a result, ground no.5 raised in assessee s appeal is allowed for statistical purposes. 22. The issue arising in ground No. 6 raised in assessee s appeal is pertaining to the charging of interest under section 234A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP has held management service fee as FTS only, c. Erred in not appreciating that impugned management service fee cannot be taxed as FTS under the provisions of the Act as well as Article 13 of the India-France DTAA read with Para 7 of the protocol of the India-France DTAA containing the Most Favoured Nation Clause and Article 12(5) of the India-Finland DTAA which provides taxing right to the state where such services are performed (i.e. France); d. Erred in not appreciating that impugned management service fee cannot be taxed as FTS under the provisions of the Act as well as Article 13 of the India-France DTAA read with Para 7 of the protocol of the India-France DTAA containing the Most Favoured Nation Clause and Article 12 of the India-USA DTAA which provides that only services which makes available technical knowledge, experience, skill, know how, or processes, or consist of the development and transfer of a technical plan or technical design are taxable as FTS/ fees for included services. 4. Erred in computing gross tax Erred in computing gross tax as INR 66,45,335 as against INR 63,62,468, 5. Interest under section 234B of the Act Erred in levying interest under section 234B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned AO, as per the directions of DRP has: 1. General Grounds Erred in assessing total income at INR 5,36,59,590 as against returned income of INR 47.65,378. 2. Management service fees taxed as Fees for Technical Services (―FTS ) a) Erred in not appreciating that impugned management service fee of INR 4:35.95.413 cannot be taxed as FTS under the provisions of the Act as well as Article 13 of the India-France Double Taxation Avoidance Agreement (DTAA) read with Para 7 of the protocol of the India-France DTAA containing the Most Favoured Nation Clause and Article 12(5) of the India - Finland DTAA which provides taxing right to the state where such services are performed (ie France); b. Erred in not appreciating that impugned management service fee of INR 4,35,95,413 cannot be taxed as FTS under the provisions of the Act as well as Article 13 of the India-France DTAA read with Para 7 of the protocol of the India-France DTAA containing the Most Favoured Nation Clause and Article 12 of the India-USA DTAA which provides that only services which makes available technical knowledge. experience, skill know-how, or processes, or consist of the development and transfer of a technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15/12/2017 passed under section 143(3) r/w section 144C(1) of the Act did not agree with the submissions of the assessee and held that Management Service Fee received by the assessee is taxable as fees for technical services under section 9(1)(vii) of the Act as well as the India France DTAA. 33. The learned DRP vide its directions dated 18/05/2018 issued under section 144C(5) of the Act held that India Finland DTAA is not applicable to the present case. As regards the reliance placed by the assessee on the India USA DTAA, on the basis that the restrictive definition of fees for technical services in the said DTAA be applied to the present case, by relying on the Protocol to the India France DTAA, the learned DRP held that assessee has made available technical input as well as the necessary training to the manpower of the group companies. Therefore, the services rendered by the assessee under the Management Services Agreement fall under the category of make available and accordingly, constitutes fees for technical services even under the India USA DTAA. Thus, unlike preceding assessment years, in the year under consideration, the learned DRP held that the management service fee re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Protocol, which is relevant to the present case, reads as under: 7. 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 1-9-1989, 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 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. 37. Thus, as per the para-7 of the Protocol to the India France DTAA, if under any Convention between India and a third State, which is a member of the OECD, entered after 01/09/1989, India limits its taxation for dividend, interest, royalty, fees for technical services or paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , or consist of the development and transfer of a technical plan or technical design. 39. It is the submission of the assessee that the services provided under the Management Services Agreement with Indian group companies do not make available any technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or a technical design. To understand the meaning of the term make available the following observations of the coordinate bench of the Tribunal in the case of Shell Global International Solutions BV vs ITO [(2015) 64 taxmann.com 3 (Ahd)], becomes relevant: 17. As for the connotations of 'make available' clause in the treaty, this issue is no longer res integra. There are at least two non-jurisdictional High Court decisions, namely Hon'ble Delhi High Court in the case of DIT v. Guy Carpenter Co Ltd. [2012] 346 ITR 504 and Hon'ble Karnataka High Court in the case of CIT v. De Beers India (P.) Ltd. [2012] 346 ITR 467/208 Taxman 406/21 taxmann.com 214 in favour of the assessee, and there is no contrary decision by Hon'ble jurisdictional High Court or by Hon'ble Supreme Court. In De Beers India (P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harat Petroleum Corpn. Ltd. v. Jt. DIT [2007] 14 SOT 307 (Mum.), another coordinate bench of this Tribunal, inter alia, held that market study covering study of supply and demand analysis, domestic refining capacity, price forecast etc did not constitute fees for technical services as it did not transmit the technical knowledge. In the case of Ernst Young (P.) Ltd. In re [2010] 189 Taxman 409/323 ITR 184 (AAR), the Authority for Advance Ruling, inter alia, observed that some of the services enumerated have the flavor of managerial services but services of managerial nature are not included in Article 13 (of Indo-UK tax treaty, which is in pari materia with the treaty provision before us) unlike many other treaties . We are in considered agreement with the views so expressed by the Authority for Advance Ruling. On the same lines are various decisions of this Tribunal in the cases of ICICI Bank Limited v. Dy. CIT [2008] 20 SOT 453 (Mum.) and McKinsey Co. Inc v. Asstt. DIT [2006] 99 ITD 549 (Mum.). What essentially follows, therefore, is that as long as the services rendered by the assessee are managerial or consultancy services in nature, which do not involve or transmit the technolo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... summed up its opinion in para 5 of the Circular, reading as under:- 5. In view of the above, it is hereby clarified that the applicability of the MFN clause and benefit of the lower rate or restricted scope of source taxation rights in relation to certain items of income (such as dividends, interest income, royalties, Fees for Technical Services, etc.) provided in India's DTAAs with the third States will be available to the first (OECD) State only when all the following conditions are met: (i) The second treaty (with the third State) is entered into after the signature/ Entry into Force (depending upon the language of the MFN clause) of the treaty between India and the first State; (ii) The second treaty is entered into between India and a State which is a member of the OECD at the time of signing the treaty with it; (iii) India limits its taxing rights in the second treaty in relation to rate or scope of taxation in respect of the relevant items of income; and (iv) A separate notification has been issued by India, importing the benefits of the second treaty into the treaty with the first State, as required by the provisions of sub-section (1) of Section 90 of the Income Tax A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt that the Central Government has entered into with the Government of any country outside India for the granting the relief. Reference to the expression `make such provisions as may be necessary for the purpose of notification in the Official Gazette, is to adopt the manner of notifying as may be necessary for implementing the agreement and not that the notification is to be issued piecemeal and in a truncated manner. On notifying the Agreement or Convention, all its integral parts, get automatically notified. As such, there remains no need to again notify the individual limbs of the Agreement so as to make them operational one by one. 12. It is trite law that a circular issued by the CBDT is binding on the AO and not on the assessee or the Tribunal or other appellate authorities. It has been held so authoritatively in CIT Vs. Hero Cycles Pvt. Ltd. (1997) 228 ITR 463 (SC) as reiterated in CCE Vs. M/s. Ratan Melting and Wire Industries (2008) 220 CTR 98 (SC). Ex consequenti, the Circular transgressing the boundaries of section 90(1) of the Act, cannot bind the Tribunal. 13. Notwithstanding the above, it can be seen that the CBDT has panned out a fresh requirement of separate notifi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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