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TMI Blog2022 (11) TMI 1342X X X X Extracts X X X X X X X X Extracts X X X X ..... PER PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER This appeal preferred by the assessee emanates from findings of the Ld. Disputes Resolution Panel-3, Mumbai-2, dated 25-04-2022 for A.Y. 2019-20, u/s 144C(5) of the Income-tax Act, 1961 (hereinafter referred to as the Act ) as per the following grounds of appeal. Based on the facts and circumstances of the case, the Appellant respectfully craves leave to prefer an appeal under Section 253 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), against the order dated 09 May 2022 (serviced on 09 May 2022) issued by the Learned Assistant Commissioner of Income Tax (IT) Circle 1, Pune (hereinafter referred to as 'Ld. AO'), under Section 143(3) read with Section 144C(13) of the Act, pursuant to directions issued by the Hon'ble Dispute Resolution Panel-3, Mumbai (hereinafter referred to as 'Hon'ble DRP'), dated 25 April 2022. The following grounds of appeal are independent of and without prejudice to one another. 1. Income from providing Information Technology (IT ) Support Services and Management Services considered taxable as Fees from Technical Services ('FTS') ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Marketing, Program Management, Information System, Human Resources, Production Purchasing, Manufacturing, Quality, etc., and it is only providing assistance, by way of consultancy services, to the AE for performing the various actual functions mentioned above. In other words, it is the personnel of the AE who have actually performed the functions with the assistance provided by the assessee company. As stated above, in the preamble to the Services Agreement, it has been stated that assessee has assembled a good knowledge and a great experience in the provision of services in the above areas. From the discussion in the preceding paragraph, it would be seen that the assessee company had, as per the Services Agreement, shared the information concerning commercial/industrial experience which it had 'assembled' and using such information, the personnel of the AE had actually performed these functions. Accordingly, it is inferred that that the payments received by the assessee from its AE in terms of the Services Agreement are covered by the definition of Royalty under Article 13(3) of the India-France DT AA. 4.1.5 The Global Information Support Services provided by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Agreement between the assessee and its AE (Exhibit I) and, the extracts of the same reproduced in the later part of this assessment order, it is crystal clear that the services provided by the assessee are managerial, technical and consultancy, in nature. X x x x x x x 4.2.5 4.2.5 In view of the above, the consideration received by the assessee from its AE towards Management charges and IT support services are covered by the definition of FTS under Article 13(4) of the India-France DTAA and is, accordingly, liable to be taxed in the hands of the assessee. X x x x x x 4.3..16 Thus, as of now, the Department s stand is that separate notification is required to be issued to give effect to the MFN clause. As stated above, the issue involved is pending for decision by the Hon ble Supreme Court, and the issue involved is yet to attain finality by way of confirmation by the Hoh ble Supreme Court. 4.3.17 In the light of the discussion in the preceding paragraphs, it is clear that the respective definition of Fees for technical services INDIA-UK-DTTA cannot be imported to the INDIA-FRANCE-DTTA . In view of the above discussion, provisions of Income-tax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R at the time of hearing submitted that in assessee s own case similar issues were addressed and answered in favour of the assessee by Pune Tribunal s decision in ITA No. 784/PUN/2015 for A.Y. 2011-12, order dated 08-07-2019, wherein it was observed and held as follows: 7. Briefly stated, the facts of this additional ground are that the assessee received a sum of Rs.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 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 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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, expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eans 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 Central Government has entered into an agreement with the Government of any country outside India under subsection (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-sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 indic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration 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 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 consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foresaid 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 allowed. 3. Respectfully following the aforestated decision, we are of the considered view that the extant payment received by the assessee can neither be considered as royalty u/s 9(1)(vi) of the Act nor as fees for technical services and therefore, the same cannot be included in the total income of the assessee. Grounds No. 1 and 2 of the assessee s appeal are allowed. 7. We also find that the decision relied on by the ld. CIT DR ..... X X X X Extracts X X X X X X X X Extracts X X X X
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