9911796707
TMI Blog2023 (9) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee to show how these services available for everybody and anybody can claim it over the counter. These are specific services for the entities of the assessee only, which are to be used in their respective organisation between different countries. Therefore, as far as the user of the services in India is concerned, their fees paid for such user in India deserve to be taxed in India. DRP has observed that there is no clause to make available in the treaty between India and Finland. According to which, it was not necessary upon the assessee to make the technology available to Indian entity and only then the receipt would be taxable. Without making it available, if the technology has been used, then also, on those receipts, the assessee has to pay taxes. Whether receipt received in the shape of guarantee fees deserves to be taxed in India within the meaning of Article 21 of India- Finland Treaty ? - According to the ld. DRP, the activities of giving of guarantee are only a routine activity. It is an obligation to its subsidiary being the owner of the subsidiary. Hence it is more likely to be a shareholders obligation/service than business activity. The ld. DRP has held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mination of taxable income under the head IT Services . 5. Brief facts of the case are that the assessee-company has filed its return of income electronically on 29.03.2019 and 12.02.2021 declaring income of Rs. 4,05,940/- and Rs. 2,33,61,680/- in A.Y. 2018-19 and 2020-21 respectively. The case of the assessee was selected for scrutiny assessment in both the years and accordingly notice under section 143(2) was issued and served upon the assessee. The assessee has provided IT Services to Indian customers during the relevant financial year. It has raised invoices on account of supply of services amounting to Rs. 2,04,00,802/- in A.Y. 2020-21, whereas Rs. 1,38,10,480/- in A.Y. 2018-19. The stand of the assessee was that it had earned income from IT Services in pursuance of a Service Agreement with Outotec India Private Limited and it had performed the said services in Finland through its office/workshop under Clause 3 of the Service Agreement. The assessee further contended that it has no permanent establishment in India and, therefore, as per Article 12 of the India-Finland DTAA, the alleged receipts are not taxable in the hands of the assessee. The ld. Assessing Officer was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. 3.4. The submissions have been examined along with the materials available on record. The dispute is essentially about the scope and applicability of Paragraphs (1), (2) and (5) of the DTAA to the facts and circumstances relating to the assessee's rendition of IT services is. Relevant extracts of said Article 12 of the India- Finland DTAA are as follows- ARTICLE 12 ROYALTIES AND FEES FOR 'TECHNICAL SERVICES 1. Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State, 2. However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of trie royalties is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services, 3(a) The term royalties as used in this Article means payments of any kind received as a consideration for the use of or the right to use, any copyright of literary, artistic or scientific work including cinemato ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e permanent establishment or fixed base is situated. 3.5. A conjoint reading of Paragraphs (1) and (2) clearly shows that Royalties / fees for technical services may be taxed in the State of residence of the payee [Paragraph (1)] as well as in the State of Source [Paragraph (2)]. In this context, Paragraph (5), inter alia, provides that ivhere the payer is a resident of a Contracting State (India in the present case), royalties/FTS shall be deemed to arise in such Contracting State. However, if the right/property for which such royalties are paid is used within a Contracting State or the services in relation to such FTS are performed in that Contracting State, the said royalties/FTS shall be deemed to arise in that Contracting State. As the India - Finland DTAA does not contain the make available clause in the FTS Article, there is no requirement to discuss that aspect of the services in the assessee's case for this AY. 3.6. In the present case, the assessee has stated that the said IT services have been performed by it in Finland through its offices / workshops in Finland and that none of its employees visited India to perform the services under aforesaid clause 3 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the fees is paid for technical services which are performed within a contracting state, then the income therefrom is deemed to accrue or arise within the state in which the services were performed. In our view, this Clause does not apply as the payment in question was made for the test results which were used within the contracting state. India. It may be true that the process of testing may have been conducted outside India. But the payment in question is not for the process but for the results of testing which is used in India. The argument of the Id. DR that these services were available in India and hence are taxable in India has to be upheld. Hence, we agree with the finding of the Assessing Officer as upheld by the DRP on this issue. In the result, this ground of the assessee is dismissed. (Emphasis supplied) 3.8. In the present case, the ratio of the decision of the Hon'ble Tribunal above is squarely applicable to the income from technical services amounting to INR 1,38,10,480 as well. The said services, even if rendered in Finland under the Services Agreement, were for the purpose of the business of Outotec India in India. Without such use in India, the rend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le in the treaty between India and Finland. According to which, it was not necessary upon the assessee to make the technology available to Indian entity and only then the receipt would be taxable. Without making it available, if the technology has been used, then also, on those receipts, the assessee has to pay taxes. 9. The next issue involved in both the appeals is, whether receipt received in the shape of guarantee fees deserves to be taxed in India within the meaning of Article 21 of India- Finland Treaty. The ld. DRP has made discussion on this issue as under:- 4. Ground of objection No 3: Taxability of income from fee for Corporate Guarantee (a)That on the facts and in the circumstances of the case and in law, the Ld. AO erred in holding that guarantee fee is taxable in India under section 56 of the Income-tax Act, 1961 ( Act ) read with Article 21 of India-Finland DTAA. (b)That on the facts and in the circumstances of the case and in law, the Ld. AO erred in not appreciating that guarantee fees being business income of the assessee is not taxable in India in the absence of permanent establishment of the assessee in India under Article 5 read with Article 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... voices submitted by the assessee confirmed that the income accrued in India as the invoices were addressed to Outotec India Private Limited in India. The AO further held that the service is treated to be performed only when the beneficiary is able to use it for its own purpose and that the intended use of the corporate guarantee was ultimately in India from where the assessee derived its right to receive the income and raise the invoices. 4.2 In DRP proceedings, the assessee stated that it earned guarantee fees from Outotec India on account of parent company guarantee under its Articles of Association, which defines the scope of the line of business of the company. The Articles permit the company to engage in business of providing guarantees to its subsidiaries on a regular basis. To facilitate the same, the assessee had negotiated with a syndicate of eight banks, whereby in connection with the above services, the bank charged fees at the rate of 1.5% per annum of the guarantee fees and the assessee subsequently recharged the cost to Outotec India together with a premium of 0.25% per annum. The assessee stated that the activity of provision of guarantees is a continuous system ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied upon Indo Finnish DTAA to determine the taxability of the commission received for providing bank guarantee... The A.O has held that the commission income earned by the assessee for providing bank guarantee is taxable under sub clause 3 of the Article 21 of the DTAA. The assessee claimed that the Articles of Association of the assessee authorizes the company to engage in business of providing guarantees to its group companies including Outotec India on a regular basis. Provision of guarantee is not an isolated event but a planned continuous systematic activity which has direct impact on the revenues of the company. The assessee also charges premium on the guarantee provided to its subsidiary company. Hence provision of guarantees has a direct effect on the profitability of the assessee which substantiates that it has direct nexus or control zoith the business of the assessee. Thus the income earned from providing guarantee to Outotec India will qualify as business income and not income from other sources. The contention of the assessee has been considered. Providing bank guarantee/parent comyamj guarantee is not a routine activity for the assessee. It does it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect ofiohich the income is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. (3)Notwithstanding the provisions of paragraphs 1 and 2 of this Article, items of income of a resident of a Contracting State not dealt with in the foregoing Articles of this Agreement and arising in the other Contracting State may be taxed in that other State. 4.6. Article 2 (Line of Business) of the Articles of Association of the assessee company reads as follows - Article 2 (Line of Business) The company's line of business is to carry on, by itself or through its subsidiaries, the design, manufacture, construction of and trade in methods, machinery, devices, equipment, spare parts and production facil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion towards pages no. 55 to 61 of the paper book, wherein submissions filed by the assessee are placed on record. He pointed out that the assessee has received guarantee fees from Outotec India Private Limited for standing as a Corporate Guarantee qua the loan obtained by the Outotec India Private Limited as a subsidiary company of the assessee. According to the assessee, it has included providing of a Corporate Guarantee as a line of business in its Memorandum of Association and in lieu of that, it has provided Corporate Guarantee towards loan taken by its subsidiary and sister concern. Therefore, whatever has been received by the assessee, it is to be construed as a business income. Further taking us through Section 5(2) of the Income Tax Act read with Section 4, he contended that total income of the non-resident would include all income from whatever sources derived which (i) accrue or arise in India or (ii) deemed to accrue or arise in India or (iii) is received in India or (iv) deemed to be received in India. According to the ld. Counsel for the assessee that the consideration was received outside India in foreign currency by the assessee and no part of revenue from guarantee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from other sources . The ld. DRP has rightly dealt with the issue and rightly directed the ld. Assessing Officer to tax it under the head income from other sources as per Article 21. 13. During the course of hearing, the assessee has pointed out that it has raised additional ground of appeal under Grounds No. 4.1 and 4.2 in A.Y. 2020-21. In these grounds, the assessee has pleaded that it has received interest on refund amounting to Rs. 2,33,61,678/- and under Article 11 of DTA, this interest income ought to have been assessed @ 10%, which has not been considered by the revenue authorities. The ld. Counsel for the assessee has submitted that this aspect has been gone into by the Tribunal in A.Ys. 2018-19 and 2019-20 vide ITA Nos. 350 351/KOL/2022. Therefore, according to him, it is covered by the order of the ITAT. 14. The ld. D.R., on the other hand, contended that there is no discussion either in the assessment order or in the order of the ld. DRP. Therefore, at the most, this issue be remitted back to the ld. Assessing Officer for read judication. 15. On due consideration of the record, we find that there is no discussion on this point in the impugned order o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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