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TMI Blog2023 (3) TMI 1485X X X X Extracts X X X X X X X X Extracts X X X X ..... uced below: - "On the facts and circumstances of the case and in law; the learned AO/ learned CT(A) has: Addition of administrative support charges as fees for technical services 1. erred in upholding the contention of the learned AO that administrative support services rendered by the Appellant to Jefferies India Private Limited ("JIPL") as 'fees for technical services' as per section 9(i)(vii) of the Act and therefore, taxing the administrative support charges amounting to Rs 7,142,498 in the hands of the Appellant; 2. erred in upholding the administrative support services rendered by the Appellant to JIPL as 'fees for technical services/ included services which is taxable in India under Article 12 of the double taxation avoidance agreement between India and United States of America (Treaty') on the basis that the Appellant 'makes available' technical knowledge, experience, skill, know-how, or process to JIPL; 3. erred in failing to appreciate that the administrative support services are routine in nature and none of the services provided by the Appellant have resulted in knowledge or know-how being transferred to JIPL which would enable JIPL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act without appreciating the fact that the Appellant had filed the accountant's report in Form 3CEB for the year under appeal vide submission dated 1 October 2014." 4. At the time of hearing, before us, Ld. AR has submitted the relevant facts and submitted as under: - "1. The Appellant, now known as Jefferies LLC (formerly Jefferies & Co. Inc.), is a US Tax Resident. 2. The Appellant has entered into an intra-group agreement dated 20 April 2010 (see Page 51 of the Paperbook) inter alia with Jefferies India Pvt. Ltd. ("JIPL") under Clause 3 (see Page 52 of the Paperbook) read with Schedule A (see Page 58 of the Paperbook) whereof the Appellant provides administrative services covering various areas like Compliance Department, Finance Department, Human Resource Department, Information Technology Department, Internal Audit Department, Legal Department, Operation Department, Risk Department, Tax Department and Treasury Department. The aforesaid services are provided by the Appellant at cost and no markup is charged by the Appellant on the cost incurred for providing the aforesaid services. 3. For the year under consideration, the Petitioner filed return of income declarin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive Support charges is treated as income of the assessee in the nature of Fees for Included Services and taxed accordingly." b. Insofar as reimbursement of costs of Rs. 2,30,99,178 incurred on behalf of JIPL was held taxable as fees for technical services since these amounts were incurred by the Appellant to render the above referred administrative support services. The relevant portion of the order passed by the Assessing Officer is reproduced herewith: 10.1 The assessee has submitted that the expenses incurred by Jeffery LLC was on behalf of JIPL which was mainly incurred towards Bloomberg Finance L.P.. Dow Jones & Company Inc,, MERGERMARKET (US) LTD., Royale Logistics Ltd., Business Wire, Verizon Network Integration Corp.. Universal E-Business Solutions, LLC. Chris Fowler Integration Corp., J2 Global Communications. Inc.. Blue Matrix LLC. NYSE Market Inc., Penton Business Media. Inc., etc. These expenses have been paid via bank or wire transfer to third parties on behalf of JIPL and they have been reimbursed at Icost by JIPL to Jeffery LLC via wire transfer. Accordingly, this is a mere reimbursement of expenditure incurred by the assessee on behalf of JIPL 10.2. In this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) (erroneously) held expenses have been incurred by the Appellant on travelling of the employees who have travelled to India for providing consultancy services and therefore, JIPL. derived the benefits from their expertise, knowledge. Hence, the travelling expenses were incurred for rendering consultancy services and accordingly, the same is taxable as fees for technical services in India. Submission of the Appellant: Ground No. 1 to 5 Rs. 71,42,948 received by the Appellant for rendering the administrative support services 6. At the outset the Appellant submits that the CIT(A) has made the following factually incorrect observations in his order: a. In pages 28 to 36 containing his "Decision" at several places the CIT(A) has erroneously referred to Jefferies International Ltd. (JIL) (another group company) instead of the Appellant. During the hearing a copy of the CIT(A) order marking the wrong reference has been handed over. b. The invoices tabulated on pages 30 32 and images of samples thereof extracted in the order are invoices of third parties showing costs incurred by the Appellant on behalf of JIPL which have been reimbursed. These bills are not for admin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... traced back to Clause 5 of the intra-group agreement dated 20 April 2010 which reads as under: "For the purposes of this agreement, the marketing and consultancy services shall include, but are not limited to the following: (a) the marketing of the corporate finance services provided by JIL, Jefco or JHKL, as the case may be, and the assistance to promote contact between JIL, Jefco or JHKL and existing and potential clients in India; (b) the provision of an advisory service to JIL, Jefco or JHKL regarding any development within the relevant markets in India; (c) liaising with clients and providing feedback to JIL, Jefco or JHKL regarding the provision of corporate finance services by JIL, Jefco or JHKL, as the case may be; (d) providing assistance as necessary or requested in connection with obtaining and complying with any consents or approvals which may be required from governmental, regulatory or any other relevant authority to enable any of JIL, Jefco or JHKL to provide corporate finance services to clients in India; (e) undertaking due diligence with respect to any potential client, or otherwise assisting JIL, Jefco or JHKL in the performance of any regulato ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x, Risk, Operations, Information Technology are taxable or not. a. It is undisputed that the Appellant is governed by the provisions of the Indo US DTAA. b. The Appellant submits that the administrative support services are not covered by Art.12(4) as they are not technical or consultancy services that make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. c. These services are provided on a year-on-year basis and are repetitively required by JIPL. Which fact clearly demonstrates that that the services do not make available the technical knowledge otherwise, the same would not be paid repeatedly. The fees paid for administration services from A.Y. 2012-13 to 2021-22 is attached herewith as Annexure-1. d. JIPL seeks these services from the Appellant as it does not have the requisite no. of employees who can carry out the aforesaid functions. This fact has also been found by the TPO in the assessment of JIPL while evaluating the nature of services which rendered by the Appellant to JIPL- relevant observation of the TPO from his order (see Page 34 of the paperbook re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2018-19 to 2022-23 and AY 2014-15 to 2017-18 (rollback years). Therefore, the amount of Rs. 71,42.398 is not taxable being reimbursement of cost incurred. In this regard, the reliance is placed on the following judgments wherein it has been held that reimbursement of cost is not taxable as fees for technical services since there is no element of income in the same: a. DIT vs. AP Moller Maersk (392 ITR 116) (SC) (Para 11) b. DIT vs. Krupp Udhe GMBH (354 ITR 173) (Bom.) (Para 6 and 7) c. CIT vs. Goldman Sachs India Finance Pvt. Ltd. (Bom.) (Para 3) d. Siemens Akstiongesellschaft (310 ITR 320) (Bom.) (Para 33) Ground No. 6 to 9-reimbursement of costs of Rs. 2,30,99,178 incurred on behalf of JIPL 9. At the outset the Appellant submits that the CIT(A) has made the following factually incorrect observations in his order: a. The CIT(A) in Para 5 on Page 36 of the order recorded as under: "Nature of these expenses which were reimbursed by JIPI to the assessee JLLC-USA were towards "travelling and hotel expenses, telecom expenses, placement charges, meal expenses, mail and freight expenses, etc. of the executives of the JIL who travelled from UK to India for consultancy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n behalf of JIPL and they have been reimbursed a cost by JIPL to Jeffery LLC via wire transfer Accordingly, this is a mere reimbursement of expenditure incurred by the assessee on behalf of JIPL" iii. It is submitted that the above submission has not been disputed by the AO after verifying the third-party bills submitted by the Appellant Para 10.1 of the assessment order. iv. It is further submitted that the CIT(A) himself on Pg. 30 to 32 of its order has reproduced the full details of the thirdparty invoices totalling to Rs. 2,30,99.178 therefore, the aforesaid finding of the CIT(A) is factually incorrect and contrary to evidence on record. This is further borne out form the bills reproduced by the CIT(A) on pages 30 to 32 and the images of sample invoices extracted - please see paragraph 6(b). 10. The Appellant submits that it is not in dispute that the entire amount of Rs. 2,30,99.178 received from JIPL was incurred towards subscription charges/license fees for using a database, communication charges for leased line, etc. is a reimbursement of actual cost for services rendered by third parties to JIPL. The Appellant incurs the expenses for all its group companies at a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le -12 of India-US DTAA therefore, the same is also not taxable by virtue of the provisions of the DTAA. In this regard, the Appellant relies on the judgments referred to in Para 11." 5. On the other hand, Ld DR briefly submitted the facts and referred to Page No. 33 of appellate order. By referring to the above findings of Ld.CIT(A), he submitted that the services rendered by the assessee denotes that the administrative services and other services offered by the assessee are regularly utilized by the JIPL and it shows that the services are make available to the JIPL without any intervention by the assessee. Further he supported the findings of Ld.CIT(A) that the expenditures of other agencies are billed back to back to JIPL. He also referred to findings of Assessing Officer in Para No. 9.4.1 of the assessment order. He relied on the decision of Hon'ble AP High Court in the case of Clouth Gummiwerke Aktiengesellscheaff (238 ITR 861) and decision of Hon'ble Kerala High Court in the case of Cochin Refineries v. CIT (222 ITR 354). 6. Considered the rival submissions and material placed on record. We observe from the record that the principal activity of the assessee is to provide m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and he is of the opinion that the services are received by the Indian entity in the course of their normal business activities and it has benefitted by employing best talent in the business to improve their business and their project. Therefore, it is continuous in nature, hence it amounts to make available. It is fact on record that the assessing officer is not disputing the fact that the assessee has provided the administrative and day to day management services to the JIPL. 8. We observe, as per clause 4 of the agreement, for each of JIPL client engagement, each of JIL, JEFCO and JHKL may provide JIPL with access to its selling, distribution and settlements abilities to assist JIPL in the identification of investors to effect the completion of capital markets and private placement fund raising engagements i.e. the distribution services. The distribution services are in relation to Jefferies Investment Banking activity and shall include the deployment by above said intragroup companies, as the case may be, of its personal to secure investors in a fundraising engagement by JIPL and if requested by JIPL may provide settlements services to it by the above said intra-group companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices are provided by the assessee. The Ld.CIT(A) has confused with the two schedules viz., Schedule A and Schedule B and came to wrong conclusion by observing the bill copies submitted before him for reimbursement of certain charges for which the assessee has outsourced certain services for the whole group and whatever the services are utilized by the assesse are alone charged to the JIPL. Therefore, in our considered view, the services provided by the assessee in order to support and provide the administrative and day to day management services to the JIPL are in the nature of group support services. These services are not to fall under the category of FIS or FTS. This is supported by the decision of ITAT Delhi bench in the case of Everest Global Inc. v. DDIT (2022) 136 taxmann.com 404, it is held as under: - "9.3 We have carefully considered the rival submissions and perused the facts on record. Article 12(4)(b) of the India-USA DTAA provides the meaning of the term FIS 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 throu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly mentioned therein. This contention of the assesee finds support by the jurisdictional Delhi Court judgment in the case of Steria (supra). The relevant para of the judgment is reproduced below. 19. The next question that arises is concerning to extent to which the benefit under the India-UK DTAA can be made available to the Petitioner. As already noticed, the definition of "fee for technical services" occurring in Article 13(4) of the Indo-UK DTAA clearly excludes managerial services. What is being provided by Steria France to the Petitioner in terms of the Management Services Agreement is managerial services. It is plain that once the expression 'managerial services' is outside the ambit of 'fee for technical services', then the question of the Petitioner having to deduct tax at source from payment for the managerial services, would not arise. It is, therefore, not necessary for the Court to further examine the second part of the definition, viz., whether any of the services envisaged under Article 13(4) of the Indo-UK DTAA are "made available" to the Petitioner by the DTAA with France." 9.6. The assesee's case also finds support from the MOU annexed to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... skills, etc., are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. {emphasis supplied} Typical categories of services that generally involve either the development and transfer of technical plans or technical designs, or making technology available as described in paragraph 4(b ), include : 1. Engineering services (including the sub-categories of bioengineering and aeronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical, and industrial engineering) ; 2. Architectural services ; and 3. Computer software development. Under paragraph 4(b), technical and consultancy services could make technology available in a variety of settings, activities and industries. Such services may, for examples, relate to any of the following areas : 1. Bio-technical services ; 2. Food processing ; 3. Environmental and ecological services ; 4. Communication through satellite or otherwise ; 5. Energy conservation ; 6. Exploration or exploitation of mineral oil or natural gas; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake available' as under: "Article 12(4): The term "fees for technical services" as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through 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, knowhow or processes, which enables the person acquiring the services to apply the technology contained therein; or c consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein." Thus as per the India-Singapore DTAA, the services in the nature of managerial, technical or consultancy nature are taxable as FTS if such services are 'made available' to the service recipient. We find that in the instant case, the management services are provided only to support SurfGold in carrying on its busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ient of service, the further question is whether such provision of services enables the person acquiring the services to apply the technology contained therein. This test specifically laid down in clause (b), in our view, is not satisfied and the legal position clarified by this Authority while interpreting more or less similar Treaty provisions applies with greater force to the present case in view of the narrow language employed in the India-Singapore DTAA. Providing comments and suggestions after reviewing the strategies and plans developed by the Applicant, giving suggestions to the Applicant to improve the product developed by it so as to bring it in line with the common practices followed by other AXA entities across the globe, providing HR support assistance, assisting the Applicant in choosing cost effective re-insurance partners, reviewing the actuarial methodologies developed by the Applicant and providing suggestions and inputs to achieve standard actuarial practices and processing guidelines in connection with the settlement of claims, marketing and risk analysis, fall short of the requirements laid down in the definition of fees for technical services in DTAA betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be said that recipient of the services was in a position to duplicate similar skill or technology or techniques in future without the aid or assistance of the assessee for carrying out similar assignments. In the case of Perfetti Van Melle Holdings BV (supra), the applicant is a company based in Netherlands and it is in the business of manufacture and sale of sugar confectionary and gun. It also provides operational and other support services for the benefit of companies of Perfetti group situated in various countries. It has entered into a service agreement with the group company (Perfetti India). The AAR held that when the expertise in running the industry run by the group is provided to the Indian entity in the group to be applied in running the business, the employees of the Indian entity get equipped to carry on that business model on their own without reference to service provider, when the service agreement comes to an end. It is not as if for making available, the recipient must also be conveyed specially the right to continue the practice put into effect and adopted under the service agreement on its expiry. It is found that this case is reversed and set aside fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eimbursed by JIPL to the assessee and also it is brought to our notice that these are reimbursed by JIPL without any mark up, it is settled position that reimbursement of expenses at cost is not taxable as fees for technical services since there is no element of income attached to the transaction. The Hon'ble Supreme Court held in the case of DIT v. AP Moller Maersk (392 ITR 116) SC as under: - "11. Aforesaid are the findings of facts. It is clearly held that no technical services are provided by the assessee to the agents. Once these are accepted, by no stretch of imagination, payments made by the agents can be treated as fee for technical service. It is in the nature of reimbursement of cost whereby the three agents paid their proportionate share of the expenses incurred on these said systems and for maintaining those systems. It is re-emphasised that neither the AO nor the CIT (A) has stated that there was any profit element embedded in the payments received by the assessee from its agents in India. Record shows that the assessee had given the calculations of the total costs and pro-rata division thereof among the agents for reimbursement. Not only that, the assessee have even ..... X X X X Extracts X X X X X X X X Extracts X X X X
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