TMI Blog2017 (2) TMI 779X X X X Extracts X X X X X X X X Extracts X X X X ..... not, it would again need the services of assessee or any other legal advisor for availing advisory on new issues. The Revenue has taken help of few judgments which are not applicable on the facts of the case before us. We are not in a position to agree with the view taken by the Revenue and thus hold that the income of the assessee would not fall in the category of “Fee for Technical Services” as envisaged in Article 13 of India-UK DTAA. Further, since this amount is not taxable under DTAA as FTS, it cannot be brought to tax as FTS as per provisions of section 9 of the Income Tax Act, 1961, in view of section 90(2) of the Act. Liability to tax in India under Article 15 of India-UK DTAA - Held that:- Article 15 of DTAA deals with taxability of independent personal services. This Article starts with the words “Income derived by an individual..in respect of professional services or other independent activities of similar character.”It is noted by us that Article 15 shall be applicable for determining taxable income in the hands of individual and not other persons. The assessee is certainly not an Individual. Thus this Article cannot be made applicable on the assessee being not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he deduction u/s 44C as per law. Levy of interest u/s 234B - Held that:- It is noted that this issue has already been decided by the Hon'ble Bombay High Court in the case of NGC Network (2009 (1) TMI 174 - BOMBAY HIGH COURT ). The Tribunal has consistently followed the said judgment and held that interest u/s 234B is not leviable in the case of Linklaters, on the facts and circumstances of the case. - I.T.A. No.1690/Mum/2015 - - - Dated:- 31-1-2017 - SHRI AMIT SHUKLA (JUDICIAL MEMBER) AND SHRI ASHWANI TANEJA (ACCOUNTANT MEMBER) For The Appellant : Shri SE Dastur / Niraj Sheth For The Respondent : Shri Jasbir Chauhan, CIT-DR ORDER Per ASHWANI TANEJA, AM: This appeal has been filed by the assessee against the final assessment order passed by the Assessing Officer u/s 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 for A.Y. 2010-11 dated 07-01-2014 (there appears to be some typing mistake in printing this date) in pursuance to the order of the Dispute Resolution Panel (hereinafter called as DRP) u/s 144C(5) dated 22-12-2014 on the following grounds:- The appellant objects to the order dated January 7, 2014 (notice of demand dated 23 January 2015 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , skill possessed by the company with regard to various aspect was made available in the form of advice or service which was made use by the assessee company in the decision making process not only in management but also in financial matters. Page 15 of the order: In the present case, it is a clear case of using the technology, expertise of the foreign company in India for taking various decision and management analysis. The expertise, analysis, technical knowledge supplied by the foreign company remains with the assessee forever and it could be even used in future for the business of the assessee in the process of management decision, financial decision making and risk management analysis 7 Fees considered as fees for technical services as per the Income Tax Act, 1961 7.1 The learned AO erred in holding that the fees earned by the appellant is in the nature of fees for technical services' as defined under section 9(1)(vii) of the Act. The learned AC ought to have appreciated that the income earned by the appellant from furnishing of legal services is covered by the provisions of section 9(l)(1) of the Act 7.2 The learned AO erred in holding tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the DTAA. 9.3 The learned AO ought to have appreciated that merely because the services to be rendered include the technical input does not per se mean that the technology is made available. 9.4 The learned AO ought to have appreciated that the definition of fees for technical services as provided in Article 13(4) of the DTAA is much narrower than the definition provided in section 9(1 )(vii) of the Income-tax Act 9.5 The learned AO erred in observing that reliance cannot be placed on Para 4(b) of the Memorandum of Understanding to the India-USA Tax Treaty for the explanation of the term make available'. 9.6 The learned AO ought to have appreciated that the DTAA has different provisions for taxing fees for technical services and fees for professional income and that the taxability of fees earned by the appellant is governed by the provision of Article 7 i.e. business profits 9.7 The learned AO erred in not considering the provisions of Article 13(7) of the DTAA. The learned AC ought to have appreciated that as per Article 13(2) read with the Article 13(7) of the DTkA fees earned from non-Indian entities who do not have a permanent establishment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... status of the appellant as Limited Liability Partnership, the tax rate ought to have been considered at 30.9%. 15. Levy of interest under 234B The learned AO erred in charging interest under section 234B of the Income-tax Act, 1961 ('the Act). The appellant denies liability to the interest charged under section 234B of the Act 16 Initiating penalty under section 271(1)(c) The learned AO erred in initiating penalty proceedings under section 271(1 )(c) of the Act. 2. During the course of hearing, detailed arguments were made on behalf of the assessee by Shri S.E. Dastur, Senior Advocate along with Shri Niraj Sheth and by Shri Jasbir Chauhan, Ld. CIT-DR, on behalf of the Revenue. 3. Though Ld. Counsel of the assessee has made elaborate arguments with respect to each of the grounds in exhaustive manner, dealing with all the aspects raised by the AO, however, we shall firstly like to deal with the issues which are crucial for the issues raised before us and if need be, only then, the remaining issues shall be decided by us. For this purpose, it is necessary to first briefly discuss the brief background of the assessee and the issues raised by the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent entity not liable to tax in UK in its own right. In addition to that it was also held by the AO that aforesaid amount of income (fee) were in the nature of fee for technical services as defined in Article 13(4) of the DTAA and were chargeable to tax under Article 13 thereof. The Ld. AO also held that in any case, these amounts were also taxable under Article 15 of the DTAA. Apart from that, the AO also raised few other minor issues which shall be dealt by us at appropriate place. 5. During the course of hearing, detailed arguments were made by both the sides addressing all the issues raised before us. However, we find that if some of the primary issues are decided, the remaining issues will become redundant or subservient to the main issues. In our considered opinion, the primary issue to be decided in this case is whether, the assessee is eligible to have the benefit of DTAA between India and UK. This issue is of primary significance because an assessee is entitled to have the benefit of provisions of the Act or DTAA, whichever is more beneficial to it in view of explicit provisions of section 90(2) of the Acts, which reads as under:- 90(2) Where the Central Gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the assessee cannot be treated as a 'resident of the United Kingdom' within meanings of that term under the India UK tax treaty and the assessee is not entitled to the benefits of the tax treaty at all. On this same issue, the Revenue is in appeal before Hon'ble Bombay High Court for AY 1995-96 and the matter is sub judice. Hence, it is held that assessee is not eligible for treaty benefits in the source country, as it is not taxable in its own right in residence country. 5.4 It is not in dispute that in the United Kingdom, a partnership firm is not taxable unit so far as income of the partnership firm is concerned, and the expression 'liable to tax' cannot include a person who is not a taxable unit. Only such a person whose income is taxed can be covered by the definition of the expression 'liable to tax'. The expression 'liable to tax', according to the learned Departmental Representative, covers only such entities which have tax liability in respect of their own income. Since a partnership firm is not 'liable to tax' in the United Kingdom, the partnership firm cannot be granted treaty benefits in India. 7. Perusal of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merits . 10. Similarly, in other years, the Tribunal has followed its earlier order and held that M/s. Linklaters is eligible for the benefits of India-UK DTAA so long as entire profits of the partnership firm are taxed in UK, whether in the taxable income is determined in relation to personal characteristics of the partners or in the hands of the firm directly. In the year before us, there is no dispute on facts that ultimately tax has been paid either by the said firm or by its partners in UK. No distinction has been pointed out by the Ld. CIT-DR on facts or law. Under these circumstances, respectfully following the orders of the Tribunal in Linklaters s case for earlier years, we hold that the assessee is entitled to claim benefits of India UK- DTAA. Therefore, Grounds 8 to 8.4 are allowed. 11. Having held that assessee is entitled to claim benefits of DTAA, we find it appropriate to examine the taxability of income (fee) received by the assessee in terms of Articles of DTAA since the definition provided in DTAA appears to be more restrictive or narrower as compared to the definition as has been provided u/s 9(1)(vii) of the Act, as has also been held in number of cases. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It was also submitted that decision relied upon by the AO are either distinguishable or they were contrary to the views taken by Hon'ble High Court CIT vs De Beers India Minerals Pvt Ltd 346 ITR 467 (Kar), view of the Special Bench in Mahindra and Mahindra s case and the view of the Third Member in CESC Ltd case as well as the view taken by the co-ordinate benches of the Tribunal in aforesaid cases, and therefore, AO s order cannot be upheld. It was submitted that the decision of Intertek Testing Service India Pvt Ltd 307 ITR 418 (AAR) is actually in favour of the assessee, which has been completely misread by the AO. This decision has followed the judgements in the case of Raymonds Ltd CESC (supra). Similarly reliance placed by AO on another judgement of AAR in the case of Perfetti Ben 342 ITR 200 is misconceived since this ruling has been set aside by Hon'ble Delhi High Court in the judgement reported at 52 Taxmann.com 161. Similarly, reliance on the judgement of Shell India Marketing Pvt Ltd 342 ITR 223 is also of no use since in this case also earlier ruling in the case of Perfetti was followed which has been set aside by Hon'ble Delhi High Court. Thus, impliedl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... covered within Article 13(4)(c) of the DTAA and thus it could not be characterised as Fees for Technical Services in terms of DTAA. 17. In rejoinder, Ld. CIT-DR again made elaborate arguments and relied upon various judgements in support of his contention that assessee was making available to its clients Technical knowledge and skill etc to enable them to perform their task very well. 18. We have gone through the orders passed by lower authorities, submissions made and judgements relied upon by both the sides before us and also the evidences showing nature of service provided by the assessee to its clients. The AO has treated the fee received by the assessee for the services provided by the assessee which according to the AO are of the nature of Fee for Technical Services as envisaged u/s 9(1)(vii) of the Act. It has been argued before us that the Revenue s case is that the income received by the assessee is of the nature of Fee for Technical Services even as per India-UK DTAA. On the other hand, the assessee s case is that the impugned amount is neither liable to be taxed u/s 9(1)(vii) nor within any of the Articles of India-UK DTAA. We, therefore, find it appropriate to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n expression make available does not mean that when the recipient uses the services, then that itself amount to making available of technical knowledge, experience, skill, know-how or processes, etc. to the recipient. It is because every service will have an end-use. Thus make available goes beyond mere user. There is a clear distinction between user of the services and making available of technical knowledge, experience, skill, know-how or processes, etc. by the service provider. If we properly analyse the background and the context in which this term has been used in the DTAA, make available postulates that recipient gets equipped to perform similar activity in future without recourse to the service provider. Although, the term make available has not been defined anywhere in India UK DTAA, but it is brought to our notice that some explanation of it has been provided in Memorandum of Understanding appended to Indo-US DTAA. In the Memorandum of Understanding concerning Fee for Included Services in Article 12 of US-India Tax Treaty dated 15 May, 1989 following explanation has been provided:- Paragraph 4(b) of article 12 refers to technical or consultancy services tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perience, skill etc. Thus, the normal, plain and grammatical meaning of the language employed, in our understanding, is that a mere rendering of services is not roped in unless the person utilising the services is able to make use of the technical knowledge etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill etc. must remain with the person utilising the services even after the rendering of the services has come to an end. A transmission of the technical knowledge, experience, skills etc. from the person rendering the services to the person utilising the same is contemplated by the article. Some sort of durability or permanency of the result of the rendering of services is envisaged which will remain at the disposal of the person utilising the services. The fruits of the services should remain available to the person utilising the services in some concrete shape such as technical knowledge, experience, skills etc. 23. Similarly in the case of CIT vs De Beers India Minerals Pvt Ltd 346 ITR 467 (Kar), identical issues came up before the Hon ble High Court wherein the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as fee for technical / included services only if the twin test of rendering services and making technical knowledge available at the same time is satisfied. 24. Similarly, identical issue came up before Hon ble Special Bench of ITAT in the case of Mahindra Mahindra Ltd vs DCIT (supra) wherein the facts involved were identical to large extent in the sense that nature of services provided by the assessee and in the said case were similar. Identical issue arose i.e. whether services received by the said company amounted to making available of technical knowledge, experience, skill, know-how or processes, etc. by the provider of the services (who was based in UK) as envisaged within the Articles of Indo-UK DTAA. In this context, Hon ble Special Bench, after analyzing the facts and entire law available, observed as under:- Clauses (1) and (2) of article 13 in the DTAA with UK clearly provide that the fees for technical services is taxable in India. Clause (4) of article 13 defines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without getting any technical knowledge, experience or skill in its possession for use at its own. Therefore, article 13 of DTAA with UK did not apply to the instant case and, hence, the management and selling commission could not be taxed in India. 25. Similarly, in the case of KPMG vs JCIT (supra), the issue before the Tribunal was identical. The said assessee rendered professional services to its clients and the AO brought the same to tax disregarding relevant articles of Indo US DTAA and India UK DTAA. The brief facts were that the said assessee paid professional fees to various persons in USA, UK and Malaysia in respect of training and professional services without deduction of tax. The assessee claimed that the professionals did not have any fixed base or permanent establishment in India and had stayed in India for less than 90 days. Also, the remittances could not be treated as royalty or fees for included / professional services as there was no make available of technical knowledge, experience, skill, know-how or process. Therefore, in view of Article 15 of Indo-USA DTAA and Article 7 of Indo-UK Treaty, the services were not taxable in India. However, the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee had rendered services were not lawyers and thus there was no question of assessee s services making available any technical knowledge, experience, etc to its clients. The assessee s partners are all lawyers qualified in various jurisdictions. The partners practice law under relevant professional regulations of local bars (such as English Wales, New York and Germany) and the Law Society of England and Wales as the assessee is registered in UK. 28. It is further noted by us that the common thread available in all the judgements we have discussed above is that the recipient of the services should be in a position to utilise the knowledge, know-how or skill or experience on its own in future with the aid of the service provider. Thus, to fit into the phrase make available the technical knowledge, skill, knowhow, experience, etc. must remain with the person receiving the services even after the process of rendering of services comes to an end. These ingredients should be imported and absorbed by the receiver so that the recipient can deploy similar technology or techniques in future without depending upon the service provider. We have analysed various services provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Advising National Grid of UK for potential acquisition in India. IV. Documentation services provided to non-India client for fund raising activities by Indian party in foreign market Drafting of placement documents, placing agreements and other documentation in connection with public offering Drafting of prospectus, issue agreement and other documents. Drafting of loan documentation V. Dispute related activities for non-Indian clients The dispute related to acquisition by Singapore company of a Chinese grain business. The said activity has no nexus with India. 29. We also made client wise analysis on random basis and found that in the case of one of the clients, viz. B.P. Explorations (Alpha) Ltd-UK, the assessee provided advisory services for documenting contracts and other related agreements on its acquisition of a 30% stake of oil and gas production blocs from Reliance Industries Ltd and the formation of a 50- 50 joint venture between the two companies for sourcing and marketing of gas in India. Similarly, services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of our order. 32. Thus, in view of the facts brought before us, and in view of the legal position as explained in many judgements as discussed above, we are not in a position to agree with the view taken by the Revenue and thus hold that the income of the assessee would not fall in the category of Fee for Technical Services as envisaged in Article 13 of India-UK DTAA. Further, since this amount is not taxable under DTAA as FTS, it cannot be brought to tax as FTS as per provisions of section 9 of the Income Tax Act, 1961, in view of section 90(2) of the Act, as discussed above. Thus, with these observations, Grounds 9 to 9.6 are allowed. 33. Now we shall take up grounds 10 to 10.5. In these grounds, the assessee has agitated the action of the AO wherein it was held by the AO that assessee was liable to tax in India under Article 15 of India-UK DTAA. 34. During the course of hearing, it was vehemently argued before us that the action of AO is wrong on law and facts due to many reasons. It was submitted that Article 15 applies only to individuals and not to partnership firms. The assessee being not an individual, therefore, Article 15 could not be applied. It was also s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reimbursed available at pages 10 and 29 of the paper book. It was further submitted that in identical facts and circumstances it has already been held by the Tribunal in case of Linklaters that reimbursement is not part of taxable income in following orders:- 1. A.Y. 1995-96 by Mumbai Tribunal vide order dated 16 July 2010(ITA No.4896/M/03 and 5085/M/03)(Para 133). 2. A.Y. 1997-98 by Mumbai Tribunal vide order dt 8 August 2014 (ITA No.1711/M/04 and 1354/M/04) (Para 8). 3. A.Y. 1998-99 to 2001-02 by Mumbai Tribunal vide order dated September 7, 2015 (ITA No.1355-57/M/04, 2812/M/05, 1712-1714/M/04, 3596/M/05)(Para 12, 21). 39. Per contra, Ld. CIT-DR relied upon the order of the AO on this issue. 40. We have gone through the orders passed by the lower authorities and orders passed in earlier years by the Tribunal in case of Linklaters. The perusal of chart containing details of the expenses clearly shows that all these items are in the nature of expenses. These are apparently not items of revenue. These are mostly expenses of routine nature incurred by the assessee in the normal course of business. It is also noted that this issue has already been decided by the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the hands of the assessee. Learned Departmental Representative, on the other hand, relies upon the orders of the authorities below and submits that the onus is on the assessee to produce all the evidences of expenditure and that this onus is clearly not discharged by the assesses. 133. Having heard the rival submissions and having perused the material on record, we are inclined to uphold the grievance of the assessee. The reimbursements received by the assessee are in respect of specific and actual expenses incurred by the assessee and do not involve any mark up, there is reasonable control mechanism in place to ensure that these claims are not inflated, and the assessee has furnished sufficient evidence to demonstrate the incurring of expenses. 'There is thus no good reason to make any addition to income in respect of these reimbursements of expenses. The action of the CIT(A), as learned counsel rightly contends, is on pure surmises and conjectures. In view of the above discussions, we direct the Assessing Officer to delete the disallowance of expenses as sustained by, the CIT(A) and hold that no part of reimbursements of expenses received by the assessee on the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in case fees are held as not taxable as Fee for Technical Services , but as business income , then only that income which has been earned in respect of services rendered in India can be taxed in India, i.e. a sum of ₹ 3,42,48,138 which has already been offered to tax by the assessee himself in its return of income. It was also submitted that this issue has already been decided in favour of the assessee by the Tribunal in case of Linklaters for AYs 1998-99 to 2001-02 vide order dated September 5, 2015 (ITA Nos 1355-57/Mum/2004). 46. Per contra, it was submitted by the Ld. CIT-DR that in this case, the AO had primarily confined himself to the aspect that the impugned amount of fee was Fee for Technical Services and therefore, liable to be taxed in India in view of section 9(1)(vii) of the Income-tax Act, 1961 as well as India-UK DTAA. Therefore, detailed examination was not done by the AO with regard to its taxability as Business Income and facts were not properly verified with respect to rendering of services in India and therefore, this issue needs to go back to the AO for proper examination. 47. We have gone through the orders passed by the lower authorities, submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 49. Ground 13: In this ground, the assessee has agitated the action of the AO in not granting 5% deduction of expenses u/s 44C. 50. It was submitted that in the draft order the AO held that the entire receipt of the assessee of ₹ 50,16,03,621 was taxable in India. He gave a 5% deduction of expenses on estimated basis ₹ 2,50,80,181 and proposed to assess the income at ₹ 47,65,23,440. However, in the final order this deduction was withdrawn without giving any reasons for such withdrawal. It is submitted that a deduction allowed in the draft order which has not been varied by the DRP cannot be disturbed in the final assessment order. Thus, the withdrawal of 5% deduction must in any event be restored. 51. We have gone through the orders passed by the lower authorities. It is noted that the AO has denied the benefit of deduction in the final assessment order without giving any reason. It is also noted that in the draft order such deduction was allowed, but in the final order, the same was not granted without giving any reasoning whatsoever. Therefore, we send this issue back to the file of the AO, who shall, after verifying the facts grant the deduction u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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