2015 (4) TMI 713 - AT - Income Tax

Marketing and management services - CIT(A) directed to be taxed it as business profits instead of fees for technical services held by the Assessing Officer - whether did not satisfy the 'make available' criteria when the nature of services showed otherwise? - assessee is having service permanent establishment (PE) in India under article 5(2)(k) of the India-US treaty - Held that - Assessing Officer has treated the entire amount as fees for included services and thus computed the total income by ignoring the income offered by the assessee. As such the business income shown by the assessee as per article 7 shall revive and become taxable. The Assessing Officer is directed to include such amount in the total income of the assessee. In so far as the remaining receipts being the consideration for the provision of marketing and management services outside India is concerned, the same cannot be subjected to tax in India because such income cannot be said to have accrued or arisen to the assessee or deemed to have been accrued or arisen to the assessee in India. Even the existence of the service per manent establishment in India will not make it taxable because of no involvement of such permanent establishment in earning this income for which the services were rendered outside India. - Decided in favour of assessee. Force of attraction rule - Held that - There is no dispute that out of total marketing and management fee of ₹ 8,15,11,339 received from WNS India only a sum of ₹ 6,52,13,074 has been attributed to such permanent establishment because the services were rendered in India. The remaining amount of marketing and management fee received by the assessee is regarding the services rendered outside India. The learned Departmental representative has contended that since the services which were rendered in India and outside India are same or similar in nature and as per the composite agreement therefore, the entire service is attributable to the service permanent establishment in India by applying the force of attraction rule. We do not find merit in the contention of the learned Departmental representative because the force of attraction rule germane under article 7(1) of the Indo-US Double Taxation Avoidance Agreement which reads as that only in case when enterprise of Contracting State carries on business in the other Contracting State through its permanent establishment as well as otherwise and both the activities are of same or similar kind then the business activities carried on not through permanent establishment shall also be treated as attributable to the permanent establishment and the profit of the enterprise may be taxed in the other State so much of them as it is attributable to permanent establishment. There is no scope of any ambiguity as the article 7(1) gives a clear understanding that the force of attraction rule applied only in respect of the business carried on by an enterprise of Contracting State in the other Contracting State through permanent establishment as well as without involvement of permanent establishment. Therefore, the two essential conditions emerge for applying the force of attraction rule are (i) the business activity carried on should be in the other State where the permanent establishment is situated (ii) the business activity carried on must be of the same or similar kind as those effected through permanent establishment. In the case in hand the condition of business activity carried on in the other State where the permanent establishment is situated is not satisfied because the marketing and management services in question are provided by the assessee outside India. Since the said issue of providing the services outside India has been decided time and again by this Tribunal as well as by the hon'ble High Court in the assessee's own case therefore in view of the finding on the ground Nos. 1 to 3 there is no need for further deliberation/discussion on the same. Having held that the marketing and management services in question were rendered outside India and income of such services cannot be said to have accrued or arisen to the assessee or deemed to have accrued or arisen to assessee in India, the existence of service permanent establishment in India would not make it taxable under article 7 of the Indo-US Double Taxation Avoidance Agreement. - Decided against revenue.

Summary

Issues Involved:
1. Classification of marketing and management services as "fees for included services" (FIS) or business profits.
2. Taxability of marketing and management services under the India-USA Double Taxation Avoidance Agreement (DTAA).
3. Existence of a service permanent establishment (PE) in India.
4. Application of the "force of attraction" rule.

Issue-wise Analysis:

1. Classification of Marketing and Management Services as FIS or Business Profits:
The Revenue contended that the marketing and management services amounting to Rs. 68,15,11,339 should be classified as "fees for included services" under Article 12(4)(b) of the Indo-US DTAA. The Assessing Officer (AO) argued that the services rendered by the assessee involved technical knowledge and expertise, thus qualifying as FIS. However, the Commissioner of Income-tax (Appeals) (CIT(A)) held that these services should be taxed as business profits. The Tribunal noted that for the assessment years 2003-04 to 2006-07, similar issues were decided in favor of the assessee, with the Tribunal and the Hon'ble High Court ruling that the services did not meet the "make available" criteria under Article 12(4)(b). Therefore, the Tribunal upheld the CIT(A)'s decision, confirming that the marketing and management services should be taxed as business profits, not as FIS.

2. Taxability of Marketing and Management Services under the India-USA DTAA:
The Tribunal reiterated that the marketing and management services provided by the assessee to WNS India were not taxable as FIS under Article 12 of the DTAA. The Tribunal emphasized that the services did not "make available" technical knowledge, experience, skill, know-how, or processes to WNS India. The Tribunal also clarified that the provisions of Article 12(4)(b) were more beneficial to the assessee compared to Section 9(1)(vii) of the Income-tax Act, thus applying the DTAA provisions in favor of the assessee.

3. Existence of a Service Permanent Establishment (PE) in India:
The Tribunal acknowledged that the assessee's employees visited India to provide managerial services, thereby constituting a service PE under Article 5(2)(k) of the Indo-US DTAA. Consequently, an amount of Rs. 6,52,13,074 was attributed to the service PE for managerial services rendered in India. This amount was declared by the assessee in its return of income. The Tribunal upheld the CIT(A)'s decision that the remaining amount of Rs. 61,62,98,265 for marketing services rendered outside India was not taxable in India, as it could not be attributed to the service PE.

4. Application of the "Force of Attraction" Rule:
The Revenue argued that the entire receipts towards marketing services should be taxable in India under the "force of attraction" rule, as the services were part of a composite agreement. The Tribunal, however, rejected this contention, stating that the force of attraction rule under Article 7(1) of the Indo-US DTAA applies only when business activities are carried out in the other Contracting State where the PE is situated and are of the same or similar kind as those effected through the PE. Since the marketing and management services were rendered outside India, they could not be attributed to the service PE in India. The Tribunal concluded that the force of attraction rule did not apply in this case, dismissing the Revenue's alternative plea.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision that the marketing and management services should be taxed as business profits and not as FIS. The Tribunal also confirmed that the services rendered outside India were not taxable in India, and the force of attraction rule did not apply. The order was pronounced in the open court on July 31, 2013.