2018 (3) TMI 1992 - AT - Income Tax

Income taxable in India - Fees for Technical Services(FTS) - consideration for the services in the nature of managerial technical or consultancy and that same would be subject to tax under India-Singapore tax treaty provisions - assessee engaged Fractal Singapore(FS) its wholly owned subsidiary for providing marketing and business development services to it and the assessee had entered in to an agreement with FS for providing Customer Coordination Services on its behalf that the Singapore entity did not have the authority to conclude any agreements or make any commitments on behalf of the assessee. HELD THAT - We hold that requirement of Article 12 of India-Singapore tax treaty-i. e. making available of services in the nature of managerial technical or consultancy-was not satisfied. We find that in the case before us the services availed by the assessee were in the nature of marketing business development and customer co-ordination support services provided by FS and those services were rendered by employees of FS outside India that the assessee was not enabled to independently perform such functions and had only consumed the services of FS that the expertise and knowledge would still remain with FS. Assessee was only reaping the rewards of the functions carried out by FS and was making payment for availing such services and not towards the skill of business development or marketing as such skills had not been made available to the assessee by the non-resident entity. So we hold that payment made by it to FS was business income of FS that FS did not have PE in India that services were rendered outside India that payment received by the FS was not taxable in India. We further hold that as per the law prevailing at the time in force no income was arising in India by virtue of these services so the provisions of Section 195 for withholding of taxes on such remittance were not applicable. In the case of Virola International 2014 (2) TMI 653 - ITAT AGRA Tribunal has held that a retrospective amendment in law would not change the tax withholding liabilities with a retrospective effect that the withholding obligations from payments made to non-residents would depend on the law as it stood on the date obligation to withhold tax arose. We hold that SG Business Development expenses paid to FS amounting to Rs. 1. 18 crores was neither taxable in India as FTS under Article 12 of India-Singapore tax treaty nor was it taxable as Business Income under Article 7 of India-Singapore DTAA that there was no liability of the assessee to withhold taxes on such payments made to FS and it was not a disallowable expenditure u/s. 40(a)(i) r. w. s. 195 of the Act. First two grounds of appeal are decided in favour of the assessee. Disallowance of business expenses - Scope of Circular 23 of 1969 dated 23/07/1969 - AR argued that the Circular was effective during the year under consideration that withdrawal of the circular at a later date could not be held to be retrospective that the benefit of the provisions laid down by the circular were available to the assessee that the income of FS was not taxable in India that no tax was required to be deducted on the payment made by the assessee - HELD THAT - We find that identical issue was deliberated upon and decided by the honorable Delhi High Court in the case of Angelique International Ltd. 2013 (10) TMI 17 - DELHI HIGH COURT wherein it was held that withdrawal of the circular and 2009 could not be held to be retrospective and could not be classified as explaining or clarifying the earlier circular issued in 1969 that the circular was in force till it was withdrawn. Respectfully following the above judgment we decide GOA 3 in favour of the assessee.

Summary

Issues Involved:
1. Justification of notice issuance under Section 148 of the Income-tax Act, 1961, and consequent reassessment proceedings.
2. Classification of payments made to Fractal Singapore (FS) as Fees for Technical Services (FTS) under Section 9(1)(vii) of the Act and India-Singapore tax treaty provisions.
3. Applicability of Circular 23 of 1969 regarding the disallowance of business expenses.
4. Levy of interest under Section 234D.

Issue-wise Detailed Analysis:

1. Justification of Notice Issuance under Section 148 and Reassessment Proceedings:
The assessee challenged the reopening of the assessment, arguing that no fresh material was available with the Assessing Officer (AO) to justify the reopening. The AO had issued notice under Section 148 based on the belief that income had escaped assessment. The First Appellate Authority (FAA) upheld the AO's decision, stating that the reopening was justified as the services provided by FS fell within the definition of FTS under Section 9(1)(vii) of the Act.

2. Classification of Payments to FS as Fees for Technical Services (FTS):
The core issue was whether the services rendered by FS were categorized as FTS. The AO determined that payments to FS were taxable under FTS provisions, considering them managerial, technical, or consultancy services. The assessee argued that the services provided by FS were marketing, business development, and customer coordination, which did not fall under FTS. The Tribunal noted that the terms managerial, technical, or consultancy were not defined in the India-Singapore tax treaty or the Act, requiring interpretation based on dictionary meanings and judicial pronouncements. The Tribunal concluded that the marketing services provided by FS were an art rather than a science, dependent on the skill of employees, and did not involve managerial, technical, or consultancy services. Consequently, the payments were not taxable as FTS under Article 12 of the India-Singapore tax treaty.

3. Applicability of Circular 23 of 1969 Regarding Disallowance of Business Expenses:
The assessee argued that the Circular 23 of 1969 was effective during the relevant year and should apply, preventing the disallowance of expenses. The AO had dismissed this argument, stating the circular was withdrawn in 2009. The Tribunal referred to the Delhi High Court's decision in Angelique International Ltd., which held that the withdrawal of the circular could not be retrospective. Therefore, the Tribunal decided in favor of the assessee, allowing the benefit of the circular for the relevant year.

4. Levy of Interest under Section 234D:
The Tribunal noted that the issue of interest under Section 234D did not arise from the FAA's order and therefore did not adjudicate on it.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, deciding the first two grounds in favor of the assessee. It held that the payments made to FS were not taxable in India as FTS or business income under the India-Singapore tax treaty, and there was no liability for the assessee to withhold taxes on such payments. The Tribunal also ruled that the Circular 23 of 1969 was applicable during the relevant year, preventing the disallowance of business expenses. The issue regarding the levy of interest under Section 234D was not adjudicated as it did not arise from the FAA's order. The appeal was allowed, and the order was pronounced in the open court on 1st March 2018.