2022 (1) TMI 1486 - AT - Income Tax

Income deemed to accrue or arise in India - income from consulting and engineering services as Fees for technical services ( FTS ) as per Article 13 of India-UK Double Taxation Avoidance Agreement ( DTAA ) - HELD THAT - We find on the similar and identical issue the decision of the Co ordinate bench of the Hon ble Tribunal for the A.Y 2015-16 in assessee s own case in 2021 (1) TMI 53 - ITAT MUMBAI held that the amount received by the assessee on account of consulting engineering services were to be treated as business profit and in the absence of assessee s PE in India it could not be brought to tax. Consequently the cost recharge which was considered to be ancillary and incidental to consulting engineering services was also held to be not taxable in the absence of assessee s PE in India. However in the year before us the assessee has already offered the consulting engineering fees to tax which has been accepted by the revenue. Since we have admitted additional ground of appeal on this point the issue of taxability of consulting engineering services would go back to AO for adjudication. Therefore logically the issue of taxability of cost recharge which has been treated as ancillary and incidental to consulting engineering services would also go back to Ld. AO for re-adjudication in the light of stand taken qua consulting engineering services. Therefore we deem it fit to restore grounds to the file of Ld. AO for read judication denovo after affording reasonable opportunity of hearing to the assessee. Whether DCIT has erroneously applied the tax rate @15% as per the India- UK DTAA instead of applying the beneficial rate @10.506% ? - DR has accepted the present facts and the decision of the Hon ble Tribunal with respect to the transactions of taxability of amount received for consulting and engineering Services and also amount received as common cost recharge as Royalty and fees for technical services are restored to the file of the Assessing officer. The Ld. DR could not controvert the findings of the Hon ble Tribunal with the new information to take a different view. We respectfully follow the judicial precedence and restore the grounds of appeal no 1 2 with respect to the transactions of taxability of amount received for consulting and engineering Services and also amount received as common cost recharge treated as Royalty and fees for technical services to the file of the A.O. for fresh adjudication on merits with the similar directions as in the earlier years. Assessee appeal is partly allowed for statistical purposes.

Summary

The core legal questions considered by the Tribunal in this appeal are:

1. Whether the amounts received by the assessee for consulting and engineering services qualify as Fees for Technical Services (FTS) under Article 13 of the India-UK Double Taxation Avoidance Agreement (DTAA) and are taxable in India.

2. Whether the common cost recharge received by the assessee constitutes Royalty and Fees for Technical Services under Article 13 of the India-UK DTAA and is taxable in India.

3. Whether the tax rate of 15% applied by the Assessing Officer (AO) under the India-UK DTAA is erroneous and the beneficial rate of 10.506% under the Income Tax Act, 1961 should have been applied.

4. Whether the consequential interest levied under Section 234B of the Income Tax Act is justified.

Issue-wise detailed analysis is as follows:

1. Taxability of Consulting and Engineering Services as Fees for Technical Services (FTS)

Legal Framework and Precedents: The key legal provision is Article 13 of the India-UK DTAA, which defines Fees for Technical Services. Paragraph 4 of Article 13 provides that FTS includes payments for technical or consultancy services which "make available technical knowledge, experience, skill, know-how or processes" or consist of development and transfer of technical plans or designs. Section 9(1)(vii) of the Income Tax Act, 1961, also governs the taxation of FTS in India.

Relevant precedents include coordinate bench decisions of the Tribunal in the assessee's own case for earlier assessment years (AY 2012-13, AY 2014-15, AY 2015-16), where the Tribunal has examined the nature of consulting and engineering services and their taxability under the DTAA. The Tribunal has also considered the distinction between managerial services and technical services and the requirement that services must "make available" technical knowledge or skill to be taxable as FTS.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee is a UK tax resident providing structural and MEP engineering and consultancy services in India. The AO and the Dispute Resolution Panel (DRP) treated the consulting and engineering fees as FTS taxable in India, relying on Article 13 of the India-UK DTAA. However, the assessee contended that the services are managerial and do not make available technical knowledge, skill, or know-how, thus not falling within the definition of FTS. The assessee also argued that in the absence of a Permanent Establishment (PE) in India, such income should be treated as business income and not taxable in India under Article 7 and Article 5 of the DTAA.

The Tribunal referred to its earlier decisions where it had restored the issue to the AO for fresh adjudication after considering the nature of services and whether they satisfy the twin conditions of being technical or consultancy services and making available technical knowledge or skill. The Tribunal admitted an additional ground raised by the assessee to revisit the taxability of consulting and engineering services and directed the AO to adjudicate the matter afresh, affording the assessee an opportunity to substantiate its claims.

Key Evidence and Findings: The assessee provided detailed descriptions of the services rendered, including master planning, acoustic engineering, and environmental engineering. The AO relied on the agreements and the nature of services to conclude that the payments were for use of information concerning industrial, commercial, or scientific experience, taxable as royalty and FTS. The DRP supported this view, holding that the services made available technical knowledge and were taxable in India.

Application of Law to Facts: The Tribunal emphasized the need for a fact-based inquiry to determine whether the services indeed "make available" technical knowledge or skill, a prerequisite for classification as FTS under the DTAA. The Tribunal's earlier decisions indicated that if the services are managerial or ancillary without making available technical knowledge, they would not be taxable as FTS.

Treatment of Competing Arguments: The Tribunal weighed the assessee's argument that the services were managerial and did not make available technical knowledge against the AO and DRP's view that the services were technical and made available such knowledge. The Tribunal found merit in the assessee's submissions and the need for fresh adjudication, following its earlier precedents.

Conclusion: The issue of taxability of consulting and engineering services as FTS is restored to the AO for fresh adjudication in light of the Tribunal's earlier decisions and after affording the assessee an opportunity to present evidence.

2. Taxability of Common Cost Recharge as Royalty and Fees for Technical Services (FTS)

Legal Framework and Precedents: Similar to the first issue, the taxability of cost recharge is examined under Section 9(1)(vi) of the Income Tax Act and Article 13 of the India-UK DTAA. The DTAA defines royalty to include payments for use of information concerning industrial, commercial, or scientific experience. The question is whether the cost recharge constitutes such use and thus attracts tax as royalty or FTS.

Earlier Tribunal decisions in the assessee's own case for AY 2012-13 and AY 2014-15 have dealt with the taxability of cost recharges, often holding that if the cost recharge is ancillary and incidental to consulting and engineering services, its taxability depends on the taxability of those services.

Court's Interpretation and Reasoning: The AO and DRP treated the cost recharge amounting to INR 4,39,80,878/- as royalty and FTS, taxable in India. They relied on the agreement between the assessee and its associated enterprise in India, which included clauses for payment for use of trademark and transfer of technical knowledge, skill, and experience. The DRP held that the payments were for use of information concerning industrial, commercial, or scientific experience and hence taxable under Article 13(3)(a) of the DTAA.

The assessee argued that the cost recharge does not make available any knowledge, skill, process, know-how or experience to the Indian entity and hence should not be taxable as royalty or FTS. It contended that these were managerial services and did not fall within Article 13 of the DTAA.

The Tribunal, following its earlier rulings, restored this issue to the AO for fresh adjudication along with the consulting and engineering services issue. The rationale was that the taxability of cost recharge is contingent on the taxability of the consulting and engineering services, as the cost recharge is ancillary and incidental to those services.

Key Evidence and Findings: The agreements between the parties, the nature of services included in the cost recharge (IT functions, business development, finance, HR management, operations, project management, corporate and commercial services), and the absence of direct transfer of technical knowledge were considered. The AO and DRP found these services to result in making available technical knowledge and hence taxable, while the assessee disputed this characterization.

Application of Law to Facts: The Tribunal emphasized that the AO must examine whether the cost recharge payments actually make available technical knowledge or skill to the Indian enterprise. The decision must be consistent with the treatment of consulting and engineering services and the terms of the DTAA.

Treatment of Competing Arguments: The Tribunal acknowledged the assessee's contention that the cost recharge payments were managerial and did not make available technical knowledge, but also noted the AO and DRP's contrary view. Given the complexity and factual nature of the issue, the Tribunal deferred to the AO's fresh adjudication.

Conclusion: The taxability of common cost recharge as royalty and FTS is restored to the AO for fresh adjudication, to be considered alongside the consulting and engineering services issue.

3. Erroneous Rate of Tax Applied

Legal Framework and Precedents: Article 13 of the India-UK DTAA prescribes a tax rate of 15% on fees for technical services. However, the Income Tax Act, 1961, provides for a beneficial tax rate of 10.506% (including applicable cess and surcharge) for certain incomes. The question is whether the AO correctly applied the tax rate.

The Tribunal relied on its earlier decision for AY 2015-16 and other coordinate bench decisions, including the Hyderabad Tribunal decision in RAK Ceramics UAE vs. DCIT, which held that surcharge and education cess cannot be added to tax calculated as per DTAA rates.

Court's Interpretation and Reasoning: The Tribunal held that the AO erred in applying the 15% tax rate under the DTAA without considering the beneficial rate of 10.506% under the Income Tax Act. The Tribunal allowed the ground raised by the assessee, directing that the beneficial rate be applied while computing tax payable.

Key Evidence and Findings: The Tribunal referred to earlier decisions where the beneficial rate was applied and the surcharge and cess were held not to be leviable on DTAA-taxed income.

Application of Law to Facts: The Tribunal applied the principle that the beneficial rate under the domestic law should be considered when it is more favorable to the taxpayer, consistent with the DTAA provisions and judicial precedents.

Treatment of Competing Arguments: The Revenue did not cite any contrary authority, and the Tribunal followed binding precedents in favor of the assessee.

Conclusion: The tax rate applied by the AO is erroneous, and the beneficial rate of 10.506% under the Income Tax Act should be applied.

4. Erroneous Levy of Interest under Section 234B

The assessee raised a ground challenging the levy of interest under Section 234B of the Income Tax Act. However, the Tribunal's order does not contain a detailed discussion or separate adjudication on this ground. The focus remained on the taxability of income and the applicable tax rate. Therefore, no conclusive holding was made on this issue.

Significant Holdings:

On the taxability of consulting and engineering services and common cost recharge as FTS and royalty, the Tribunal held:

"We respectfully follow the judicial precedence and restore the grounds of appeal no 1 & 2 with respect to the transactions of taxability of amount received for consulting and engineering Services and also amount received as common cost recharge treated as Royalty and fees for technical services to the file of the A.O. for fresh adjudication on merits with the similar directions as in the earlier years."

On the tax rate applicability, the Tribunal held:

"We find that the issue in dispute is squarely allowed in favour of the assessee by the Co-ordinate Bench decision... wherein it was categorically held that surcharge and education cess could not be added to connotation 'tax' when the same is calculated as per DTAA... Accordingly by respectfully following the aforesaid judicial precedent, the ground No. 2 raised by the assessee is allowed."

Core principles established include:

• The necessity of a fact-based inquiry to determine whether services "make available" technical knowledge or skill to attract tax as FTS under the DTAA.
• The taxability of cost recharge payments depends on their nature and relationship to taxable consulting and engineering services.
• The beneficial tax rate under the Income Tax Act should be applied when more favorable than the DTAA rate, and surcharge and cess are not leviable on DTAA-taxed income.
• Issues involving complex factual and legal questions may be restored to the AO for fresh adjudication with directions to consider earlier judicial precedents.