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ABB Inc. Versus Deputy Director of Income-tax-International Taxation, Circle-1 (1) , Bangalore

2015 (7) TMI 678 - ITAT BANGALORE

Transfer pricing adjustment - Taxing fees received by ABB Inc from ABB Limited and ABB Global Industries & services Limited - Held that:- The law is by now settled so far as the connotations of 'make available' clause in the definition of fees for technical services in the contemporary tax treaties are concerned. It is held to be a condition precedent for invoking this clause that the services should enable the person acquiring the services to apply technology contained therein. Hon'ble Karnatak .....

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ces are technical services in nature but what is really the decisive factor, so far taxability of its consideration in the Indo US tax treaty is concerned, is not the fact of training services per se but the position that training services being of such a nature that it results in transfer of technology. That is not the case here. It is not even suggestion of the Assessing Officer that there was a transfer of technology in this case so as to bring the services within the ambit of services which .....

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has been paid a remuneration less than arm's length remuneration. We, therefore, see no need to examine the aspect regarding existence of the DAPE. That aspect of the matter will be wholly academic. We are inclined to uphold the grievances of the assessee and delete the impugned additions in respect of the income of ₹ 11,04,11,826 under article 12(4)(a) as fees for technical services and also in respect of income of ₹ 4,37,161 under article 7(1) of the India US tax treaty. - Decided .....

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round numbers 1, 2 and 3, which we will take up together and which are the only effective grounds in this appeal, the assessee has raised the following grievances: 1. Taxing fees received by ABB Inc from ABB Limited and ABB Global Industries & services Limited (a) On the facts and in the circumstances of the case, the learned assessing officer ('AO') has erred in law and facts in holding that the payments received by the appellant from ABB Limited and ABB Global Industries & serv .....

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view its Income tax return. 2. Holding ABB Global Industries & Services Limited as Permanent Establishment ('PE') of the appellant in India (a) The Honorable Dispute Resolution Panel ('DRP') erred in law and facts in holding that ABB Global Industries & Services Limited would constitute a dependant PE of ABB Inc in India in view of the agreement entered into between ABB Inc and ABB Global Industries & Services Limited. (b) The DRP erred in law in not providing the ap .....

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lant in India. (d) Without prejudice to the aforesaid, on the facts and in the circumstances of the case, the learned AO has erred in law and facts in not considering the fact that the entire turnover earned by ABB Global Industries and Services Limited from sale and distribution of Harmony products has been offered to tax by ABB Global Industries and Services Limited and appropriate taxes have been paid on the same. 3. Taxing twice- as Fees for included services and as PE (a) Without prejudice .....

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t services and other support services to its associated enterprises (AEs) in India. During the relevant previous year, the assessee has earned fees aggregating to ₹ 11,04,11,826, for providing these support services. In the income tax return filed by the assessee, entire such income was claimed to be, on the strength of Article 12(4)(b) of the Indo US Double Taxation Avoidance Agreement [(1991) 187 ITR (Stat) 102], taxable exclusively in the residence state. The income tax return so filed .....

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39; as per India USA tax treaty". The Assessing Officer proceeded to reject the claim by observing, inter alia, that "although it appears that services rendered by the ABB Inc might have rendered services to its AEs, what appears to be unconvincing is the contention that the services rendered by the ABB Inc donot make available any technical knowledge, experience, skill, know how or processes". He further observed that, "whether a service rendered by a non resident company re .....

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d and AGISL clearly indicate that services rendered by ABB Inc with ABB Ltd and AGISL clearly indicate that services rendered by ABB Inc fall under section 9(1)(vii) of the Income Tax At,1961. This fact has been admitted by ABB Inc in its submissions dated 2nd September 2011 and 17th November 2011. What remains to be seen is whether the services rendered by ABB Inc, as mentioned in the agreement, "make available" any technical knowledge, experience, skill etc to ABB Ltd and AGISL. 4. T .....

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technical services to its associated enterprises and also makes available technical knowledge to the service recipients". The Assessing Officer then proceeded to discuss judicial precedents on the connotations of technical services, but, for the reasons we will set out in a short while, it is not really necessary to deal with those judicial precedents. The assessee raised the objections, against the stand so taken by the Assessing Officer, before the Dispute Resolution Panel. However, not .....

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company on the geography, product sales environment etc". The DRP, on this aspect, thus concluded as follows: 6.29 From the above observation, the Panel finds that the Indian company is a dependent agency of the assessee company for the purchase and sale of Harmony Products of the assessee company. Thus a Permanent Establishment with the character of "Dependent Agency PE" has been established through the presence of the Indian company. The continuing commercial relationship betwe .....

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e view that a case as this with income accruing/arising in India through the dependent agent in view of the agency PE, it will serve good purpose to bring to tax the same as profits of the business. In this regard, it may also be clarified that so much of the profit which is attributable to the operations in India are to be brought to tax by the AO. This has to be computed in accordance with Article 7 of the DTAA read with Rule 10 of the Income-tax Rules, 1962. This objection is disposed off as .....

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record and duly considered facts of the case in the light of the applicable legal position. 7. The law is by now settled so far as the connotations of 'make available' clause in the definition of fees for technical services in the contemporary tax treaties are concerned. It is held to be a condition precedent for invoking this clause that the services should enable the person acquiring the services to apply technology contained therein. Hon'ble Karnataka High Court in the case of CIT .....

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ult in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology "making available", the technical knowledge, skill?, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense t .....

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e that may require technical knowledge, skills, etc., does not mean that technology is 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. 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 .....

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deration in the Indo US tax treaty is concerned, is not the fact of training services per se but the position that training services being of such a nature that it results in transfer of technology. That is not the case here. It is not even suggestion of the Assessing Officer that there was a transfer of technology in this case so as to bring the services within the ambit of services which "make available" technical knowledge, experience, skill and know how etc. The authorities below h .....

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ithout the aid of the service provider. The matter, however, does not end here. The DRP has held that without prejudice to this line of argument, the assessee is to be treated as having a dependent agency permanent establishment in its Indian AEs, and, therefore, "the fees paid by the Indian company to the assessee company has to be treated as profit and gains of the business and has to be taxed as business income". In effect, thus, the recipient of the service has been held to be the .....

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anent establishment exists and the assessee carries on business through the PE, under Article 7(1) of the Indo US tax treaty, the profits of the assessee may be taxed in the source jurisdiction but only so much of them as are "attributable to (a) that permanent establishment; (b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in the other State of the same or similar .....

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the case of the assessee that the Indian affiliate has not been paid arm's length remuneration of services rendered by the Indian affiliate, which is treated as the DAPE, is paid an arm's length remuneration, in the light of the settled legal position in the case of SET Satellite (Singapore) Pte Ltd v. DDIT [(2009) 307 ITR 205 (Bom)] ,nothing remains to be brought to tax. Their Lordships have, in this case inter alia observed as follows: 12. We may now consider the judgment in Director o .....

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for providing certain support services to MSCo. MSCo. outsourced some of its activities to MSAS. MSAS was set up to support the main office functions in equity and fixed income research, account reconciliation and providing income-tax enabled services such as back office operations, data processing and support centre to MSCo. On 5th May, 2005 MSCo filed its advance ruling application. The basic question related to the transaction between the MSCo and MSAS. The advance ruling was sought on two c .....

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respect of the service agreement dt. 14th April, 2005 and it meets the test of arm's length as prescribed under s. 92C of the 1961 Act, and no further income was attributable in the hands of MSAS in India. The said ruling of AAR on the question of income attributable to the PE was the subject-matter of challenge by the Department. Insofar as the issue of PE is concerned the Supreme Court was pleased to hold that it agreed with the ruling of the AAR that stewardship activities would fall und .....

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though the quantum of income taxable is income attributable to the PE of the said foreign company in India. The Court observed that the important question which arises for determination is whether the AAR is right in its ruling when it says that once the transfer pricing analysis is undertaken there is no further need to attribute profits to a PE. The Court further noted that the computation of income arising from international transactions has to be done keeping in mind the principle of arm' .....

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the basis of arm's length principle we have quoted art. 7(2) of the DTAA. According to the AAR where there is an international transaction under which a non-resident compensates a PF at arm's length price, no further profits would be attributable in India. In this connection, the AAR has relied upon Circular No. 23 of 1969 issued by the CBDT. This is the key question which arises for determination in these civil appeals." After discussing the various issues the Court in its conclusi .....

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