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M/s. Sandvik AB Versus DDIT (International Traction) -II, Pune

2015 (9) TMI 957 - ITAT PUNE

Transfer pricing adjustment - computation of the Arm’s Length Price - Management Service Fees (‘MSF’) received whether taxable in India as ‘Fees for Technical Services’ (‘FTS’) within the meaning of Article 12 of the India-Sweden read with the protocol thereto ? Held that:- Since the nature of services provided by the assessee company to its affiliates during A.Y. 2007-08 and 2008-09 are similar, therefore, following the decision of the Tribunal in assessee’s own case in the immediately precedin .....

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Bafna For The Department : Shri A.K. Modi ORDER PER R.K. PANDA, AM : This appeal filed by the assessee is directed against the order dated 27-10-2012 passed u/s.143(3) r.w.s.144C(13) of the DDIT (IT)-II, Pune relating to Assessment Year 2008-09. 2. Facts of the case, in brief, are that the assessee (Sandvik AB) filed its return of income on 30-09-2008 declaring NIL total income. The Assessing Officer referred the matter to the DCIT (Transfer Pricing-IV), Pune u/s.92CA(1) of the I.T. Act for com .....

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t. Ltd., and ₹ 1,39,68,410/- from Walter Tools India Pvt. Ltd. In the draft assessment order passed on 26-12-2011 u/s.143(3) r.w.s.144C addition of ₹ 8,60,02,251/- was made by treating the amount received on rendering management services taxable as fees from technical services. 4. Before DRP the assessee submitted that the assessee provides management services to Sandvik Asia Private Limited and Walter Tools India Private Limited in accordance with the Management Services Agreement e .....

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ates in various matters. By virtue of such managerial intervention, common benefit accrues to the group companies and it is expected that their level of performance will improve. These are non-technical services and are availed by group companies with the intention of carrying on business in line with the best practices followed by Sandvik group. 4.2 It was submitted that as specified in the Agreement, the assessee is a central hub of knowledge relating to the business strategy and Sandvik group .....

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onsist of management services, business processes, manufacturing, quality control, logistics and development, marketing, sal support, promotion, human resources, IT support etc. The AO taxed the consideration received for services rendered by it as fees for technical services under Article 12 of India-Sweden Tax Treaty. The AO has stated that Article 12 includes managerial, technical or consultancy services. The services rendered by the assessee are in the nature of managerial and consultancy se .....

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he rate or scope provided for in this convention on the said items of income. The same rate or scope as provided for in that convention or protocol on the said items of income shall also apply under this convention. 4.5 The assessee further stated that in view of the above, the income will not be taxable as DTAA between India and Portugal is more restricted in scope of FTS. Article 12 on fees for technical services in India-Portugal DTAA has make available clause. The services provided by the as .....

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do not satisfy the make available condition. It was submitted that the term make available has been discussed in detail in • Memorandum of Understanding (MOU) to India -US DTAA • Technical explanation to India-US DTAA • Explanatory Memorandum to India-Australia DTAA 4.7 The assessee submitted that the services rendered by it are essentially managerial services to support the day-to-day functioning of the group entities and to share benefit of specialisation to improve quality of p .....

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ny and Walter Tools India Private Limited are identical. The DRP referred to the clauses related to services as contained in the agreement which are as under : 2.1. The Providing Party shall form time to time at the request of the Receiving Party provide the Receiving Party with all or any of the Services under the terms set out in this Service Agreement. 2.2 The Providing Party agrees to perform the Services with reasonable care and skill and within a reasonable time. 2.3. The Providing Party w .....

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ving Party. 5.1 They observed that the terms service is defined in the definition clause of the agreement which reads as under : the support services listed in Schedule 2 of the agreement as may be amended from time to time by the agreement of the parties . 5.2 They also reproduced the schedule-2 of the agreement which reads as under : As specification of the Services provided and of the principles for allocating the costs of such services to the Receiving Party will be updated annually and will .....

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e agreement is of managerial service agreement, however, the DRP noted that the nomenclature given by the parties is not determinative of real nature of the transactions. Since the agreement according to the DRP does not list any services provided by the assessee so as to treat the same as managerial service, therefore, the DRP did not accept the contention of the assessee that the services rendered are of marketing, manufacturing and human resources and information technology functions. In view .....

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us with the following grounds : On the facts and circumstances of the case, and in law; 1. The Ld. Assessing Officer and the Ld. DRP has erred in holding that the Management Service Fees ( MSF ) of INR 86,002,251 received by the Appellant, is taxable in India as Fees for Technical Services ( FTS ) within the meaning of Article 12 of the India-Sweden read with the protocol thereto. 2. The Learned ( Ld ) Assessing Officer has erred in denying applicability of Double Taxation Avoidance Agreement ( .....

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ence erred by declining to interfere with the order of the Ld. Assessing Officer. 8. The Ld. Counsel for the assessee at the outset filed a copy of the order of the Tribunal in assessee s own case for A.Y. 2007-08 vide ITA No.1720/PN/2011 order dated 28-11-2014 and submitted that under identical circumstances the Tribunal has held that on the principle of the most favoured nation clause the payment received by the assessee company from its Indian subsidiaries cannot be brought to tax. Referring .....

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10. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer/ DRP and the and the Paper Book filed on behalf of the assessee. We find the Tribunal in assessee s own case in the immediately preceding assessment year while deciding an identical issue has held that on the principle of most favoured nation clause the payment received by the assessee company from its Indian subsidiaries cannot be brought to tax. The relevant observation of Tribunal f .....

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The claim of the assessee is that the assessee received the said payment from its Indian subsidies for rendering the services which are in the nature of commercial, management, marketing and production services. The nature of the services as per the agreement are already mentioned here-in-above. In this case there is no dispute about the legal position that the amount received by the assessee from its Indian subsidies is taxable in India under normal provisions of Act more particularly u/s. 9(1 .....

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India in view of the beneficial provisions of the tax treaty between India and Sweden read with the protocol which is integral part of said treaty. He submits that the provisions of tax treaty between India and Sweden read with the protocol relating to the scope and taxation of fees for technical services being more beneficial than the correspondence provisions of the Income-tax Act hence, the assessee may be given the benefit of the treaty between India-Portugal on the basis of Protocol. He sub .....

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is fulfilled. 8.2 Ld. Counsel placed heavy reliance on the decision of the Hon ble High Court of Karnataka in the case of CIT, Central Circle, Bangalore and another vs. M/s. De Beers India Minerals Pvt. Ltd. 340 ITR 467 (Kar) and Bharati Axa General Insurance Co. Ltd. Vs. DIT 326 ITR 477. He referred to the assessment order and submits that Assessing Officer has impliedly accepted that the tax treaty between India-Portugal can be applied to the assessee more particularly in the context of the p .....

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in the case of Sandvik Australia Pty. Ltd. Vs. D. D. I -International Tax-II, Pune in ITA No. 93/PN/2011 and the assessee s case is squarely covered on the interpretation of a expression- make available . Per contra, the Ld. DR relied on the written submissions. 9. In this case the only issue to be considered by us is whether the assessee can be given benefit of India-Portuguese treaty on principle of MFN clause? The India entered into DTAA with the Sweden which was notified vide notification no .....

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h Portuguese republic which was notified vide notification no. GR F42/E dated 16th June, 2000. In the said Treaty, mode of taxation of the fees for technical services (FTS) between two countries is also provided in the Article 12 but instead of fees for technical services the expression used is fees for included technical services . As per the Article 12(4) fees for included services means payment of fees of any kind other than those mentioned in article 14 and 15 of the said treaty, to any pers .....

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ch enables the person acquiring the services to apply the technology contained therein. The main plank of the argument of the Ld. Counsel is that considering the principle of most favoured nation (MFN) clause in treaty between India and Portuguese unless a condition of make available the technical knowledge or skill or services is fulfilled then said payment cannot be taxed in source country i.e. India. 10. In the case of Sandvik Australia Pty. Ltd. (supra) and following the decision in the case .....

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elopment and data of technical plan or technical design. In view of the above rendered by the assessee company to its Indian affiliates are in the nature of FTS or royalties and same is taxable in India. We reproduce herein under the relevant part of Article 12: ARTICLE XII - Royalties - 1. Royalties arising in one of the Contracting States, being royalties to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State. 2. Such royalties may also be .....

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n sub-paragraph (3)(f) that relate to equipment mentioned in sub-paragraph (3)(b); 10 per cent of the gross amount of the royalties; and (b) in the case of other royalties : (i) during the first 5 years of income for which this Agreement has effect : (a) where the payer is the Government or a political sub-division of that State or a public sector company: 15 per cent of the gross amount of the royalties; and (b) in all other cases: 20 per cent of the gross amount of the royalties; and (ii) duri .....

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fic equipment; (c) the supply of scientific, technical, industrial or commercial knowledge or information; (d) the rendering of any technical or consultancy services (including those of technical or other personnel) which are ancillary and subsidiary to the application or enjoyment of any such property or right as is mentioned in sub-paragraph (a), or any such equipment as is mentioned in sub-paragraph (b) or any such knowledge or information as is mentioned in sub-paragraph (c); (e) the use of, .....

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pment and transfer of a technical plan or design; but that term does not include payments or credits relating to services mentioned in sub-paragraphs (d) and (g) that are made; (h) for services that are ancillary and subsidiary, and inextricably and essentially linked, to a sale of property; (i) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; (j) for .....

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carries on business in the other Contracting State, in which the royalties arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the property, right or services in respect of which the royalties are paid or credited are effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. 5. Royalt .....

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ay the royalties was incurred, and the royalties are borne by the permanent establishment or fixed base, then the royalties shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 6. Where, owing to a special relationship between the payer and the person beneficially entitled to the royalties, or between both of them, and some other person, the amount of the royalties paid or credited, having regard to what they are paid or credited for, exceeds the .....

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es the term Royalty. Under the IT Act, the term royalty and expression FTS are classified as two different connotations, i.e. 9(1)(vi) and 9(1)(vii). So far as Article 12 is concerned, FTS is included in the term royalty for the purpose of deciding in which contracting state the income from the same is to be taxed. Clause (g) in Article 12(3) goes to the roots of the issue. Main thrust of the argument of the Ld. Counsel is that it is not only sufficient to render the services but the same should .....

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ervices of that persons own technical knowledge or technology in performance of the services. The technology will be considered as made available when the person receiving the services is able to apply the technology by himself. 14. The expression make available has come for consideration before the Hon ble High Court of Karnataka in the case of M/s. De Beers India Minerals Pvt. Ltd. (supra). In the said case, the Treaty between India and Netherlands was for the consideration of their Lordships. .....

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e geophysical services for clients. For the technical services rendered by them the said assessee had paid consideration. The Assessing Officer applied Article 12 of the Indo-Netherlands Treaty and held that the same was taxable in the hands of the Netherlands Company. As the wordings of Article 12 in the Indo-Netherlands Treaty are analogous to Article 12 of the India Australia Treaty, as expression make available is also used while determining fiscal jurisdiction of the contracting state, the .....

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l services. The fees for technical services means the payment of any amount to any person in consideration for rendering of any technical services only, if such services make available technical knowledge, expertise, skill, know-how or processes. If the technical knowledge expertise, skill, know how or process is not made available by the service provider, who has rendered technical service for the purpose of Article 12 of DTAA it would not constitute fees for technical services. To that extent .....

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rd make available . According to the aforesaid definition fees for technical service means payments of any kind to any person in consideration for services of technical nature if such services make available technical knowledge, experience, skill, know how or processes which enables the person acquiring the service to apply technology contained therein. Though this provision is not contained in India Netherlands Treaty, but virtue of Protocol in the agreement, Clause (iv)(2) reads as under: If a .....

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ame rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention. 14. Therefore the Clause in Singapore agreement which explicitly makes it clear the meaning of the word make available , the said clause has to be applied, and to be read into this agreement also. Therefore, it follows that for attracting the liability to pay tax not only the services should be of technical in nature, but it should be made available to the person .....

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es, so that the recipient also acquires technical knowledge, experience, skill, know how or processes so as to render such technical Services. Once all such technology is made available it is open to the recipient of the service to make use of the said technology. The tax is not dependent on the use of the technology by the recipient. The recipient after receiving of technology may use or may not use the technology. It has no bearing on the taxability aspect is concerned. When the technical serv .....

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se the technology which the service provider had used. Therefore, unless the service provider makes available his technical knowledge, experience, skill, know how or process to the recipient of the technical service, in view of the Clauses in the DTAA, the liability to tax is not attracted. 11. Now, the next question is whether the assessee is entitled for the benefits of DTAA between India-Portuguese as second condition make available is not fulfilled. There is a Protocol to the treaty between .....

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for technical services) if under any Convention. Agreement or Protocol between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, or fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items of income shall also apply under this .....

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ituation where in cases either of the contracting states enter into a bilateral agreement into the nature of DTAA with the another sovereign state and where the same subject matter has been given more favourable treatment by way of a definition or mode of tax then the parties can claim the benefit on the recognized principle of MFN clause. In his introduction to Double Taxation Conventions (Third Edition) Klaus Vogel has explained the role of the protocol and its role in interpreting the treaty. .....

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provisions of the aforesaid DTAA are, therefore, required to be read with the protocol clauses and are subject to the provisions contained in such protocol. Examined in the light of DTAAs between India and UK, USA and Switzerland, we find that in the case before us the assessee had not purchased any property from UTAC France. Therefore, none of the fees i.e., impact testing fees or fee paid for test reports is ancillary and subsidiary as well as inextricably and essentially linked to the sale of .....

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y for installation and commissioning of the machines were related to technical services, which were ancillary and subsidiary as well as inextricably and essentially linked to the sale of the property. Hence, the payments made to the foreign party were not liable to be taxed in India. In the decision relied upon by the assessee in the case of Raymond Ltd. vs. Dy. CIT (supra), it was held that no technical knowledge, experience, skills, know-how or process etc. was made available to the assessee c .....

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persuasive value which reads as under : 16. In his introduction to Double Taxation Conventions (Third Edition), Klaus Vogel, has clarified the role of a protocol and its role in interpreting a treaty. He says, Protocols and in some cases other completing documents are frequently attached to treaties. Such documents elaborate and complete the text of a treaty, sometimes even altering the text. Legally they are a part of the treaty, and their binding force is equal to that of the principal treaty .....

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