TMI Blog2015 (10) TMI 954X X X X Extracts X X X X X X X X Extracts X X X X ..... 223;. The distinction between these two DTAAs clearly points out that the scope of”provision of services‟ as in India-China Treaty is much wider than scope of”provision of rendering of services‟ as in Pakistan-China Treaty. Based on this distinction this Authority had held in the case of Inspectorate (Shanghai) Limited that”provision of services‟ will cover the services even when these are not rendered in the other contracting state (i.e. India in this case) as long as these services are used in the other contracting state (i.e. India in this case). The ITAT Mumbai Bench in the case of Ashapura Minichem [2010 (5) TMI 523 - ITAT, MUMBAI ] had also reached at the same conclusion saying that if at all the contrast with China-Pakistan tax Treaty shows something, this contrast shows that the India-China tax Treaty intends to follow the source rule, while China-Pakistan tax Treaty gives up the source rule for fee for technical services. Appendix A to the service agreement in this case makes it very clear that the applicant had the skill, acumen and knowledge in the specialized field of evaluation of credit, organization, finance and production facility of an organiza ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , CIT(IT)-1, Ms Sukhvinder Khanna,CIT-DR(AAR),ND Mr. Sachin Dhania, DCIT DR(AAR), ND (by Mr. A.K Tewary) The applicant is a company registered under the laws of People‟s Republic of China. The share capital of the applicant company is held by M/s Usha International Limited (UIL) having its registered office at New Delhi and accordingly it is a wholly owned subsidiary of the Indian company. The applicant company has been set up to carry on the business of import and export and also to provide services relating to business of household electrical appliances and equipments, household goods and accessories etc to the Indian company. 2. The applicant has raised the following questions for advance rulings before the Authority:- (1) Whether in the stated facts and circumstances of the case and the relevant provisions of Income Tax Act read with Double Taxation Avoidance Agreement between Government of India and People‟s Republic of China, the amount of service fee received/receivable by the applicant from Usha International Limited in terms of Agreement dated 16.11.2012 for providing services in connection with procurement of goods by Usha International ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om UIL for product improvement. Information sharing with UIL on the new development in China regards to technology/product/process upgrade. 4. Appendix B to the service agreement describes the Service Fee chargeable by the applicant from UIL as under:- For the purpose of this agreement, Cost shall mean all expenses incurred by SERVICE PROVIDER in providing services under this agreement to UIL inter alia including all general and administrative overheads, rent, depreciation, human resource cost, etc, but excluding any one of items like write offs, losses on sale of fixed assets etc. The Mark-Up Rate shall be ten percent (10.00%). The Services Fees for a month shall be based on the budgeted costs to be incurred by SERVICE PROVIDER plus a mark up as stated above. At the end of each calendar year, SERVICE PROVIDER shall issue a final invoice or a credit note in the case where the amount of the actual costs incurred will be different from the budgeted amount already invoiced to UIL during the relevant calendar year and the Services Fees shall be computed as follows: Service Fees = Actual Services Costs + (Actual Services Costs x Mark-Up Rate) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal services under Article 12 (4) of DTAA. 9. The applicant‟s counsel further argued that payment received by the applicant is also not for services rendered in the nature of managerial, technical or consultancy. According to him, these services are in connection with procurement of goods as per instructions and requirements of UIL and are of commercial nature. In his support he cited the following case laws. - In Re: Spahi Projects (P) Ltd. AAR No.802 of 2009 - DIT (Intl. Tax) v. PanalfaAutoelektrik Ltd. (2014) 272 CTR (Del) 117 - CIT v. Grup ISM P. Ltd., ITA No. 325/2014 decided on 29.05.2015 Delhi High Court - Adidas Sourcing Limited v. ADI(IT)(2013) 211 ITR (Trib.) 697 As regards taxability of fees received when services are rendered outside India he cited the following cases: - CIT v. Toshoku Ltd (1980) 125 ITR 525 (SC) - Carborandum Co. v. CIT (1977) 108 ITR 335 (SC) - M/s Voest Alpine A.G. ITA No.79 80/2001(Delhi H.C.) - Ishikawajima Harima Heavy Industries Ltd. v DIT (2007) 208 ITR 408 (S.C) - Clifford Chance v. DCIT (2009) 318 ITR 237 (Bom.) The applicant‟s counsel strongly relied on the decision of the Hon̶ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by a resident of a Contracting State in the other Contracting State (including the provision by such resident of the services of technical or other personnel) but does not include consideration for any activities mentioned in paragraph 3 of Article 5 or Article 15 of the Agreement. Without prejudice to the arguments advanced as above by the applicant‟s counsel, he also mentioned that even if it is contended for any reason that income of the applicant company is chargeable to tax in India, the service fee to the extent representing reimbursement of cost cannot be deemed to be its income and only the amount which is being charged by it as mark-up over and above the cost (i.e. 10%) is in the nature of income which would be chargeable to tax in India. He relied on the decision in the case of HMS Real Estate Private Limited, In Re (2010) 325 ITR 71. 11. Shri Sanjay Puri, Principal CIT (International Taxation), representing the Revenue submitted the following points:- a) As UIL lacks the information/knowledge and the technical expertise about certain aspects of procuring goods from China, it has retained the applicant to identify evaluate , review , monitor , inspe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any fee received in lieu thereof will fall under the definition of fees for technical services‟ within the meaning of section 9(1)(vii) of Income Tax Act and Article 12 of the India-China DTAA. f) For taxation under the Income Tax Act, any sum (including any lump sum consideration) received for rendering technical services‟ is necessarily to be brought within the ambit of section115A(1)(b)(B) read with section 44D, which provide for such sum to be taxed at appropriate rate on the gross amount without giving any deduction for the expenses incurred in earning the same. Under the DTAA also the fees for technical services‟ is to be taxed @ 10% on the gross amount‟ without giving any deduction for the expenses incurred. 12. As regards, the case cited by the applicant‟s counsel, Shri Sanjay Puri has submitted as under:- (i) The reliance on Carborandum‟s case is misplaced, as firstly, the judgment of the Apex Court was in the matter of determination of business connection of the non-resident in India, which is not the case here. Secondly, the judgment was in the context of Income Tax Act 1922, which did not have any provision on the fees for te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment the Indian company was to pay US Dollar 1 million in consideration of Bauxite Testing services by the Chinese company in its laboratories and for preparation of test reports. The basic thrust of assessee‟s contention in this case was that since no part of the testing services was rendered in India, the Chinese company did not have any tax liability in India. The ITAT analyzed the provisions of DTAA between India and China, between China and Pakistan and went behind the expression provision of services‟ . ITAT held that the expression provision of services‟ is much wider in scope and will cover the services even when these are not rendered in the other contracting state, as long as these services are used in other contracting state and, therefore, the technical services in question are clearly covered by Article 12(4) of the Treaty. This position was further clarified with the help of provisions of Article 12(6) of the Treaty saying that such services are specifically covered by the deeming fiction under Article 12(6) as well. The applicant‟s counsel, in his rejoinder to the arguments put forward by Shri Sanjay Puri, pointed out that the reliance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sign or model, plan, secret formula or process or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. 4) The term fees for technical services as used in this Article means any payment for the provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State, but does not include payment for activities mentioned in paragraph 2(k) of Article 5 and Article 15 of the Agreement. 5) The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties of fees for technical services arise, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein; and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pression provision of services‟ should be construed as rendering of services‟. At this stage it is necessary to point out the distinction between India-China Treaty and Pakistan-China Treaty. In the first case the expression used is provision of services of managerial, technical or consultancy nature and in later case it is provision of rendering of any managerial, technical or consultancy services . We notice that similar issue had come up before this Authority in AAR No.1005 of 2010 in the case of Inspectorate (Shanghai) Limited and the Authority had gone into details in respect of Article 12 of DTAA between India and China. The following paragraphs of the ruling are relevant:- 11. It is important to take note of the deeming fiction under Article 12(6) of the Treaty. This Article, inter-alia, provides that Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is the Government of the Contracting State, a political subdivision, a local authority thereof or a resident of that Contracting State. In other words irrespective of the situs of the technical services having been rendered, according to this treaty prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rea in the use of the expression provision of services and utilization of services . There are three types of situations envisaged: (a) Provision (b) Rendering (c) Utilization 14. According to the Revenue the applicable provisions relate to categories (a) (c) while the applicant submits it relates to (b). We are of the considered view that it would depend upon the factual scenario and there cannot be any straitjacket formula. 15. In view of above, a literal interpretation to a tax treaty, which renders treaty provisions unworkable and which is contrary to clear and unambiguous scheme of the treaty, has to be avoided. In any case, even on merits, we are of the considered view that the scope of the expression provision for services‟ is much wider in scope than the expression provision for rendering of services‟ and will cover the services even when these are not rendered in the other contracting state, as long as these services are used in the other contracting state. Therefore, the technical service in question is clearly covered by Article 12(4) of the treaty. This position is further clarified, and is specifically covered by the deemi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch wider than scope of provision of rendering of services‟ as in Pakistan-China Treaty. Based on this distinction this Authority had held in the case of Inspectorate (Shanghai) Limited that provision of services‟ will cover the services even when these are not rendered in the other contracting state (i.e. India in this case) as long as these services are used in the other contracting state (i.e. India in this case). The ITAT Mumbai Bench in the case of Ashapura Minichem had also reached at the same conclusion saying that if at all the contrast with China-Pakistan tax Treaty shows something, this contrast shows that the India-China tax Treaty intends to follow the source rule, while China-Pakistan tax Treaty gives up the source rule for fee for technical services. 18. The next issue is whether the services rendered in this case can be covered within the definition of fees for technical services in Article 12(4) of DTAA. In this respect the list of services rendered by the applicant as per Appendix A to the service agreement is a very clear guide. The applicant is not only identifying the products but also generating new ideas for UIL after conducting market researc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and knowledge in the specialized field of evaluation of credit, organization, finance and production facility of an organization, in conducting market research, in giving expert advice for improvement of high quality of standards, advising on new development in China with regard to technology/product/process up gradation. The UIL asks for advice from the applicant and refer to the source of information provided by the applicant. The nature of these services in a specialized field mentioned in Appendix A would surely come within the ambit of the term consultancy services‟. 19. The last question is with respect to amount which should be brought to tax i.e. whether the gross amount should be taxed or only the profit element. Similar issue had come up before the Authority in the case of DANFOSS Industries Private Limited (AAR 606 to 2002) wherein the thrust of the argument of the applicant was that there was no income element in the service fee and that it was only reimbursement of the cost. It was held therein by this Authority that the entire sum will be chargeable to tax and can be assessed to tax under the Act and that such sum might be income or income hidden or otherwise ..... X X X X Extracts X X X X X X X X Extracts X X X X
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