Contact us   Feedback   Annual Subscription   New User   Login      
Tax Management India .com
TMI - Tax Management India. Com
Extracts
Home List
← Previous Next →

2015 (10) TMI 954 - AUTHORITY FOR ADVANCE RULINGS

2015 (10) TMI 954 - AUTHORITY FOR ADVANCE RULINGS - [2015] 378 ITR 465 - Taxability of income - 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 Limited from vendors in China and other related services provided in China - whether is taxable in India and the applicant is liable to pay tax thereon in India? - Double Taxation Avoidance .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

gerial, technical or consultancy services‟ whereas India-China DTAA refers to”provision of services of managerial, technical or consultancy nature‟. 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”provisi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s 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 organization, in conducting market research, in giving expert advice for improvement of high quality of standards, advising on new development in .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

to the extent of full amount received by it.

Service fee received by the applicant chargeable to tax in India - whether same is chargeable to the extent of full amount received by it or only to the extent of mark up received @ 10% over and above the actual cost incurred by it in providing services in China? - Held that:- Similar issue had come up before the Authority in the case of DANFOSS Industries Private Limited (2004 (5) TMI 58 - AUTHORITY FOR ADVANCE RULINGS) wherein the thrust .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

t on securities etc. but also to gross sums, the whole of which might not be income or profit of the recipient, such as payments to contractors and sub-contractors and the payment of insurance commission. In the case of Timken India Limited (2004 (12) TMI 12 - AUTHORITY FOR ADVANCE RULINGS ) also it was decided that entire amount was liable to be taxed in India and accordingly the applicant was obliged to withhold Income-tax at appropriate rate. We respectfully follow the same ruling in this cas .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

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) Whet .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

China is taxable in India and the applicant is liable to pay tax thereon in India? (2) Without prejudice to Question No.1 hereinabove in case in view of Hon‟ble Authority for Advance Ruling, service fee received by the applicant is chargeable to tax in India, whether same is chargeable to the extent of full amount received by it or only to the extent of mark up received @ 10% over and above the actual cost incurred by it in providing services in China? (3) In case the amount of service fee .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nt to UIL are described in Appendix A to the service agreement which is reproduced as under:- Details of Services to be performed by GZUIL GZUIL shall perform its obligations as follows:- • New suppliers development - Identify Products/Manufacturers requested by UIL. Evaluate the credit, organization, finance, production facility etc of the identified manufacturer. • New Products development - Generate New Products/new Ideas for UIL and Market research for different products. Identify .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he recommendation for improvement for ensuring high quality standards. • Quality system- monitoring of vendors. • Inspection through SGS - to co-ordinate to ensure product being shipped is meeting product specification. • Interaction with vendors - on customer feedback received from 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 Se .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ed 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) 5. The UIL while making the payment of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nt of rendering services to UIL is not taxable in India as per provisions of section 5 of the Income-tax Act because the same is neither accruing nor arising in India and cannot be deemed to have accrued or arisen in India. He also pointed out that the income is neither being received nor deemed to have been received in India. He further mentioned that in terms of Article 7 of DTAA between India and China the income of the applicant company is chargeable to tax in China as it is a company regist .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

es 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 . According to the applicant the payment will be covered under Article 12 (4) as fees for technical services in case the payment is for:- A. provisions of services of managerial, technical or .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e 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) 2 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

Court in the case of Carborandum Company vs. CIT (supra) wherein the services rendered by the American Company were in the foreign territory and it was held that the technical service fee received by the American Company from the Indian company during the accounting year relevant to the Assessment Year 1957-58 did not accrue or arise in India nor would be it deemed to have accrued or arisen in India. He also relied upon the decision of the Hon‟ble High Court in the case of CIT vs. M/s Voe .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

t assessee outside India would not be taxable in India. The applicant‟s counsel also relied on the decision of the Hon‟ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. (supra) wherein it was observed that the services should not only be utilized in India but the same should be rendered in India to be covered under the provisions of Section 9(1)(vii) of the Income-tax Act. In this connection he also cited the case of Clifford Chance (supra) wherein the Hon .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

depending upon the agreement with respective country. He drew our specific attention to clause 3 to Article 13 of DTAA between China and Pakistan which reads as under:- The term fees for technical services as used in this Article means any consideration (including any lump sum consideration) for the provision of rendering of any managerial, technical or consultancy services by a resident of a Contracting State in the other Contracting State (including the provision by such resident of the servi .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ch 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

th its vendors in the matters of resolution of price issues . b) The applicant is acting as a consultant to UIL and providing consultancy services in a specialized field i.e. the Chinese Market, by identifying and evaluating the products and ideas available for buying by UIL from that market. As held by the Supreme Court in GVK Ind & Ors vs ITO, where the non-resident person provided services using its skill, acumen and knowledge in the specialized field, it was acting like a consultant and .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

es. d) It is not disputed that the applicant has performed the aforesaid services in China, but until they were received by UIL, these cannot be said to have been provided. Since neither the DTAA nor the Income Tax Act elucidate about the term provision of services‟, a reference is made to the laws governing service tax in India, according to which, generally the place of provision of a service shall be the location of the recipient of service. In the present case the recipient of services .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

hnical 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

dly, the judgment was in the context of Income Tax Act 1922, which did not have any provision on the fees for technical services‟ which under the Income Tax Act of 1961 (w.e.f. 01.06.1976) are to be deemed to accrue or arise in India, regardless of the place where the services were rendered. And, most importantly, the judgment of the Apex Court in Carbonrandum‟s case and other similar judgments that have been relied upon by the applicant have been overtaken by the amendment in the Ac .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

at of the export agent as is evident from the service agreement between the applicant and UIL which was on a principal to principal basis and where the applicant was to perform its obligations under the agreement as an independent contractor/service provider. (iii) The case of HMS Real Estate P Ltd In re has been cited to claim that only the markup element of the fees received for providing services to UIL in India may be considered for taxation. Reliance on this case is also faulty. In that cas .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

roviding services to an Indian company (i.e. UIL) in India, the entire payment will be subject to tax @ 10% as provided in the DTAA. 13. Shri Puri cited the decision of the ITAT Mumbai Bench in the case of Ashapura Minichem Limited v/s Asstt. Director of Income Tax (IT) (ITA No.2508/Mum/08) wherein a similar issue was considered. He pointed out that the facts in case of Ashapura Minichem were similar as this company had entered into an agreement with a China based company and under the said agre .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

vision 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 specific .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

is very clear and specific and needs to be given its literal interpretation and, secondly, the ITAT has wrongly observed that by giving interpretation to clause 4 to Article 12 to the effect that only income for services rendered in India will be taxable in India, will render Article12(6) meaningless. According to the applicant‟s counsel Article 12(6) is a deeming provision and will have its applicability only if the payment is covered in the definition of fee for technical services as def .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ian company for services rendered in China is taxable in India under Article 12(4) of DTAA between India and China. Article 12 of the Treaty reads as under:- Royalties and fees for technical services 1) Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 2) However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise, and .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

s for radio or television broadcasting, any patent, trade mark, design 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ate 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. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. 6) Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is the government of that Contracting State, a pol .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

se, then such royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. 7) Where by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the paye .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

services as used in this Article means any consideration (including any lump sum consideration) for the provision of rendering of any managerial, technical or consultancy services 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. 16. The applicant‟s counsel em .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

al, 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 sha .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ule that we have discussed earlier in this order in the context of domestic law provision, and which in principal, requires taxability of an income in the tax jurisdiction in which it is sourced. Normally, the source of an income is the country in which person making the payment is located. There could, of course, be situations in which a payment related to business or profession being carried out in one country is being made by a resident of another country who is carrying out such business or .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

or fixed base in the other contracting state, such royalties and fees for technical services will be deemed to have accrued in the other contracting state. In such a situation, the true source jurisdiction will be that other contracting state even though the payment may be made from outside both the contracting states, and, therefore, the income is deemed to have accrued in that other contracting state. 12. Article 5(5) of the treaty is also relevant. The same reads as follows: An enterprise of .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ndent status within the meaning of this paragraph . [emphasis supplied] 13. It factually needs to be noted that the role of Inspectorate India was spot inspection. There seems to be some grey area 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 .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

or 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 deeming fiction under Article 12(6) as well. The impugned payment to the Chinese company, therefore, is covered by the scope of fees for tech .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ompany (supra) which was decided on the basis of provision of the relevant sections of the then Income-tax, 1922, as it existed, which did not have any provision on the fees for technical services‟ which under the Income Tax Act of 1961 are to be deemed to accrue or arise in India, regardless of the place where the services were rendered. He also does not get any support from the judgements of Hon‟ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. (supra) and .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

etween India and Austria. We are here concerned only with DTAA between India and China. Any other Treaty either between India and other country or between China and other country cannot influence the scope of Treaty between India and China. Be that as it may, since the applicant‟s counsel has sought to make a distinction between India-China DTAA and Pakistan-China DTAA, we notice that Pakistan-China DTAA refers to provision of rendering of any managerial, technical or consultancy services& .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ces 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 sou .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

finance, production facility etc. and based on this evaluation it is giving advice in the form of a report to UIL. Such evaluation can be given only by an expert in the specific area. The applicant company is also providing information on the new developments in China with regard to technology/product/process upgrade. These are specialized services requiring special skill, acumen and knowledge. These services are definitely in the nature of consultancy services. What is to be seen in such cases .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ITO & Anr(2015) TIOL-10(SC-IT) l-10(SC-IT) had noted as under: In this context, a reference to the decision in C.I.T. V. Bharti Cellular Limited and others (2009) 319 ITR 139=2009-TII-11-HC-DEL-INTL, would be apposite. In the said case, while dealing with the concept of consultancy services‟, the High Court of Delhi has observed thus: Similarly, the word consultancy has been defined in the said Dictionary as the work of position of a consultant; a department of consultants. Consultant .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

It is obvious that the service of consultancy also necessarily entails human intervention. The consultant who provides the consultancy service, has to be human being. A machine cannot be regarded as a consultant . 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 organization, in conducting market research, in giving exper .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 



|| Home || Acts and Rules || Notifications || Circulars || Schedules || Tariff || Forms || Case Laws || Manuals ||

|| About us || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members || Site Map ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version