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Sandvik AB, C/o Sandvik Asia Ltd. Versus The Dy. Commissioner of Income Tax, Circle 10, Pune

Taxing receipts for Management Services to be in the nature of ‘Fees for Technical Services’ (‘FTS’) DTAA between India and Sweden - Held that:- Identical issue arose before the Tribunal in assessee’s own case in assessment year 2007-08 and 2008-09 wherein held on the principle of most favoured nation clause, that the payment received by the assessee company from its Indian subsidiaries could not be brought to tax. - Decided in favour of assessee - ITA No.745/PN/2014 - Dated:- 19-2-2016 - MS. SU .....

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d 1: The Learned Commissioner of Income-tax (Appeals) - V, [ Ld.CIT(A) ] has erred in confirming the action of the Learned Assessing Officer ( Ld.AO ) of taxing receipts for Management Services amounting to ₹ 4,85,82,800/- to be in the nature of Fees for Technical Services ( FTS ) within the meaning of Article 12 of the Double Taxation Avoidance Agreement between In dia and Sweden ( tax treaty between India and Sweden ) read with the protocol thereto as well as under section 9(1)(vii) of t .....

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the interest charged by the Ld.AO and confirmed by the Ld.CIT(A) be deleted. 3. The learned Authorized Representative for the assessee at the outset pointed out that the issue raised in the present appeal is squarely covered by the orders of Tribunal in assessee s own case relating to assessment years 2007-08 and 2008-09. It was pointed out by the learned Authorized Representative for the assessee that similar issue arose before the Tribunal in the above said appeals and the issue was decided in .....

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ssessee in assessment year 2007-08. The learned Authorized Representative for the assessee drew our attention to the order of Tribunal in ITA No. 47/PN/2013, relating to assessment year 2008-09, order dated 22.05.2015 and pointed out that identical issue arose and the matter was decided in favour of the assessee. 4. The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below. 5. We have heard the rival contentions and perused the record. Briefly, in .....

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SAL) for rendering various management services. In lieu thereof, the assessee received fees for management services rendered to SAL pursuant to the said contract. SAL had been issued a Zero Tax Withholding Order , as per more beneficial provisions of India-Sweden Tax Treaty, on the basis that the income was not chargeable to tax in India. The assessee company thereafter, filed return of income declaring total income at Nil for the captioned assessment year. However, the Assessing Officer was of .....

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in the DTAA with Sweden, it was apparent that the amount received by the assessee as per the said agreement with SAL was clearly in the nature of fees for technical services and therefore, was taxable in India. Another aspect noted by the Assessing Officer was whether the nature of services rendered by the assessee to SAL makes available any technical knowledge, experience, skills, know-how, etc. After considering the issue at length and taking note of the clauses of agreement and the correspond .....

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he assessee was the actual beneficial owner of the fees for technical services, the tax was charged @ 10% as per DTAA of gross amount. 6. The CIT(A) was of the view that as per DTAA between India and Sweden, the amount received by the assessee falls into the category of fees for technical services unless it falls into restrictive definition make available clause signed with other OECD countries like Portugal, the benefit of which would also go to the assessee company. Referring to Article 12(4) .....

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es. The CIT(A) further observed that in the said services, there was nothing which could have been made available to SAL, but was not done. In view thereof, the order of Assessing Officer was upheld since the DRP had upheld the order of TPO / AO in assessment year 2007-08. 7. The assessee is in appeal against the aforesaid order of CIT(A) and both the learned Authorized Representatives have put forward their contentions. 8. We find that identical issue arose before the Tribunal in assessee s own .....

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It is claimed that that it does not have a permanent place of business in India (PE). The dispute is in respect of the payment of ₹ 5.9 Crores received by the assessee company from its Indian subsidies i.e. Sandvik Asia Pvt. Ltd. (SAPL) and WTIPL. 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 .....

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even if the assessee s income is taxable in the normal provisions still he can claim the exemption from the tax as per the clauses applicable in the treaty. 8.1 Ld. Counsel argues that the above payment received by the assessee company is not taxable in 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 relat .....

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Sweden, the assessee can claim the exemption from tax in India because subsequently the India has also entered into DTAA with Portugal which is also member of the OECD and fees for technical services are not taxable unless the condition of make available 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 .....

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y FTS cannot be taxed. The assessee is to be given the benefit of the India-Portuguese treaty on principle of MFN clause which is well recognized in international taxation. He submits that the identical issue has come for the consideration by the ITAT, Pune 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 wr .....

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f the fees for technical services (FTS) is given in Article 12(3)(b) of the Act. It is true that it is a very conservative definition and there is no condition that the technical services should be made available. The India also entered into the treaty with 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 .....

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he right, property or information for which a payment describe in para no. 3 is received or (b) make available technical knowledge, expressions, skill, knowhow or process, or consist of the development and transfer of technical plan or technical design which 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 Portugu .....

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ed that as per the Treaty FTS means payment of any kind to any person in consideration for the rendering of any technical or consultancy services if such services make available technical knowledge, experience, skill, know-how or process or consists of development 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 p .....

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referred to in subparagraph (3)(d), subject to sub-paragraphs (3)(h) to (l), that are ancillary and subsidiary to the application or enjoyment of equipment for which payments or credits are made under subparagraph (3)(b); or (iii) royalties referred to in 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 ef .....

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made as consideration for : (a) the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trade mark or other like property or right; (b) the use of, or the right to use, any industrial, commercial or scientific 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 subs .....

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any property or right referred to in subparagraphs (a) to (e); (g) the rendering of any services (including those of technical or other personnel), which make available technical knowledge, experience, skill, know-how or processes or consist of the development 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 .....

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of individuals (other than a company) for professional services as defined in Article 14. 4. The provisions of paragraphs (1) and (2) shall not apply if the person beneficially entitled to the royalties, being a resident of one of the Contracting States, 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 prop .....

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son paying the royalties, whether the person is a resident of one of the Contracting States or not, has in one of the Contracting States or outside both Contracting States a permanent establishment or fixed base in connection with which the liability to pay 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 .....

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rt of the amount of the royalties paid or credited shall remain taxable according to the law, relating to tax, of each Contracting State, but subject to the other provisions of this Agreement. 13. We are concerned with para No.3 of Article 12, which defines 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 decid .....

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vices relating to the technical know-how is to be taxed. The expression make available is used in the context of supplying or transferring technical knowledge or technology to another. It is different than the mere obligation of the person rendering the services 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 expressi .....

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esh and Chhattisgarh. During the early stage, various techniques were employed for the purpose of carrying out geophysical survey, the assessee entered into agreement with M/s.Fugro Elbocon B.V. Netherlands, who had a team of experts specialised in air borne 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 .....

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hnical services constitute income by way of fees for technical services, it is taxable. However, Article 12 of the aforesaid India-Netherlands Treaty defines fees for technical services for the purpose of Article 12 which deals with royalties and fees for technical 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 .....

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definition of fees for technical services contained in the agreement overrides the statutory provisions contained in the Act. In fact, the latest agreement between India and Singapore further clarifies this position, where they have explained the meaning of the word 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, experi .....

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es or payments for the use of equipment 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, then as from the date on which the relevant Indian Convention or Agreement enters into force the same 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 wo .....

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edge, experience, skill, know how or processes. To attract the tax liability, that technical knowledge, experience, skill, know how or process which is used by service provider to render technical service should also be made available to the recipient of the services, 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 mak .....

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der, it does not follow that he is making use of the technology which the service provider utilises for rendering technical services. The crux of the matter is after rendering of such technical services by the service provider, whether the recipient is enabled to use 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 Cla .....

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with respect to taxes on income and on capital, the undersigned have agreed that the following shall form an integral part of the Convention : With reference to Articles 10, 11 and 12 : In respect of Articles 10 (Dividends), 11 (Interest) and 12 (Royalties and fees 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 servic .....

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x some elements of the income. An MFN clause can direct more favourable treatment available in other treaties only in regard to the same subject matter, the same category of matter or the same clause of the matter. The protocol attached to the treaty take care of a situation 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 .....

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under : 11.1 It is settled position in law that protocol is an indispensable part of the treaty with the same binding force as the main clauses therein, as protocol is an integral part of the treaty and its binding force is equal to that of the principal treaty. The 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 .....

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from UK and payments were made to foreign party for installation and commissioning of the machines. The foreign party did not have any PE in India to which such income could be attributed. In this view of the matter it was held that the payments made to foreign party 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 .....

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ishable on facts, hence, are not applicable to the facts of the assessee s case. 11.3 It is also worthwhile to refer to the ruling given in the case of Authority for Advanced Ruling (AAA) in the case of Poonavala Aviations reported in 343 ITR 381 though it is having 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 .....

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the observations of the Supreme Court in Union of India vs. Azadi Bachao Andolan (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC) at p. 751 that "An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief, is that treaties are negotiated and entered into at a political level and have several considerations as their bases". So the argument of the Revenue that the protocol cannot be r .....

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