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The Dy. Director of Income Tax, (IT) – II, Pune. Versus Tata Technologies Limited

2016 (5) TMI 167 - ITAT PUNE

TDS u/s 195 - remittance towards ‘group cost recharge’ to its associated enterprise(AE) in Singapore was liable to TDS withholding tax - ‘make available’ - provisions made under the DTAA prevaling over the general provision contained in the Income-tax Act - Held that:- The impugned services rendered by INCAT group companies for which the payment was collected by Singapore entity through cost recharge mechanism is not assessable as ‘fee for technical services’ under Article 12 of India – Singapor .....

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n of services which ‘make available’ to technical knowledge, etc.. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver of service so that the receiver can deploy the similar technology or techniques in future without depending upon the provider. Therefore, the assessee stands exonerated from its obligation to deduct withholding tax in view of non-application of Article 12 of the beneficial provisions of DTAA.

The Hon’ble Supreme Court .....

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essee. Therefore, we find that the assessee was not under any legal obligation to deduct withholding tax on the impugned remittance. Therefore, we decline to interfere with the order of the CIT(A) and dismiss the appeal of the Revenue. - Decided in favour of assessee - ITA No.1171/PN/2013 - Dated:- 30-3-2016 - MS. SUSHMA CHOWLA, JM AND SHRI PRADIP KUMAR KEDIA, AM For The Appellant by : Shri (Dr.) Dheeraj K. Jain For The Respondent : Shri Naresh Kumar ORDER PER PRADIP KUMAR KEDIA, AM : The captio .....

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pore, is for availing of the managerial or consultancy services, when in fact, as it is seen from the nature of services received, the assessee had made payment to TTPL for availing consultancy or technical services. 2. On the facts and circumstances of the case, the Ld. CIT(A) has erred in concluding that TTPL, Singapore entity has worked as an agent for all other service provider entities, when in fact, the cost is also incurred by TTPL for providing services to TTL. 3. On the facts and circum .....

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without recourse to the service provider. 4. On the facts and circumstances of the case and the law, the Ld. CIT(A) has erred in concluding that the term make available means to supplying or transferring of technical knowledge or technology to another. 5. On the facts and circumstances of this case, the Ld. CIT(A) was not correct in holding that the assessee has not acquired any technical inputs for its own from TTPL, when in fact, the assessee does acquire the technical inputs during the servi .....

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issue involved are that the assessee company is part of the Global professional services group engaged in providing engineering and design services, product life cycle management, and enterprise solution and plant automation. The Assessee co. as a part of INCAT entities entered into a cost recharge mechanism with a view to share the group costs attributable to it as per Group Cost Recharge Agreement . Singapore entity namely Tata Technologies Pte Ltd. (TTPL) acts as conduit for allocation of gro .....

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to non resident company a sum of ₹ 1,04,24,399/- towards group cost recharge ought to have deducted tax at source at appropriate rate. The Assessing Officer was of the view that the above amount was incurred for availing technical services and the assessee should have deducted tax @ 10% being payment made as fee for technical services (FTS) amounting to ₹ 10,42,439/-. For default in non deduction of tax and payment thereof to the credit of Indian Government, he also levied interest u .....

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ll; INCAT GmbH, Germany 4.2 As a part of the arrangement, costs incurred in providing services (group costs) are pooled in by the TTPL-Singapore in its hands. Thereafter, each group entity is allocated its share of cost required to be paid to TTPL for availing group services. The assessee has also charged the Singapore Company for the services rendered by it to the group. Likewise, it also paid for the services availed from the group companies (INCAT entities) to TTPL. This amount paid by the as .....

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es availed has already been remitted by the Assessee co. prior to application under S. 195(2) of the Act. Accordingly, he refused to examine the belated request of the Assessee in this regard. 4.4 Thereafter, the Assessing Officer embarked upon the proceedings under S. 201 / 201(1A) and passed an elaborate order holding the Assessee in default for breach of S. 195 which is subject matter of present appeal. The AO in the impugned order came to the conclusion that the payment made by the assessee .....

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al or consultancy services etc. to fall within the scope of Article 12 for the taxability under the DTAA. 4.5 The assessee inter alia made out a case before the Assessing Officer that the group costs incurred by the INCAT entities were to be merely reimbursed by the assessee according to the agreement. The nature of the group cost areas broadly comprises of :- Nature of Cost Includes costs incurred on Marketing and business development costs Global Contract Negotiations Global Brand building act .....

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tters. Quality initiatives costs Global quality policies. Finance and treasury management costs Global treasury management. Global fund management. Global contract monitoring. 4.6 The assessee also explained the nature of the services received by it for each of the costs enumerated as under :- • Marketing and business development services. Promotion of the business of TIL inter alia, public relations, marketing, customer identification, contract making calls to Clients and prospective Clien .....

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s support and account handling services TIL. • IT infrastructure and support services. Services in relation to maintaining of INCAT Global web site. INCAT.com web site and Networks and managing of general IT projects and systems. • Global HR Support services Assistance and advice relating of issue arising in connection with temporary and permanent transfer of personnel and global polices applicable thereto. • Legal and Company secretarial services. Company secretarial services, le .....

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ing and credit management, sureties, assumption of guaranties, bank reporting and project financing. 4.7 The assessee (TTL) contended before the AO (TDS) that firstly Singapore entity (TTPL) has merely pooled the group costs to be recharged to the INCAT entities based on certain key ratios and has merely recharged and allocated the costs to the respective entities availing benefits of such costs as per Group Cost Recharge Agreement without any mark-up thereon. Secondly, TTPL has not rendered any .....

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ia from any business connection in India. 4.8 Having explained the modus operandi as broadly noted above, the assessee submitted before the Assessing Officer that all the group companies including the assessee were benefited by the costs so incurred by an entity at the group level for which the expenses have been shared by respective INCAT entities without any mark-up. Thus, share of group costs so incurred were reimbursed to TTPL, Singapore at cost without any mark-up. TTPL has merely pooled th .....

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the Act (other than Salaries ), is under obligation to withhold income-tax thereon at the rates in force, at the time of credit of income to the account of the payee or at the time of payment thereof by any mode, whichever is earlier and pay the same into the Government Treasury within stipulated time limit. Accordingly, the obligation to withhold taxes on payments made to a non-resident/ foreign co. arises under S. 195 only if the payments are chargeable to tax under the Act. It was the case o .....

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required to be determined in accordance with the provisions of the Act or Double Tax Avoidance Agreement ( DTAA ) between India and relevant country whichever is more beneficial to the assessee. The assessee contended that provisions of tax treaty between India and Singapore being more beneficial to the assessee should be applied to determine its tax obligations. 4.10 In the context of applicability of DTAA, the assessee submitted that TTPL is a tax resident of Singapore and would accordingly b .....

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know-how or processes, which enables the person acquiring the services to apply the technology contained therein. It was submitted on behalf of the Assessee that the payment made by TTL to TTPL could possibly be in consideration for rendering managerial or consultancy services involving use of technical knowledge and skill. However, the services do not ipso facto make available any technical knowledge, experience, skill etc. per se so as to enable TTL India to apply the same. Hence, the payment .....

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n India under section 195 of the Act. TTL remitted USD 250,542 on 15th May, 2008 in terms of stipulations made under group cost recharge agreement. The Assessee supported its action that while remitting the impugned cost to TTPL, it obtained the necessary certificate in prescribed form from a chartered accountant. 4.11 However, the Assessing Officer was not impressed with the submissions of the assessee that it is a case of mere reimbursement of expenses. The Assessing Officer observed that reim .....

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expression make available heavily relied upon by the assessee with reference to Article 12 of India - Singapore DTTA. The Assessing Officer addressed the argument of the assessee that payment can be termed as fee for technical services as per beneficial provisions of DTAA only when the payment are in consideration of rendering managerial, technical or consultancy services and more importantly such services make available technical knowledge, skill, processes, etc. which enables the person so ava .....

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to apply the technology and it does not concern transfer of the technology. 4.13 The AO accordingly brushed aside various contentions of the assessee and observed that payment towards group cost recharge has been made to Singapore company for availing services of technical, managerial nature etc. for which Assessee was liable for deducting or withholding the tax in terms of section 195 of the Act having regard to the provisions of the Act read with treaty. As a result, the AO came a conclusion t .....

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tion can use the provisions of the Income-tax Act or DTAA, whichever is more beneficial to it. The CIT(A) concluded that in terms of the provisions of the DTAA, the impugned payment to Singapore entity does not fall within the definition of fee for technical services as provided under Article 12 of treaty, which provision is more beneficial to the assessee. He accordingly came to the conclusion that the assessee is not required to withhold tax while making payment to Singapore entity under secti .....

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the context of treaty and contended that the Assessing Officer has rightly concluded that the expression make available as used in the India - Singapore entity merely signifies that a person acquiring the services should be enabled to apply the technology contained therein and transfer of technical knowledge, experience, skill, processes etc. involved in rendering such services is not mandated per se. He therefore submitted that assessee was under legal obligation to deduct and deposit withholdi .....

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miciled and tax resident of Singapore. The Ld. AR for the assessee reiterated the facts noted supra and adverted our attention to Group Cost Recharge Agreement entered into between Assessee co. and other INCAT entities for mutual benefit with a view to share group costs which is incurred by any of the group entity for the benefit of others. As per the agreement, the Singapore company acts a conduit who is authorised to recharge and allocate the group costs to other beneficiary entities forming p .....

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re reimbursed by TTPL at costs without any mark-up thereon and this cost is recovered from other beneficiary companies of the group. Thus, the remittance towards cost of services so allocated and attributable to the assessee comprises of actual costs alone with no element of profit thereon. Thus, in essence, Singapore Co.-TTPL has merely pooled the group costs to be recharged and allocated to various INCAT entities. In pursuance of the aforesaid arrangement, the TTPL raised invoice of USD 250,64 .....

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tc. per se so as to enable the assessee to apply the technology contained therein. Hence, the payment made under the Group recharge agreement would not qualify as FTS under the treaty. 8.3 The Ld. Authorized Representative for the assessee discredited the premise adopted by the Assessing Officer in understanding the meaning of expression make available with reference to general dictionary or other enactments and in resorting to Google search on the subject. He adverted our attention to the decis .....

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contended that the expression make available has been subjected to judicial scrutiny on various occasions. He relied upon the decision of the Co-ordinate Bench of the Tribunal in the case of Sandvik Australia Pty. Ltd. vs. DDIT (2013) 31 taxmann.com 256 (Pune - Trib.) to submit that payment in consideration would be regarded as fee for technical services only if twin tests of rendering services as well as making technical knowledge available at the same time is satisfied which it is not shown in .....

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of the impugned payments. He thus submitted that the provisions of DTAA would prevail over S. 9(1)(vii) of the Act concerning taxability of FTS. Article 12 governing scope and ambit of Fee for technical service does not include a situation where services were rendered without technical knowledge etc. being made available to the recipient of service. Therefore, the impugned remittance does not fall within the definition of fee for technical services under the beneficial treaty and as a corollary, .....

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namely TTPL towards group costs recharge for availing purported technical services. The assessee has made the remittance without deducting withholding tax contemplated @ 10% thereon as contemplated under Article 12 of DTAA read with S. 115A of the Act. In consequence, the Assessing Officer has declared the assessee as assessee in default under section 201(1)/201(1A) of the Act. 9.1 Without intending to repeat the facts already narrated above, the pertinent case of the assessee in short is that i .....

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a - Singapore treaty as the services obtained by the assessee do not come within the ambit of expression make available which is a sin qua non to bracket it within the ambit of FTS under treaty. The CIT(A) observed that under the normal provisions of the Income-tax Act, the services availed by the assessee are in the nature of managerial or consultancy services as per Explanation to section 9(1)(vii) of the Income-tax Act. Accordingly, the payment would be considered as taxable under section 9(1 .....

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, etc. which would enable the assessee acquiring the services to apply the technology contained therein. 9.2 We shall delineate the first plank of argument on behalf of the Assessee that the payment is in the nature of reimbursement and therefore not chargeable to tax. We find that the stand of the assessee that the payment to Singapore entity is merely in the nature of reimbursement of group costs allocated to it and other beneficiaries of services without any mark-up i.e. without any element o .....

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he basis of allocation which is qua the economic benefit of such expenses. The CIT(A) has also not disputed the case of the assessee that in reality no services were rendered by the Singapore company, which has merely acted as a conduit to recover group costs as an agent for all other services provider entities. The CIT(A) brushed aside this aspect of the argument of the assessee merely on the ground that the assessee has paid to the Singapore entity against certain services availed. The CIT(A) .....

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sement with service providers not making profits but merely recouping their costs though Singapore co. which remains uncontroverted, We are of the view that S. 195 is rendered a non starter and thus liability to deduct tax cannot be fastened on the payer Assessee. It would be pertinent to make reference to Section 195 here which casts obligation on the person responsible for making payment to nonresident / foreign entity to deduct income-tax on the amount of remittance provided such sum is charg .....

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decision in the case of CIT vs. Dunlop Rubber Co. Ltd. 10 Taxman 179 (Cal.) relied on behalf of the Assessee echoes similar view that mere sharing of expenses together with other entities would not give rise to any income per se in the hands of recipient. We also notice that Goa Bench of Hon ble Bombay High Court in the case of Sera Resources Ltd. vs. DCIT - Tax Appeal No.11 of 2016, order dated 07.03.2016 has restated the position of law that before effecting deduction at source one of the aspe .....

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various group entities towards group costs. As observed, the INCAT entities who have rendered group services and collected the same through Singapore company has not made any resultant profit against cost incurred and were merely reimbursed towards the cost albeit in a different proportion by various group entities based on parameters fixed in the group cost recharge agreement. On this premise, in the absence of its chargeability in the hands of recipients, We are of the view that section 195 of .....

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ICLE 12: ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. Royalties and 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 State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charg .....

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ins derived from the alienation of any such right, property or information; (b) any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in paragraph 4(b) or 4(c) of Article 8. 4. The term "fees for technical services" as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical o .....

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enable the person acquiring the service to apply the technology contained therein. For the purposes of (b) and (c) above, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person. 5. Notwithstanding paragraph 4, "fees for technical services" does not include payments: (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a) .....

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d in Article 14; (e) for services rendered in connection with an installation or structure used for the exploration or exploitation of natural resources referred to in paragraph 2(j) of Article 5; (g) for services referred to in paragraphs 4 and 5 of Article 5. 6. 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 roya .....

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cal services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, a statutory body or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, a .....

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in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement. [ Underline is ours] 10.2 Perusal of the Article 12(4)(b) inter alia would show that in view of the aforesaid exclusion provided, payment cannot be taxed as TTPL has not made available any technical knowl .....

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or transferring technical knowledge or technology to the recipient of service. Further, service recipient should be able to make use of technical knowledge, skill, etc. by himself in his business or for his own benefit without taking recourse to the performer of the services in future. Technical knowledge, experience, skill, etc. must remains with the person using the service even after rendering of services has come to an end. Such is not the case here. The assessee has admittedly not acquired .....

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