TMI Blog2017 (12) TMI 299X X X X Extracts X X X X X X X X Extracts X X X X ..... available technical knowledge, experience or skill that the sum in question can be taxed in the hands of the Assessee. There is no evidence brought on record to show that the technical skill, knowledge etc., were made available to TIL by the Assessee. At best the sum in question is taxable only in the hands of the persons who provided the services to TIL and not in the hands of the Assessee. The Transfer Pricing Officer scrutinized the details of reimbursements while examining the international transaction of reimbursement by TIL to the Assessee u/s.92 of the Act and found that the Assessee made no profit on such reimbursements and that the reimbursements were at Arm’s Length. All these circumstances are sufficient to conclude that the order of the CIT(A) on this issue has to be upheld. - Decided in favour of assessee. - I.T.A Nos. 387 & 398/Kol/2010, C.O.Nos.32 & 31/Kol/2010, I.T.A Nos. 387 & 398/Kol/2010, I.T.A No. 2139/Kol/2013, I.T.A No. 1268/Kol/2014 And I.T.A Nos. 2140 & 2141/Kol/2013 - - - Dated:- 29-11-2017 - Sri N. V. Vasudevan, JM And Shri M.Balaganesh AM For The Department : Shri N.B.Som, Addl. CIT, Sr.DR For the Assessee : Shri Ravi Sharma, AR ORDER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cross the globe perform many functions for their counterparts in the other country in order to manage, supervise, guide, co-ordinate the activities of the group entities. These activities are referred to as intra group services, which are performed by the parent company for their group companies or vice versa. These services may also be performed by any one of the group companies for its fellow group company. These services are referred to as Home Office Allocation receipts in the order of assessment and the submissions made by the Assessee before the revenue authorities as well as the Tribunal. Such services rendered to group companies are generally referred to as Intra Group Services (IGS). 4. On 2nd Aug., 2000, the Assessee entered into an agreement with TIL, pursuant to which the Assessee agreed to render various services to TIL in USA and no part of the same was to be rendered in India. It was also agreed between the parties that the compensation payable by TIL to the Assessee for the services would cover only the cost actually incurred by the Assessee and that no profit element or mark-up on the cost would be added to it. Article 1.1 of the said Agreement describes the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nagement for Deere Co., Customer Engineering Industrial, S M Assistance, Evaluation of Manufacturing Processes, process development and capital planning, consulting on facilities issue engineering, Services related to tooling metrology, tool design, Detail tool design, quality direction and support, EM-Management GWR, Global Management of Computer infrastructure, Corporate help desk services, Global Voice communication support, global Data Telecom support, Global telecom support wireless, information security policies monitoring and control, Data Warehouse loads and support, E-Business training and support, general HRPC admin services, compensation planning, expatriate and admin, Performance Management and management development, Purchasing support of direct materials, finding/developing global sources, others like communications, develop strategy BP, Marketing, Marketing communications, Metallurgical services. All these services have been grouped as Business Strategy Development and Business Strategy Development special projects at Page-6 of Annexure-1. These expenses are on account of services provided by Centralised Unit which are initially borne by Centralized Unit. The s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f profits under ss. 28 to 43C of the Act should be read in s. 44AC. It was the plea of the Assessee that similar option should be read into the provisions of Sec.44D of the Act r/w Sec.115A of the Act. If it is so read, then on admitted facts that there was no element of mark up in the charges paid by TIL to the Assessee, there would be no income and there would be no obligation to deduct tax at source by TIL. 7. The AAR in its ruling on the above questions reported as Timken India Ltd. In Re 273 ITR 67 (Authority for Advance Ruling) took the view that the principle laid down by the Hon ble Supreme Court in the case of A.Sanyasi Rao (supra) in interpreting s. 44AC cannot be called in aid in interpreting s. 44D. The AAR pointed out that the Hon ble Supreme Court itself observed in regard to s. 44D, among other sections that they relate to a non-resident carrying on business in India and are not much relevant in construing ss. 44AC and 206C of the Act and therefore, it would be futile to contend that interpretation placed on ss. 44AC and 206C would equally apply to s. 44D of the Act. Before the AAR the Assessee had placed reliance on the decision of the ITAT Mumbai in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 863 to tax by following the ruling of the AAR referred to earlier in the case of TIL. The following were the relevant observations of the AO in this regard: 4.1. So far as Reimbursement of Cost of Services provided to Timken-India is concerned, the said issue is covered by the decision of the Hon ble Authority for Advance ruling in the assessee s own case reported in 273 ITR 67 relating to AY 2002-03. Ld. Authority ruled, .... sum received by Tunken-USA from the applicant (sic Timken-India) as consideration for services rendered in the USA in pursuance of the Agreement dated August 2, 2000 would be subject to tax in India , having regard to Article 12 of the Indo-US Treaty. While deciding the issue, Ld. Authority observed that Sanyasi Rao s case, 219 ITR 330(SC), will not apply in the facts of the present case. Therefore, respectfully following the above. Ruling, sum of money received for so called reimbursement of services provided is also charged to tax in India as per Article 12 of the Treaty. 11. Before CIT(A) the Assessee reiterated its submission that the sum in question is reimbursement of actual cost incurred by the Assessee to provide service to TIL and there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore, they are chargeable to tax as per article 12 of the tax Treaty VT between India and USA. Further, the appellant has not substantiated its claim that the above payments were merely reimbursement of expenses incurred by it. I have also carefully agreement the appellant has entered into with the TIMKEN India. It has listed the following services to be rendered by the appellant as detailed below:- (vii) Management services (viii) Management Information Services - such as Information Resources, Systems Development Computer Usage, Communication Services, Engineering . Services, Crosses and Tool design services, Manufacturing Services, Capital Planning and Inventory Management Services,Mettallurgical Services, RGI, Quality Assurance Services, Damage and Failure Analysis, Marketing Sales and Customer Services, Advertising Services, Human Resource Services, Procurement Services Benefits and perol Administration, Finance and Accounting Services, Tax Services and Legal Services. As well as any materials related any of these functions which are necessary. As can be seen from the above, all the above services are mainly coming under the cat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om activities described in paragraph 2(c) or 3 or Article 8. ( 4) For the purposes of this article fees for included services means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provisions of services of technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in para 3 is received; or (b) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. 15. A plain reading of the above clause makes it clear that only such technical and consultancy services are covered by Article 12(4) as either (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information referred to in Article 12(3), or (b) make available technical knowledge, experience, skill know-how etc. It is not even Revenue s case before us that the assessee s case has anything to do with Article 12(3). The case of the Revenue therefore hinges on the applicab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal information about the same in the sense that it requires that the services should result in making available to the user technical knowledge, experience, skill, etc. Thus, the normal, plain and grammatical meaning of the language employed is that a mere rendering of services is not roped in unless the person utilizing the services is able to make use of the technical knowledge, etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill etc. must remain with the person utilizing the services even after the rendering of the services has come to an end. A transmission of the technical knowledge, experience, skill, etc. from the person rendering services to the person utilizing the same is contemplated by the article. Some sort of durability or permanency of the result of the rendering services is envisaged which will remain at the disposal of the person utilizing the services. The fruits of the services should remain available to the person utilizing the services in some concrete shape such as technical knowledge, experience skill etc. 17. In the Raymond s case (supra), th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red to the Indian company through the service contract is commercial information. The fact that technical skills were required by the performer of the service in order to perform the commercial information does not make the service a technical service within meaning of para (4)(b). This example, set out in the MOU between the Indian and US governments, also makes it clear that consideration for advisory services rendered cannot be treated as fees for included services under Article 12(4)(b). 19. The learned DR placed reliance on a decision of the ITAT Cochin Bench in the case of US Technology Research Pvt.Ltd. v. ACIT 61 SOT 19 (Cochin). We have perused the said decision and find that in para-37 of the order, the Tribunal has found as a fact that technology or technique was made available to the recipient. On the facts of the present case, there is no material on record to show that technology was made available and TIL was permitted to apply the technology in the sense that the fruits of the services remained available to TIL in some concrete shape such as technical knowledge, experience skill etc. The learned DR also made submissions that some of the services were rendere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a High Court has not attained finality and further no such examination regarding absence of mark up on the charges levied by the Assessee on TIL has been undertaken by the revenue authorities. We are of the view that this plea of the AR is only academic, in view of our conclusion in paragraph 20 that the receipt in question is not FTS and cannot be charged to tax in the hands of the Assessee. Nevertheless, we are of the view that it would be just and appropriate to direct the AO to examine the claim of the Assessee in this regard and if the claim of the Assessee is found to be correct, then the receipt in question cannot be taxed as FTS. We hold and direct accordingly. Thus the relevant grounds of Cross objections by the Assessee are allowed. The conclusions in para-20 21 would hold good for AY 2003-04 also as the facts and circumstances are similar. The nature of services rendered for which TIL paid Assessee the sums in question for AY 2003-04 is given as Annexure-2 (Pages 1 to 7). 22. Now we shall deal with the grounds raised by the revenue in its appeals viz., challenging the correctness of the order of CIT(A) deleting the addition of ₹ 87,65,928 in AY 2002-03 a sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessee on behalf of TIL. The nature of expenses incurred in AY 2003-04 is also identical. 24. In the return of income filed for AY 2002-03, the Assessee in Note-3 highlighted that the sum of ₹ 87,65,928 was reimbursements and therefore not chargeable to tax, as follows: 3. The Company has received reimbursements from Timken India Limited (TIL) on account of certain services rendered to TIL by some third parties for which the company has acted only as a conduit. The amount received/receivable from TIL was only reimbursements and without any mark up on the amounts charged by such third parties. Such reimbursements, without having any element of income is not taxable in India. 25. The AO was not satisfied with the aforesaid claim of the Assessee. He observed that expenses claimed as reimbursement included Legal expenses, Inspection Survey Exp., and airfare, local conveyance, fooding lodging charges etc. incurred on behalf of employees of TIL who went abroad to attend various Workshop or Seminars, Business Meetings, Training Courses imparted / conducted by the Assessee or its associated enterprises. He was of the view that the fees received for imparting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and found that the Assessee made no profit on such reimbursements and that the reimbursements were at Arm s Length. 27. The CIT(A) agreed with the submissions of the Assessee. He found from scrutiny of the evidence filed by the Assessee that the reimbursement of expenses were in the nature of commission charges, mobile expenses, Airlines Tickets, VISA CHARGES, Hotel expenses, Apartment rental etc. He held that the above sums were clearly re imbursements and therefore do not contain the profit element. He also observed that the AO in AY 2004-05 has treated them as reimbursement and not subjected them to tax. The CIT(A) held that the expenses claimed as reimbursement of actual expenses of ₹ 8765928/- and Rs.l,65,07,4001 for AY 2002-03 2003-04 cannot be categorized as technical services or any other services rendered for the purpose of making profit. Accordingly, he held that taxing them was not justified. The A.O. was directed to delete the addition of ₹ 87,65,928/- and Rs..1,65,07,400/- for the assessment Years 2002- 03 and 2003-04 respectively. 28. Aggrieved by the order of the CIT(A), the Revenue is in appeal before the Tribunal. The learned DR made submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Revenue. A perusal of the details in Annexure-3 4 to this order would go to show that it was third parties who had rendered services to TIL. The actuals billed by the third parties were paid by the Assessee in USA and were later on reimbursed by TIL to the Assessee in India. We are of the view that there is no basis for the AO to conclude that the payment of reimbursements were in the nature of FTS. As rightly contended on behalf of the Assessee, the Assessee was not the ultimate beneficiary of the sum in question nor did it render any service to TIL. There is no basis on which the AO came to the conclusion that the sum in question was FTS in the hands of the Assessee. Even assuming that the sum in question is in the nature of FTS, under Article 12(4)(b) of the DTAA it is only when technical or consultancy services rendered by the Assessee makes available technical knowledge, experience or skill that the sum in question can be taxed in the hands of the Assessee. There is no evidence brought on record to show that the technical skill, knowledge etc., were made available to TIL by the Assessee. At best the sum in question is taxable only in the hands of the persons who provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endered agreement dated 2.8.2000. We have elaborately discussed the nature of these services while deciding identical issue in AY 2002-03 2003-04. The services rendered by the Assessee through its centralized units are referred to as Home Office Allocation receipts in the order of assessment and the submissions made by the Assessee before the revenue authorities as well as the Tribunal. Such services rendered to group companies are generally referred to as Intra Group Services (IGS). 36. The nature of the services rendered by the Assessee to TIL are set out in the annexures to this order as follows: For AY 2004-05 For AY 2004-05 the Assessee disclosed receipts from TIL of only ₹ 1,90,23,485 and this the actual services provided by Assessee to TIL as per Annexure-5. The AO noticed that in Form 3CEB a figure of ₹ 2,25,29,278 was reflected as payment received from TIL. The differential figure of ₹ 35,06,243 (2,25,29,278 1,90,23,485) as payment made to Timken France. A TDS certificate reflecting turnover of ₹ 34,92,626 was furnished. The cost of services received by the Assessee was therefore taken by the AO at ₹ 2,25,29,728 as reflected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived payments from TIL on account of certain services rendered to TIL by some third parties for which the Assessee made payments and which TIL reimbursed to the Assessee. It is the plea of the Assessee that it acted only as a conduit and derived no income from such reimbursements which were at actual with no profit element. The plea of the Assessee was that the amount received/receivable from TIL was only reimbursements, without having any element of income is not taxable in India. The sum so received/receivable by the Assessee from TIL are referred to as Charge Back Receipts in the orders of the revenue authorities as well as the submissions made before the Tribunal. 39. As mentioned earlier these expenses are for the services that are provided by various third parties who rise invoice on the Assessee directly. The same are charged back to back by the Assessee to the service recipients including TIL. The kind of services that are availed by TIL inter alia, includes Legal, Inspection and survey, Global Cargo Insurance, Internet usage, courier, vehicle leasing and rental, usage of various application software, travelling etc. The nature of expenses in all these AYs 2004-05 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin the holistic framework of the Service Agreements, The items shown above are also not in the nature of day to day expenses as claimed by the Authorised Representative, Again, such receipts are covered within the ambit of Fee for Included Services as per Article 12 of the DTAA between India and USA, From the standpoint of taxability, such receipts as listed in Table II shown under the description Chargeback stands on the same footing as home office allocation .Therefore out of the total amount of R.s. 3,087,811. ₹ 1.37.0187 is held to be taxable as Included Services . 42. On appeal by the Assessee, the CIT(A) confirmed the order of the AO except for the sum of ₹ 75,923 which is the last item in the chart given in the earlier paragraph towards training expenses as he found that it was cost of printing study material provided training of employees of TIL in USA. The relevant observations of the CIT(A) are contained in para25 to 40 of his order. 43. We have perused the orders of the revenue authorities on this issue. The AO has not given any basis as to how and why the sum of ₹ 13,70,187 is considered as part of Home office expenses relatable to Ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presented services given by the appellant directly under service agreement dated 02-08-2000 to TIL. 24. In the facts and circumstances the taxability in the hands of appellant needs to be examined based on taxability of such receipts in hands of ultimate recipient/service provider. The Assessing Officer has failed to consider the taxability of each item of receipts in India under the Income Tax Act or under the provisions of Treaty (DTAA) and has considered the specified receipts as taxable as fees for technical services generally. Hence, taxability of each of the items is to be examined specifically. 44. From the above observations of the CIT(A) it is clear that the Assessee is not the recipient of the sums in question and it was only a conduit for payment by TIL to a third party service provider. In such circumstances, we fail to see how it can be charged to tax in the hands of the Assessee. In this regard in Ground No.2 of the grounds of appeal the Assessee has specifically challenged the action of the CIT(A) in taxing the sum in question in the hands of the Assessee and that taxability of the said sum should be considered only in the hands of the service provider. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xable as Included Services . 46. On appeal by the Assessee, the CIT(A) confirmed the order of the AO. The relevant observations of the CIT(A) are contained in para 4.3 to 4.8 of his order. 47. We have perused the orders of the revenue authorities on this issue. The AO has not given any basis as to how and why the sum of ₹ 5,55,405 is considered as part of Home office expenses relatable to Agreement dated 2.8.2000. In this regard the AO has not given any opportunity of being heard to the Assessee and this ground of appeal of the Assessee before CIT(A) is not found by the CIT(A) to be wrong or incorrect. The CIT(A) agrees that this item of expenses are not part of the payments under the service agreement dated 2.8.2000. The following observations of the CIT(A) are relevant in this regard: 4.3. In the facts and circumstances of the case, the taxability in the hands of appellant needs to be examined based on taxability of such receipts in hands of ultimate recipient/service provider. The Assessing Officer has failed to consider the taxability of each item of receipts in India under the Income Tax Act or under the provisions of Treaty (DTAA) and has considered the spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Training Expenses 2,70,131 Total 75,48,825 Items as noted above are such that they indicate that some services were rendered by Timken USA to Timken India within the holistic framework of the Service Agreements, The items shown above are also not in the nature of day to day expenses as claimed by the Authorised Representative, Again, such receipts are covered within the ambit of Fee for Included Services as per Article 12 of the DTAA between India and USA, From the standpoint of taxability, such receipts as listed in Table II shown under the description Chargeback stands on the same footing as home office allocation .Therefore out of the total amount of R.s. 16,046,673//- ₹ 75,48,825/- is held to be taxable as Included Services . 50. On appeal by the Assessee, the CIT(A) confirmed the order of the AO to the extent of ₹ 2,50,287. The relevant observations of the CIT(A) are contained in para 18 to 39 of his order. 51. We have perused the orders of the revenue authorities on this issue. The AO has not given any basis as to how and why the sum of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as fees for technical services generally. Hence, taxability of each of the items is to be examined specifically. 52. From the above observations of the CIT(A) it is clear that the Assessee is not the recipient of the sums in question and it was only a conduit for payment by TIL to a third party service provider. In such circumstances, we fail to see how it can be charged to tax in the hands of the Assessee. In this regard in Ground No.2.0 of the grounds of appeal the Assessee has specifically challenged the action of the CIT(A) in taxing the sum in question in the hands of the Assessee and that taxability of the said sum should be considered only in the hands of the service provider. We agree with the submission of the Assessee and are of the view that on this short ground the addition sustained by the CIT(A) should be deleted and the same is hereby deleted. In view of the aforesaid conclusion, we are of the view that there is no need to look into the description of the service and find out whether it is in the nature of FTS or not and as to whether it would be taxable under DTAA or not and also the effect of the ruling of the AAR in the case of Timken India Ltd (supra) which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total 27090862 Items as noted above are such that they indicate that some services were rendered by Timken USA to Timken India within the holistic framework of the Service Agreements, The items shown above are also not in the nature of day to day expenses as claimed by the Authorised Representative, Again, such receipts are covered within the ambit of Fee for Included Services as per Article 12 of the DTAA between India and USA, From the standpoint of taxability, such receipts as listed in Table II shown under the description Chargeback stands on the same footing as home office allocation .Therefore out of the total amount of R.s. 42317937/-, ₹ 24268627/- is held to be taxable as Included Service. 54. On appeal by the Assessee, the CIT(A) confirmed the order of the AO partially to the extent of ₹ 1,23,90,515 and another sum of ₹ 5,14,705. The relevant observations of the CIT(A) are contained in para 16 to 79 of his order. 55. We have perused the orders of the revenue authorities on this issue. The AO has not given any basis as to how and why the sum of ₹ 2,42,68,627 is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nical services generally. Hence, taxability of each of the items is to be examined specifically. 56. From the above observations of the CIT(A) it is clear that the Assessee is not the recipient of the sums in question and it was only a conduit for payment by TIL to a third party service provider. In such circumstances, we fail to see how it can be charged to tax in the hands of the Assessee. In this regard in Ground No.2.1 of the grounds of appeal the Assessee has specifically challenged the action of the CIT(A) in taxing the sum in question in the hands of the Assessee and that taxability of the said sum should be considered only in the hands of the service provider. We agree with the submission of the Assessee and are of the view that on this short ground the addition sustained by the CIT(A) should be deleted and the same is hereby deleted. In view of the aforesaid conclusion, we are of the view that there is no need to look into the description of the service and find out whether it is in the nature of FTS or not and as to whether it would be taxable under DTAA or not and also the effect of the ruling of the AAR in the case of Timken India Ltd (supra) which was overruled by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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