TMI Blog2018 (8) TMI 1264X X X X Extracts X X X X X X X X Extracts X X X X ..... The MOU and the narrow definition given to 'included services' takes the services availed by the appellant herein, out of the 'included services' as per the DTAA. The non-resident Company only assists the Indian Company in making the correct decisions on such aspects as is specifically referred to in the agreement, as and when such advise is required. There is no transfer of technology or know-how, even on managerial, financial, legal or risk management aspects; which would be available for the Indian Company to be applied without the hands-on advise offered by the US Company. The advise offered on such aspects would have to be on a factual basis with respect to the problems arising at various points of time and there cannot be found any transfer of technical or other know-how to the Indian Company. The remuneration received by the US Company for the services offered to the Indian Company being not a technical or consultancy service as defined under the DTAA, would also not be a fee for included services. The remuneration so obtained by the US Company definitely being an income accruing within India would not, hence, be taxable in India under the DTAA. - Consequently no TDS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the payments made by the appellant to a company situated in the United States of America (USA) for providing specifically management, financial, legal, public relations, treasury and risk management service. The Assessing Officer [AO] found the same to be income deemed to accrue or arise in India with respect to a non-resident as provided for under Sections 5(2) and 9(1)(vii) of the Income Tax Act, 1961 [for brevity IT Act ]. The assessee, before the AO, claimed that under the Double Taxation Avoidance Agreement [for brevity DTAA ] entered into between the Government of the USA and Government of India, the non-resident was not liable to tax and consequently the appellant was not liable to deduct tax at source under Section 195(1) of the IT Act. The AO did not refer to the DTAA; but, however, relied on Wallace Pharmaceutitals P. Ltd. In re [(2005) 148 Taxman 347 (AAR-New Delhi), a ruling of the Authority for Advance Rulings (Income-tax). The AO hence disallowed the amounts claimed as expenditure under Section 40(a)(ia) of the IT Act. Identical facts arise in the appeals; but, however, in I.T.A.38 of 2014 there was a disallowance made of the expenditure, while in the othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecognized under the Income Tax Act and by sub section (2) the provisions of the Income Tax Act would apply only to the extend that they are more beneficial to the assessee. In the context of the specific services availed of by the Indian Company and the exemption provided under the DTAA such provisions have an overriding effect being more beneficial to the assessee. It cannot at all be said that the taxation provisions of the Act are in favour or more beneficial to the assessee as against the DTAA which exempts any taxation of the income generated from such services. The Tribunal having looked into the DTAA as also the MOU chose to rely on the Karnataka decision which did not consider the DTAA. The learned counsel would assert that specific services availed of by the Indian Company does not come under the fee for Included services especially when the same has been taken away by the MOU entered into between the two Governments under the DTAA. 6. We have heard learned Senior Counsel for Government of India (Taxes) Sri.P.K.R.Menon and learned Standing Counsel for Government of India (Taxes) Sri.Christopher Abraham; appearing for the Revenue. It is the submission of the Revenue th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head Salaries . There can also be no dispute as per the extracted Explanation that the services offered by the US Company to the Indian Company comes under the said definition. The services offered, as is seen from the terms of the agreement which are specifically termed by the first appellate authority as 'technical and consultancy services', are (i) management decision making, (ii) financial decision making, (iii) legal matters and public relation activities, (iv) treasury services and (v) risk management services. Read with the Explanation, this definitely would come within the ambit of 'technical and consultancy services' as defined under the Act. The first appellate authority has also relied on Continental Construction Ltd. v. CIT [(1992) 1954 ITR 81], CBDT v. Oberoi Hotels India (P) Ltd. [(1998) 97 Taxman 453] and Dean, Goa Medical Coll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed services'. We are not concerned with 'royalties' and only with 'fees for included services'. 10. As per Clause 1 of Article 12, fees for included service arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State, again indicating that the taxation has to be in accordance with the American laws. Clause 2, however, provides that fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State, subject only to the condition that if recipient of the charge (fees) is a resident of the other Contracting State, the tax so charged shall be a particular percentage for five years and then a different percentage for the following subsequent years. Hence, when there is a fees for included services, generated within India for services rendered by a Company situated in the US, not having a permanent establishment in India, the taxation is permitted by both States. The tax levied under the US laws for the business profits so received by the US Company will not at all be affected. However, with respect to the taxation within India, it is levied at a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-clause (b) of Article 12(4), which speaks of technical knowledge, experience, skill, know-how, or processes, or consist of development and transfer of a technical plan or technical design. The same has to be read along with the MOU which has been entered into on May 15, 1989 and is a part of the notified DTAA. 13. In the MOU, paragraph 4(a) (herein above termed clause) of DTAA was clarified and agreed to be understood in order for a service fee to be considered ancillary and subsidiary to the application or enjoyment of the right, property, or information; only with respect to a service related directly to such application or enjoyment. The predominant nature of the arrangement should be the application or enjoyment of the right, property or information described in paragraph 3. It was also agreed that the question as to whether such services is related to the application or enjoyment would be determined by reference to the facts and circumstances of each case. Paragraph 4(b) was agreed to be narrower than the category described in paragraph 4(a), since it excludes any service that does not make technology available to the person acquiring this service. Technology would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, when a vegetable oil manufacturing firm having mastered the process of manufacturing cholesterol-free oil, hired an American marketing company to advise it on marketing strategies, the same would be taken out of the 'included services' and any remuneration received would have to be relieved of taxation under the IT Act. 16. We have to look at the Andhra Pradesh and Karnataka decisions with the above understanding of the DTAA and MOU in our mind. GVK Industries Ltd. v. ITO [(2015) 371 ITR 453 (SC)] was a case in which the Indian Company, formed for generation and sale of electricity, entered into an agreement with a Company at Zurich, Switzerland for help in raising finance. On the basis of the non-resident Company's advise regarding processing of loans, the Indian Company obtained finances, both from India and from a foreign institution. The question was whether the success fee paid to the non-resident Company on the finances being successfully obtained as per the advise of the non-resident Company was taxable in India. The Division Bench of the Andhra Pradesh High Court, looking at the various decisions of the Hon'ble Supreme Court interpreting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tegy relating to management, finance, legal, public relations or risk management transferred to the appellant. The services promised by the non-resident Company is only advise on such aspects as are specifically referred to in the agreement. The non-resident Company only assists the Indian Company in making the correct decisions on such aspects as is specifically referred to in the agreement, as and when such advise is required. There is no transfer of technology or know-how, even on managerial, financial, legal or risk management aspects; which would be available for the Indian Company to be applied without the hands-on advise offered by the US Company. The advise offered on such aspects would have to be on a factual basis with respect to the problems arising at various points of time and there cannot be found any transfer of technical or other know-how to the Indian Company. 19. Particularly under the DTAA, we are of the opinion that none of these aspects on which the US Company has promised advise to the Indian Company would fall under the 'included services' and the 'fees for included services' would not be taxable in India as per the DTAA. As we noticed, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduct it at source and the non-compliance of the provisions of Section 195(1) of the IT Act cannot be alleged against the appellant for reason of such obligation not existing in law. The questions of law raised as (i) and (ii) are answered against the Revenue and in favour of the assessee. 21. We have already held that the services offered by the US Company would not come under the definition of 'included services' as available under the DTAA and as a consequence, the remuneration received by the US Company would not be 'fees for included services'. We have to find that the interpretation of the provisions of the DTAA between the Governments of India and USA have not been correctly carried out by the Tribunal. We, hence, set aside the orders of the lower authorities answering the questions of law (iii) and (iv) against the Revenue and in favour of the assessee. In view of the answers already given by us, we are of the opinion that questions of law raised at (v) and (vi) need not be answered. In I.T.A.No.38 of 2014, the orders are set aside and the AO is directed to consider the claim of expenditure afresh without looking at the application of Section 195(1), whi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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