TMI Blog2019 (8) TMI 1264X X X X Extracts X X X X X X X X Extracts X X X X ..... inz, India Novel Define but services are coming while claiming the reimbursement. The approach of the assessee is that the services should not be considered as taxable contending that they are merely reimbursements and reimbursement cannot be taxed. But to come under the category of reimbursement of certain receipts of service, the same has to fulfill certain criteria for which the services have to be provided by the assessee to its affiliated companies. The assessing officer has observed that the services provided by the assessee are in the area of supply chain, human resources, strategic planning and marketing, finance and information systems under the agreement which is an admitted fact. Thus, services have been utilized by the Indian Company as well. The concept of make available requires that the fruits of the services should remain available to the service recipients in some concrete shape such as technical knowledge, experience, skills etc. which is met in the instant case as can be reflected from the nature and duration of the contract. The service recipient has to make use of such technical knowledge, skills etc. by himself in his business and for his own benefit. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and Royalty under the Act and Double Taxation Avoidance Agreement between India and USA ( DTAA ) 2. On the facts and in the circumstances of the case and in law, the Learned AO/ DRP erred in holding that the cost reimbursements of ₹ 1,88,54,358 received by the Appellant towards providing support services to its group affiliates are taxable as FTS both under section 9(1)(vii) of the Act as well as Article 12(4) of the DTAA; 3. On the facts and in the circumstances of the case and in law, the Learned AO erred in holding that the Appellant has made available technical knowledge, skill, experience, etc. to the recipient of services; 4. On the facts and in the circumstances of the case and in law, the Learned AO/DRP further erred in holding that the cost reimbursements are also taxable as Royalty both under section 9(1)(vi) of the Act as well as Article 12 of the DTAA; 5. On the facts and circumstances of the case, the Learned AO/ DRP failed to appreciate that the amounts represented pure reimbursement of costs and hence does not result into any taxable income accruing in India; 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,16,750 as against an income of INR 5,18,235 computed and returned by the Appellant; Ground 2: Taxing of reimbursements of ₹ 9,82,61,852 as Fees for Technical I included service ( FTS/FIS) and Royalty under the Act and Double Taxation Avoidance Agreement between India and USA ( DTAA ) 2. On the facts and in the circumstances of the case and in law, the Learned AO/ DRP erred in holding that the cost reimbursements of ₹ 9,82,61,852 received by the Appellant towards providing support services to its group affiliates are taxable as FTS both under section 9(1 )(vii) of the Act as well as Article 12(4) of the DTAA; 3. On the facts and in the circumstances of the case and in law, the Learned AO erred in holding that the Appellant has made available technical knowledge, skill, experience, etc. to the recipient of services; 4. On the facts and in the circumstances of the case and in law, the Learned AO/ DRP further erred in holding that the cost reimbursements are also taxable as Royalty both under section 9(1 )(vi) of the Act as well as Article 12 of the DTAA; 5. On th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dertaking the support activities for affiliates are allocated/shared between the affiliates based on an allocation key. No mark up is charged by the assessee on the cost allocated of its affiliates. Heinz India, a private limited company, incorporated under the Indian Companies Act, 1956 is an indirect and independent subsidiary of the assessee. Pursuant to the Agreement entered into with Heinz India, the assessee allocated cost of $ 367,603 equivalent to ₹ 18,854,358/- without any mark up to Heinz India and received a reimbursement towards the same during the subject year. Based on the facts and circumstances of the case, the Assessing Officer taxed receipts of ₹ 18,854,358/- received by the Assessee under the aforesaid agreement as FTS. The assessee Company, resident of USA filed its return of income on 30/09/2009 declaring a total income at NIL. The case was selected for scrutiny and notice u/s 143(2) was issued. In response to the notice Authorized Representative of the assessee Company appeared on various dates and filed details before the Assessing Officer. During the course of the proceedings, the assessee Company vide order sheet entry dated 25/11/2011 was given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... associated with activities carried out by the assessee for each affiliate. For each cost centre an appropriate allocation factor is identified. The above costs are allocated by the assessee to its Affiliates without charging any mark up/profit element. The cost contribution/payments made by Heinz India as a participant to the Agreement merely represents a reimbursement of the costs incurred by the assessee towards the above activities. In substance and in form the payment cannot be considered as income earn by the assessee. The same can be seen from the agreement itself that there is a zero percent mark up. Expenses incurred by the assessee and reimbursement by Heinz India are mere recoupment of expenses and would not constitute income of the assessee. The assessee merely allocates the costs and does not charge any mark up. In view of the above, the Ld. AR submitted that reimbursement of expenses received from Heinz India is not taxable in the hands of the assessee in India under the provisions of the Act. The Ld. AR further submitted that the addition is liable to be deleted on this ground alone as there are various judgments on this issue where it is held that w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the service made require technical input by the person providing the service does not per say mean that technology knowledge, skills, etc are made available to the person charging services. Similarly the use of product which embedded technology is not part to be considered to make the technology available further, even if the services are considered to be managerial in nature, the same would not be taxable in India US Tax Treaty because under the US Tax Treaty, the Treatment Managerial Services is not included under the definition of Fees of Included Services. In view of the above, by a draft Fee for Technical Knowledge etc is made available to a purchaser any fees generated would not be FIS under Article 12(4) of the DTAA. Services rendered may not make available any technical knowledge skill knowhow or service processed if the service provider is able to show that; (i) such services do not enable the service recipient to apply the technology if any contained therein under independent manner in future. (ii) Such services also do not contemplate development or transfer of a technical plant or technical design. (iii) The paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further, the case laws mentioned hereunder are specifically on the proposition that since support services are rendered year-on-year, they do not satisfy make available test and hence is not taxable as FIS: i) Exxon Mobil Company India (P) Ltd. (2018) 92 taxmann.com 5 ii) Bombardier Transportation India (P) Ltd. 162 ITD 586 iii) Outotec Oyj (2017) 162 ITD 541 In light of the above submissions and the relevant case laws in favour of the assessee, the Ld. AR submitted that the said services cannot be held to be FIS and hence are not taxable in India. 8. The Ld. AR submitted that the receipts of ₹ 1,88,54,358/- from Heinz India do not fall within the ambit of ancillary and subsidiary clause. The amount received is not ancillary and subsidiary to the payment of royalty under TTLA. At the outset itself, the Ld. AR submitted that the parties of both the agreements, TTLA and SA are entirely different. While one aims to provide license on which royalty is being earned, the aim of the assessee is to ensure uniformity, consistency and international standards across all group companies, for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvice must be related to the application or enjoyment of the right, property, or information. 10. The Ld. AR further submitted that the receipts of ₹ 1,88,54,358/- from Heinz India do not fall within the ambit of royalty and hence is not taxable. Royalty has been defined under the India-US DTAA as payments consideration received of any kind for the use of or right to use any intellectual property. A perusal of the services covered under the Service Agreement shows that they are in the nature of General Management, Human Resources, Finance, Data Processing, Quality Control, purchasing, business development, law and other related areas which nowhere fall within the ambit of royalty has been defined under Article 12. The Ld. AR relied upon the decision of Marck Bio Sciences Ltd. (2017) 164 ITD 205 Ahmedabad Tribunal and Vanoord Dredging Marine Contractors BV ITA 7589/Mum/2012, Mumbai ITAT. The Ld. AR submitted that the decisions relied upon by the Assessing Officer are not applicable in the present case as the same are distinguishing in the factual aspect with the present assessee s case. 11. The Ld. DR submitted that the argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 2.1. It has to ensure the secrecy and confidentiality of the formulation and actual ingredients of the suffice tax as per Clause 3.3.B and for this purpose there is a provision of training of the employees of the licensee by the assessee as per Clause 3.4 and that of making available of technology specialized by the assessee for development of employee training and managerial skills and in the operation of factory and manufacture of license products Clause 3.5. Quality control is recognized as one of the important aspects of the TTLA. Its importance can be gauged from the fact that it is the most elaborate and exhaustive of the above three control systems. The entire agreement provides for quality claim control measures and includes inspection of facilities, equipment and materials used for preparing, processing, packaging, advertising, selling and distributing the products manufactured. The other clauses of the agreement identify the areas where the license need to be confirmed with the quality control programmes of the assessee. These are (i) Personnel management (ii) Resources Management including internal quality audit (iii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such services and whether the amount paid for the services is an insubstantial portion of the combined payments for the services and the right, property or information described in Paragraph 3 of the agreement. The Ld. DR pointed out that the quantum paid is not insignificant and is more than the amount of royalty paid. Hence, the answer to this question is in negative. The fourth test as per the memorandum is whether the payment made for the services and the royalty described in Paragraph 3 of the agreement are made under a single contract (or a set of related contracts). The Ld. DR submitted that as held by the DRP, both the S.A and the TTLA are related contracts. The last test as per the memorandum is whether the person performing services is the same person as the person receiving the royalties described in Paragraph 3 of the agreement and the answer is yes according to the Ld. DR. Thus, the Ld. DR submitted that all the test stated under the memorandum are specified and the service fee can be considered ancillary and subsidiary to the application or enjoyment of rights for which royalty was paid and hence covered under Paragraph 4(a) of Article 12. The Ld. DR further submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch services are customarily provided in the ordinary course of business arrangements involving royalties described in paragrapah3. (iii) Whether the amount paid for the services ( or which would be paid by parties operating at Arm s Length) is in substantial portion of the combined payments for the services and the right, property, or information described in Paragraph 3. (vi) Whether the payment made for the services and the royalty described in Paragraph 3 are made under a single contract or a set of related contracts) (v) Whether the person performing the services is the same person as related person to the person receiving the royalties described in Paragraph 3 ( for this purpose, persons re considered related if the relationship is described in Article 9 (An associated enterprises or if person providing the service is doing so in connection with and over all arrangements which includes the payer and recipients of the royalties. 12. The Ld. DR further submitted that the Facilitation Test as envisaged in the Memorandum, when applied to the obligations and services as enumerated in the above table leaves no unce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the rights granted to it under TTLA but the predominant purpose of the arrangement under which the payment of the service fee and such other payments are made are to facilitate the effective application or enjoyment of such rights as granted by the licensee under TTLA. Moreover, while analysing the relationship between the services provided with the earning of royalty, it should be remembered that the quantum and value of royalty receipts is directly dependent upon the Net Sales value of licensed products. Thus, any services resulting in enhanced sales, maximization of profits, increase in the efficiency and benefits of economies of scale of the licensee facilitates the effective application or enjoyment of the rights granted under TTLA as well as maximization of Royalty receipts in the hands of the appellant. Thus, the facilitation test is satisfied. The second test as per the Memorandum is whether such services are customarily provided in the ordinary course of business arrangements involving royalties described in paragraph 3. It can t be said that services as envisaged in SA are customarily provided in the ordinary course of business arrangements involving royalties. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... changed method of marking or manufacturing the licensee products which are discovered by the licensee or any of its employees. Viewed from this prospective, there is no doubt that the requirements make available Clause also stand satisfied. The Ld. DR relied upon the decision of the Hon ble Delhi High Court in case of Centrica India Off Shore Vs. CIT(A) (2014) 364 ITR 336. The Ld. DR also relied the decision of the AAR in the case of Intertek Testing Services India Pvt. Ltd. (2008) 307 ITR 418. The Ld. DR further submitted that the cases/decisions relied upon by the assessee are distinguishable on facts and are delivered in the contest of make available provision and hence have not reliefs to the present case, since it is covered under the provisions of Article 12(4) (A) of the DTAA. Accordingly, it is prayed that the order of the DRP be sustained and the assessee s appeal be dismissed. 14. In rejoinder, the Ld. AR submitted that that the services rendered under the Service Agreement (SA) dated 3 May 2007 entered between Heinz US and its various other associated companies including Heinz India is ancillary and subsidiary to the Technology Transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ured by the licensee i.e. Heinz India. The TTLA agreement clearly states that it is pertaining to granting of license in connection with the distribution, marketing and sale of licensed products. 'Licensed products as mentioned in Exhibit A of the TTLA agreement states the list of licensed products i.e. tomato ketchup, condiments and sauces, beans, convenience meals, baby foods and pasta/ noodles only. On the basis terms of TTLA, Heinz India has paid royalty to Heinz US on the sales of tomato ketchup, which constitute only 1 to 3% of total sales of Heinz India against which a royalty of ₹ 32.48 lakhs and ₹ 34.54 lakhs during the AY 2009-10 and AY 2011-12 respectively was paid by Heinz India to Heinz US. Further a technical assistant services, if required under the TTLA would at best be rendered for the license products and not for all the products manufactured by Heinz India. There is no overlap between the TTLA and SA Agreement and, therefore, SA in India manner assist in the enjoyment of the TTLA. Services under SA do not cover any product specific technology assistance or products specific quality control. The very fact that SA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsidiary to royalty payment made to Heinz US. The Ld. AR submitted that the Ld. DR agrees in his synopsis that the quantum paid is significant and is more than royalty paid. Therefore, the Ld. AR submitted that the Support Service Agreement cannot be ancillary said to be ancillary or subsidiary to the TTLA as the benefits arising out of the support services are for all he products manufactured by Heinz India i.e. Complan, Glucon D, Nycil, Tomato ketchup and also for the corporate office of Heinz India for e.g. finance, legal, human resource, general management, information system, etc. Further, it is humbly stated that Heinz trade name is not used on products such as Complan, Glucon D, Nycil, etc which constitute 90% and more of total sales of Heinz India. 18. The Ld. AR submitted that in the present case, the activities carried out by the assessee under the agreement are particularly in the area of general management, human resources, strategic planning and marketing, finance and information systems. Costs incurred by the Assessee in terms of time and effort of its employees for carrying out the activities are shared amongst the various affilia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available technical services to Heinz India. The Ld. AR submitted that the assessee does not Make Available Technical Services to Heinz India and hence should not be taxable as FIS under the provisions of the DTAA. In the present case, the Ld. AR submitted that factually no technical knowledge, etc was Made Available by the assessee to Heinz India. The fact that the assessee performs such activity on year on year basis also supports the contention that no technical knowledge etc. was made available . The Ld. AR submitted that the assessee does not make available any technical knowledge, skill, etc. to Heinz India, nor does it develop and transfer any technical plan, design, etc. Therefore, the amount received by the Assessee cannot be said to be covered within the meaning of FIS under the DTAA. Hence, such reimbursements should not be taxable in India under the DTAA. Article 12(4) of the DTAA defines the term FIS . In light of the above definition and judicial pronouncements of various courts it is now a well settled law that for any payment to qualify as FIS under the DTAA, the following criteria are essential. The services need to be of technical or consultancy nature; a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions were relied by the Ld. AR US Technology Resources (P) Ltd. (2018) 407 ITR 327 (Kerala) H.C Guy Carpenter Co. Ltd. [2012] 346 ITR 504-Delhi H.C De Beers India Minerals (P) Ltd. [2012] 346 ITR 467 (Karnataka)- H.C Koninklijke Philips Electronics N. V. [2018] 99 Taxmann.com 23- Kolkata ITAT ExxonMobil Company India (P.) Ltd [2018] 92 taxmann.com 5 - Mumbai ITAT Bombardier Transportation India (P.) Ltd. [2017] 162 ITD 586 (Ahmedabad - Trib) Timpken Company [2017] 88 taxmann.com 21 - Kolkatta ITAT Outotec Oyj [2017] 162 ITD 541 - Kolkatta ITAT Steria (India) Ltd. [2016] 386 ITR 390- Delhi- HC Cummins Ltd. [2016] 381 ITR 44-AAR Sandvik AB [2015] 61 taxmann.com 31 - Pune ITAT Measurement Technology Ltd. [2015] 376 ITR 461 - AAR Sandvik Australia Pvt. Ltd. [2013] 31 taxmann.com 256 - Pune ITAT Endemol India Pvt. Ltd. [2014] 361 ITR 340-AAR Invensys Systems Inc [2009] 183 Taxman 81 - AAR KPMG Ltd. [2013] 142 ITD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provision 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 paragraph 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. The assessee has filed the present appeal challenging the assessment order on the ground that the cost reimbursement of ₹ 1,88,54,358/- received by the assessee towards providing support services to its group affiliates are taxable as FTS both u/s 9(1)(vii) of the Act as well as Article 12(4) of the DTAA taxing the same by the assessing officer as royalty is also not just and proper. From the perusal of the records it can be seen that the assessee has entered into a global agreement effective from 3rd May, 2007 with its group entiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f reinsurance brokerage, commission which was paid by insurance companies operating in India to the assessee was assessable as fees for technical services within the meaning of Section 9(1)(vii) of the said Act read with Article 13 of the India United Kingdom Double Tax Avoidance Agreement or not. The Hon ble Delhi High Court observed that a plain reading of Article 13(4)(c) of the DTAA indicates that fees for technical services would mean payments of any kind to any person in consideration for the rendering of any technical or consultancy services which inter alia makes available technical knowledge, experience, skill, know-how or processing or consist of the development and transfer of a technical plan or technical design. In the said case, the assessee did not maintain any office in India and has a referral relationship with J. B. Boda which is not affiliated company of the assessee. Thus, the factual aspect differs with the present assessee and therefore the ratio laid down by the Jurisdictional High Court decision is not applicable to the facts of the present case. In fact the assessee during the hearing has given almost 20 decisions which are quoted hereinabove as the submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X
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