TMI Blog2021 (1) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... tax treaty. We leave it at that. Taxability of consultancy services as FTS - As argued Appellant has only recharged the actual cost it incurred for providing the project consultancy services and since there is no profit element the same is not taxable in India - what is the impact of the MFN clause in the Indo Swedish tax treaty, read with the Indo Portuguese tax treaty which was subsequently entered into between India and Portugal, an OCED member country.? - HELD THAT:- It is not in dispute that Portugal is an OECD jurisdiction, that the Indo Portuguese tax treaty was entered into after the Indo Swedish tax treaty was entered into, and that the Indo Portuguese tax treaty provides far more restricted scope of 'fees for technical services' inasmuch as it adopts the 'make available' clause which restricts the taxation of fees for technical services only in such cases which make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design which enables the person acquiring the services to apply the technology contained therein. Therefore, respectfully following the coor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ambit of taxation. The person selling the SAP software is Be One Solution, Switzerland, whereas the person providing the services in question is the assessee. Article 12(4)(a) will not, therefore, come into play at all. In our considered view, therefore, the taxation under article 12 in the present case can come into play only when the make available clause is satisfied, but then the Assessing Officer's justification for the satisfaction of 'make available' clause, for the detailed reasons set out earlier in this paragraph, does not meet our judicial approval. In view of these discussions, as also bearing in mind the entirety of the case, we uphold the plea of the assessee on this point as well. Accordingly, we hold that the income on account of Information Technology Services is also not taxable under article 12. - ITA No. 7315/Mum/2018 - - - Dated:- 8-1-2021 - Pramod Kumar (Vice President) And Saktijit Dey (Judicial Member) Jitendra Jain for the appellant SS Iyengar for the respondent ORDER Per Pramod Kumar, VP: 1. This appeal, filed by the assessee, calls into question the correctness of the order dated 11th October 2018 passed by the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a reimbursement simpliciter, that the SAP licences were acquired from a rank outsider, that as it is pure reimbursement without any markup, there is no income element embedded therein. The assessee also advanced certain arguments on other facets regarding the inapplicability of article 12(3)(a) to the facts of this case. However, since the issue in the appeal can be decided on the short ground of its being pure reimbursement in nature, we see no need to deal with those aspects of the matter. The Assessing Officer was not convinced by these submissions. The Assessing Officer noted that there was no evidence on record that the market value of services to various group entities is not equivalent to the payments received by the assessee from group entities. He was further of the view that once a right has been provided for a cost, then the fact that there is no markup or any profit would not take the receipt out of income nature. He referred to certain decisions of the coordinate benches, as also the Authority for Advance Ruling, in support of the proposition that absence of markup, by itself, would not take the receipt outside the ambit of income. Aggrieved by the stand so taken b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a cost to cost reimbursement received by the assessee. What learned Departmental Representative contends is that if the Indian entity was to be directly supplied this licence by the actual product vendor supplying it to the assessee, the tax withholding by Indian entity would have come into play, and that tax withholding has been avoided by routing the purchase through the assessee. That issue, whether right or not, has no bearing on taxability of an income in the hands of the assessee. We reject this argument. As regards learned DRP's reliance on a decision of the coordinate bench in the case of AMD Research and Development Centre India Pvt Ltd (supra), we can only say that it was a case in which the coordinate bench came to the conclusion that the payment for a software licence to the group company was not on cost to cost basis , as evident from the coordinate bench observations to the effect that In the absence of these details as well as the basis of allocation of cost of software applications/licences, we find it difficult to accept the contention of the assessee that the amount in question paid by it to ATI Technologies, Canada towards its share of software application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h utilised by the subsidiaries as well as the head office organisation would not be income which would be assessable to tax. A similar view was taken in Stewarts Lloyds of India Ltd.'s case (supra). We are in respectful agreement with the view expressed by the Delhi and Calcutta High Courts. 7. In view of the above discussions, as also bearing in mind entirety of the case, we hold that the receipt of software licence fees by the assessee, from its Indian subsidiary, is reimbursement of software licence fees paid by the assessee to a third party, and, therefore, it cannot constitute income taxable in the hands of the assessee. As this income is not taxable under the domestic law provisions in India, we see no need to deal with the other aspects of the matter with respect to non-taxation of this income under the provisions of the Indo- Swedish tax treaty. We leave it at that. 8. Ground no. 1 is thus allowed in the terms indicated above. 9. In ground no. 2 and 3, which we will take up together, the assessee has raised the following grievances: Ground No. II- Taxability of consultancy services as FTS 2.1 On the facts and in the circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical services. 10. So far as these two grounds of appeal are concerned, briefly the material facts of the case are as follows. The assessee has under the same agreement, as is referred to in paragraph 3 above in connection with the first ground of appeal, rendered services for leading the work during 2014 and 2015 of building up the new factory site at Ranjangaon, near Pune . This work was to be done, for consideration of approximate actual cost based charges: 16,000 EUR per month + expenses (mainly travelling costs) during 2014 until the end of the project by one Nazir Alibay. The total amount received by the assessee under this arrangement was ₹ 1,97,94,209. The nature of services included the follows: Factory project leader: Nazir Alibay Description of services: Leading the work during 2014 and 2015 of building up the new factory site at Ranjangaon near Pune: Full time assignment. As Factory project leader, following shall be the services rendered: To plan and steer execution of all the work to establish the factory (including building, infrastructure and machinery). Responsible for all activities until machines are running at targe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive 2. Details of the object of the Services Scope, type and purpose of the intended collections, processing, or use of data Data managed is related to the operations of the SCA business and to the management of its workforce, and will only be used to that purpose. The processing and use of the date is restricted to the territory of a member state of the European Union or another state party to the Agreement of the European Economic Area. Relocation to other countries is subject to SCA India's prior approval. Type of Data The collection, processing and/or use of personal data refers to the following types/categories of data:- Personal data Communication data (e.g. Telephone/e-mail) Contractual accounting and payment data Financial and non-financial planning and control data Information obtains from third parties, e.g, credit inquiry agencies or public directories Statistical data The group of data subjects affected by the use of their personal data hereunder comprises: Employees Customers and Vendors Interested parties Consumers Other cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... include payments for these excerpts, the character of their service needs to be elaborated for purpose of deciding the character of fee received by the assessee. It is also noted that the assessee is operating in project monitoring and project scheduling and budgeting which require development of elaborate plans which are subsequently transferred to the Indian party for execution. 4.20. It is not the case of the assessee that these services are provided in isolation of the employees of SCA India who are involved in project execution, whether it is pre-development stage or subsequent stage. We are not convinced that the project execution service could be executed by the assessee without active involvement of project related employees of SCA India. It is not merely engineering or architectural designs which are contemplated under Article 12(4)(b) of the Treaty but also development and transfer of any technical plan or technical design, Technical does not mean technological. It only means specialized- the area may be finance, legal, commerce, arts, science or project implementation as in the case. This will include scheduling charts, time lines, bar charts which are contemplate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions are set out below: ARTICLE 12 OF INDO-SWEDISH TAX TREATY 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. Notwithstanding the provisions of paragraph (1), 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 State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services. 3. (a) The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. (b) The term 'fees for technical services' means payment of any kind i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Convention between the Government of the Republic of India and the Government of the Kingdom of Sweden for the avoidance of double taxation and the prevention of fiscal evasion 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 services 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, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items of income shall also apply under this Convention. . IN WITNESS whereof the undersigned being duly authorised thereto have signed this Protocol. DONE in duplicate at New Delhi, this 24th day of June, 1997, in the Swedish, Hindi an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property; (b) For services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international craft; (c) For teaching in or by educational institutions; (d) For services for the personal use of the individual or individuals making the payment; (e) To an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in article 14; (f) For services rendered in connection with an installation or structure used for the exploration or exploitation of natural resources referred to in paragraph 2, f), of article 5; (g) For services referred to in paragraph 3 of article 5. 6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties and fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties and fees for included services arise, through a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a more generous tax treatment to any other tax jurisdiction, or any other tax jurisdiction of a particular nature- e.g. OECD member jurisdiction, the same tax treatment will be due to the treaty partner in question. For example, if X jurisdiction provides for source taxation @ 15% for interest to Y jurisdiction, it also assures, by incorporating a MFN clause, that in case X jurisdiction enters into an agreement providing for a lower rate of source taxation, or more restricted scope for taxation of interest, with any other jurisdiction- or any other OECD member tax jurisdiction, the same will be extended to Y jurisdiction as well. In a sense, terming this clause as a 'most favoured nation clause' is a misnomer because what this clause ensures is an equal treatment vis- -vis other jurisdictions, or other jurisdictions of a specific category, rather than a favoured treatment for the treaty partner jurisdiction. 18. It is crucial to bear in mind that the implementation of a most favoured nation clause is not always in a homogenous manner. There are different ways in which such an MFN clause can be implemented. There can be situations like in India Switzerland Double Taxation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the illustrations that we discussed, in which the MFN clause can be implemented- first, as in Indo Swiss tax treaty, where all that the MFN clause ensures is that the negotiations take place, without any delay, to ensure that the same treatment is provided to the treaty partner; second, as in India Philippines tax treaty, where the information, about a more generous treatment for any another tax jurisdiction, by one of the treaty partners is to be provided to the other treaty partner, through diplomatic channels, so that existing provisions can be brought in par with more generous tax treatment in the source jurisdiction; and, third- in which the treaty does not prescribe anything further that is required to be done, for giving effect to the MFN status, as the same rate or the same scope, as is extended to any other OECD country subsequently, shall also apply under this treaty. There can also be situations in which an MFN clause may require the treaty partner jurisdictions to issue notifications to the effect that the benefit extended to another jurisdiction is extended to the treaty partner jurisdiction as well. There can be several modes for implementation of the MFN clause, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion. However, the coordinate bench was of the view that nothing turned on this notification and ignored the same. The plea that issuance of notification was at best done as a measure of abundant caution by the CBDT, and it did not have any legal effect on the implementation of the protocol clause, was, in effect, accepted. However, when an identical issue, in the case of Indo French tax treaty itself, came up before the Authority for Advance Ruling, in the case of Steria India Ltd In Re [(2014) 72 taxmann.com 1 (AAR)], the approach adopted, on this issue, by the Authority for Advance Ruling was entirely different, as it held notification to be a crucial and legal source of the rights by the implementation of protocol, Hon'ble Authority for Advance Ruling observed as follows: ..What is stated by the Protocol is for India to limit its taxation at source for the detail items mentioned therein. The restrictions are on the rates and 'make available' clause cannot be read in the items. On the basis of the Protocol, notification No.9602 [F.No.501/16/80-FTD], dated 6.9.1994 as amended by Notification No. SO 650(E), dated 10.7.2000. was issued by Govt. of India. The said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal High Court, or, for that purpose, even any other Hon'ble High Court, bind us. The AAR decisions, as is the well-settled legal position, do not constitute binding judicial precedents for us. It is also not in dispute that Portugal is an OECD jurisdiction, that the Indo Portuguese tax treaty was entered into after the Indo Swedish tax treaty was entered into, and that the Indo Portuguese tax treaty provides far more restricted scope of 'fees for technical services' inasmuch as it adopts the 'make available' clause which restricts the taxation of fees for technical services only in such cases which make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design which enables the person acquiring the services to apply the technology contained therein. Therefore, respectfully following the coordinate bench decision in the case of ITC Ltd (supra), which has been specifically approved by Hon'ble Delhi High Court in the case of Steria India Ltd (supra), we hold that the provisions of article 12 (4)(b) of the Indo Portuguese tax treaty, being more restricted in scop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal/included services only if the twin test of rendering services and making technical knowledge available at the same time is satisfied.' 24. In order to decide whether or not the services rendered by the assessee fit the definition of 'fees for technical services', as applicable under the Indo Swedish tax treaty, the question that we must ask ourselves is not only whether the technical services are performed on the facts of this case, but whether the technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. In this light when we analyze the nature of services, which are set out in detail earlier in this order, we find that in none of the cases, these services enable the recipient of these services to perform the same services, in the future, without recourse to the assessee. The consultancy services are in the nature of leading the setting up of factory, including planning and steering execution of work, being responsible for managing project within budget constraints, leading the project team from different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Article 12(4)(a) . In the assessment order, there is also mention about resulting in overall improvement in business and the income generating capacity of SCA India, which is a clear enduring benefit and about the stand that the rendition of these services are also providing a skill level and relevant training which will be readily available to personnel of SCA India and thereby a clear enduring benefit is provided . It is also mentioned that specific support in the form of implementation of SAP project amd Project Vinadalloin the form of pre-implementation, testing, post- implementation is also provided which is clearly technical in nature and intended to increase the efficiency and improve the functioning of SCA India . It is to be noted that so far as the enduring benefit and increase of efficiency in the recipient entity is concerned, that has nothing to do with the satisfaction of make available clause. As we have seen in our analysis earlier, what is important is transfer of technology and not the incidental benefit. Unless the recipient of a service is not enabled to perform that service on his own, without recourse to the service provider, the requirements of the m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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