TMI Blog2022 (2) TMI 769X X X X Extracts X X X X X X X X Extracts X X X X ..... ircular of the year 2022. DTAA between India and Spain, having the Protocol containing the MFN clause as its integral part, was duly notified on 21-04-1995, after having entered into force on 12-01- 1995. On such notification of the DTAA, the Protocol containing the MFN clause triggering the importing of any other DTAA fulfilling the requisite requirements, including the Portuguese DTAA, got automatically notified pro tanto , in terms of section 90(1) of the Act leaving no room for any separate notification for the importation. The sequitur is that that the authorities below were not justified in denying the benefit of the straight rate of tax at 10% as per the DTAA read with Portuguese DTAA and also additionally charging Surcharge and Education cess. Income from royalty or fees for technical services, which the assessee claimed to have received as reimbursement and hence not includible in its gross revenue for taxability - HELD THAT:- Primarily, we find that the basic details about the nature of expenses etc. are not forthcoming. It is not known as to whether such expenses claimed to be reimbursed were in furtherance of the rendering of fees for technical services or d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ha Sarathi Chaudhury, Judicial Member For the Assessee : Shri Siddhesh Chaugule For the Revenue : Shri Shivraj B More ORDER PER R.S. SYAL, VP : This appeal by the assessee is directed against the final Assessment order dated 26-03-2021 passed by the Assessing Officer (AO) u/s.143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (hereinafter also called the Act ) in relation to the assessment year 2016-17. 2. The first issue raised in this appeal is against applying the tax rate as per section 115A of the Act instead of the tax rate as per the DTAA between India and Spain (hereinafter also called the DTAA ) read with the Protocol thereof. 3. Pithily put, the factual panorama of the case is that the assessee is a foreign company incorporated in Spain. The return was filed declaring total income of ₹ 2,88,38,464/-, comprising of receipt of ₹ 2,25,29,742/- from M/s. Shrenik Industries Pvt. Ltd. towards providing technical support, financial support and advice, legal support, commercial support etc., and ₹ 63,08,722/- received towards SAP software and implementation of process model. The assessee declared the above amounts as fees for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of royalty or fees for technical services etc., the amount of income-tax shall be calculated @10%. It goes without saying that such rate of tax is liable to be loaded with the applicable Surcharge and Education cess. Section 90 of the Act provides that where the Central Government has entered into an Agreement with the Government of any country outside India for granting relief in respect of income on which tax is payable both in India and the other country, then, in relation to the assessee to whom such Agreement applies, the provisions of the Act shall apply to the extent they are more beneficial to that assessee. To put simply, if the provisions of the concerned DTAA are more beneficial to the assessee vis-a-vis their counterparts under the Act, then the assessee can choose to be governed by the beneficial provisions contained in the DTAA. 5. The assessee is a resident of Spain and the DTAA between India and Spain was notified in 1995. Article 13 of the DTAA contains provisions relating to royalties and fees for technical services , whose relevant part runs as under: - ₹ 1. Royalties and fees for technical services arising in a Contracting State and paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into force after 1st January, 1990, India limits its taxation at source on 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 incomes, the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this convention with effect from the date on which the present Convention comes into force or the relevant Indian Convention or Agreement, whichever enters into force later. 8. A cursory glance at the above para unfolds that if under any convention between India and a third State which is a Member of the OECD, entered into force after 01-01-1990, India limits its taxation for royalties or fees for technical services to a rate lower or scope more restricted than the rate or scope as set out in the DTAA, such beneficial rate or scope shall also apply under this Convention. Thus, the MFN clause contained in the above para 7 of the Protocol manifests that if India has entered into a Convention after 01-01-1990 with a third country which is a Member of the OECD and under such Convention it has, inter al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the Agreement, also got automatically notified along with the Agreement. In such a scenario, it is difficult to comprehend the need for any separate notification for the import of the MFN clause. 10. It would be prudent to take cognizance of the CBDT Circular No.3/2022 dated 03-02-2022 providing clarification and laying down certain pre-requisites for deriving the benefit of the MFN clause in the Protocol to India s DTAAs with certain countries. The CBDT has summed up its opinion in para 5 of the Circular, reading as under:- 5. In view of the above, it is hereby clarified that the applicability of the MFN clause and benefit of the lower rate or restricted scope of source taxation rights in relation to certain items of income (such as dividends, interest income, royalties, Fees for Technical Services, etc.) provided in India's DTAAs with the third States will be available to the first (OECD) State only when all the following conditions are met: (i) The second treaty (with the third State) is entered into after the signature/ Entry into Force (depending upon the language of the MFN clause) of the treaty between India and the first State; (ii) The second trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lementing the agreement. In our opinion, the Circular specifying the need for a separate notification for importing the beneficial treatment from another Agreement as a corollary of section 90(1) of the Act, overlooks the plain language of the section seen in juxtaposition to the language of the Protocol, which treats the MFN clause an integral part of the Agreement. What is amply borne out from the language of section 90(1) is that a notification may be made for implementing the agreement that the Central Government has entered into with the Government of any country outside India for the granting the relief. Reference to the expression ` make such provisions as may be necessary for the purpose of notification in the Official Gazette, is to adopt the manner of notifying as may be necessary for implementing the agreement and not that the notification is to be issued piecemeal and in a truncated manner . On notifying the Agreement or Convention, all its integral parts, get automatically notified. As such, there remains no need to again notify the individual limbs of the Agreement so as to make them operational one by one. 12. It is trite law that a circular issued by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tification for the importation. The sequitur is that that the authorities below were not justified in denying the benefit of the straight rate of tax at 10% as per the DTAA read with Portuguese DTAA and also additionally charging Surcharge and Education cess. 15. The next ground raised is about taxing ₹ 35,67,719/- as income from royalty or fees for technical services, which the assessee claimed to have received as reimbursement and hence not includible in its gross revenue for taxability. 16. Tersely stated, the facts of this ground are that the assessee claimed a sum of ₹ 35,67,719/- as reimbursement on cost-to-cost basis and did not include the same in the total revenues for the purpose of offering income for taxation. The AO called upon the assessee to furnish complete evidence like all invoices, agreements, ledger extracts and etc. in support of recovery/reimbursement of the expenses. In the absence of any response coming from the side of the assessee, the AO treated this amount as a part and parcel of fees for technical services/royalties and thus applied tax rate of 10% plus applicable surcharge and education cess thereon. The assessee filed certain evide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf is charged to tax though at a concessional rate of 10% etc., in the latter, it is the income embedded in the revenue or gross receipt which is charged to tax at normal rate. Any reimbursement in the latter case cannot be charged to tax because of the absence of any element of income therein, which is sine qua non for the chargeability in such a situation. However, in the former case which proceeds with taxation of the gross receipts/revenue at a concessional rate of tax, reimbursement of costs that have contributed to the earning of the revenue have to be necessarily included. In all cases of taxation of revenue or gross basis, a fundamental question which needs to be asked is whether a particular cost has contributed to the earning of the revenue. If the answer is in affirmative, then its corresponding receipt needs to be included in the revenue for applying the concessional rate of tax irrespective of the nomenclature given to the parties as reimbursement or revenue. Thus in all cases of concessional taxation on gross receipt or revenue basis, splitting of total receipt into reimbursement or revenue, remains neutral to its chargeability. Both such cases, invariably warrant i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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