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TMI Blog2022 (7) TMI 1302X X X X Extracts X X X X X X X X Extracts X X X X ..... se of assessment proceedings, the AO observed that a sum of Rs.3,99,18,072/- was received by the assessee from its Indian entity, namely, Grupo Antolin Pune Private Limited, which was not included in the total income. On being called upon to explain the reasons, the assessee submitted that the amount was consideration for rendering certain services including Human resources, Finance, Legal, I.T., Marketing, Research and Purchasing etc., which did not fall within the tax-net. The AO's proposed view that it was chargeable to tax as 'fees for technical services' (FTS) u/s.9(1)(vii) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') was countered by the assessee with the mandate of Article 13 of the Double Taxation Avoidance Agreement between India and Spain (hereinafter also called `the DTAA'). The assessee also contended before the AO that the Protocol to the DTAA enabled it to invoke corresponding beneficial relevant clause under the DTAA between India and the USA, under which, it was necessary that technical services must be 'made available' so as to attract taxation. Since no services were claimed to have been 'made available' to the Indian group entity, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnical 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". 5.2. In order to decide the taxability or otherwise of the amount under the Act, it would be paramount to first consider the precise nature of services rendered. The services comprise `General services' of formulating the group's internal audit plan and assistance in implementation of the same; `Financial services' of providing assistance in formulation of financial policies and strategies, managing financial operations at group level; `Legal services' of providing legal assistance in litigious issues; `Human resources services' of providing performance evaluation procedures and forms with administrative support; `Quality and environment related services' of defining, managing and supervising the quality and environment strategy of the entire group; `Marketing services' of developing marketing policy, providing of new market data; `Research services' of defining and supervising research procedures and policies; `Purchase services' of defining, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee directed in its next communication to "set machine to a given nominal value and pour 5-10 times and record the values. Calculate CpK and let us know whether we're OK or not." Pages 254 and 255 contain e-mails by which the assessee stated to the Indian entity that there was an issue which cropped up lately after new audits by writing that: "We observe a worrying profusion of software development at Grupo Antolin plants worldwide. These developments very frequently support critical process and overlay functionality with corporate tools or platforms. As a rule, this is in place to provide standardized and secure environment. . . . . . In case of your plants, the following licenses must be removed". Thereafter, the Indian entity expressed some difficulties in removing the software. However, the assessee eventually prevailed over the Indian entity by writing that "you can remove this software immediately. Of course keep us informed any problem in SAP. We would not want to disrupt our service to the customer". Page 258 is again e-mail exchanges between the assessee and the Indian entity about certain hardware procurement. Pages 260 and 261 are e-mails between the assessee and In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce is sought and given. Once the expert advice is given, the consultancy service comes to an end. Technical services cover giving expert services in the field of technology. Contextually, consultancy and technical services, being separate species of technical services u/s 9(1)(vii) of the Act, need to be viewed separately from managerial services. Even though, the line may be blur in some cases and a service may appear to be both managerial por ona parte and consultancy or technical por otra parte, the consultancy or technical services need to be characterized as such independent of the managerial services for the purposes of this section. 5.5. On an overview of the above e-mails exchanges between the assessee and the Indian entity read in conjunction with the services as described in the Agreement, it becomes overt that the services mainly envisage i) formulating the global policies in the spheres of the business, including, Administration, Purchases, and Human resources so as to have world-wide uniformity in compliance; ii) ensuring application of the such policies by all the global entities including the Indian AE; and iii) evaluating their compliance. The services also cater t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en under Article 13(4) of the DTAA, it becomes clear that though the Act covers consideration for managerial, technical or consultancy services within the horizon of FTS, Article 13 covers only "consideration for the services of technical or consultancy nature", thereby excluding consideration for managerial services. In that view of the matter, the consideration received by the assessee towards managerial services gets excluded at the very threshold itself in terms of Article 13(4) of the DTAA. However, it has been noted above that the consideration in the present case is not only for managerial, but also for consultancy and technical services. 6.5. The assessee invoked India-USA DTAA to claim immunity from taxation, which was negated. At this juncture, it would be fruitful to note the terms of para 7 of the Protocol with reference to Article 13 of the DTAA between Indian and Spain, which provides that : `if under any Convention or Agreement between India and a third State which is a Member of the OECD, which enters into force after 1-1-1990, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aid and assistance of the provider. On going through the above judicial interpretation, it becomes palpable that in order to `make available' such services, it is sine qua non that the recipient of the services must acquire such technical know-how etc. which he himself can use in future without any assistance of the provider and the same should not be anything which vanishes or disappears with its provision by the payee itself. 6.8. However, it is significant to note the command of para (b) of Article 12(4) of the India-USA DTAA, which says that fees for included services means consideration for rendering any technical or consultancy services, if such services make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. On an analysis of the clause (b), it turns out that it covers two broader segments: viz., one where such services `make available technical knowledge, experience, skill, know-how, or processes' and two, where such services `consist of the development and transfer of a technical plan or technical design'. The first use of the word `or' between the words `know-h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices would inter alia include defining and supervising the research procedures and policies preparing a research plan in support with the engineering and project team, participating in the forums and coordinating with the official institutions on the subject of technological policies. ix. IT Support services This division of services would inter alia include defining of group information systems policy, strategy, planning and management tools. Further, it will involve coordination of information technology strategy and planning actions, optimization and standardization of resources, defining software and hardware standards to be applied within the group and support and cooperation in resolution of incidents. 6.10. It can be seen that the Research services rendered by the assessee, inter alia, include defining the research procedures and policies by preparing a research plan in support with the engineering and project team on the subject of technological policies to be followed. The word `define' in Black's Law Dictionary has been explained as: `to state or explain explicitly'. The term `technical plan', in common parlance, implies the input of technical effort in drawing a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ign, we desist from examining if the above services are also making available any technical knowledge, experience, skill, know-how, or processes covered under the first segment of the Article. The raison d'etre is that the answer to this can be found out only after examining the detailed nature of the defined Quality and Environment strategy; the defined research procedures and policies on the subject of technological policies; and the defined group information systems policy, strategy, planning and management tools and then seeing, how they were actually used by the Indian entity to find out if they make available any technical knowledge, experience, skill, know-how, or processes. No such detail is available on record. 6.15. In the hue of the above discussion, it is held that though the assessee, in principle, can seek the benefit of the India-USA DTAA, but the consideration for the `development and transfer of a technical plan or technical design' in the terms discussed above, falling under the second part of the Article 12(4)(b) of the India- USA DTAA, would qualify for taxation. Since such amount is not readily ascertainable from the material on record, we set aside the impugn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State...'. Para 3 of the Article defines the term "dividends" as used in this Article to mean: ` income from shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.' Testing the facts of the case on the touchstone of the definition of the term `dividend', it transpires that the consideration received by the assessee is for rendition of intra group services and not either as income from shares etc. or income from other corporate rights or from any participation in profits. Thus, the amount under consideration cannot be characterized as `dividend' income falling under Article 11 so as to magnetize taxability. IV. Whether the receipt is `Other income' under Article 23(3) of the DTAA? 9.1. The AO has taken another without prejudice view that the amount received by the assessee also falls under Article 23(3) of the DTAA. It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Telefonica, an international leased line service provider, for allotting leased line to all group entities on payment basis. Telefonica raised bill on the assessee for the total amount, which the assessee recovered from its group entities including the Indian entity on cost to cost basis. We have examined relevant invoices of 6500 euros per month raised by the assessee on the Indian entity. It is the exact amount which has been charged by Telefonica from the assessee for providing leased line to the Indian entity. Thus, one-to-one correlation is established between the payment made by the assessee and the amount recovered from the Indian entity without any markup. 14. The ld. DR contended that it is a case of payment by the Indian entity to Telefonica through the assessee and hence cannot be considered as reimbursement. The Department has made out a case that the amount received by the assessee is chargeable to tax under the Act as falling under Explanation 2(iva) and also Explanation 2/6 of section 9(1)(vi) of the Act. I. Is it covered under clause (iva) of Expl.2 to sec. 9(1)(vi)? 15.1. Firstly, we examine the applicability or otherwise of clause (iva) of Explanation 2 to se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts of the instant case. II. Is it covered under Expls. 2/6 of sec. 9(1)(vi)? 16.1. The next view point of the ld. CIT(A) is that the amount paid for the use of leased line falls under Explanation 2 read with Expl. 6 to section 9(1)(vi) of the Act. To be more specific, the ld. CIT(A) has held the amount to be in the nature of payment for a `process', thereby covering it under Explanation 2 providing that "royalty" means consideration ...for- (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property. Thereafter, recourse has been taken to Explanation 6 defining the term `process', which has been inserted by the Finance Act, 2012 with retrospective effect from 01-06-1976. It provides that: `For the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret'. 16.2. The term 'process' as usually understood in common parlance does not include transmission of da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifying the scope of the term `process', applying to the Explanation 2 to section 9(1)(vi), there is no similar definition of the term `process' as given in Article 13(3) of the DTAA. 16.5. At this stage, it is pertinent to note that some treaties link certain clauses of the Articles with domestic law. In those cases, the prescription of the concerned section under the Act is automatically imported in the concerned DTAA. Per contra, if a DTAA does not refer to domestic law and gives its own mandate, the provisions of the Act become irrelevant for construing the ambit of the provision under the DTAA. Coming to the Indo-Spain DTAA, it is axiomatic that the domestic law has not been linked with the definition of the term `royalties' as given in the Article. The definition in the Article simply stops at receipt, inter alia, for use or right to use any 'process'. In that view of the matter, we cannot read Explanation 6 to section 9(1)(vi) of the Act in the definition of the term `royalties' under the Article. Though the term 'process' under the Act also includes payment for leased line charges in the light of Explanation 6, but absence of any analogous provision in para 3 of Article 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the advance tax would be computed by deducting the amount of income-tax payable under relevant clauses as reduced by the amount of income-tax "deductible" etc. at source during the said financial year. Thus, the requirement of payment of advance tax in the context of a non-resident cannot arise because of section 195 providing for deduction of tax at source in all cases of payments made to them. If income tax is deductible at source, whether or not actually deducted, the stipulation of section 209(1)(d) gets satisfied. As the assessee is a non-resident and any payment made to it is otherwise tax-deductible, there can be no liability for interest u/s.234B. 20. At this stage, it is significant to note that an amendment has been carried out to section 209(1) by insertion of proviso w.e.f. 1.4.2012 providing, inter alia, that for computing liability for advance tax, income-tax calculated under clause (a) or clause (b) or clause (c) shall not be reduced by the aforesaid amount of incometax which would be deductible during the said financial year under any provision of this Act from any income, if the person responsible for deducting tax has paid or credited such income without deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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