TMI Blog2023 (1) TMI 1207X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee, it is evident that the services are performed by the assessee s own personnel in France and the payment on account of search services was directly remitted by the Indian group companies to the assessee. As part of the TSIS Service Agreement, the Indian group companies only receive standard services and no licences in any software/right to use any software etc. is provided - there is no sharing of any confidential information by the assessee with the Indian group companies. The term Royalty is not as widely defined in India France DTAA as in the India Singapore DTAA, which was taken into consideration by the coordinate bench of the Tribunal in the case of sister concern. Since it has not been disputed that the facts of the present case are similar to the case of the assessee s group concern, wherein income arising from services of similar nature are held to be not taxable as royalty, therefore, we find merit in the plea of the assessee. Accordingly, respectfully following the aforesaid decision of the coordinate bench of the Tribunal, we direct the AO to delete the addition in respect of TSIS Service Fees received by the assessee. As a result, ground No. 2 raise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e India France DTAA. In the present case, the assessee is a resident of France and thus in view of para-7 of the Protocol to the India France DTAA has sought the benefit of the restricted scope of the definition of fees for included services as provided under the India USA DTAA. We are of the considered view that CBDT Circular No. 3/2022 dated 03/02/2022 is not applicable to the present appeal. Therefore, in view of the aforesaid findings, we are of the considered opinion that the assessee is entitled to claim the benefit of the restricted definition under India USA DTAA in view of the Protocol to the India France DTAA. Since the assessee has been found not to have made available any technical knowledge, experience, skill, or know-how, therefore, Management Service Fees received by the assessee cannot be taxed under the provisions of Article 13 of the India France DTAA read with para 7 of the Protocol to the India France DTAA and Article 12(4) of India USA DTAA. In view of the above, the alternative claim of the assessee under India Finland DTAA becomes academic. Further, once the taxability fails in terms of the treaty provisions, there is no occasion to refer to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e now proceed to decide the issues on merit, as per the chronology of the assessment years under consideration. ITA no.508/Mum./2016 Assessee s Appeal A.Y. 2012 13 3. In its appeal, the assessee has raised the following grounds: On being aggrieved by the order dated 30 December 2015 of the learned Deputy Commissioner of Income-tax (International Tax)-2(2)(1), Mumbai (AO) passed under section 143(3) read with section 144C of the Income tax Act, 1961 (Act) as also directions issued by the DRP, Mumbai dated 24 November 2015, the present appeal is being preferred on the following grounds amongst others which, it is prayed, may be considered without prejudice to one another. On the facts and circumstances of the case and in law, the learned AO, as per the directions of DRP has: 1 . General Grounds erred in assessing total income at INR 8,48,48,880 as against returned income of INR 87,03,089; 2. Technology and Strategic Information Systems ('TSIS') fees taxed as royalty erred in considering TSIS charges of INR 42,42,933 to be taxable as royalty under the provisions of Act and the India-France Double Taxation Avoidance Agreement (&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India, namely Edenred (India) Private Ltd, Royal Images Direct Marketing Private Limited, and SurfGold.com (India) Private Ltd. Out of the aforesaid amount, the assessee offered Rs. 87,03,089, for tax in India. However, the assessee claimed that the amount of Rs. 7,61,45,790, received on account of Management Service Fees and Technology and Strategic Information Systems ( TSIS ) Service Fees as not liable to tax in India as per Article 13 read with the Protocol to the India France Double Taxation Avoidance Agreement ( DTAA ) along with Article 13 of the India USA DTAA and the India Finland DTAA. The AO vide draft assessment order dated 31/03/2015, passed under section 143(3) r/w section 144C(1) of the Act treated the TSIS Service Fees of Rs. 42,42,933, as royalty within the meaning of Article 13(3) of India France DTAA as well as section 9(1)(vi) of the Act. As regards the Management Service Fees received by the assessee, the AO treated the same as fees for technical services under Article 13 of the India France DTAA. 5. The learned DRP vide its directions dated 24/11/2015, issued under section 144C(5) of the Act noted that in the case of the group company of the assessee viz. E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e under both TSIS and Management Service Agreements are taxable in India. The learned DRP further directed that fees received by the assessee under the aforesaid agreements be taxed as royalty. It cannot be disputed that the learned DRP s direction was issued on 24/11/2015, and thus was appealable by the Revenue before the Tribunal. Since, the Revenue has not challenged the aforesaid findings of the learned DRP and has accepted the same, therefore now in the present appeal we need to only examine whether the receipts under the aforesaid agreements are in the nature of royalty. On which issue, the assessee is in appeal before us. 9. Under the TSIS Agreement, the services provided by the assessee include IT infrastructure management and mailbox and web hosting services. During the year, the assessee received total consideration of Rs. 42,42,933, from its 3 group companies, namely, Edenred (India) Private Ltd, Royal Images Direct Marketing Private Limited, and SurfGold.com (India) Private Ltd. There is no dispute regarding the fact that under the agreement with each of the aforesaid entities the nature of services provided by the assessee is identical. Further, under the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Tribunal in Edenred PTE Ltd vs DCIT, in ITA No.2178/Mum./2017, for the assessment year 2013-14. The coordinate bench of the Tribunal after considering the facts of the case in para 6 of its order, decided the similar issue in favour of the assessee s group concern and held that income arising from the provision of services by the assessee cannot be treated as royalty either under the provisions of the Act or under the India Singapore DTAA. The relevant findings of the coordinate bench of the Tribunal are as under: 7. As could be seen from the facts discussed herein before, the issue in dispute is, whether the payment received by the assessee from provision of IDC services can be treated as royalty under Article 12 of India-Singapore DTAA. As we find, identical issue came up for consideration before the Tribunal in assessee's own case for assessment years 2010-11 to 2012-13. In fact, learned DRP has decided the issue in favour of the revenue by relying upon its decision in assessee's own case in assessment year 2012-13. However, while deciding the appeals of the assessee on identical issue in assessment years 2010-11 to 2012-13 the Tribunal, in the order referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e output of usages of such bandwith and network and not its use, (viii) consideration is for IDC services and not any specific program and (ix) no embedded/secret software is developed by the appellant. Against the above factual backdrop, let us discuss below the case laws relied on both sides. 6.1 We begin with the case laws relied on by the Ld. counsel. A plethora of precedents on the subject in which we are presently concemed compels us, in order to avoid prolixity, to refer only a few decisions below. In the case of Bharati Axa General Insurance Co. Ltd. (supra), the appellant, an Indian company carrying on business of general insurance entered into a service agreement with a Singapore company AXA ARC for receiving assistance such as business support, market information, technology support services and strategy support etc. from the latter. The AAR held that (i) though the services rendered by AXA ARC may well be brought within the scope of the definition of FTS under the IT Act as they answer the description of consultancy services or some of them may be categorized as technical services but the qualifying words make available technical knowledge, experience, skill, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived by SPL is for using the computer hardware which does not involve use or right to use a process, (iv) there is nothing on record to establish that the hardware could be accessed and put to use by the assessee by means of positive acts, (v) therefore, it cannot be said that the payment by the assessee to SPL is royalty within the meaning of Article 12 of the treaty. In ExxonMobil Company India (P) Ltd. (supra), the assessee had paid certain amount to 'EMCAP', Singapore towards global support fees. The AO opined that payment made by the assessee was in the nature of FTS as defined in Explanation 2 to section 9(1)(vii) of the Act. The Tribunal observed that as per terms of agreement, EMCAP had to provide management consulting, functional advice, administrative, technical, professional and other supporting services to the assessee; however, there was nothing in agreement to conclude that in course of such provision of service, EMCAP had made available any technical knowledge, experience, skill, knowhow or process which enabled assessee to apply technology contained therein on its own. Therefore, the Tribunal held that payment made by the assessee could not be considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a company, brand or product. It was a platform for users to hear and engage with their customers, brand ambassadors etc. across the internet. The applicant offered service on charging a subscription. The clients, who subscribe, can login to its website to do a search on what is being spoken about various brands and so on. The AAR held that the amount received from offering the particular subscription based service is taxable in India as 'royalty' in terms of paragraph 2 of Article 12 of the DTAC between India Singapore. However, we find that in the intense, the appellant in only providing DC service which includes administration and supervision of central infrastructure, mailbox hosting services and website hosting services and therefore, the ratio laid down in the above is not applicable to the facts of the appellant's case. 6.3 From the enunciation of law in Bharati Ax General Insurance Co Ltd. ExxonMobil Company India (P) Ltd., Standard Chartered Bank v. DDIT; DCIT v/s M/s Reliance Jio Infocomm Ltd. narrated at pare 6.1 hereinbefore, it is quite luculent that revenues under the IDC agreement ought not to be taxed in the hands of the appellant as royalty under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ispute regarding the fact that under the agreement entered into with each of the aforesaid entities the nature of services provided by the assessee is identical. As noted above, the AO vide draft assessment order treated the Management Services Fees as fees for technical services under section 9(1)(vii) of the Act and Article 13 of India France DTAA. However, in further proceedings, the learned DRP has held the fees received by the assessee under the Management Services Agreement to be taxable as royalty. As noted above, the Revenue has not filed any appeal against the appealable DRP s directions and therefore has accepted the findings of the learned DRP. From the perusal of the Management Services Agreement entered into by the assessee with the aforesaid Indian group companies, forming part of the paper book from page no. 280 324, we find that the scope of work is restricted to various services in the nature of public relations services, corporate social responsibility, partnership opportunities, networking coordination, financial services, legal services / advices, human resources. In support, the assessee has also filed copies of emails exchanged between the parties regarding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. In view of the decision of Hon ble Supreme Court in DIT v. Mitsubishi Corporation, [2021] 438 ITR 174 (SC), ground No. 7, raised in assessee s appeal, is allowed. 17. In the result, this appeal by the assessee is allowed for statistical purposes. ITA no.7247/Mum./2017 Assessee s Appeal A.Y. 2013 14 18. In its appeal, the assessee has raised the following grounds: On being aggrieved by the order dated 31 October 2017 of the learned Deputy Commissioner of Income-tax International Tax)(2)(1)(2), Mumbai (AO) passed under section 1433) read with section 144C(13) of the Income-tax Act, 1961 (the Act) as also directions issued by the DRP, Mumbai dated 22 September 2017, the present appeal is being preferred on the following grounds amongst others which, it is prayed, may be considered without prejudice to one another On the facts and circumstances of the case and in law, the learned AO, as per the directions of DRP has 1. General Grounds Erred in assessing total income at INR 7,09,51,660 as against returned income of INR 77,18,773; 2. Technology and Strategic Information Systems (TSIS ) fees taxed as royalty Erred in consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the Appellant is a non-resident assessee and its entire revenue / receipts are subject to tax withholding in India under section 195 of the Act and the Appellant is not liable to pay advance tax in respect of such revenues; The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal. 19. The issue arising in grounds No. 2 and 3 raised in assessee s appeal is pertaining to the taxability of TSIS Service Fees and Management Services Fees received by the assessee as royalty. The learned DRP vide its directions, after noting that the facts for the year under consideration are similar to the preceding assessment year, held that both the receipts are taxable as royalty. Since a similar issue has been decided in assessee s appeal being ITA No. 508/Mum./2016, for the assessment year 2012 13, therefore, our findings/conclusion rendered in the said appeal shall apply mutatis mutandis. Accordingly, grounds No. 2 and 3 raised in assessee s appeal are allowed. 20. The issue arising in grounds No. 1 and 4 are general in nature and therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce Double Taxation Avoidance Agreement (DTAA ); 3. Management service fees taxed as royalty a. Erred in characterizing and taxing management service fee amounting to INR 4,67,23,873 as royalty as against the characterization as Fees for Technical Services (FIS) as mentioned in the draft assessment order; b. Erred in characterizing and taxing the impugned management service fee as royalty by holding that the nature of the services rendered is the same as that in the case of group company (re Edenred Pte Ltd) where they have been held as royalty, however, in the group company's case the DRP has held management service fee as FTS only, c. Erred in not appreciating that impugned management service fee cannot be taxed as FTS under the provisions of the Act as well as Article 13 of the India-France DTAA read with Para 7 of the protocol of the India-France DTAA containing the Most Favoured Nation Clause and Article 12(5) of the India-Finland DTAA which provides taxing right to the state where such services are performed (i.e. France); d. Erred in not appreciating that impugned management service fee cannot be taxed as FTS under the provisions of the Act as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s allowed for statistical purposes. ITA no.5193/Mum./2018 Assessee s Appeal A.Y. 2015 16 30. In its appeal, the assessee has raised the following grounds: On being aggrieved by the order dated 13 July 2018 of the learned Assistant Commissioner of Income-tax (International Tax)-2(2)(1), Mumbai (AO) passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (the Act) as also directions issued by the DRP Mumbai dated 18 May 2018, the present appeal is being preferred on the following grounds amongst others which, it is prayed, may be considered without prejudice to one another. On the facts and circumstances of the case and in law, the learned AO, as per the directions of DRP has: 1. General Grounds Erred in assessing total income at INR 5,36,59,590 as against returned income of INR 47.65,378. 2. Management service fees taxed as Fees for Technical Services (―FTS ) a) Erred in not appreciating that impugned management service fee of INR 4:35.95.413 cannot be taxed as FTS under the provisions of the Act as well as Article 13 of the India-France Double Taxation Avoidance Agreement (DTAA) read with Para 7 of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onse thereto, the assessee submitted that the services are provided only to support the Indian group companies in carrying on business efficiently and running the business in line with the business model, policies, and best practices followed by the Edenred group. The assessee further submitted that these services are performed by the personnel of the assessee in France and payments are directly remitted from India to the assessee in its bank account in France. The assessee also invoked the provisions of the Protocol to the India France DTAA regarding the Most Favourable Nation ( MFN ) clause and submitted that beneficial provisions of other DTAA entered into by India are applicable in the present case. The AO vide draft assessment order dated 15/12/2017 passed under section 143(3) r/w section 144C(1) of the Act did not agree with the submissions of the assessee and held that Management Service Fee received by the assessee is taxable as fees for technical services under section 9(1)(vii) of the Act as well as the India France DTAA. 33. The learned DRP vide its directions dated 18/05/2018 issued under section 144C(5) of the Act held that India Finland DTAA is not applicable to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement which was executed in the preceding assessment year. Under the agreement, the services provided by the assessee broadly include management services in the nature of public relations services, corporate social responsibility, partnership opportunities, networking coordination, financial services, legal services / advices, human resources. The assessee, inter-alia, claimed benefit under para 7 of the Protocol to the India France DTAA and submitted under the restrictive definition of fees are included services as provided in Article 12(4) of the India USA DTAA, the services provided by the assessee are not taxable. In order to decide the claim of the assessee, it is relevant to note the provisions of the Protocol to the India France DTAA. Paragraph 7 of the Protocol, which is relevant to the present case, reads as under: 7. In respect of articles 11 (Dividends), 12 (Interest) and 13 (Royalties, fees for technical services and payments for the use of equipment), if under any Convention, Agreement or Protocol signed after 1-9-1989, between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, fees for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of para-7 of the Protocol to the India France DTAA has sought the benefit of the restricted scope of the definition of fees for included services as provided under the India USA DTAA. Article 12(4) of the India USA DTAA, defines the term fees for included services as under: (4) For 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. 39. It is the submission of the assessee that the services provided under the Management Services Agreement with Indian group companies do not make available any technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as fee for technical/included services only if the twin test of rendering services and making technical knowledge available at the same time is satisfied.' 18. .. In the case of Boston Consulting Group (supra), it was stated that advising on marketing strategies is held to be outside the scope of technical services and that as for the business of rendering strategy consulting services, such as business strategy, marketing and sales strategy, portfolio strategy carried on by the assessee the nature of these services is materially similar . All these services were held to be outside the scope of fees for technical services taxable under the Indo-US tax treaty. In the case of Bharat Petroleum Corpn. Ltd. v. Jt. DIT [2007] 14 SOT 307 (Mum.), another coordinate bench of this Tribunal, inter alia, held that market study covering study of supply and demand analysis, domestic refining capacity, price forecast etc did not constitute fees for technical services as it did not transmit the technical knowledge. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement do not constitute fees for included services under the India USA DTAA. 41. The learned DR submitted that since there is no notification as per CBDT Circular No. 3/2022 dated 03/02/2022, in order to import the benefits of the India USA DTAA into the treaty with France, therefore, the Protocol to the India France DTAA cannot be invoked in the present case. We find that the aforesaid circular came up for consideration before the coordinate bench of the Tribunal in GRI Renewable Industries S.L. vs DCIT, in ITA No. 202/Pun./2021, wherein vide order dated 15/02/2022, the coordinate bench observed as under: 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that: `The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,- (a) for the granting of relief in respect of- (i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or .and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate bench of the Tribunal, we are of the considered view that CBDT Circular No. 3/2022 dated 03/02/2022 is not applicable to the present appeal. Therefore, in view of the aforesaid findings, we are of the considered opinion that the assessee is entitled to claim the benefit of the restricted definition under India USA DTAA in view of the Protocol to the India France DTAA. Since the assessee has been found not to have made available any technical knowledge, experience, skill, or know-how, therefore, Management Service Fees received by the assessee cannot be taxed under the provisions of Article 13 of the India France DTAA read with para 7 of the Protocol to the India France DTAA and Article 12(4) of India USA DTAA. In view of the above, the alternative claim of the assessee under India Finland DTAA becomes academic. Further, once the taxability fails in terms of the treaty provisions, there is no occasion to refer to the provisions of the Act, as in terms of section 90(2). The taxability of impugned receipts, under section 9(1)(vii) of the Act, is thus wholly academic. Hence, the AO is directed to delete the addition on this account. Accordingly, ground No. 2 raised in assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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