Mumbai bench India Thailand DTAA no FTS clause dealt aricle 22 (other income) vis a vis Article 7 (business income) Ass Fav McKinsey order; Chennai bench ITAT disallowance u/s 40(a)(i) TDS default u/s 195 non resident Payment: for investment decision facilitation through compiled data in public domain not royalty and non taxable; Mumbai bench ITAT on rev fav order in Sargent & Lundy LLC USA: Make available satisfied in provision of technical plan/design; Dehors Article 8 DTAA shipping company held non taxable u/article 7 (general) on basis of Commission at ALP to indian dependent agent
Kapil Goel
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES “L”, MUMBAI ITA No.7624/Mum/2010 : Asst.Year 2007-2008 M/s.McKinsey & Company (Thailand) Date of Pronouncement : 10.
The only issue assailed in this appeal is against the treatment
given to income from borrowed services rendered as `Royalties’
under Article 12 of the Double Taxation Avoidance Agreement
between India and Thailand (hereinafter called `the DTAA’) as
against the assessee’s claim of `Business profits’. Briefly stated the
facts of the case are that the assessee is a foreign company incorporated in and resident of Thailand. The assessee is part of
McKinsey group of entities, the primary business of which is to
render strategic consultancy services to their clients, which, inter
alia, include the analysis of performance, developments, strengths
and weaknesses of their clients, improving their profitability and
productivity and similar other parameters. In order to analyze these
parameters, the entities in various countries make use of certain data,
information and other support that is provided by the assessee. The
receipts amounting to `79,99,272 in the instant year for such services
rendered by the assessee to its Indian counterpart were claimed as
having been performed outside India and since these were rendered in
the ordinary course of business, the same qualified to be a `business
receipt’. In the absence of the assessee having any Permanent
Establishment (PE) in India, it was argued that no incidence of tax
arose in India on this account.
We have heard the rival submissions and perused the relevant material on record. There is no dispute on the fact that the assessee received `79.99 lakh from its group entity in India. It is further not disputed that the assessee has no PE in India. It is clearly borne out from the facts recorded in the assessment order that the assessee is in the business of rendering strategic consultancy services to their clients. Under such circumstances, the question arises as to whether
the said receipt of `79.99 lakh is covered under Article 22 of the DTAA as held by the DRP or under Article 12 of the DTAA as held by the Assessing Officer in the final order or under Article 7 as claimed by the assessee.
The effect of para 7 of Article 7 is that if
there is a `Business income’ which is of the nature as covered under
separate Articles such as `Shipping and air transport’ under Article 8
or `Royalties’ under Article 12, then such income would move out
of Article 7 and be considered only under the specific Articles. The
position which conversely follows is that if there is an income from
the carrying on of the business by the assessee, which does not fall
into any of the specific Articles, then it would remain included under
Article 7.
6. Article 22, which has been taken note of by the DRP, provides
that : “Items of income of a resident of a Contracting State, wherever arising, not expressly dealt with in the foregoing Articles may be
taxed in that State. Such items of income may also be taxed in the
Contracting State where the income arises”. A bare perusal of Article
22 makes it abundantly clear that it deals with residual items of
income which are not covered in any of the earlier Articles of the
Treaty. To put it differently, if an income is covered under one of the
Articles then application of Article 22 is ousted on such income.
Presently we are dealing with a situation in which the assessee
earned income by rendering the services which are in the course of its
business. Ordinarily, such income would remain under Article 7,
unless specifically dealt by other Articles. The case of the AO is that
Article 12 is applicable. We have noticed that such Article deals only
with `Royalties’ and not `Fees for included services’. Obviously, the
application of Article 12 is ruled out. In that view of the matter, such
income would remain included under Article 7 and will not move in
the lap of Article 22, which deals with items of income not expressly
dealt with in the other Articles of the DTAA. As the nature of the
extant income is such which is otherwise specifically covered under
Article 7, it cannot be considered in the residual provision of Article
22. Whichever way we may view the income, the opinion of the
authorities below of including it under Article 12 or under Article 22
is not sustainable. The amount falls under Article 7 as `Business
profits’ and is hence not chargeable to tax because of the absence of
any PE in India. We, therefore, hold that the amount of `79.99 lakh
falls under Article 7 and not under Article 12 or Article 22 of the
DTAA.
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES “L”, MUMBAI ITA No.8986/Mum/2010 : Asst. Year 2007-2008 Sargent & Lundy, LLC, USA, Date of Pronouncement : 24.07.2013 Briefly stated the facts of the case are that the assessee was incorporated in and is tax resident of USA. It is a consulting firm engaged in providing services to the power industry by providing diverse services such as operating power plants, decommissioning consulting, project solutions and other engineering based services. In the previous year relevant to the assessment year under consideration, the assessee received a sum of Rs.2,22,16,154/- from L&T Limited for rendering consulting and engineering services in relation to Ultra Mega Power projects in Mundra and Sesan. he only controversy is as to whether such technical services can fall within the scope of the DTAA. Article 12 of the DTAA, inter alia, deals with `fees for included services’. Para 4 of the Article defines this expression as : “ …….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: ……. 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.” It is not the case of the assessee that the payment is covered by para 5 of the Article 12, which states that "fees for included services" does not include amounts paid in respect of certain items enumerated therein. A brief resume of the services provided by the assessee to L&T as noticed above makes it abundantly clear that these are in the nature of `technical or consultancy services’ as per the main part of para 4 of the DTAA. To this extent the definition of `fees for included services’ given under the DTAA matches with that given in Explanation to section 9(1)(vii), which provides that : "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include …..”. At the cost of repetition, we mention that that the assessee has not assailed the finding of the AO in treating the amount as covered under `fees for technical services’ as per section 9(1)(vii) of the Act. The arguments made before us revolve around the definition of `fees for included services’ as per Article 12 of the DTAA. In nutshell, there are two aspects of the definition of `fees for included services’ for our purpose, viz., first that there should be rendering of `technical or consultancy services’ and second that such services should be `made available’ to the payer of such services. On perusal of the details of the nature of work done by the assessee for L&T, we have held above that the consideration is for the rendition of `technical or consultancy services’. The case of the assessee largely hinges on the second aspect of the definition, being `making available’ such technical or consultancy services. The ld. AR argued that the activities done by the assessee did not result into making available such technical or consultancy services to L& 14. Adverting to the facts of the extant case we find that the technical services provided by the assessee in the shape of technical plans, designs, projects, etc. are nothing but blueprints of the technical side of mega power projects. Admittedly such services are rendered at a pre-bid stage. It is quite natural that such technical plans etc. are meant for use in future alone if and when L&T takes up the bid for the installation of the power project. When the otherwise technical services provided by the assessee are of such a nature which are capable of use in future alone, we fail to comprehend as to how the same can be considered as not made available to L&T. In our considered opinion, there is no infirmity in the impugned order holding that the assessee received consideration for `making available’ technical services within the meaning of Article 12 of the DTAA. This ground is not allowed..
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES “L”, MUMBAI ITA No.8847/Mum/2010 : Asst. Year 2007-2008 ITA No.8847/Mum/2010 : Asst. Year 2007-2008 Date of Pronouncement : 24.07.2013
We have heard the rival submissions and perused the material on record. Before going into the first question of the availability of the benefit of Article 8 of the DTAA in respect of such 21 voyages, we proceed to examine as to whether the amount is chargeable to tax as per Article 7 of the DTAA. The ld. AR was fair enough to accept that CMA may be considered as the dependent agent of the assessee. Thus, it satisfies the requirement of Article 5 of the DTAA. We therefore, hold that CMA was the agent of the assessee and hence constitutes its permanent establishment in India. 4. The next question is determination of the `Business profits’ as per Article 7 of the DTAA. 6. It is observed that the income in respect of 21 voyages which has been considered as chargeable to tax in India as per Article 7 of the DTAA is the amount on which the assessee paid commission etc. to CMA, which is its AE and also a dependent agent. The receipt in the hands of the CMA has been determined at ALP under due process of law. Though we do not find the submissions of the ld. DR recorded above as absolutely devoid of any force, but the cases of Set Satellite (supra) and Delmas France (supra) stand in the way. In these decisions, it has been held that where the associated enterprise (that also constitutes a PE) is remunerated on ALP, then nothing further would be left to attribute to the PE. In that view of the matter and respectfully following the precedents, we uphold the contention of the ld. AR. We, therefore, hold that income in respect of 21 voyages cannot be included in the hands of the assessee.
IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH : CHENNAI I.T.A. No. 1774/Mds/2012 Assessment year : 2008-09 Sundaram Asset Management Date of Pronouncement : 19-07-2013 Co. Ltd.,
Dis-allowance u/s. 40(a)(i) Rs. 33,48,666/- on account of non-deduction of tax at source u/s. 195 on the payments made to M/s. Fund Quest a non-resident firm:
ld. Counsel on ground No. 3 of the appeal submitted that an amount of Rs. 33,48,666/- was paid to M/s. Fund Quest for the services rendered abroad. M/s. Fund Quest does not have PE in India and the services rendered by them were advisory in nature. The Assessing Officer has erred in come into the conclusion that the payment is in the nature of ‘Royalty’. The assessee had not obtained any certificate u/s. 197 of the Act as assessee had no doubt that the payment is for services and not in the nature of ‘Royalty’. Since, the said amount is not taxable in India, the provisions of Section 195 are not applicable.. The third ground in the appeal relates to dis-allowance u/s. 40(a)(ia). The assessee is into investment business. The assessee has entered into an agreement with M/s. Fund Quest (France) on 13-07-2007, to provide investment advice for the investments to be carried outside India. M/s. Fund Quest has been providing advisory services. For the services rendered, the assessee paid fee in accordance with mutual agreement. In the course of providing advisory services, M/s. Fund Quest is providing certain data of the companies which facilitates the assessee to make investment decisions. The information provided to the assessee by Fund Quest in the form of database is published information which is available in public domain. M/s. Fund Quest has merely compiled the information and transmitted the same to assessee. The authorities below termed the payments made by the assessee to M/s. Fund Quest for the services and data provided as ‘Royalty’ We are of the considered opinion that such payments cannot be termed as ‘Royalty’ as defined under the provisions of the Act. The term ‘Royalty’ has been defined in Explanation (2) to Section-9, Sub-section-1, Clause-(vi) which is re-produced here in below.. Thus, a perusal of the term of ‘Royalty’ as defined in the Act shows that it does not include any information provided in the course of advisory services. We do not agree with the findings of the CIT(Appeals) on the issue. Since, payments made to M/s. Fund Quest are not in the nature of ‘Royalty’ and the services were rendered abroad, no part of income had accrued or arisen in India. The assessee is not liable to deduct tax at source on the payments so made. The findings of the CIT(Appeals) on this issue are set aside and this ground of appeal of the assessee is allowed.