METSO OUTOTEC OYJ (EARLIER KNOWN AS OUTOTEC OYJ),GURUGRAM vs. ACIT, (INTERNATIONAL TAXATION) CIR. 1(2), KOLKATA

Per Shri Rajpal Yadav, Vice-President (KZ):- The present two appeals are directed at the instance of assessee against the assessment orders dated 15.02.2022 and 30.01.2023 passed for assessment years 2018-19 and 2020-21 respectively passed under section 143(3) read with section 144C(13) of the Income tax Act, 1961.

3. The assessee has taken six grounds of appeal

4. In Ground No. 2, the assessee has raised sub- grounds also and it has agitated the determination of taxable income under the head “IT Services”.

"3. Place of work to be performed 3.1 All activities related to the Services shall be provided at Service Providers premises”. 3.3. The assessee stated that none of its employees had visited India to provide the services to Outotec India. The assessee contended that in terms of paragraph 5 of Article 12 of the DTAA, FTS shall be deemed to arise in India if the payer is a resident of India. However, the second sentence of the said paragraph limits the operation of the first paragraph in as much as where the FTS relates to services performed within Finland, then such FTS shall be deemed to arise in the State in which the services are performed, which in this case is Finland. Hence the income therefore will only be taxable in Finland and not in India. On the PE observation of the AO, the assessee stated that the provision will apply only if the non-resident has a PE in India and that it had no PE in India during the year. 3.4. The submissions have been examined along with the materials available on record. The dispute is essentially about the scope and applicability of Paragraphs (1), (2) and (5) of the DTAA to the facts and circumstances relating to the assessee's rendition of IT services is. Relevant extracts of said Article 12 of the India- Finland DTAA are as follows- ARTICLE 12 ROYALTIES AND FEES FOR 'TECHNICAL SERVICES 1. Royalties or 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. However, such royalties or 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 beneficial owner of trie royalties is a resident of the other Contracting State, 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 5 Assessment Year: 2018-2019 & Assessment Year: 2020-2021 Metso Outotec OYJ (Earlier known as ‘Outotec OYJ”) use of or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, and films or tapes for television or radio broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. (b) The term "fees for technical services" as used in this Article means payments of any kind, other than those mentioned in Articles 14 and 15 of this Agreement as consideration for managerial or technical or consultancy services, including the provision of services of technical or other personnel.

4.The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect ofivhich the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

5. Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. Where, however, the right or property for which the royalties are paid is used within a Contracting State or the fees for technical services relate to services performed, within a Contracting State, then such royalties or fees for technical services shall be deemed to arise in the State in which the right or property is used or the services are performed. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by 6 Assessment Year: 2018-2019 & Assessment Year: 2020-2021 Metso Outotec OYJ (Earlier known as ‘Outotec OYJ”) such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 3.5. A conjoint reading of Paragraphs (1) and (2) clearly shows that Royalties / fees for technical services may be taxed in the State of residence of the payee [Paragraph (1)] as well as in the State of Source [Paragraph (2)]. In this context, Paragraph (5), inter alia, provides that ivhere the payer is a resident of a Contracting State (India in the present case), royalties/FTS shall be deemed to arise in such Contracting State. However, if the right/property for which such royalties are paid is used within a Contracting State or the services in relation to such FTS are performed in that Contracting State, the said royalties/FTS shall be deemed to arise in that Contracting State. As the India - Finland DTAA does not contain the make available clause in the FTS Article, there is no requirement to discuss that aspect of the services in the assessee's case for this AY. 3.6. In the present case, the assessee has stated that the said IT services have been performed by it in Finland through its offices / workshops in Finland and that none of its employees visited India to perform the services under aforesaid clause 3 of the Service Agreement. The services provided under Appendix 1 to the Service Agreement are as follows - (i)IT infrastructure services - including client Administration system service, wide area network, or to take active directory, antivirus control, mail no Lotus Notes, Internet and remote access, dial-up and wireless service, push mail, partner virtual private network, Internet connections website, encryption service, videoconference service etc, (ii) IT infrastructure special services - including virtual private network hardware site connection and video equipped meeting room (iii) IT application services - including SAP and SAP related services, project data Administration Systems, design applications support, development and support of customer relationship Administration Systems, community tools for information sharing and collaboration etc. 7 Assessment Year: 2018-2019 & Assessment Year: 2020-2021 Metso Outotec OYJ (Earlier known as ‘Outotec OYJ”)

3.7.The Assessing Officer has stated that the service is treated to be performed only when the beneficiary is able to use it for its purpose. In this context, the Panel notes that for AY 2015-16 in in the assessee's case, the Hon'ble ITAT, Kolkata held that income from testing and other services is taxable in India even if the technical services of testing were performed outside the country. The Tribunal held that even though the process of testing ivas conducted outside India, the payment for the same was not for the process but for the results of testing which were used in India. Accordingly, the services provided by the assessee were held to be taxable as fees for Technical Services under Article 12(5) of the India - Finland DTAA. It is that for the said assessment year, the assessee had, inter alia, earned four types of revenue including income from the rendition of technical services which was offered to tax. On income from rendering of testing services, the Hon'ble Tribunal did not accept the assessee's contention that as the services have been rendered outside India, the same was not taxable in India under Article 12(5) of the DTAA. Specifically, the Hon'ble Tribunal held as follows - "22, The assessee argues that the technical services of testing is performed outside the country, i.e. in Finland and hence cannot be taxed in India in view of the exception carved out to Article 12(5) of the India - Finland DTAA. The exception in question is, when the fees is paid for technical services which are performed within a contracting state, then the income therefrom is deemed to accrue or arise within the state in which the services were performed. In our view, this Clause does not apvlu as the payment in question was made for the test results which were used within the contracting state. India. It may be true that the process of testing may have been conducted outside India. But the payment in question is not for the process but for the results of testing which is used in India. The argument of the Id. DR that these services were available in India and hence are taxable in India has to be upheld. Hence, we agree ivith the finding of the Assessing Officer as upheld by the DRP on this issue. In the result, this ground of the assessee is dismissed." (Emphasis supplied) 8 Assessment Year: 2018-2019 & Assessment Year: 2020-2021 Metso Outotec OYJ (Earlier known as ‘Outotec OYJ”)

3.8. In the present case, the ratio of the decision of the Hon'ble Tribunal above is squarely applicable to the income from technical services amounting to INR 1,38,10,480 as well. The said services, even if rendered in Finland under the Services Agreement, were for the purpose of the business of Outotec India in India. Without such use in India, the rendering of the services in Finland would be devoid of meaning. Clause 2 (Scope of Services) clearly affirms the above as it states that "the services provided may be adjusted from time to time by the Parties as is necessary in order to reflect changes in Buyer's needs, economic conditions, business operations and practices." 3.9. As rightly held by the AO, the performance of services can be said to have been made only when the beneficiary is able to use it for its purpose. In the light of the abovementioned discussion, the Panel upholds the action of the AO. The objection is dismissed. 3.10. Since the factual and legal matrix remain same, the Panel reiterates its own stand as spelt out for assessment year 2018-19. The assessee's objection on the above is rejected”.

"During assessment proceedings, the assessee submitted that the income constituted business income in its hands and was not taxable in India in the absence of permanent establishment in India. It also submitted that DRP had accepted the position of non-taxability of guarantee fees in its own case for AY 2013- 14. The Assessing Officer noted that the agreement signed between the assessee and Outotec India Private Limited was limited to IT services and that no other contract/agreement was provided by the assessee regarding providing corporate guarantee. The AO held that there was no reason to believe that the income from providing corporate guarantee xvas business income of the assessee since the same was already included in the supply of IT services. On the abovementioned DRP directions for AY 2013- 14, the AO stated that the DRP had confirmed the AO's view that the income from fee for providing corporate guarantee is income from other sources and taxable under Article 21(3) of the India- Finland DTAA but had held that since the income arose in Finland and corporate guarantee was provided in Finland, it was not taxable under Article 21(3). The AO noted that the assessee did not submit any evidence to show that the corporate guarantee was provided in Finland, while the invoices submitted by the assessee confirmed that the income accrued in India as the invoices were addressed to Outotec India Private Limited in India. The AO further held that the service is treated to be performed only when the beneficiary is able to use it for its own purpose and that the intended use of the corporate guarantee was ultimately in India from where the assessee derived its right to receive the income and raise the invoices. 4.2 In DRP proceedings, the assessee stated that it earned guarantee fees from Outotec India on account of parent company guarantee under its Articles of Association, which defines the scope of the line of business of the company. The Articles permit the company to engage in business of providing guarantees to its subsidiaries on a regular basis. To facilitate the same, the assessee had negotiated with a syndicate of eight banks, whereby in connection with the above services, the bank charged fees at the rate of 1.5% per Assessment Year: 2018-2019 & Assessment Year: 2020-2021 Metso Outotec OYJ (Earlier known as ‘Outotec OYJ”) annum of the guarantee fees and the assessee subsequently recharged the cost to Outotec India together with a premium of 0.25% per annum. The assessee stated that the activity of provision of guarantees is a continuous systematic activity which had a direct impact on the revenue of the company. The assessee stated that section 5 read with section 9(l)(i) of the IT Act provides that income shall accrue or arise in India if the same is earned through any business connection in India. The assessee referred to the observations of the Hon'ble Supreme Court in Carborundum Co vs CIT (108 ITR 335) that carrying on activities in India is essential to make non-residents have business connection in India. The assessee stated that it is not carrying any activity in India in connection with the guarantee fees charged from Outotec India and hence there zvas no presence of business connection in India and no scope for attributing income to Indian operations. The assessee also stated that under the DTAA, income derived by it from guarantee fees is governed by Article 7 of the DTAA and since it does not have a fixed place of business in India, the question of PE in India does not arise. Therefore, guarantee fees cannot be taxed under Article 7 read with Article 5 of the DTAA. Also, such income being business income will fall outside the scope of Article 11 (Interest) as had been accepted by the AO and also outside Article 21 ('Other income') 4.3. In DRP proceedings the assessee also filed additional evidence in the form of copy of the Articles of Association and copies of invoices pertaining to guarantee fees, which was admitted by the Panel in the interest of natural justice under the DRP Rules, 2009. However, it is noted that no agreement for any such corporate guarantee was furnished by the assessee in DRP proceedings. 4.4. The submissions of the assessee along with the additional evidence have been examined. It is seen that the same issue arose in AY 2013 -14, which was examined by DRP as follows - “...The assessee had given bank guarantee/ Parent company guarantee of Nordes Bank Finland (lead arranger of syndicate of banks) for OT1N. OTIN used this bank guarantee to give bank guarantee to its customers in respect of the advance money received for the projects. The AO 13 Assessment Year: 2018-2019 & Assessment Year: 2020-2021 Metso Outotec OYJ (Earlier known as ‘Outotec OYJ”) has held that the income earned by the assessee against the bank guarantee given in favour of OTIN as income from other sources for the assessee giving bank guarantee is not the business of the assessee. To this extent the findings of the A.O. is correct. Once having decided the head of income, the A.O. relied upon Indo Finnish DTAA to determine the taxability of the commission received for providing bank guarantee... The A.O has held that the commission income earned by the assessee for providing bank guarantee is taxable under sub clause 3 of the Article 21 of the DTAA. The assessee claimed that the Articles of Association of the assessee authorizes the company to engage in business of providing guarantees to its group companies including Outotec India on a regular basis. Provision of guarantee is not an isolated event but a planned continuous systematic activity which has direct impact on the revenues of the company. The assessee also charges premium on the guarantee provided to its subsidiary company. Hence provision of guarantees has a direct effect on the profitability of the assessee which substantiates that it has direct nexus or control zoith the business of the assessee. Thus the income earned from providing guarantee to Outotec India will qualify as business income and not income from other sources. The contention of the assessee has been considered. Providing bank guarantee/parent comyamj guarantee is not a routine activity for the assessee. It does it as an obligation to its subsidiary comyamj being the owner of the subsidiary. Hence it is more likely to be a share holder obligation/service than business activity. Had it been a business activity, the assessee should not have restricted it to it's subsidiaries only. Therefore the decision of the A.O. that the commission income earned by the assessee for providing bank/parent company guarantee is income from other sources is confirmed. The A.O. has held that the income is taxable in India by virtue of sub clause 3 of article 21 of Indo Finnish DTAA. This interpretation appears to be wrong. For the sake of clarity sub section3 is reproduced once again: 14 Assessment Year: 2018-2019 & Assessment Year: 2020-2021 Metso Outotec OYJ (Earlier known as ‘Outotec OYJ”)

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The company's line of business is to carry on, by itself or through its subsidiaries, the design, manufacture, construction of and trade in methods, machinery, devices, equipment, spare parts and production facilities for the mining, concentration, metallurgical and other processing industry, metals forming technology, materials technology, energy technology and environmental protection, the production and sale of technical design, project services and research and product development services for the processing industry, energy technology and environmental protection, including any industrial and commercial operations and the sale of business management and consultancy services based on or relating to these activities or know - how acquired in this sphere of activities, as well as the holding and control of domestic and foreign securities, own and control domestic and foreign securities, raise and punt loans, gave guarantees and pledge its assets. Within the limits of its line of business, the Company may also establish domestic and international companies and consortiums,'(Emphasis supplied) 4.7. From the above, it is clear that the activities highlighted above including giving of guarantees are only in furtherance of the assessee's business of business of providing innovative and environmentally sound solutions in metals processing industries. The Panel notes that the DRP did not have the benefit of the ratio laid down by the Hon'ble IT AT as discussed in paragraph 3.7 above before it for AY 2013-14. As seen in the case of income from IT services Assessment Year: 2018-2019 & Assessment Year: 2020-2021 Metso Outotec OYJ (Earlier known as ‘Outotec OYJ”) earlier, the Panel is of the view that the corporate guarantee was given for the business of the assessee's subsidiary in India namely Outotec India Private Ltd., with the invoicing address for the costs related to bank guarantee being that of Outotec India Private Ltd in Kolkata, India. In other words, the sit us of utilization of the service of providing corporate guarantee is in India, with the income arising there from in the form of corporate guarantee fee arising in India and falling within the scope of the non-obstante Paragraph 3 of Article 21. In view of the above, the Panel upholds the action of the AO. The objection in Ground 3 stands dismissed. 4.8. Since the factual and legal matrix remain same, the Panel reiterates its own stands as spelt out for assessment year 2018-19. The assessee objection on the above is rejected.

16. In Ground No. 4 of for A.Y. 2018-19, the assessee has pleaded that ld. Assessing Officer has erred in granting the TDS Credit for an amount of Rs.24,79,026/- as against the TDS Credit of Rs.32,58,306/- claimed by the assessee. No discussion is discernable qua this aspect also. Therefore, we remit this issue also back to the file of ld. Assessing Officer for re- verification and adjudication. In case it revealed that TDS Credit is of Rs.32,58,306/-, then, ld. Assessing Officer shall record a specific finding as to why Credit of reduced amount is to be given to the assessee. 21 Assessment Year: 2018-2019 & Assessment Year: 2020-2021 Metso Outotec OYJ (Earlier known as ‘Outotec OYJ”)

17. All other grounds, namely levy of interest under sections 234A and 234B are consequential in nature, initiation of penalty under section 270A is pre-mature in nature. The assessee will be given fresh opportunity as to why penalty be not imposed, if any imposable. Therefore, it can explain its stand in the penalty proceeding independently.

Sd/- Sd/- (Rajesh Kumar) (Rajpal Yadav) Accountant Member Vice-President(KZ) Kolkata, the 29th day of August, 2023 (1) Metso Outotec OYJ, Copies to : (Earlier known as “Outotec OYJ”), C/o. Metso Outotec India Private Limited, 1st Floor, Building No. 10, Tower-A, DLF Cybercity, Phase-II, Gurugram-122002, Haryana (2) Deputy/ Assistant Commissioner of Income Tax, (International Taxation), Circle-1(2), Kolkata, Aayakar Bhawan Poorva, 110, Shanti Pally, 2nd Floor, Kolkata-700107 (3) Dispute Resolution Panel-2, New Delhi