ACIT(IT) 3(1)(1), MUMBAI vs. JEFFERIES LLC , MUMBAI

Whether on facts and in circumstances of the case and in the law, the Ld.CIT(A) was erred in not upholding addition of income made on account of the administrative support services rendered by the assessee company to its Indian entity M/s. Jefferries India Pvt Ltd (“JIPL”) as „fees for technical services/included services which is taxable in India under Article 12 of the double taxation avoidance agreement between India and United States of America (Treaty‟) since, the assessee „makes available‟ technical knowledge, experience, skill, know-how, or process to JIPL?

Whether on facts and in circumstances of the case and in the law, the Ld.CIT(A) was not correct in holding that the administrative support services are routine in nature and none of the services provided by the assessee resulted in knowledge or know-how being transferred to JIPL without appreciating the fact that the business strategies, administrative and management support services rendered regularly by the assessee company constitute services of specialised nature and cannot by any stretch of imagination called „routine‟ especially when data and information about the clients and customers has been accessed by engaging third party firms to collect, collate and provide such information to the assessee company which ultimately passed on the same to the Indian subsidiary entity JIPL for its own used in India to meet with and comply with statutory requirements of India and even to meet its business goals?

Whether on the facts, in circumstances of the case and in law, the Ld.CIT(A) was not correct in holding that reimbursement of expenses are not taxable as fees for technical/ included services merely relying on decision of the tribunal in the assessee‟s own case for AY2012-13 which is not accepted by the Department? Further appeal was not applied due to low tax effect.

Whether on the facts, in circumstances of the case and in law, the Ld.CIT(A) has failed appreciate the fact that expenses reimbursed constitute the expenses incidental to the rendering of services by the assessee company to its subsidiary JIPL in India and are clearly classifiable under the category of “technical service fees” defined in Section 9(1)(vii) of the IT Act read with Article 12(4) of the India-USA DTAA.

Briefly stated facts of the case are that the assessee, a Company incorporated in and tax resident of the USA, filed its return of income for the relevant assessment year declaring total income of Rs. NIL which P a g e | 3 Jefferies LLC, Mumbai was processed u/s. 143(1) of the Act and subsequently selected for scrutiny. During the year, it received certain amounts from its Indian affiliate „Jefferies India Private Limited‟ (JIPL) i.e. (i) Administrative Support Charges of Rs. 3,74,44,400/- and (ii) Reimbursement of Expenses of Rs. 3,13,08,046/-. It was contended that both receipts were not taxable in India. The Assessing Officer, however, treated these as „Fees for Technical Services‟ (FTS) under Section 9(1)(vii) of the Act and Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA) and completed the assessment u/s 143(3) r.w.s. 144C(3) of the Act, determining total income at Rs. 6,87,52,446/-.

Aggrieved, the assessee filed further appeal before the ld.CIT(A) contesting the impugned additions claiming that the assessee renders administrative support service to JIPL, a group entity in India, under the Intra-Group Agreement for Services (IGAS) which was entered into and was effective from 01.04.2014. Under the said IGAS, the administrative support services were rendered towards compliance advisory/support, general financial statements preparation, regulatory reporting, general support relating to human resources, information technology helpdesk support services, internal audit of systems, processes, and controls in place, etc. The copy of the agreement was P a g e | 4 Jefferies LLC, Mumbai placed on record. JIPL is registered with Securities and Exchange Board of India as a Category-I Merchant banker and as a Stockbroker. The principal business activities of JIPL are to provide Merchant banking and investment advisory services to investors and corporates and stock broking services to domestic and foreign institutional investors. JIPL also provides advisory services with respect to cross border merger and acquisition carried out by its clients which includes advising its clients through various stages of a transaction i.e. strategy development, target selection, deal structuring, negotiation and closing. During the year under consideration, assessee had provided the aforementioned administrative support services to JIPL as per Clause 3 of IGAS read with Schedule A and it was contended that the services rendered to JIPL were routine administrative and support functions of a non-technical nature. There was no transfer or “making available” of any technical knowledge, skill, experience, know-how, or process as required under Article 12(4)(b) of the India-USA DTAA. Reliance was placed on decisions of ITAT Mumbai in its own case for AY 2012-13 as well as consolidated ITAT order for AYs 2014-15, 2015-16, 2017-18 and 2018-19, following AY 2012-13 and also CIT(A) orders for AYs 2013-14, 2016-17 and 2019-20, which also accepted the its claim.

3 Further, it was observed that following the aforesaid ITAT decision dated 28.03.2023,the ld. CIT(A)-57, Mumbai had decided the ground under consideration in assessee‟s favour for AYs 2013-14, 2016- 17 and 2019-20.Thus, considering the material similarity of facts and circumstances of the grounds related to reimbursement of expenses for earlier and the assessment years under consideration, following the decision of the ITAT in appellant‟s own case for AY 2012-13 and AYs 2014-15, 2015-16, 2017-18 and 2018-19, as well as CIT(A)‟s decisions for AYs 2013-14, 2016-17 and 2019-20, the amount of Rs.3,13,08,046/- received as reimbursement of expenses was held to be not taxable as FTS under section 9(1)(vii) or Article 12 of the DTAA. Accordingly, the AO was directed to delete the addition of Rs. 3,13,08,046 /-.

Before us, the ld.AR has reiterated that both the grounds of the Revenue are covered in favour of the assessee vide ITAT orders in its P a g e | 7 Jefferies LLC, Mumbai own case involving identical facts and circumstances. Therefore, both the grounds are liable to be dismissed as they are covered by the aforesaid decision. The ld.DR on the other hand placed reliance on the assessment order and admitted that the issues in hand were covered.

We have carefully perused the records, the cited decisions and find no infirmity in the conclusion drawn by the ld.CIT(A).We may refer part of the order passed by the coordinate Bench in its appeal in ITA No.1023 to 1026/Mum/2024 dated 28.06.2024 which are extracted as below for the sake of brevity: “3.1 The following are the grounds taken by the revenue: “i. Whether on facts and in circumstances of the case and in the law, the Ld.CIT(A) was erred in not upholding addition of income made on account of the administrative support services rendered by the assessee company to its Indian entity M/s. Jefferries India Pvt Ltd (“JIPL”) as „feees for technical services/included services which is taxable in India under Article 12 of the double taxation avoidance agreement between India and United States of America (Treaty1) since, the assessee „makes available‟ technical knowledge, experience, skill, know-how, or process to JIPL? ii. Whether on facts and in circumstances of the case and in the law, the Ld.CIT(A) was correct in holding that the administrative support services are routine in nature and none of the services provided by the assessee resulted in knowledge or know-how being transferred to JIPL without appreciating the fact that the business strategies, administrative and management support services rendered regularly by the assessee company constitute specialised nature and „cannot by any stretch of imagination called „routine‟ especially when data and information about the clients and customers has been accessed by engaging third party firms to collect, collate and provide such P a g e | 8 Jefferies LLC, Mumbai information to the assessee company which ultimately passed on the same to the Indian subsidiary entity JIPL for its own used in India to meet with and comply with statutory requirements of India and even to meet its business goals? iii. Whether on facts and in circumstances of the case and in the law, the Ld.CFT(A) has failed to appreciate that fact that the Indian subsidiary of the assessee JIPL has deducted tax at source u/&. 195 of the Income Tax Act on payments made by it to the assessee @10% applicable to “technical service fees”.‟ iv. Whether on the facts, in circumstances of the case and in law, the Ld.CIT(A) was correct in holding that reimbursement of expenses are not taxable as fees for technical/ included services merely relying on decision of the tribunal in the assessee‟s own case for AY2 012-13 which is not accepted by the Department? v. Whether on the facts, in circumstances of the case and in law, the Ld.CIT(A) has failed appreciate the fact that expenses reimbursed constitute the expenses incidental to the rendering of services by the assessee company to its subsidiary JIPL in India and are clearly classifiable under the category of “technical service fees” defined in Section 9(l)(iii) of the IT Act read with Article 12(4) of the India- USA DTAA.

The brief fact of the case is that the assessee is a foreign company incorporated in United States of America. The assessee company i.e. Jefferies LLC provides “Administrative Support Services” to Jefferies India Pvt Ltd(in short JIPL) against which the assessee company receives payments from JIPL. For the impugned assessment year, the assessee company had filed its return of income declaring NIL income. Subsequently the case was selected for scrutiny assessment and during assessment proceedings it was noted by the ld. AO that receipts of Rs.72,80,069/- on account of “Administrative Support Services” as well as reimbursements amounting to Rs.11,46,63,298/- received from JIPLwere not offered for taxation. The assessment was completed treating the receipts amounting to Rs.72,80,069/- in the nature of “Fee for Technical Services” (in short FTS) and accordingly assessed income of the assessee amount of Rs.72,80,069/- in the impugned assessment order. Further, the assessee company has provided “Administrative Support Service” to JIPL, as per the agreement entered into with JIPL. JIPL is registered with P a g e | 9 Jefferies LLC, Mumbai Securities and Exchange Board of India as a Category Merchant Banker and a stock Broker. The principal activities of JIPL are to provide merchant banking and investment advisory services to investors, corporate and stock broking services to domestic and foreign Institutional Investors. The “Research Management Support Services”are rendered towards compliance advice/support, general financial statement preparation, regulatory reporting. Information technology helpdesk support, internal audit of systems, etc. During the impugned assessment year the assessee company provided “Administrative Support Service” to JIPL and the Administrative support charges received from JIPL wereamount Rs.72,80,069/- which was taxed in India. The assessee was also in receipt amount of Rs.11,46,63,298/- from JIPL on account of reimbursement of expenses which was not offered for taxation while filing the return of income by the assessee. The assessee has claimed that the reimbursement of expenses received from JIPL is not taxable in India. While making the payments, JIPL has deducted tax at source.Accordingly, TDS amounting to Rs.51,04,694/- on the above payment has been claimed as Refund in the return of income. The assessee has received reimbursements to the tune of Rs.11,46,63,298/- from JIPL on account of reimbursement of expenses but has claimed the same as not liable to tax in India as per the India-USA Double Taxation Avoidance Agreement (DTAA). It has claimed the said receipts as not taxable in India, since these cannot be characterized as “Fees for Technical/included services” as per the tax treaty. Similar additions were also made in A.Y. 2013-14, 2015-16 and 2016-17.The aggrievedassessee filed the appeal before the ld. CIT(A). Considering the covered issues of ITAT Mumbai Bench the ld. CIT(A) allowed the appeal of the assessee for all impugned assessment years. Being aggrieved on the appeal order the revenue has filed an appeal before us. On the other hand, the assessee has also filed Cross Objection before us against the impugned appeal order related to legal issues.

The Ld. DR vehemently argued and filed a written submission which is kept in the record. The Ld.DR specifically mentioned that the issue is duly dismissed by the said ld. CIT(A) is unjustified. The Ld. DR fully relied on the assessment order. The relevant paragraphs of written submission filed by the Ld. DR are reproduced as below:-

In the case of Mersen India (P) Ltd. The AAR (A.A.R. No. 1074/2010 dated 16.04.2012) observed that the payments by Indian company to French company towards advisory services is fees for technical services. In this case, the French company was provided services in nature of assistance, professional and - administrative consultation and training - various clauses of service agreement contained provision for service which related to overall management and direction, marketing and managing account and financial operations to the Indian company.

The Advisory/Support services is stated to have been used by the Indian entity in the course of their normal business activities. The services rendered by the assessee company to the Indian company JIPL are utilized by them for the betterment and improvement of their business model and other practices, which is ultimately reflected in the increase in profitability of JIPL. Thus, the business strategies, administrative and management support services of the assessee company is ultimately made use by the management for their administrative purposes for which they have paid high service fees to them. Moreover, the employees of the JIPL are all very educated and highly qualified. The said companies recruit the best talent available in P a g e | 12 Jefferies LLC, Mumbai the Indian market, from the most premiere of institutions and hence it would be impossible to imagine ITA Nos 1023 to 1026 /Mum/2024 Jefferies LLC that the advisory services provided by the assessee company is not absorbed and utilized by them in the management of their projects. Thus, there is an element of „make available‟ involved in whatever administrative/advisory service that may have been received by JIPL.

The non-resident assessee company, the service provider (SP) has provided services through third party to the Indian entities who are the service recipients. If the expenses were not met by the service recipient (SR), the expenses would have been met by the service provider. As a natural consequence, the service provider might have charged the additional amount (which was to be met out for expenses) from the SR. The expenses of the service provider, which were to be met out by the service provider in the normal course of business operations. So, what was paid by the SR for the services done by the service provider is technical service fees payable as per the agreement plus the expenses met out by the SR.

It is also pertinent to note that the fees for Included/Technical Services are taxed on the Gross Amount. That is why the taxation rate is lower when compared to the general rate of taxation. The fees for technical services are taxed at a lower rate (and on gross basis) only to take care of the expenses to be met in providing the technical services. Since the fees for technical services are taxed on a gross basis, no expenses can be allowed as deduction. The expenses met out by the assessee are nothing but the expenses of the services provider in providing the services. Since expenses cannot be allowed while taxing the fees for included services, the amount of reimbursement also should be added with the fees for included services. Section 2(24)(iva) also considers these payments as income of the services provider. The Hon‟ble Kerala High Court in the case of Cochin Refineries vs. CIT - 222 ITR 354 has held that the reimbursements of expenses are taxable. The facts and the held portion as reported in the ITR is reproduced below:- “Cochin Refineries requested a foreign company, F. to evaluate whether the coke produced from blend of vacuum bottoms and clarified oil from Bombay High crude was suitable for making

The Ld.AR mentioned that the issue prevails that the explanation of definition of „FTS‟ charges. As per insertion of Explanation of Finance Act, 2010 with effect from 01/04/1976 is liable for the tax as per the revenue. But the charges „FTS‟ is for technical services which is received by the assessee is duly covered by the Article 12(4)(b) of DTAA between India and US Tax Treaty. In earlier years, the issue was duly covered by the Co-ordinate bench of ITAT-Mumbai in assessee‟s own case for A.Y. 2012-13 in ITA No.5674/Mum/2017, date of pronouncement 28/03/2023. The relevant paragraph is duly mentioned by the Ld.AR which is reproduced as below:-

4 Now coming to the facts of the present appeal, the assessee has rendered management support services of the description listed at Annexure C of Master Support Services Agreement to Everest India on independent and non-exclusive basis. These services are centralized services which are being provided to all group entities in order to P a g e | 15 Jefferies LLC, Mumbai maintain uniformity and rationalize and standardize the practices across global location. No element of profit is earned by the assesee in course of rendering these services. These services include-

The next question that arises is concerning to extent to which the benefit under the India-UK DTAA can be made available to the Petitioner. As already noticed, the definition of “fee for technical services” occurring in Article 13(4) of the Indo-UK DTAA clearly excludes managerial services. What is being provided by Steria France to the Petitioner in terms of the Management Services Agreement is managerial services. It is plain that once the expression „managerial services‟ is outside the ambit of „fee for technical services‟, then the question of the Petitioner having to deduct tax at source from payment for the managerial services, would not arise. It is, therefore, not necessary for the Court to further examine the second part of the definition, viz., whether any of the services envisaged under Article 13(4) of the Indo-UK DTAA are “made available” to the Petitioner by the DTAA with France.”

The assesee‟s case also finds support from the MOU annexed to the India- USA DTAA explaining the FIS wherein it is clarified that clause 4(b) of Article 12 excludes any service that does not make technology available to the person acquiring the service. “Memorandum of Understanding (MOU) annexed to the India-USA DTAA dated 15.05.1989 concerning FIS states as under: Article 12 includes only certain technical and consultancy services. But technical services, we mean in this context services requiring expertise in a technology. By consultancy services, we mean in this context advisory services. The categories of technical and consultancy services are to some extent overlapping because a consultancy service could also be a technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in a technology is required to perform it. Under paragraph 4, technical and consultancy services are considered included services only to the following extent: (1) as described in paragraph 4(a), if they are ancillary and subsidiary to the application or enjoyment of a right, property or information for which are royalty payment is made; or (2) as described in paragraph 4(b), if they make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. Thus, under paragraph 4(b), consultancy services which are not of a technical nature cannot be included

Geological surveys ;

Scientific services ; and 9. Technical training.” From the above, it is evident that none of the services provided by the assesee are in the nature of FIS.

7 Further, considering the services provided by the assesee (listed above), in our view, these are not technical services nor do they require any technological knowledge, skill or experience. There is no transfer of technology involved. Everest India is not enabled to apply any technology on its own without recourse to the service provider i.e. the assesee. These services have not resulted in any enduring benefit to Everest India by way of any knowledge which could be applied by it on its own in future without depending on the assessee. These are general managerial services which are received by the assesee on recurring basis. Therefore, the test laid down under Article 12(4)(b), in our considered view, are not satisfied in the present factual scenario.

8 Thus, management fee received by the assesee from Everest India is not taxable as FIS under the provisions of India-USA DTAA. Accordingly, this ground is allowed in favour of the assesee.”

Further, the coordinate bench decided similar issues in the case of EdenredPte Ltd v. DDIT [2020] 118 taxmann.com 2 (Mumbai - Trib.) and held as under: - “9. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. We find that the services provided under the management agreement broadly include (i) consultancy services to support the sales activities of Surf Gold, (ii) legal services, (iii) financial advisory services and (iv) human resource assistance. There is no dispute here that under the provisions of section 9(1)(vii) of the Act, rendering of management services will be taxable as FTS. However, Edenred, by virtue of section 90(2) of the Act, is eligible to rely on the provisions of the India- Singapore DTAA, should the same be more beneficial than the provisions of the Act. In this regard, we fruitfully rely on the judgment of the Hon‟ble Delhi High Court in the case of New Skies Satellite BV &

1 Now we discuss the case laws relied on both sides. We begin with the reliance placed by the Ld. counsel. In the case of De Beers Mineral (P.) Ltd., the Hon‟ble Karnataka High Court has observed as under : “The technical or consultancy services rendered should be aimed at and result in transmitting of technical knowledge etc., so that the payer of the service could derive an enduring benefit and utilize the P a g e | 20 Jefferies LLC, Mumbai knowledge or know-how on his own in future without the aid of the service provider. In other words, the technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending on the provider.” In the case of Intertek Services (307 ITR 418), the AAR has observed on the term „make available‟ as under : “By making available the technical skills or know-how, the recipient of service will get equipped with that knowledge or expertise and be able to make use of it in future, independent of the service provider. In other words, to fit into the terminology „make available‟, the technical knowledge, skills etc. must remain with the person receiving the services even after the particular contract comes to an end. The services offered may be the product of intense technological effort and lot of technical knowledge and experience of the service provider would have gone into it. But, that is not enough to fall within the description of services which make available the technical knowledge, etc. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in future without depending on the provider.” In the case of M/s Bharati Axa General Insurance Co. Ltd., the AAR has ruled as under :

2 Then we turn to the case laws relied on by the Ld. DR. in US Technology Resources Pvt. Ltd. (supra), in terms of management service agreement between the assessee and the USA company, the latter provides highly technical services which are used by the assessee for making managerial decision, financial decision, risk management decision etc. The service of technical input, advice, expertise etc. rendered by the USA company are technical in nature as provided in clause 4(b) of the Article 12 of the DTAA. It is found that this case is reversed by the Hon‟ble Kerala High Court in 97 taxmann.com 642 dated 09.08.2018, wherein it is held that fees for management services received by US company would not be taxable in India as there is no transfer of technical knowledge by US company to Indian company. In Shell India Markets (P.) Ltd. (supra), the applicant is an Indian company, it has a network of retail fuel stations in India. SIPCL is a group company of assessee incorporated in UK. It is in the business of providing consultancy services to various group companies. The applicant has entered into Cost Contribution Agreement (CCA) with SIPCL for provisions of General Business Support Services (BSS). While providing General BSS, SIPCL works closely with the employees of the applicant and supports/advices them. Thus, General BSS is made available to the applicant. However, we find that subsequently, after considering the decision in the case of Shell India (supra), the Mumbai ITAT in the case of Linklaters LLP (ITA No. 1690/Mum/2015)

3 We find that in view of the factual matrix delineated at para 9 above, the case laws narrated at para 9.1 hereinbefore i.e. De Beers Mineral (P.) Ltd; Intertek Services; M/s Bharati Axa General Insurance Co. Ltd. are applicable to the instant case. Therefore, we delete the addition of Rs. 73,61,951/- made by the AO towards management services fees and allow the 3rd ground of appeal.”

From the above discussions and case law, the services provided by the group entities or holding company to its subsidiaries as support services to run their business effectively will not be considered as FTS or FIS under the treaty and these services does not amount to make available technical or skill or expertise while providing these services.

We heard the rival submission and considered the documents available in the record. The moot issue is that the assessee received amount to Rs.72,80,069/- on account of “Administrative Support Services”and also the reimbursement of amount to Rs.11,46,63,298/- received from JIPL which have not been offered for tax in ROI. As per the revenue, the FTS is liable for the tax under section 9(1)(vii) of the Act. The word „technical services‟ is preceded by the word „managerial‟ and succeeded by the word „consultancy‟. Since the expression technical services is duly covered for tax, in case of reimbursement, it is also enabled taxed in India. But considering Article 12(4)(b) of DTAA, the “Administrative Support Services” is re-defined, and issue is duly covered by the order of the Co-ordinate bench of ITAT in assessee‟s own case (supra). So, both the amounts are not liable for tax in India U/s 9 of the Act. Further, the observation of Ld.C IT(A) in appeal order is reproduced as below: - “6.3.1 The facts of the case of the appellant are that the appellant and M/s. Jefferies India Pvt. Ltd. entered into an agreement for providing administrative support services. For providing administrative support services, the appellant received Rs.19,07,598/-. The same was not offered for taxation as per India-US DTAA, particularly, Article 12(4) of the DTAA. On the other hand, the AO was of the view that the administrative services provided to JIPL were utilized in running its business. Further, the employees of JIPL were assisted to carry out the business mode of services on their own. Thus, the employees were enabled to work independently by acquiring the services from the appellant. The AO was of the view that acquiring the services from the appellant by highly qualified employees of JIPL was in the nature of make available of administrative/advisory services by the appellant to JIPL. Thus, administrative support services were fees for technical/included services which were taxable in India. During the appellant proceedings, the appellant has submitted that on similar facts and circumstances, in respect of administrative support services,