KENNAMETAL INC,BENGALURU vs. DEPUTY COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION, CIRCLE-1(2), BENGALURU

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by assessee is directed against final assessment order passed by the Deputy Commissioner of Income-tax, International Taxation, Circle-1(2), Bengaluru for the assessment year 2020-21 dated 31.1.2023.

2.1 The assessee is established under the laws of USA. The assessee company, a tax resident of the United States of America, belongs to Kennametal group of Companies, and is global supplier

IT(IT)A No.258/Bang/2023 Kennametal Inc., Bangalore

Page 2 of 11 of tooling, engineered components and advanced materials consumed in the production process. The assessee company has centralized worldwide operations through implementation of centralized IT system, which is housed at Latrobe in the USA. The assessee company receives Royalty from the affiliate entities for the use of the Intellectual property Rights. It also provides various beneficial Information Technology services and services of personnel to other Kennametal Group Entities. The costs of such services are allocated to international Kennametal entities and such allocated cost is reimbursed by the international entities under a service agreement. The company has provided Information Technology support services ('IT Services') to its group entities globally including its subsidiaries, Kennametal India Ltd ('KIL') and Kennametal Shared Services Private Limited ('KSSPL).

2.2 According to the AO, these services are technical and consulting in nature. The assessee makes available the global best practices in the domain of HR management to its group affiliates for which the receipts in the nature of professional fee are received. It is necessary to bring forth the Article 12(4)(b) of the India-USA DTAA which reads as under:

“(a) 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:

(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(IT)A No.258/Bang/2023 Kennametal Inc., Bangalore

Page 3 of 11 According to AO, this is clearly in the nature of FTS as per Article 12(4)(b) of the India-USA DTAA.

2.3. Therefore, the lower authorities observed that the sum of Rs.2,62,65,433/- is taxed as “fees for included services” in terms of Para 4(a) of Article 12 of India-US Tax Treaty as the services clearly falls under the purview of provisions of the said Para. Against this assessee is in appeal before us.

“B. Most of the companies within the Kennametal Group (as defined herein) utilize a common business system for timekeeping, payroll services and recruitment services in order to enhance performance, increase efficiency, improve productivity, strengthen communication and reduce costs from that which would otherwise occur if each company acquired and operated independent systems. C. Service Provider provides many useful and beneficial Human Resources services for the establishment, operation, support and upgrade of the common timekeeping, payroll and recruitment services system used within the Kennametal Group (as defined herein), Over a period of time, Service Provider has provided these services to Service Receiver. D. Service Recipient desires to continue to utilize the Services (as defined herein) that are provided by Service Provider in

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Page 4 of 11 order to receive the necessary human resources services and support for the conduct of its business and operations.

E. Service Provider is willing and able to continue to provide the Services (as defined herein) for Service Recipient. F. The Parties agree that Service Provider shall be remunerated for the Services (as defined herein) it provides to Service Recipient based upon the Actual Services Costs for Service Recipient (as defined herein) without mark-up. G. The Parties agree that the attribution of Services Costs (as defined herein) between Service Recipient, Service Provider and Other Clients (as defined herein) shall be made on the basis of the Allocation Method (as defined herein). H. The Parties have discussed in sufficient detail the structure and organization necessary to meet the objectives set forth in this Agreement and have verified the reciprocal benefits pursuant to this Agreement and therefore intend to formalize their business relationship by entering into this Agreement. Definitions a) Actual Services Costs has the meaning set forth in Section 6.1. b) Actual Services Costs for Service Recipient has the meaning set forth in Section 6.2. c) Allocation Method means the method of allocating Services Costs between Service Recipient, Service Provider and Other Clients as set forth in Appendix B, as may be amended in writing by the Parties from time to time. Accounting and Reporting 6.1 Actual Services Costs. For each month during which this Agreement is in effect, Service Provider shall properly record, account for and report the actual Services Costs incurred in each such month (the "Actual Services Costs"), 6.2 Actual Services Costs for Service Recipient. For each month during which this Agreement is in effect, Service Provider shall allocate the Actual Services Costs by the Allocation Method to arrive at the Actual Service Costs attributable to Service Recipient (the "Actual Services Costs for Service Recipient").

IT(IT)A No.258/Bang/2023 Kennametal Inc., Bangalore

Page 5 of 11 6.3 Accounting and Reporting Currency. The accounting and reporting currency for the Services Costs shall be USD. Service Fees 7.1 Service Fees Billing Currency and Exchange Rate. The Services Fee billing for each month shall be made in the currency of the Service Recipient. For each month within each Fiscal Year, the exchange rate used to translate the Actual Services Costs for Service Recipient from USD into the currency of the Service Recipient shall be at the Kennametal planned exchange rate that was established for each such Fiscal Year at the outset of each such Fiscal Year (the "Planned Exchange Rate"), 7.2 Services Fee. The Services Fee for each month shall be equal to the sum of the Actual Services Costs for Service Recipient in USD translated into the currency of the Service Recipient at the Planned Exchange Rate. Therefore the Services Fee shall be computed as follows: Services Fee = Actual Services Costs for Service Recipient in USD x Planned Exchange Rate Appendix A HUMAN RESOURCES SERVICES Services Types A. Human Resources (HR) Services Service Provider will render HR Services, including:

• Provide timekeeping services (If applicable) to Recipient to effectively and efficiently report actual time worked. • Provide payroll services to effectively and efficiently report payroll activity. • Provide recruitment services to fill legal entity open positions as needed by Service Recipient. B. Other Services Service Provider will render other HR Services as agreed with Service Recipient.

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“Technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills etc are made available to the person purchasing the service. Similarly, the use of a product which

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Page 8 of 11 embodies technology shall not per se be considered to make the technology available.” 15. As already stated, the nature of service rendered by the assessee is not disputed by the revenue and the fact is also substantiated by the copy of the agreement placed on record [pg. 118 to 153 of PB]. With regard to whether rendering of HR services is in the nature of technical services that is made available, we notice that the coordinate Bench in the case of QlikTech International AB v. DCIT, [IT(IT)A No.173/Bang/2021] while considering similar issue held that –

“13. The assessee entered into an agreement with Qlik India Ltd., whereby it agreed to provide assistance to Qlik India in respect of certain back office support operations, through it’s shared services center. Copy of the said agreement is at pages 113119112 of the assessee’s Paper Book. As per the said agreement, the assessee agreed to provide the following assistance to QlikTech India : - General Ledger related services

- closing of local books and group reporting activities on a monthly basis - statutory filings of local tax and local financial statements - assistance with audit related work • Revenue Operations related services − reviewing closed orders and preparing and issuing of invoices − support to sales related to technical admin in ERP • Expenses, Banking & AP related services − handling of 011 accounts payable invoices, including reminders − handling cash disbursements and receipts − reviewing and payment of all travel expense claims − payroll related payments • Payroll related services − administrating info sharing with outsourcing provider − review of payroll runs. 14. The assessee received a sum of Rs.98,93,448/- from Qlick India for provision of shared services. The plea of the assessee that the said receipt is not chargeable to tax in India was that the services were rendered outside India and payments were received outside India by the person to whom services were provided. It was the plea of the assessee that it being a non-resident, in terms of section 5(2)(b) & (c) of the Act, it is only income that is chargeable to tax in India that which accrue or arise in India or is deemed to accrue or arise in India. Since the services in question was rendered outside India, payment cannot be regarded as income that accrues or arises in India. Assessee also pointed out that payment in question cannot be regarded as “Fees for Technical Services”

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Page 9 of 11 (FTS). The assessee brought to the attention of the AO the provisions of section 9(1)(vii) which defines the terms of FTS to mean any consideration for rendering any managerial, technical or consultancy services. The plea of the assessee was that back office services rendered by the assessee were neither managerial, technical or consultancy services. The assessee, therefore, submitted that the receipt in question cannot be brought to tax as FTS. ******* 24. The meaning of the expression make available were considered by the Tribunal in the case of Raymond Ltd. Vs. DCIT (2003) 80 TTJ (Mum) 120. The Tribunal after elaborate analysis of all the related aspects observed that :- “The words ‘making available’ in Article 13.4 refers to the stage subsequent to the ‘making use of’ stage. The qualifying words is ‘which’ the use of this relative pronoun as a conjunction is to denote some additional function the ‘rendering the services’ must fulfil. And that is that it should also ‘make available’ technical knowledge, experience, skill etc. The word which occurring in the article after the word ‘services’ and before the words ‘make available’ not only described or defines more clearly the antecedent noun ‘(services’) but also gives additional information about the same in the sense that it requires that the services should result in making available to the user technical knowledge, experience, skill, etc. Thus, the normal, plain and grammatical meaning of the language employed is that a mere rendering of services is not roped in unless the person utilizing the services is able to make use of the technical knowledge, etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill etc. must remain with the person utilizing the services even after the rendering of the services has come to an end. A transmission of the technical knowledge, experience, skill, etc. from the person rendering services to the person utilizing the same is contemplated by the article. Some sort of durability or permanency of the result of the ‘rendering services’ is envisaged which will remain at the disposal of the person utilizing the services. The fruits of the services should remain available to the person utilizing the services in some concrete shape such as technical knowledge, experience skill etc. 25. Going by the nature of services enumerated in the present case, we are of the view that the services were purely in the nature of back office services and nothing can be regarded as having been made available to the recipient of services. As per the terms of the Service

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Page 10 of 11 Agreement, it is clear that the assessee only provides corporate back office services to QlikTech India and such services are not consultancy services and the same do not involve transfer of any technical knowledge or skill or experience to the recipient. The CIT(A) has erred in law and on facts in stating that, since the business model and the accounting and financial policies of the business remains the same, the consultancy services could be utilised by the Indian entity in its business year after year, thereby satisfying the 'make available' condition. On the contrary, the CIT(A) has failed to appreciate that the year on year rendition of services by the assessee to the Indian entity proves that technical knowledge is not transferred or made available to the Indian entity for independently function without the aid of the assessee. We therefore agree with the plea of the assessee and hold that the sum received towards shares services were not in the nature of FTS and cannot be brought to tax in India as “FTS”. The sum in question cannot be taxed as business profits also, as under Article 7(1) of DTAA, as the receipts in question cannot be attributed to the permanent establishment. Ground No.3 is accordingly allowed.” 16. The nature of services rendered by the assessee is purely HR services such as payroll services, recruitment services, etc. (pg. 136 of PB) and therefore the ratio laid down n the above decision of the coordinate Bench is applicable in assessee’s case also. Accordingly we hold that the payment received by the assessee is not in the nature of FIS and therefore cannot be brought to tax in India. The addition made is therefore deleted. 17. With regard to the alternate contention that the amount received is a reimbursement without any income element, we see merit in the submission based on the perusal of the terms of the agreement. Clause F of the agreement clearly states that the service fees will be based on actual cost without any mark up. However, since we have already deleted the addition, this plea of the assessee has become academic and hence we are not separately adjudicating the same and leave it open. 18. Ground Nos. 7 & 8 are consequential not warranting any adjudication. 19. The issue contended in the appeal for AY 2019-20 is identical, except for the figures and therefore the same is also held in favour of the assessee and the addition made is deleted accordingly. 20. In the result, both the appeals for AYs 2018-19 & 2019-20 are held in favour of the assessee.”

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Order pronounced in the open court on 10th July, 2023

Sd/- Sd/- (Beena Pillai) (Chandra Poojari) Judicial Member Accountant Member

Bangalore, Dated 10th July, 2023. VG/SPS

Copy to:

Asst. Registrar, ITAT, Bangalore.