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

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER

IT(IT)A Nos.813 & 814/Bang/2022 Assessment years : 2018-19 & 2019-20

Kennametal Inc., Vs. The Deputy Commissioner C/o. Kennametal India, of Income Tax, 8th/9th Mile, Tumkur Road, International Taxation Bengaluru – 560 073. Circle 1(2), PAN: AACCK 6397B Bengaluru.

APPELLANT RESPONDENT

Appellant by : Shri Chavali Narayan Respondent by : Shri D.K. Mishra, CIT(DR)(ITAT), Bengaluru.

Date of hearing : 23.03.2023 Date of Pronouncement : 29.03.2023 O R D E R Per Padmavathy S., Accountant Member These appeals are against the final order of assessment passed by the ACIT, International Taxation, Circle 1(2), Bengaluru dated 15.7.2022 for the assessment year 2018-19 and dated 14.7.2022 for the assessment year 2019-20 passed u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act]. The issues involved are common in both the appeals and hence heard together and disposed of accordingly.

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notice u/s 143(2) was issued on 22/09/2019. Subsequently, notice u/s 142(1) was issued on 04/11/2020. The assessee has filed the submission on 12/11/2020 and furnished the breakup of the payments from its group entities in India as under:-

Sl. No. Nature of payment Amount In INR 1 Information technology (IT) allocation Charges Rs. 24,14,38,503/- Professional Charges 2 Rs. 1,25,16,500/- . 3 Royalty Income Rs. 1,90,32,437/- Total Rs. 27,29,87,440/-

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Human Resources (HR) services (Appendix A): As per “3.1 submission dated 13/09/2021 of the assessee, the assessee furnished Human resources service Agreement between Kennametal INC and Kennametal India which says: 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 actively. Provide recruitment services to fill legal open position as needed by Service Recipient. 3.2 HR services It is clear from above that 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: 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 : (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. Hence, this is clearly in the nature of FTS as per Article 12(4)(b) of the India-USA DTAA. Therefore, the undersigned it of the opinion that these receipts of Rs. 1,25,16,500/- are chargeable as FIS. 4. Therefore, the sum of Rs.1,25,16,500/- is taxed as ‘fees for included services’ in terms of Para 4(a) of Article 12 of Indo-US Tax Treaty as the services clearly falls under the purview of provisions of the said Para.”

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“3.4 The above information extracted from the Service Agreement shows that these services are auxiliary to the provision of SAP software. These services are subsidiary to SAP software and arise only because the assessee company allows the use of SAP software to its group entities. These services though supplementary, are necessary as they allow the Indian entities to make proper use of the tools forming part of the SAP Software. These services are not provided to companies or entities that have not utilized SAP software provided by the Assessee. The information on record clearly indicates that all these services are in regard to the licensing of software. Therefore, we are of the view that they would constitute "fees for included services" as per Article 12(4)(b) of the Indo-US DTAA. The objections of the Assessee are, therefore, rejected.” 9. Regarding the contention raised that the payment received is a cost-to-cost reimbursement, the DRP held that –

“4.2 At the very outset, we have already held that these payments from Indian entity constitute Royalty and Fees for Included Services and hence taxable under the Income Tax Act

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and DTAA for reasons discussed. As regards the plea of reimbursement, we note that the assessee has not substantiated the claim of cost to cost reimbursements. The Annexure enclosed in the Paper Book pertains to cost allocation for different financial year and have no relevance for the subject year, and thus the basis of cost allocation was not given. In view of these, the plea that they are cost reimbursements is rejected.” 10. The assessee is in appeal before the Tribunal against the final order of the AO passed pursuant to the directions of the DRP.

“The assessee provides many useful and beneficial HR services for the establishment, operation and support and upgrade of the common timekeeping, payroll and recruitment services used within the Kennametal Group. In order to provide HR services to its Group entities, the assessee has entered into agreements with service providers like IBM and ADP for management of payroll and HR related services. The agreement covers support across all global locations of Kennametal Group. The billing is made to the assessee for the support rendered across locations. The assessee then allocates the cost to the Kennametal Group entities based on the headcount for each entity on cost-to-cost basis. During AY 2018-19, KIL and KSSPL desired to utilize the services of the assessee. KIL and KSSPL intend to utilize the services on continuous basis in order to receive the necessary HR services and support for conduct of its business operations. KIL and KSSPL require the services of the assessee time and again as the knowledge of performing HR services are not made available to KIL and KSSPL. During the course of assessment proceedings, the Ld. AO. was provided with the copy of the agreement which clearly brings about the fact that the assessee provides for the HR services with the help of software and services provided by vendors like IBM and ADP. Even the cost allocation matrix of the amount charged by these vendors was provided as a part of the agreement in Appendix B.

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However, the Ld AO has erred in overseeing the facts and have considered the entire nature of services as FIS. In this regard, the assessee wishes to submit that the amount received from KIL and KSSPL are towards these software utlisation charges charged by the vendors. Taxability In terms of section 90(2) of the Act, in case of a taxpayer who is a tax resident of any country with which India has entered into a DTAA, the provisions of such agreement shall apply, to the extent they are more beneficial as compared to the provisions of the Act. Kennametal Inc, being a tax resident of United States, is entitled to avail the beneficial provisions of the Treaty. As stated earlier, the amount received by the assessee are towards the software cost allocated to KIL and KSSPL for performing the HR services. The assessee wishes to submit that the amount received for usage of softwares for performing HR services are not taxable in India and are squarely covered by the Supreme Court ruling in the case of Engineering Analysis Centre of Excellence Private Limited [TS-106-SC-2021]. In the aforementioned case, the Apex court has ruled that software sales should not be characterized as "royalties" under applicable tax treaty law, consequently not triggering Indian withholding tax. The SC held in its judgement that distribution agreements / end user licence agreements (EULA) did not create any interest or right in the Indian distributors or end users which could amount to right to use any copyright and hence do not qualify under royalty. In light of the above submission, the Company wishes to submit that KIL and KSSPL does not have right to use any copyright of a literary, artistic, or scientific work, any patent, trademark, design or model, plan, secret formula or process in the software. Therefore, the cost allocation towards software licenses cannot be regarded as royalty and thus not taxable in India. Without accepting but considering that the Ld AO. treats that the payments received by the assessee are in the nature of Fees for Included Services, the assessee wishes to submit that the HR

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services is for rendition of standard services under a services contract and does not make available any technology, technical knowledge or expertise under the tax treaties. Therefore, the same does not fall within the ambit of FIS under the India – US tax treaty. As per Article 12(4) of tax treaty the provisions of the definition of 'fees for included services' is as follows: "(4) For the 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." (Emphasis supplied) Test of 'make available' under the India-USA not fulfilled The second condition to regard a service to be in the nature of fees for technical service, such services should "make available" technical knowledge, experience, skill know-how or processes. For understanding the term 'make available" inference should be drawn from the Memorandum of Understanding (MoU') to the India-USA DTAA, which explains this term as follows: Paragraph 4(b) of article 12 refers to technical or consultancy services that make available to the person acquiring the service technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design to such person (For this purpose, the person acquiring the service shall be deemed to include an agent nominee, or transferee of such person.) This category is narrower than the category described in paragraph 4(a) because it excludes any service that does not make technology available to the person acquiring the service. Generally speaking,

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technology will be considered 'make 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, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available". As per the MoU, technology is considered as 'made available' only when the person acquiring the service is enabled to apply the technology. The fact that the provision of 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 embodies technology, shall not per se be considered to make technology available. As your Hon'ble Panel will appreciate, in order for a payment to be considered as "FIS" as per Article 12(4) of the tax treaty, the following conditions must be fulfilled: • The payment should be in consideration for services of a technical or consultancy nature; and • The services should fulfil the conditions set out in any of the clauses (a) or (b) above. In the instant case, your Hon'ble Panel may note that the Company is not 'making available' any technical knowledge, experience, etc. to KIL and KSSPL. It is providing support services to KIL and KSSPL such as: timekeeping services, if applicable, to effectively and efficiently report actual time worked; payroll services to effectively and efficiently report payroll activity; recruitment services to fill legal entity open positions, as needed; other HR services, as per requirement. The services provided by the Company is on an ongoing basis and also on a year to year basis, which itself suggests that the

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services are not making available any technology, skill, know- how to the recipient of the services. Hence, the receipts by the Company will not qualify as "FIS" under Article 12(4) of the USA tax treaty. Accordingly, the same should not be taxed in India. The Company also places reliance on certain judicial precedents to support the aforesaid view: • Hon'ble Jurisdictional Karnataka High Court in De Beers India Minerals (P.) Ltd1 laid down the principles as to when the services rendered would pass the make available test: • "The technology will be considered 'made available' when the person 'who received service is enabled to apply the technology. The service provider in order to render technical services uses technical knowledge, experience, knowledge, experience, skill, know-how or process which is used by service provider to render technical service should also be made available to the recipient of the services, so that the recipient also acquires technical knowledge, experience, skill, know- how or processes so as to render such technical services. Once all such technology is made available it is open to the recipient of the service to make use of the said technology. The tax is not dependent on the use of the technology but the recipient. The recipient after receiving of technology map use or may not use the technology. It has no bearing on the taxability aspect is concerned. When the technical service is provided, that technical service is to be made use of by the recipient of the service in further conduct of his business. Merely because his business is dependent on the technical service which he receives from the service provider it does not follow that he is making use of the technology which the service provider utilizes for rendering technical services. The crux of the matter is after rendering of such technical services by the service provider, whether the recipient is enabled to use the technology which the service provider had used. Therefore, unless the service provider makes available his technical knowledge, experience, skill, know-how or process to the recipient of the technical service, in view of the clauses in the DTAA, the liability to tax is not attracted."

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• (Emphasis supplied) 12. The ld. DR relied on the order of the lower authorities. The ld. DR submitted that given the nature of activity, the assessee is engaged in, the professional fees has been rightly held to be FIS.

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

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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

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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"). 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:

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• 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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services make available technical knowledge, experience, skill, know- how or processes or consists of the development and transfer of a technical plan or technical design. Accordingly, the test of ‘make available’ needs to be satisfied. As per the Memorandum of India- USA DTAA the services will be regarded as made available only when –

“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 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 113- 119112 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

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- 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” (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

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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 Agreement, it is clear that the assessee

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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.

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deleted the addition, this plea of the assessee has become academic and hence we are not separately adjudicating the same and leave it open.

Pronounced in the open court on this 29th day of March, 2023.

Sd/- Sd/-

( BEENA PILLAI ) ( PADMAVATHY S. ) JUDICIAL MEMBER ACCOUNTANT MEMBER

Bangalore, Dated, the 29th March, 2023. /Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order

Assistant Registrar ITAT, Bangalore.