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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI G.S. PANNU & SHRI SANDEEP SINGH KARHAIL
Date of Hearing – 20/12/2022 Date of Order – 29/12/2022
O R D E R PER BENCH The present appeal has been filed by the assessee against the impugned final assessment order dated 19/06/2020, passed under section 143(3) r/w section 144C(13) r/w section 254 of the Income Tax Act, 1961 (‘the Act‟) by the Assessing Officer (‘AO‟), pursuant to the directions dated 30/01/2020 issued by the learned Dispute Resolution Panel (‘learned DRP’), for the assessment year 2011–12.
In its appeal, the assessee has raised the following grounds:– “The following grounds of appeal are independent of, and without prejudice to one another:
M/s. Partners Medical International Inc. ITA no.1737/Mum./2020
Ground No. 1-General-Total Income On the facts and circumstances of the case, and in law, the learned DCIT erred in making additions and messing the total income of the Appellant for the year at Rs.5,52,50,139, as against the returned income of NIL. It is prayed that the learned DCIT be directed to delete the additions made. Ground No. 2-Addition on Account of Royalty On the facts and circumstances of the case, and in law, the learned DCIT erred in concluding that 90% of the receipts of the Appellant during the year amounting to Rs. 4,97,25,117 are in nature of Royalties under the provisions of Article 12(3) of the Double Taxation Avoidance Agreement between India and USA (DTAA) and thus, liable to tax in India. It is prayed that the learned DCIT be directed to hold that the entire payment received by the Appellant is for services rendered, and no part is in the nature of Royalties, and hence, the payment falls outside the scope of Article 12(3) of the DTAA. Ground No. 3-Addition on account of Fees for Included Services 3.1 On the facts and circumstances of the case, and in law, the learned DCIT erred in concluding that 10% of the receipts of the Appellant during the year amounting to Rs. 55,25,013 constitute 'Fees for Included Services (FIS) under Article 12(4)(b) of the DTAA and thus liable to tax in India. 3.2 It is prayed that the learned DCTT be directed to hold that the entire payment received by the Appellant is for services rendered, and are not „Included Services‟ within the meaning of Article 12(4)(b) of the DTAA read with the Memorandum of Understanding to the DTAA and hence payments received for such services fall outside the scope of Article 12(4)(b) of the DTAA. 3.3 Without prejudice to the above, on the facts and circumstances of the case, and in law, the learned DCIT erred in disregarding the Appellant's submission that in terms of Article use 12(5)(c) of the DTAA fees received for providing teaching/educational services are not taxable as FIS. 3.4 The Appellant peys that the learned DCIT be directed to hold that the Appellant is not liable to tax in India on payments attributable to the teaching services by virtue of Article 12(5)(C)of the DTAA. Ground No. 4 Business profits not taxable in the absence of a Permanent Establishment in India On the facts and circumstances of the case, and is law, the learned DCIT erred in not appreciating that, the payments received by the Appellant during the year are in the nature of „Business Profits' and hence, not taxable in India under Article 7 of the DTAA in the absence of a Permanent Establishment in India (under Article 5 of the DTAA).
M/s. Partners Medical International Inc. ITA no.1737/Mum./2020
The Appellant prays that the learned DCIT be directed to hold that the payments received by the Appellant are not liable to tax in India in the absence of a Permanent Establishment in India. Ground No. 5-Invoking Rule 10 of the Income-tax Rules, 1960 On the facts and circumstances of the case, and in law, the DCIT erred in invoking the provisions of Rule 10 of the Income-tax Rules, 1962 for attributing 90% of the total receipts as Royalties and the balance 10% as FIS. The Appellant prays that the learned DCIT be directed not to invoke the provisions of Rule 10 of the Income-tax Rules, 1962. Ground No. 6- Addition on account of reimbursement of expenses On the facts and circumstances of the case, and in law, the learned DCIT erred in closing as part of the total income, sum of Rs. 47,24.930, being reimbursements need actual expenses incurred by the Appellant. It is prayed that the learned DCIT be directed to delete the addition to the Appellant's income on account of reimbursement of expenses, as the same does not constitute taxable income. Ground No. 7-General-Rate of tax Without prejudice to the above, the learned DCIT has erred in applying a 15% rate of tax instead of a 10% rate as applicable under section 115A of the Act for such agreements entered after June 1, 2005. The Appellant prays that the learned DCIT be directed to delete the erroneous rate of tax applied. Ground No. 8 - Short credit of TDS On the facts and circumstances of the case, and in law, the learned DCIT erred in not granting TDS credit to the extent of Rs. 32,96,715. The Appellant prays that the learned DCIT be directed to grant full TDS credit of Rs. 51,44,542 as claimed by the Appellant in the return of income. Ground No.9 - Levy of interest under section 234B On the facts and circumstances of the case, and in law, the learned DCIT erred in levying interest of Rs.70,83,662 under section 234B of the Act. The Appellant prays that the learned DCIT be directed to delete the interest levied under section 234B of the Act. Ground No. 10 - Levy of interest under sections 234A and 234D On the facts and circumstances of the case, and in law, the learned DCIT erred in levying interest under sections 234A and 234D of the Act amounting to Rs. 1,93,191 and Rs. 5,63,499 respectively. The Appellant prays that the learned DCIT be directed to delete the interests levied under the said sections. Page | 3
M/s. Partners Medical International Inc. ITA no.1737/Mum./2020
Ground No. 11- Initiation of Penalty Proceedings under section 271(1)(c) of the Act. On the facts and circumstances of the case and in law, the learned DCIT has erred in initiating penalty proceedings under section 271(1)(c) of the Act. The Appellant prays that the learned DCIT be directed to drop the penalty proceedings initiation under section 271(1)(c) of the Act. The Appellant craves leave to add, alter, amend, modify, delete, substitute or withdraw all or any of the Grounds of Appeal stated herein and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing.”
The brief facts of the case are: The assessee is a not-for-profit entity incorporated in the United States of America (‘USA‟) under section 501(c)(3) of the USA Internal Revenue Code of 1986, and accordingly is exempt from Federal Income Tax in the USA. Assessee’s mandate is exclusively to perform internationally certain charitable functions and to carry out certain charitable purposes of its parent entity. Its various activities include providing assistance to medical institutions and healthcare systems throughout the world to provide high-quality medical training and enhance patient care and research. During the year, the assessee received the following income:
Name of the Client Amount in US$ Wockhardt Hospitals Ltd. („WHL‟) – 200,000 Education and Teaching Agreement WHL – Consulting Agreement 50,000 Wockhardt Ltd. – Masters Service 343,000 Agreement Sri Ramchandra Medical College („SRMC‟) 125,000 – Second amended and restated Memorandum of Agreement Four Seasons Foundation („FSF‟) – 40,000 Master Services Agreement Total: 1,118,000
The above amount was received by the assessee in the course of carrying out activities for which it is set up, namely, the business of providing Page | 4
M/s. Partners Medical International Inc. ITA no.1737/Mum./2020 consulting and education/teaching programs to hospitals, medical schools, healthcare institutions, etc. The assessee claimed that the above income being business income, is not liable to tax in India in the absence of Permanent Establishment as per Article 5 read with Article 7 of the India USA Double Taxation Avoidance Agreement (‘DTAA‟). Further, the assessee also claimed that the above receipt is also not in the nature of fees for included services (‘FIS‟) under Article 12(4)(b) of the DTAA, as payments being in the nature of payments received for teaching by an educational institution are not taxable as FIS, in view of exclusion under Article 12(5)(c) of the DTAA. The assessee also claimed that the aforesaid amount is also not taxable under Article 12(3) of the DTAA. Besides the above, the assessee also received payments aggregating to USD 105,911.73 towards reimbursement of expenses. As the said sum does not constitute ‘income‟ in the hands of the assessee being reimbursement of actual expenditure incurred by the assessee, the said amount was not considered taxable by the assessee. The AO did not accept the submissions of the assessee and after considering the agreements entered with Wockhardt Hospitals Ltd dated 01/07/2004, with Shri Ramchandra Medical College and Research Institute dated 01/01/2005, and with Four Seasons Foundation dated 23/11/2010 held that the assessee has given its rights to Wockhardt Hospitals Ltd, Shri Ramchandra Medical College and Research Institute, and Four Seasons Foundation to use copyrighted items, deliverables, name, logos, etc. with limited restrictions in as much as that the rights can be used only during the tenure of the agreement after obtaining the prior approval of the assessee and in accordance with the restrictions which assessee may enforce. The AO, finding Page | 5
M/s. Partners Medical International Inc. ITA no.1737/Mum./2020 the facts for the year under consideration similar to the preceding assessment years, considered 90% of the income as royalty and the balance 10% as FIS. Reimbursement of expenses was also held to be taxable by the AO following the approach adopted in the preceding and subsequent assessment years.
The assessee filed detailed objections against the addition made by the AO. Vide directions dated 30/01/2020, issued under section 144C(5) r/w section 254/260A of the Act, the learned DRP, though noted that identical issue in assessee’s own case has been decided in its favour by the coordinate bench of the Tribunal, rejected the objections filed by the assessee in order to keep the issue alive judicially and to protect the interest of the Revenue.
In conformity with the directions issued by the learned DRP, the AO vide impugned final assessment order dated 19/06/2020, assessed the receipts both as royalty as well as FIS under the DTAA. Being aggrieved, the assessee is in appeal before us.
During the hearing, the learned Authorised Representative (‘learned AR‟) submitted that similar issues have been decided in favour of the assessee by the decisions of the coordinate bench of the Tribunal rendered in assessee’s own case for the preceding as well as subsequent assessment years. The learned AR further submitted that the learned DRP did not grant relief to the assessee merely to keep the issue alive. The learned AR also submitted that the Revenue’s appeals against the decisions of the coordinate bench have been dismissed due to the lower tax effect.
M/s. Partners Medical International Inc. ITA no.1737/Mum./2020
On the other hand, the learned Departmental Representative vehemently relied upon the orders passed by the lower authorities.
We have considered the rival submissions and perused the material available on record. We find that the learned DRP after taking note of the decision of the coordinate bench of the Tribunal on similar issues in paragraph 7.1.2 of its direction rejected the objections filed by the assessee merely to keep the issue alive judicially and to protect the interest of the Revenue. We find that the coordinate bench of the Tribunal in assessee’s own case in Partners Harvard Medical International Inc. vs ADIT, in etc., vide order dated 03/07/2015, for assessment years 2006–07 to 2009–10, after following the judicial precedents in assessee’s own case decided similar issue in respect of receipts from Wockhardt Hospitals Ltd, and Shri Ramchandra Medical College and Research Institute, in favour of the assessee, by observing as under:
9. We notice that the co-ordinate bench of Tribunal has passed the order dated 22-02-2013 in the assessee‟s own case relating to AY 2004-05 in and ITA No.1020/Mum/2008, wherein it has followed the orders passed by the co-ordinate benches from AY 2000-01 onwards. In assessment year 2004-05, the assessee had received fees from M/s Max India Ltd for identical services rendered by the assessee for advisory services rendered. Identical view was taken in the case of receipts from Wokhard Hospitals. The Tribunal in paragraph13 and 14 of its order has held as under:- “13. Consistent with the aforesaid view taken by the Tribunal in Assessee‟s own case, we hold that the payments received from Max does not constitute FIS (Fee for Included Services) within the meaning of Article 12(4), as nothing is made available by the Assessee to Max and also the Assessee does not have any P.E in India. Therefore the income so arising to the Assessee in India cannot be taxed under Article 7 as “Business Profits
In case of WHL (Wokhard Hospitals Ltd) also, we hold that it is neither taxable as FIS nor as royalty and also the Assessee does not have any P.E in India and, therefore, the payment received by it cannot be taxed in India. Accordingly, consistent with the view taken in earlier years in assessee‟s own case, we allow grounds no.1 and 2, raised by the assessee.” Page | 7
M/s. Partners Medical International Inc. ITA no.1737/Mum./2020 The above said decision of the Tribunal shall be applicable to the fees received by the assessee in the current year under Consulting Agreement (Wokhard Hospitals and Carol Info Services Ltd) and under Award Agreement (Wokhard Hospitals).
10. The Tribunal also considered the issue relating fees received under Education and Teaching Agreement from SRMCRI. Since the assessee had allowed the SRMCRI to use its logo, the tax authorities had taken the view that the fee received also pertains to Royalty for use of Logo. In respect of this receipt also, the Tribunal held that they cannot be considered as Royalty or Fee for Included Services and further it cannot also be taxed as Business profits, since the assessee does not have P.E. Hence this decision is applicable to the fees received from Wokhard Hospitals and SRMCRI under Education and Teaching Agreement.
11. In respect of amount received by way of reimbursement of expenses also, the Tribunal in paragraph 31 of its order held that the same cannot be held to be taxable, since the main receipts have been held to be not taxable.
12. Thus, it is seen that the Tribunal has considered identical issues in AY 2004-05 and it has held that none of the receipts is taxable in India.
13. We notice that the tax authorities have examined only the agreements and have drawn conclusion against the assessee. They have not examined about the nature of services actually provided or delivered by the assessee to the Indian entities. In our considered view, one may not be able to come to a conclusion about the nature of services provided unless the actual services/deliverables are examined. Then one shall be in a position to ascertain as to whether the services or techniques provided was mere commercial information or a technique made available to the assessee. We may elucidate this point with an example. Let us assume that a financial consultancy firm provides consultancy services for “Cash management system”. It may provide various techniques to be followed to achieve the objective of effective cash management. The said techniques may be followed by the recipient of services even in the absence of the financial consultancy firm. In that case, the question that requires to be examined is whether the financial consultancy firm has made available the technology related to Cash management system or not within the meaning of the provisions of Indo-USA DTAA.
14. In the absence of such kind of examination from the side of tax authorities, we notice that the Tribunal also has proceeded to adjudicate the issue by considering the agreements only. In the absence of such kind of intricate details, we are also not in a position to examine the nature of services vis-à-vis the products/package, if any, delivered by the assessee. Since the Tribunal has consistently taken a particular view in the earlier years and since there was no deeper examination done by the tax authorities, we are inclined to follow the decision rendered by the Tribunal in the earlier years. Accordingly, by following the order passed by the Tribunal in the earlier years, we set aside the orders of Ld CIT(A) in AY 2006-07 and the assessment orders passed on the above said issues in AY 2007-08 to 2009-10 and direct the AO to delete the addition of all the receipts discussed above.”
M/s. Partners Medical International Inc. ITA no.1737/Mum./2020
Further, we find that the receipt from Four Seasons Foundation was also considered by the coordinate bench of the Tribunal in assessee’s own case in DCIT vs Partners Medical International Inc., in ITA No. 412/Mum./2016, for the assessment year 2012–13, vide order dated 02/05/2018. We further find that the coordinate bench of the Tribunal has taken a consistent view in respect of similar receipts from hospitals and healthcare institutions, and deleted the addition made by the Revenue in the hands of the assessee for other assessment years. The learned Departmental Representative could not show any reason to deviate from the aforesaid orders and no change in facts and law was alleged in the relevant assessment year. The issue arising in the present appeal is recurring in nature and has been decided in favour of the assessee by the decisions of the coordinate bench of the Tribunal for the preceding as well as subsequent assessment years. Thus, respectfully following the orders passed by the coordinate bench of the Tribunal in assessee’s own case cited supra, we uphold the plea of the assessee and direct the AO to delete the addition on account of royalty and/or FIS in the hands of the assessee. Further, the said income being in the nature of business profit is also not taxable in India in absence of the Permanent Establishment of the assessee in India. Respectfully following the aforesaid decisions, the reimbursement of expenses also cannot be held to be taxable, since the main receipts have been held to be not taxable. Accordingly, grounds no.2–6, raised in assessee’s appeal are allowed.
Ground No.1 is general in nature and therefore same needs no separate adjudication. Page | 9
M/s. Partners Medical International Inc. ITA no.1737/Mum./2020
Ground No.7 is rendered academic in view of aforesaid findings, and therefore requires no separate adjudication.
Ground no.8, raised in assessee’s appeal is pertaining to short grant of credit of TDS. This issue is restored to the file of the AO with the direction to grant TDS credit, in accordance with the law, after conducting the necessary verification. As a result, ground no.8 raised in assessee’s appeal is allowed for statistical purposes.
14. The issue arising in ground No.9, raised in assessee’s appeal, is pertaining to the levy of interest under section 234B of the Act. In view of the decision of Hon’ble Supreme Court in DIT v. Mitsubishi Corporation, [2021] 438 ITR 174 (SC), ground No.9, raised in assessee’s appeal, is allowed.
Insofar as the levy of interest under section 234A of the Act is concerned, we deem it appropriate to remand this issue to the file of AO for de novo adjudication after the necessary examination of the fact whether the return of income was filed by the assessee within the prescribed time under the Act. Further, as regards the levy of interest under section 234D, the same is consequential in nature. Accordingly, ground No.10, raised in assessee’s appeal is allowed for statistical purposes.
Ground No. 11 is pertaining to the initiation of penalty proceedings, which is premature in nature and therefore is dismissed.
M/s. Partners Medical International Inc. ITA no.1737/Mum./2020
In the result, the appeal by the assessee is partly allowed for statistical purposes. Order pronounced in the open Court on 29/12/2022