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Income Tax Appellate Tribunal, MUMBAI BENCH “ I ”, MUMBAI
ORDER
PER VIKAS AWASTHY, JM:
This appeal by the assessee is directed against the assessment order passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961[ in short ‘the Act’] for A.Y.2013-14.
Shri Poras Kaka appearing on behalf of the assessee submitted that the assessee in present appeal is primarily assailing the addition of Network Transportation Charges (NTC) Rs.8,46,91,990/- earned during the year by assessee and treated as Royalty and Fee for Technical Services(FTS). The ld. Counsel for the assessee submitted that the assessee in appeal has raised 12 grounds. The ground of appeal No.1 & 2 are in respect of aforesaid addition. The ground No. 3 to 7 are either consequential or alternate contentions to the primary submissions in respect of the aforesaid addition. The ld. Counsel for the assessee further submits that in ground No.8 to 10 of appeal, the assessee has assailed levy of interest charges u/s. 234A, 234B and 234D of the Act. In ground No.11 of appeal, the assessee has assailed recovery of interest u/s.244A of the Act and finally in ground No.12 of appeal, the assessee has assailed initiation of penalty proceedings u/s. 271(1)(c) of the Act.
The ld. Counsel for the assessee narrating the facts of case submitted that the assessee /appellant company is incorporated in Netherlands. The assesee is engaged in the business of Freight Forwarding and Supply Chain Management. In the course of its business, the assessee entered into various network agreements with its local Damco entities (DE) in different countries. Each local DE becomes a member of such network in their respective countries. For business in India the assessee has its entity incorporated in India i.e. Damco India Pvt. Ltd. [in short ‘Damco India’].
3.1 The ld.Counsel for the assessee submitted that Damco India under its network agreement is remunerated by way of guaranteed profit of 10% on its cost. In case of any shortfall in its income below cost + 10%, the assessee remunerates Damco India by way of profit sharing. Thus, the return of cost + 10% is guaranteed to Damco India. In the event Damco India’s profit exceeds cost + 10% it shares excess profit with the assessee in the form of network fee. Thus, network agreement between the assessee and Damco India works on the model of profit sharing, whereas, the entire risk is borne by the assessee.
3.2 The ld. Counsel for the assessee submitted that network model was adopted w.e.f. 01/01/2013. Prior to 01/01/2013 the business model was different whereby Damco India had entered into an agreement with Damco International AS, Denmark. Prior to January, 2013 part of the cost of the central entity [Damco International AS] was being allocated to all local entities through out the world including Damco India for the Indian region. The assessment order under appeal is in respect of transactions between the assessee and Damco India is for the period starting from 01/01/2013 to 31/03/2013 i.e. for a period of three months. A separate assessment order has been passed for the transactions for the period from 01/04/2012 to 31/12/2012 i.e. the period of nine months, wherein transactions were in terms of agreement between Damco International AS, Denmark and Damco India. The terms and conditions of the agreement between Damco International AS, Denmark and Damco India effective upto 31/12/2012 and the subsequent agreement between the assessee and Damco India effective from 01/01/2013 are similar. The facilities/infrastructure provided by assessee under the new network agreement are largely similar to the old agreement. The major difference between the two agreements is, now the assessee is the sole risk taker. The local entities are guaranteed arms length return with no risk.
3.3 In the period relevant to the assessment year under appeal, Damco India had remitted network fee of Rs.8,46,91,990/- to the assessee calculated on the basis of profit split method. The Transfer Pricing Officer (TPO) on reference u/s 92CA of the Act, made no adjustment in respect of the aforesaid transaction. The Assessing Officer and the Dispute Resolution Panel (DRP) has held the receipts received by assessee from Damco India are in the nature of FTS/Royalty.
3.4 The ld.Counsel for the assessee asserts that Damco India gets guaranteed profit of 10% with no risk. The ld.Counsel for the assessee submits that as per the new agreement effective from 01/01/2013 between assessee and Damco India, the entire risk is taken over by the assessee. The ld.Counsel for the assessee pointed that in assessment year 2014-15 the assessee had paid approximately Rs.32.41 crores to Damco India under Network agreement. Similarly, in assessment year 2015-16 the assessee paid Rs.4.71 crores to Damco India. The ld.Counsel for the assessee referred to order of TPO in the case of Damco India Pvt. Ltd. for assessment year 2014-15 and 2015-16 at pages 76 and 79 of the paper book. The TPO has accepted that the transaction between the assessee and Damco India are at arm’s length during the impugned assessment year as well. The Assessing Officer has erred in re- characterization of the transfer pricing method and the business profit sharing model after the order by TPO.
3.5 The ld.Counsel for the assessee submits that the Tribunal in an appeal by Damco International AS, Denmark in & 6465/Mum/2017 for the assessment years 2012-13 and 2013-14 (For the period 01/04/2012 to 31/12/2012) decided vide common order dated 20/07/2020 has held that the payment made by Damco India to Damco International AS is not in the nature of technical, managerial and consultancy fee under Indo-Denmark Double Taxation Avoidance Agreement (DTAA). The ld.Counsel for the assessee further pointed that Assessing Officer as well as the DRP in the impugned assessment year in their respective order/directions have placed reliance on their respective decisions in preceding assessment years. Both, the Assessing Officer and the DRP have observed that the nature of services in the assessee’s case are similar to the services in the case of Damco International AS. The ld.Counsel for the assessee further pointed that the Assessing Officer in impugned order has extensively reproduced the findings from the assessment order in the case of Damco International AS and has even incorrectly referred to the treaty between India and Denmark despite the fact that the treaty relevant to the impugned assessment year is India-Netherland DTAA, as the assessee is tax resident of Netherlands.
3.6 The ld.Counsel for the assessee further submits that the assessee is rather in a more advantageous position as in India – Netherland DTAA, the definition of FTS includes rendering of technical or consultancy services only. There is no mention of any services in the nature of managerial or any other services forming part of FTS. The ld.Counsel for the assessee further points that Article -5(5) of the treaty refers to “make available” clause which is not there in India- Denmark DTAA. The ld.Counsel for the assessee in support of his contentions placed reliance on the decisions in the case of Raymonds Ltd. vs. DCIT, 86 ITD 791(Mum).
3.7 The ld.Counsel for the assessee finally contended that no technical services were made available to Damco India by the assessee as defined under Article -12 of the India – Netherland DTAA.
Per contra, Shri B.K.Bagchi representing the Department vehemently defended the impugned order and the directions of the DRP. The ld.Departmental Representative submits that the assessee has received compensation for the services and network. The ld.Departmental Representative referred to the scope of work as detailed in Appendix -2 to the Network Agreement at page 12 of the paper book. The ld.Departmental Representative submits that a perusal of terms and conditions would show that the nature of services are managerial and technical, therefore, the payment for the same clearly falls within the meaning of FTS or royalty. The ld.Departmental Representative further submits that the agreement under which payments are made to the assessee by Damco India is the first agreement between Damco India and the assessee. The said agreement is different from the earlier agreement between Damco India and Damco International AS. The ld. Departmental Representative finally submits that from the nature of transactions and the Network Agreement it emanates that Damco India is Agency PE of the assessee.
5. Rebutting the arguments made by ld.Departmental Representative, the ld.Counsel for the assessee submits that clauses and covenants detailing nature of services provided under both agreements are similar in nature. The only difference between the agreements is the method of remuneration. The current agreement is more favourable to Damco India as it guarantees cost + 10% income on profit sharing basis with no risk. The risk under new agreement shifts from Damco India to the assessee being central entity. Now, Damco India is risk insulated with guaranteed profits. The ld.Counsel for the assessee further submits that ld. Departmental Representative has referred to Appendix -2 of the Network Agreement whereby assessee’s obligation to maintain its own team and staff in the network is mentioned. The ld. Counsel for the assessee submits that the obligations mention in Appendix-2 are assessee’s own obligation towards the network and it does not “make available” any technical know-how. There were similar obligations under the earlier agreement with Damco International AS. The services mentioned under clause 5 of the present agreement are similar to the services mentioned in clause 4 of the earlier agreement. The ld.Counsel for the assessee reiterated that there is no payment of royalty by Damco India. The payment is made by Damco India on profit sharing model. The ld. Counsel for the assessee further referred to US Protocol to contend that managerial services does not form part of technical services.
5.1 The ld. Counsel for the assessee anxiously rebutted the argument raised by the ld. Departmental Representative that Damco India is a Dependent Agency Permanent Establishment (DAPE). The ld. Counsel for the assessee stated that in the first instance this objection was never raised by the Assessing Officer or the DRP. Further, the transaction between the assessee and Damco India is accepted at arm’s length, therefore, no further profits can be attributed to DAPE. To support his submissions the ld. Counsel referred to the decisions in the case of DIT vs. Morgan Stanley 292 ITR 416 (SC ); ADIT v. E- Funds IT Solution Inc.(2017) 399 ITR 34(SC); Honda Motors Co Ltd vs. ADIT[2018] 255 Taxman 72(SC); DIT(IT) v. B4U Holdings Ltd.[2015] 374 ITR 453(Bom HC); Set Satellite (Singapore) PTE Ltd. vs. DDIT [2008]307 ITR 205 (Bom HC).
We have heard submissions made by the rival sides and have examined the orders of authorities below. We have also considered the documents on which rival sides have placed reliance in support of their respective submissions. The assessee during the period relevant to the assessment year under appeal has received network fees from Damco India. The services have been rendered by the assessee in accordance with Network Agreement dated 01/01/2013 (at page 3 of the paper book). The contentions of the assessee is that it does not have Permanent Establishment (PE) in India in terms of Article -5 of India- Netherland DTAA. And by virtue of Article-7 of India – Netherland DTAA, network fees earned by the assessee is not taxable in India. At the outset it would be pertinent to mention that the network fee which is subject matter of dispute in the present appeal was earned by the assessee for the period starting from 01/03/2013 to 31/03/2013. For the period starting from 01/04/2012 to 31/12/2012 falling under the same assessment year i.e. assessment year 2013-14, Damco India had agreement with Damco International AS, a Danish entity. Both the agreements i.e. agreement between Damco International AS - Damco India and assessee - Damco India are stated to be similar. A perusal of the directions of DRP dated 11/09/2017 would show that the DRP has placed heavy reliance on the directions of the DRP for assessment year 2012-13, wherein instead of present assessee, Damco International AS, a Danish entity was the assessee. In para 4.2 of the DRP directions, the DRP has categorically mentioned that the only change in the impugned assessment year is that instead of Damco International AS, the Damco India has entered into new agreement w.e.f. 01/01/2013 with Damco International BV (the assessee). Thereafter, the DRP has listed the general/ specific obligations of the assessee and Damco India as per the Network agreement . In the assessment order for assessment year 2013-14 the Assessing Officer while passing the final assessment order reiterated the observations made by the DRP. The Assessing Officer has made no observation that the facts or the agreement in the impugned assessment year are in any manner at variance with the facts of the earlier agreement between the assessee and Damco International AS. The Assessing Officer based on the observations made by DRP finally concluded that the amount of Rs.8,46,91,990/- is taxable as “Royalty” and “Fee for Technical Services” under the provisions of the Act as well as under Indo-Netherland Tax Treaty.
We find that in the case of Damco International AS vs. DCIT in & 6465/Mum/2017 for assessment years 2012-13 and 2013-14, decided on 20/07/2020 the Tribunal has held that business support charges paid by Damco India are not taxable as FTS/Royalty under the Act or the relevant DTAA as the same is purely in the nature of reimbursement of cost.
We have thoroughly examined network agreement dated 01/01/2013. The remuneration clause for the services and obligation of Damco India is contained in Clause -7 read withAppendix-3 of the agreement. As per the terms of Appendix – 3, Damco India shall pay to the assessee network fee calculated as under:
Network Fee = CMI – (Company Costs+ Mark up)
CM1 has been defined in the Definitions clause of the Network Agreement as under:
“ 1.2 “CM1” OR “GROSS MARGIN” is the result of the Company computed by deducting carriage and consolidation charges, including direct labour cost and related costs, from sales revenue;”
In Addendum Network Agreement “Network Fee Basis” and “ Mark Up” has been explained. For the sake of completeness the relevant extracts of Addendum Network Agreement are reproduced herein below:
“3 NETWORK FEE BASIS As per Appendix 3 of the Network Agreement, the Network Fee shall be an amount equal to the CM1 in the accounts of the Company, reduced by the Company Costs and Mark-up. It is understood by Parties that the CM1 and Company Costs are determined on the basis of financials reported in the HFM accounting system (based on IFRS principles) as used by INTERNATIONAL and Company. 4. xxxxxxxx 5 MARK UP With reference to item (d) of Appendix 3 of the Network Agreement, Parties agree that the Mark-Up for the Territory will be set at 10% for 2013 and onwards- until otherwise agreed.
In another addendum network agreement “Network Fee Payment” has been explained, the same is reproduced herein below:
“ NETWORK FEE PAYMENT
Thus, Parties declare and confirm that in the event the calculation of Network Fee results in a negative figure, Company shall be entitled to receive from INTERNATIONAL a payment as compensation for damages for not having been able to obtain the committed results.
By virtue of the foregoing, if the calculation of Network Fee is negative, INTERNATIONAL shall pay compensation as indemnity for damages to Company. Such compensation is valued in advance by the parties, as penalty clause, in an amount such as to enable the Company to obtain EBT based on Cost Company, equivalent to the agreed Mark Up, as defined in the Network Agreement.” From above clauses in the Network Agreement it is ambiguously clear that Damco India remunerates the assessee only in the event of surplus profits. In the event of insufficient receipts Damco India is entitled to retain “Cost + 10% Mark Up”. In the impugned assessment year Damco India had surplus that was shared with the assessee in accordance with the terms and conditions of agreement. We observe that the entire risk is borne by the assessee and Damco India is insulated from the risk. It has been contended that the obligation under both the agreements i.e. agreement between Damco International AS and Damco India as was applicable in the assessment year 2012-13 and 2013-14 (from 01/04/2012 to 31/12/2012) and the subsequent agreement between the assessee and Damco India effective from 01/01/2013 to 31/03/2013 relevant to assessment year 2012-13 are similar. This fact has not been rebutted by the Revenue. In fact, as pointed earlier, the DRP and the Assessing Officer has admitted this fact. The Ld.Counsel for the assessee has drawn our attention to the order passed under section 93CA(3) of the Act by the TPO for assessment year 2014-15 and 2015-16 in the case of Damco India, where Damco India has received minimum guaranteed network income of Rs.32.41 crores in assessment year 2014-15 and Rs.4.71 crores in assessment year 2015-16 from the assessee.
It has been further submitted that network fees received by the assessee does not fall within the meaning of FTS or Royalty under Article -12 of India – Netherland DTAA. For the sake of ready reference the relevant extract of Article -12 is reproduced herein below:-
“ 4. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.
For purposes of this Article, "fees for technical 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 4 of this Article 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.
A bare perusal of Article -12 of the DTAA defining the term ‘Royalty’ would show that the nature of payment received by the assessee does not fall within the meaning of Royalty.
The clause -5 of Article 12 defines FTS. A reading of clause -5 shows that FTS is with respect to rendering of any technical or consultancy services. It does not include managerial services. Further, sub-clause (b) to clause (5) refers to “make available” condition. In the present case nothing has been brought on record by the Revenue to substantiate that any technical know- how has been “made available” to Damco India by the assessee .
Thus, in view of our above observations we hold that network fee received by the assessee from Damco India is neither in the nature of Royalty nor FTS. Consequently, the aforesaid amount received by the assessee is not exigible to tax under the provisions of the Act or India – Netherlands DTAA.
The ld. Departmental Representative raised an argument that Damco India is DAPE of the assessee. The aforesaid contention raised by the ld. Departmental Representative is not in coherence with the directions of the DRP or findings of the Assessing Officer. The Assessing Officer during assessment proceedings never raised a question of Damco India being a PE/DAPE of the assessee. The ld. Departmental Representative cannot make out a new case or improve the case of Assessing Officer at second appellate stage specially when it is the appeal by the assessee. Even otherwise, the role of the ld. Departmental Representative is to support the findings of Lower Authorities and not build a new case by raising arguments not emanating from the assessment order.
Thus, the assessee succeeds on ground No.1 and 2 of the appeal.
In ground No.3 of appeal, the assessee has assailed addition in respect of service tax. Since, ground No.1 and 2 of the appeal have been allowed, the addition assailed in ground No.3 is consequential, hence, the same is allowed.
The grounds No. 4 to 7 of the appeal are in support of grounds No.1 and 2, hence, require no specific adjudication.
In grounds of appeal No.8, 9 and 10 the assessee has assailed charging of interest under section 234A, 234B and 234C of the Act, respectively. The charging of interest is mandatory and consequential, hence, grounds No.8 to 10 of the appeal are dismissed.
In ground of appeal No.12, the assessee has assailed initiation of penalty proceedings under section 271(1)(c) of the Act. Challenge to penalty proceedings at this stage is premature, hence, ground No.12 of appeal is dismissed.
In the result, appeal by the assessee is partly allowed.
Order pronounced in the open court on Monday the 22nd day of August, 2022.