M/S. ESSITY HYGIENE AND HEALTH AB,MUMBAI vs. DY CIT, INTERNATIONAL TAXATION-4(2)(1), MUMBAI

PER VIKAS AWASTHY, JM:

(I) Taxability of consultancy services as Fees for Technical Services (FTS). (II) Taxability of SAP Licence Charges as Royalty. (III)Taxability of IT Support services as FTS/Royalty (iv)Taxability of reimbursement of expenses treated as FTS/royalty.

(i) Project related consultancy services Rs. 1,85,69,742/- (ii) IT Support services Rs. 1,31,41,737/- (iii) SAP Licensing Charges Rs. 23,18,747/- (iv) Reimbursement of Expenses Rs. 5,74,634/- Total Rs. 3,46,04,860/- The assessee did not offer any of the aforesaid receipts to tax. The Assessing Officer while passing draft assessment order dated 29/11/2019 held that the aforesaid receipts are liable to be taxed under India – Sweden DTAA @10% as FTS/Royalty. The assessee filed objections before Dispute Resolution Panel (DRP). The DRP vide directions dated 24/02/2021 rejected the objections raised by the assessee. The Assessing Officer consequently passed the final assessment order passed on the directions of the DRP and made aforesaid additions.

3.1 The ld.Authorized Representative for the assessee submitted that the assessee is providing consultancy services to its Indian AE for setting up of manufacturing plant at Pune. The services include managerial services, such as administrating and execution of manufacturing facility, co-ordinating with various vendors for timely installation of machinery, etc. The assessee has merely reimbursed actual cost it had incurred for providing managerial services. The Assessing Officer had erred in holding receipts in respect of providing consultancy services as Fee for Technical Services (FTS). The ld.Authorized Representative for the assessee submitted that addition on account of receipts for consultancy services as FTS was raised in assessment year 2016-17 as well. The facts in the impugned assessment year are identical. In assessment year 2016-17 the matter travelled upto the Tribunal. The Tribunal deleted the addition by following earlier order of Tribunal in assessee’s own case in for assessment year 2015-16 decided on 08/01/2021. The ld.Authorized Representative for the assessee referred to the observations of the DRP on this issue at page 15 of the DRP’s directions to show that the facts in the impugned assessment year are identical to the facts in assessment year 2016-17. The ld. Authorized Representative for the assessee pointed that the DRP in the impugned assessment year has followed the directions of the DRP in assessment year 2016-17.

3.2 The ld.Authorized Representative for the assessee further submitted that the issues raised in ground No. 2 and 3 of appeal i.e. taxability of SAP licence charges as royalty and taxability of IT Support Services as FTS/royalty in the impugned assessment year are identical to the issues raised in assessment year 2016-17. The Tribunal in the appeal of assessee for assessment year 2016-17 in decided on 06/05/2021 has deleted the addition.

3.3 In respect of issue raised in ground No.4 relating to taxability of reimbursement of expenses treated as FTS/Royalty, the ld.Authorized Representative for the assessee pointed that the DRP has made no observations on this issue, therefore, this issue can be restored to the Assessing Officer for fresh examination.

“(iv) A separate notification has been issued by India, importing the benefits of the second treaty into the treaty with the first State, as required by the provisions of sub- section (1) of Section 90 of the Income Tax Act, 1961.” is not satisfied, therefore, the findings given by the Tribunal in assessment year 2016-17 would not apply. In so far as other grounds, the ld. Departmental Representative fairly admitted that the issue raised in ground No.2 and 3 has already been considered by the Tribunal in assessee’s own case in preceding assessment years. In so far as ground No.4 the ld.Departmental Representative submitted that the same can be restored back to the Assessing Officer /DRP for fresh adjudication.

7. In ground No.1 of appeal, the assessee has assailed taxability of Consultancy Services as FTS. We find that on this issue the Assessing Officer for the third consecutive assessment year has made addition. For the first time this issue had cropped up in assessment year 2015-16. It travelled to the Tribunal in ITA No.7315/Mum/2018(supra). The Co-ordinate Bench after examining the issue threadbare concluded as under:

“24. In order to decide whether or not the services rendered by the assessee fit the definition of 'fees for technical services', as applicable under the Indo Swedish tax treaty, the question that we must ask ourselves is not only whether the technical services are performed on the facts of this case, but whether "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 upon the provider." In this light when we analyze the nature of services, which are set out in detail earlier in this order, we find that in none of the cases, these services enable the recipient of these services to perform the same services, in the future, without recourse to the assessee. The consultancy services are in the nature of leading the setting up of factory, including planning and steering execution of work, being responsible for managing project within budget constraints, leading the project team from different locations, coordination and follow up with the contractors, securing communication and good flow of information between those directly or indirectly involved with the project, preparing project progress report and updating all concerned with the project progress. Just because the assessee renders these services does not mean, and by no stretch can imply, that the recipient can next time do all this work without recourse to the assessee. As regards learned DRP's observations that the project leading work "will include scheduling charts, timelines, bar charts which are contemplated in the case of the assessee under Project Administration….project and financing controls including necessary charts and controls for implementation of the project", that "the assessee is not executing the project but is rendering consultancy service to the AE", and that "when project implementation tools are provided to the employees of the AE, they are enabled to employ these tools in implementing their own project," these observations are factually incorrect inasmuch as the assessee's representative is executing the work and is the key person at the factory site who is doing all the needful and inasmuch as there is no mention anywhere of developing these tools and handing over the same to the recipient of services. In any case, just because the Indian entity is interacting with the project leader and getting inputs from him does not mean that the Indian entity is transferred the technology of being a project leader of this type and next time Indian entity can perform similar services without recourse to the same- which is the core test for the fulfilment of 'make available' clause. We are unable to approve the stand of the authorities below on this point. In our considered view, in the light of the discussions above, the make available clause is not satisfied, in the course of rendition of services by the assessee, and, as such, the consultancy fees of Rs 1,97,94,209 cannot be brought to tax, in the hands of the assessee, under article 12 of Indo Swedish tax treaty.”

In assessment year 2016-17 the Tribunal decided the issue in favour of the assessee following the order in assessee’s own case for assessment year 2015- 16.

“10. It would be prudent to take cognizance of the CBDT Circular No.3/2022 dated 03-02- 2022 providing clarification and laying down certain pre-requisites for deriving the benefit of the MFN clause in the Protocol to India’s DTAAs with certain countries. The CBDT has summed up its opinion in para 5 of the Circular, reading as under:- “5. In view of the above, it is hereby clarified that the applicability of the MFN clause and benefit of the lower rate or restricted scope of source taxation rights in relation to certain items of income (such as dividends, interest income, royalties, Fees for Technical Services, etc.) provided in India's DTAAs with the third States will be available to the first (OECD) State only when all the following conditions are met: (i) The second treaty (with the third State) is entered into after the signature/ Entry into Force (depending upon the language of the MFN clause) of the treaty between India and the first State; (ii) The second treaty is entered into between India and a State which is a member of the OECD at the time of signing the treaty with it; (iii) India limits its taxing rights in the second treaty in relation to rate or scope of taxation in respect of the relevant items of income; and (iv) A separate notification has been issued by India, importing the benefits of the second treaty into the treaty with the first State, as required by the provisions of sub- section (1) of Section 90 of the Income Tax Act, 1961. If all the conditions enumerated in Paragraph 5(i) to (iv) are satisfied, then the lower rate or restricted scope in the treaty with the third State is imported into the treaty with an OECD State having MFN clause from the date as per the provisions of the MFN clause in the DTAA, after following the due procedure under the Indian tax law.”

11. A look at the above para deciphers that the benefit of a lower rate of taxation or restricted scope of source taxation rights, as contained in the MFN clause with reference to ‘royalty’ and ‘fees for technical services’ etc. provided in the India’s DTAAs with second State, can be availed under the DTAA with the first State only when the four conditions are fulfilled. There is no dispute that conditions enshrined under points (i) to (iii) are fulfilled in the instant case. The condition under point (iv) states that a separate notification should be issued by India importing the benefit of the second treaty into treaty with the first State as required u/s 90(1) of the Act. Thus, it becomes ostensible that the CBDT has mandated the issuance of a separate notification for importing the benefits of a treaty with second State into the treaty with the first State by relying on provisions of subsection (1) of Section 90 of the Income Act, 1961. Let us examine the prescription of section 90(1) of the Act which has been invoked as a shield for stipulating the fourth requirement. This section provides that: `The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,— (a) for the granting of relief in respect of— (i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or…….and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.’ In our opinion, the Circular specifying the need for a separate notification for importing the beneficial treatment from another Agreement as a corollary of section 90(1) of the Act, overlooks the plain language of the section seen in juxtaposition to the language of the Protocol, which treats the MFN clause an integral part of the Agreement. What is amply borne out from the language of section 90(1) is that a notification may be made for implementing the agreement that the Central Government has entered into with the Government of any country outside India for the granting the relief. Reference to the expression `make such provisions as may be necessary’ for the purpose of notification in the Official Gazette, is to adopt the manner of notifying as may be necessary for implementing the agreement and not that the notification is to be issued piecemeal and in a truncated manner. On notifying the Agreement or Convention, all its integral parts, get automatically notified. As such, there remains no need to again notify the individual limbs of the Agreement so as to make them operational one by one.

12. It is trite law that a circular issued by the CBDT is binding on the AO and not on the assessee or the Tribunal or other appellate authorities. It has been held so authoritatively in CIT Vs. Hero Cycles Pvt. Ltd. (1997) 228 ITR 463 (SC) as reiterated in CCE Vs. M/s. Ratan Melting and Wire Industries (2008) 220 CTR 98 (SC). Ex consequenti, the Circular transgressing the boundaries of section 90(1) of the Act, cannot bind the Tribunal.

13. Notwithstanding the above, it can be seen that the CBDT has panned out a fresh requirement of separate notification to be issued for India importing the benefits of the DTAA from second State to the DTAA with the first State by virtue of its Circular, relying on such requirement as supposedly contained in section 90(1) of the Act. In our considered opinion, the requirement contained in the CBDT circular No.03/2022

cannot primarily be applied to the period anterior to the date of its issuance as it is in the nature of an additional detrimental stipulation mandated for taking benefit conferred by the DTAA. It is a settled legal position that a piece of legislation which imposes a new obligation or attaches a new disability is considered prospective unless the legislative intent is clearly to give it a retrospective effect. We are confronted with a circular, much less an amendment to the enactment, which attaches a new disability of a separate notification for importing the benefits of an Agreement with the second State into the treaty with first State. Obviously, such a Circular cannot operate retrospectively to the transactions taking place in any period anterior to its issuance. In view of the foregoing discussion, we are satisfied that the requirement of a separate notification for implementing the MFN clause, as per the recent CBDT circular dt. 03-02-2022, cannot be invoked for the year under consideration, which is much prior to the CBDT circular of the year 2022.” [Emphasized by us] In the light of the above decision of Tribunal it is ambiguously clear that there is no requirement of separate notification for importing the beneficial treatment from the agreement. Hence, in the facts of the case and the decision referred above, we find no merit in the arguments forwarded by the ld. Departmental Representative. The conditions set out in CBDT Circular 3/2022 would not apply in the impugned assessment year. Consequently, ground No.1 of the appeal is allowed.

“6. We find that it is a case in which the assessee has purchased the SAP software licence from a third party- namely "Be One Solutions, Switzerland," and even a copy of one of the purchase invoices is placed before us at page 17 of the paper- book. The finding of the DRP to the effect that it is a case of purchase of software through an AE of the assessee is thus factually incorrect. We have also taken note of the certificate dated 18th April 2018, signed by the Finance Director of the assessee company, which states that "this is to certify that we have provided SAP/SAP B1 licences to SCA Hygiene Products India Pvt Ltd (SCA-India) during year April 2014 to March 2015" and that "we further certify that the above- mentioned licences are provided to SCA-India on cost to cost basis without any mark up being charged." There is no, and perhaps rightly so, challenge to the factual element of its being a cost to cost reimbursement received by the assessee. What learned Departmental Representative contends is that if the Indian entity was to be directly supplied this licence by the actual product vendor supplying it to the assessee, the tax withholding by Indian entity would have come into play, and that tax withholding has been avoided by routing the purchase through the assessee. That issue, whether right or not, has no bearing on taxability of an income in the hands of the assessee. We reject this argument. As regards learned DRP's reliance on a decision of the coordinate bench in the case of AMD Research and Development Centre India Pvt Ltd (supra), we can only say that it was a case in which the coordinate bench came to the conclusion that the payment for a software licence to the group company was not on "cost to cost basis", as evident from the coordinate bench observations to the effect that "In the absence of these details as well as the basis of allocation of cost of software applications/licences, we find it difficult to accept the contention of the assessee that the amount in question paid by it to ATI Technologies, Canada towards its share of software applications/licences on cost to cost basis, without involvement of any element of profit, so as to say that the amount so remitted is not chargeable to tax in the hands of ATI Technologies, Canada in India, being merely in the nature of reimbursement of actual expenses incurred by the said company, without any profit element". This decision, therefore, does not support the case of the Assessing Officer anyway inasmuch as this decision supports the proposition that when the payment for software licence fees to a group entity is a reimbursement pure and simple, it will not be taxable as income of that group entity. It is quite elementary that what can be taxed in the hands of an assessee is not a receipt, by itself, but only the income element, and, therefore, when a receipt by the assessee is bereft of income element, as a pure reimbursement inherently is, it cannot be brought to tax in the hands of that assessee. Hon'ble jurisdictional High Court, in the case of CIT Vs Siemens AG [(2009) 310 ITR 320 (Bom)], have accepted this proposition and observed as follows: That leaves us with the last contention as to whether the amounts by way of reimbursement are liable to tax. To answer that issue, we may gainfully refer to the judgment of a Division Bench of the Delhi High Court in Industrial Engineering Projects (P.) Ltd.'s case (supra). The learned Division Bench of the Delhi High Court was pleased to hold that reimbursement of expenses can, under no circumstances, be regarded as a revenue receipt and in the present case the Tribunal had found that the assessee received no sums in excess of expenses incurred. A similar issue had also come up for consideration before the Division Bench of the Calcutta High Court in Dunlop Rubber Co. Ltd.'s case (supra). The learned Division Bench was answering the following question: "Whether, on the facts and in the circumstances of the case, the amounts received by the assessee (English company) from M/s. Dunlop Rubber Co. (India) Ltd. (Indian company) as per agreement dated 29-1-1957 constituted income assessable to tax?" On considering the issue the learned Bench noted that the Tribunal was of the view that what was recouped by the English company was part of the expenses incurred by it. The learned Court upheld the said finding. The learned Bench was pleased to hold that sharing of expenses of the research utilised by the subsidiaries as well as the head office organisation would not be income which would be assessable to tax. A similar view was taken in Stewarts & Lloyds of India Ltd.'s case (supra). We are in respectful agreement with the view expressed by the Delhi and Calcutta High Courts.

“7. In ground No.3 of appeal, the assessee has assailed taxability of IT Support services as FTS /Royalty. We find that the Assessing Officer had made addition for similar reasons in assessment year 2015-16. The Co-ordinate Bench after considering the facts, Indo-Swedish Tax Treaty and the terms of agreement held that the payments received on account of IT Support services are neither taxable as FTS nor Royalty. The relevant extract of findings of the Tribunal on this issue are as under:- “25. That leaves us with the taxability of Rs 57,47,684 on account of Information Technology Services. The main reason for its taxability by the DRP is stated to be that "the services is found to be intrinsically linked with enjoyment of the SAP system and hence, would fall within the ambit of Article 12(4)(a)". In the assessment order, there is also mention about "resulting in overall improvement in business and the income generating capacity of SCA India, which is a clear enduring benefit" and about the stand that the rendition of these services are "also providing a skill level and relevant training which will be readily available to personnel of SCA India and thereby a clear enduring benefit is provided". It is also mentioned that "specific support in the form of implementation of SAP project and Project Vinadalloin the form of pre-implementation, testing, post implementation is also provided which is clearly technical in nature and intended to increase the efficiency and improve the functioning of SCA India". It is to be noted that so far as the enduring benefit and increase of efficiency in the recipient entity is concerned, that has nothing to do with the satisfaction of "make available" clause. As we have seen in our analysis earlier, what is important is transfer of technology and not the incidental benefit. Unless the recipient of a service is not enabled to perform that service on his own, without recourse to the service provider, the requirements of the make available clause are not satisfied. The concept of enduring benefit, increase in efficiency, improvement in income generating capacity and incidental skill development is wholly irrelevant for this purpose. The authorities below have been thus swayed by considerations not germane in this context. So far as these services being incidental to SAP system being the reason for taxation under article 12(4)(a) is concerned, we have noted that providing support services for SAP implementation is a small part of the services and in any case what article 12(4)(a) covers is the services which "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" and the information technology services, as set out in Annexure B to the agreement, cannot be described as ancillary and subsidiary to the SAP system. At best, a small part of these services could fall in that category, but that payment is not even separately identified. These things apart, 12(4)(a) would come into play when the assessee receives a payment in the nature of royalties under article 12(3) and the services ancillary and subsidiary to the application or enjoyment of that right, payment for which is described in article 12(3). In other words, the person receiving the money as royalty, such as the actual seller of the software in this case, and the person providing service ancillary or subsidiary to the enjoyment of that right, must be the same. That's not the case here. In the present case, the payment received by the assessee has been held to be in the nature of reimbursement, which is outside the ambit of taxation. The person selling the SAP software is Be One Solution, Switzerland, whereas the person providing the services in question is the assessee. Article 12(4)(a) will not, therefore, come into play at all. In our considered view, therefore, the taxation under article 12 in the present case can come into play only when the "make available" clause is satisfied, but then the Assessing Officer's justification for the satisfaction of 'make available' clause, for the detailed reasons set out earlier in this paragraph, does not meet our judicial approval. In view of these discussions, as also bearing in mind the entirety of the case, we uphold the plea of the assessee on this point as well. Accordingly, we hold that the income of Rs 57,47,684 on account of Information Technology Services is also not taxable under article 12.” Since, the facts in impugned assessment year are identical to the facts in AY 2015-16, the findings of Tribunal for 2015-16 would mutatis mutandis apply to the impugned assessment year. Ergo, ground No.3 of appeal is allowed.”

The ground No.3 of the appeal is allowed in similar terms.

Order pronounced in the open court on Friday the 10th day of June, 2022.