NALCO COMPANY,PUNE vs. ASSISTANT COMMISIIONER OF INCOME TAX (INT. TAXATION) CIRCLE 2, PUNE

Pithily put, the factual matrix of the case is that the assessee is a foreign company incorporated under the laws of Delaware, United States of America. The return was filed declaring income of Rs.24.51 crore with refund of Rs.2.55 crore. The assessee received a sum of Rs.24,33,66,285/- from its Indian subsidiary company, i.e. Nalco Water India Limited (NWIL), consisting of Rs.3,16,29,519/- towards Headquarter common expenses incurred by it; and Rs.21,17,36,766/- towards Regional Management Assistance and Services provided by its Asia-Pacific (Singapore) entity. The assessee claimed that the amount was exempt under the provisions of the Double Taxation Avoidance Agreement between India and the USA (hereinafter referred to as DTAA). The AO, after going through the relevant parts of the concerned Agreements, came to hold that the amount was in the nature of „FTS‟ chargeable to tax u/s.9(1)(vii) of the Act and also „Fees for Included Services‟ under Article 12 of the DTAA. The assessee approached the Dispute Resolution Panel (DRP), which countenanced the view point of the AO by noting that similar view was canvassed by it in earlier years. In the final assessment order, an addition of Rs.24.33 crore was made treating the amount received from Indian entity as „FTS‟ under the Act as well as „Fees for Included Services‟ under the DTAA. Aggrieved thereby, the assessee has come up in appeal before the Tribunal.

We have heard the rival submissions and gone through the relevant material on record. It is seen that the assessee rendered services to NWIL partly through itself and partly through its Singapore entity. The AO as well as the DRP have primarily held the amount to be taxable as fee for technical services under the Act and as fee for included services under the DTAA on the basis of the direction of the DRP for earlier years. At this stage, it is pertinent to mention that the AO initially accepted the assessee‟s stand and did not put the similar receipt to tax for the A.Ys. 2011- 12 to 2013-14. The CIT invoked revisionary jurisdiction and held by means of orders u/s 263 that the assessment order was erroneous and prejudicial to the interest of the revenue on this count. The assessee appealed against the orders passed u/s 263 for these years, which were allowed by the Tribunal on preliminary legal issues without going into the merits of the issue. The ld. AR submitted that out of the immediately two preceding years, one was not taken up for scrutiny and for the second year, the addition made by the AO is pending adjudication before the ld. CIT(A). On a specific query as to the position prior to the A.Y. 2011-12, the ld. AR candidly admitted that the assessee suo motu offered similar receipts for taxation for the A.Ys 2008-09 and 2009-10 and further that there is no change in facts or law for such two years and the year under consideration. Thus, it is ostensible, that on one hand the assessee has shifted its stand from taxability to non-taxability and on the other there is no adjudication so far by the Tribunal on the point.

Coming back, it is seen that the AO held the amount to be chargeable to tax under the Act as well as the DTAA. The ld. AR fairly accepted the taxability of the amount u/s.9(1)(vii) of the Act. His only challenge is to the taxability under the DTAA. It is axiomatic that if the amount is not chargeable to tax in the hands of the assessee under the DTAA, it will escape taxation even though it is chargeable under the Act. The only relevant Article of the DTAA for our purpose is 12(4), whose relevant part runs 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 : (a) …….

The focus of the ld. AR was on the argument that the services provided by the assessee did not `make available‟ any technical know-how etc. to the Indian entity. Undoubtedly, the term ‘make available’ has been interpreted by the Hon‟ble Karnataka High Court in CIT Vs. De Beers India Minerals Pvt. Ltd. (2012) 346 ITR 467 (Kar.) holding that the payer of the services should be able to utilize the acquired knowledge or know-how at his own in future without the aid of its provider. Thus, it becomes palpable that in order to `make available‟ such services, it is sine qua non that the recipient of the services must acquire such technical know-how etc. which he himself can use in future without any assistance of the provider and the same should not be anything which vanishes or disappears with its provision by the payee itself.

However, it is significant to note the command of para (b) of Article 12(4) of the India-USA DTAA, which says that fees for included services means consideration for rendering any technical or consultancy services, if such services make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. On an analysis of the clause (b), it turns out that it covers two broader segments: viz., one, where such services `make available technical knowledge, experience, skill, know-how, or processes‟ and two, where such services `consist of the development and transfer of a technical plan or technical design‟. The first use of the word `or‟ between the words `know-how‟ and `processes‟ and the terms `technical knowledge, experience, skill‟ all preceding the word `know-how‟ and joined by commas between themselves, indicates that the term `make available‟ is applying to the words starting from `technical knowledge‟ and ending with „processes‟. The second use of the word `or‟ in clause (b) after the word `processes‟ and before `consist of the development and transfer of a technical plan or technical design‟ deciphers that a new independent context is starting after the second `or‟, which deals with the services that consist of the development and transfer of a technical plan or technical design. Thus, it is manifested that the only requirement to rope in an amount within the ambit of `fees for included services‟ under the second segment of para 4(b) of Article 12 is that the consultancy or technical services should consist of the development and transfer of a technical plan etc. to the payer. Unlike the first segment, there is no further requirement of satisfying the test of `make available‟. This discussion shows that there are two different air tight limbs of para 4(b) of Article 12 mutually exclusive from each other and if a case falls in either of them, it amounts to fees for included services.

With the above background, we now advert to the Agreements entered into between the assessee and its Singapore entity on one hand and NWIL on the other to find out if the receipt is covered under the Article 12(4) of the DTAA? The first Agreement is dated 31-12-2007, whose copy has been placed on record. This Agreement provides that the assessee will provide “Services” as set forth in Exhibit-A. Exhibit-A refers to certain services, namely, Insurance and Risk Management, Treasury, Marketing, Information Technology, Human Resources, Legal etc. Except for naming them, there is no further elucidation of the nature of such services. This Agreement was amended in the year 2009. A copy of the Addendum is available in the paper book, which has added some mark-up to the costs incurred. It also has certain other relevant clauses regarding the duty of the assessee to maintain proper accounts qua the services rendered to NWIL, which we will discuss infra at the appropriate stage. The second Agreement between the Singapore entity and the NWIL, against which the assessee received the amount, is dated 01-01-2012. A copy of this Agreement has been placed in the paper book. This Agreement refers to providing certain services, including, Financial, Accounting, Administrative, Managerial and Legal Services. This Agreement also, apart from naming the services, does not precisely throw any light on their nature. On going through the above Agreements read with the Addendum, it can be seen that they only name the services but do not specify their nature. For example, though the Agreement talks of “Information Technology” service, but does not precisely point out the nature of service as to whether it was only some Support service; or providing access to the IT facility set up by the assessee or its Singapore entity consisting of software and hardware etc.; or some software developed by it has been supplied to the entities; or some technical plan or design has been developed and given to the group entities. A positive finding on this issue is necessary as different consequences ensue depending upon the nature of service. For example, if bare IT support services are rendered, they may not lead to any taxation under the DTAA. If some software is purchased and transferred to the Indian entity, it may also not lead to any taxation in India. If an IT facility is set up and access is given to NWIL, it may amount to royalty; and if the real nature of service is that the IT services have resulted into development of a technical plan or design etc., it may amount to fees for included services under the DTAA. Thus, the infallible conclusion is that ascertaining the precise nature of work done by the assessee for NWIL is of fundamental importance to settle the taxability or otherwise of the amount in India.

In this regard, the ld. AR was directed to show the exact nature of the services rendered by the assessee to NWIL. He referred to page 462 onwards of the paper book, which is a `Report of Independent Accountants‟ submitted to the management of Nalco India Limited. There are certain Schedules to this Report, which basically specify the amount of total costs incurred; and the amount and the manner of allocation of such costs to the assessee under the different heads. Total costs incurred are 74002860 USD, out of which the assessee has been charged with a total of 926951 USD. Page 463 contains a break-up of the costs recovered from NWIL totaling 9,26,951 USD under different heads with varying allocation keys. From the allocation of costs on the basis of different keys to the group entities on global level, it prima facie appears that the assessee is providing uniform services to all its group entities and then allocating the total costs incurred on their provision on the basis of some keys. It is not a simple case of the assessee having rendered some call centre services as was sought to be argued by the ld. AR but without any substantiation. The major component of such costs charged to NWIL is “Regional IT” with figure of 7,38,757 USD which has been allocated to all the group entities on the basis of `Nalco and Champion Headcount OUS‟. This shows that around 80% of the costs charged by the assessee to NWIL are towards Information Technology only. This Report again unfortunately does not discuss the nature of services but only gives broad heads, such as, Regional IT, HR etc.

At this juncture, it would be pertinent to note clause 3 of the Agreement between the assessee and NWIL which provides that: “Parent agrees to provide Affiliate with Services that are necessary or appropriate to the business of the Affiliate. As required, Parent will send necessary personnel to Affiliate‟s facilities to provide management expertise and knowledge to assist with specific issues as necessary. Parent may at its own option hire outside experts or consultants to provide such assistance.” This clause reveals that the assessee will send necessary personnel to NWIL‟s facilities to provide management expertise and knowledge to assist with specific issues as necessary. This manifests that the assessee was not only providing some services but also deputing its personnel to its Indian entity for providing expertise and knowledge to assist with specific issues as necessary.

The ld. AR placed on record certain additional documents, which admittedly were not before the AO/DRP. These documents also on their face value seem to be referring to certain e-mail communications only without making a narration of the precise nature of actual services rendered. No precise report of the services actually rendered has been placed before us despite the fact that clause 2(e) of the Addendum provided that the: “Parent shall keep true and accurate books of account and records relating to Costs so the Affiliate can review the Costs incurred and the methodology for allocating the Costs between affiliates” and further clause 2(c) of the Addendum specifically provides that the: “Parent agrees to provide Affiliate with summary of actual costs incurred by it in providing Services to Affiliate and related Markup for each year after the end of that year”. Ergo, it is clear from the above clauses of the Addendum to the Agreement that the assessee was obliged to maintain all the necessary details and record of services and the expenses incurred thereon. Since such details were not readily available with the ld. AR, he requested that the matter may be sent back to the AO/TPO for fresh determination of the issue in the light of all the relevant information/evidence. The ld. DR did not raise any serious objection to it. In view of the fact that certain crucial evidence for the decision is not available on record and further certain evidence filed as additional evidence has not been examined by the authorities below, we are of the considered opinion that it would meet the ends of justice if the impugned order on this score is set-aside and the matter is remitted to the file of the AO. We order accordingly and direct him to determine the precise nature of services rendered by the assessee to NWIL and then determine its taxability or otherwise. Needless to say, the assessee will be providing all the necessary details as called for by the AO for a proper determination of the issue.

Ground No.2 is about non-granting of credit for TDS on interest received. The AO is directed to examine and allow the necessary credit after proper verification.

Last ground about the initiation of penalty is premature and, therefore, dismissed. 14. In the result, the appeal is allowed for statistical purposes. Order pronounced in the Open Court on 1st November, 2022.