GRI RENEWABLE INDUSTRIES S L (FORMERLY KNOWN AS GONVARRI EOLICA S L),MADRID vs. ASSISTANT COMMISSIONER OF INCOME-TAX (INTERNATIONAL TAXATION) CIRCLE -1, PUNE

PER R.S. SYAL, VP :

This appeal by the assessee is directed against the final

Assessment order dated 26-03-2021 passed by the Assessing Officer

(AO) u/s.143(3) r.w.s. 144C(13) of the Income-tax Act, 1961

(hereinafter also called ‘the Act’) in relation to the assessment year

2016-17.

rate as per section 115A of the Act instead of the tax rate as per the

DTAA between India and Spain (hereinafter also called ‘the

DTAA’) read with the Protocol thereof.

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is a foreign company incorporated in Spain. The return was filed

declaring total income of Rs.2,88,38,464/-, comprising of receipt of

Rs.2,25,29,742/- from M/s. Shrenik Industries Pvt. Ltd. towards

providing technical support, financial support and advice, legal

support, commercial support etc., and Rs.63,08,722/- received

towards SAP software and implementation of process model. The

assessee declared the above amounts as ‘fees for technical services’

and ‘royalties’ respectively, claiming them as covered under Article

13 of the DTAA. Relying on the Protocol to the DTAA having Most

Favoured Nation (MFN) clause along with Article 12 of the Double

Taxation Avoidance Agreement between India and Portugal

(Portuguese DTAA), the assessee claimed that the above gross

receipts of ‘royalties’ and ‘fees for technical services’ were taxable

@10% instead of 20% as provided in the DTAA. The AO did not

dispute the amount or the nature of income offered by the assessee.

He, however, held that the tax rate of 10% applied by the assessee

under Portuguese DTAA could not be applied because section 90(1)

specifically requires the issuance of necessary Notification by the

Government of India. In order to import an MFN clause from

another DTAA having lower rate of tax or narrower scope of

3 ITA No.202/PUN/2021 GRI Renewable Industries S.L.

definition of certain clause, it is necessary that such importing of

clause must be notified. In the absence of any notification of the

MFN clause from the Portuguese DTAA, the AO held that the

benefit of the relevant Article of the Portuguese DTAA was not

available to the assessee in terms of the Protocol and hence, the ‘fees

for technical services’ and ‘royalty’ was chargeable to tax at 10%

plus applicable Surcharge and Education Cess in terms of section

115A of the Act, which was more beneficial vis-à-vis 20% rate of tax

provided in the DTAA. No succor was provided by the Dispute

Resolution Panel. In the final assessment order, the AO taxed the

amount of ‘fees for technical Services’ and ‘royalty’ at 10% plus

applicable Surcharge and Education cess u/s.115A of the Act as

against 20% straight rate in the DTAA. Aggrieved thereby, the

assessee has come up in appeal before the Tribunal.

material on record. It is amply borne out from the facts recorded

above that there is no dispute on the quantum, nature or taxability of

the amount of ‘fees for technical services’ or ‘royalty’ of the

assessee. The core of controversy is only anent to the rate of tax to

be applied on such income. Section 115A of the Act, dealing with tax

on ‘royalty’ and ‘fees for technical services’ etc. in the case of

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foreign companies, provides through clause (b) of sub-section (1)

that where the total income of a non-resident (not being a company)

or a foreign company includes income by way of ‘royalty’ or ‘fees

for technical services’ etc., the amount of income-tax shall be

calculated @10%. It goes without saying that such rate of tax is

liable to be loaded with the applicable Surcharge and Education cess.

Section 90 of the Act provides that where the Central Government

has entered into an Agreement with the Government of any country

outside India for granting relief in respect of income on which tax is

payable both in India and the other country, then, in relation to the

assessee to whom such Agreement applies, the provisions of the Act

shall apply to the extent they are more beneficial to that assessee. To

put simply, if the provisions of the concerned DTAA are more

beneficial to the assessee vis-a-vis their counterparts under the Act,

then the assessee can choose to be governed by the beneficial

provisions contained in the DTAA.

India and Spain was notified in 1995. Article 13 of the DTAA

contains provisions relating to ‘royalties’ and ‘fees for technical

services’, whose relevant part runs as under: -

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`1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed : (i) in the case of royalties relating to the payments for the use of, or the right to use, industrial, commercial or scientific equipment, 10% of the gross amount of the royalties; (ii) in the case of fees for technical services and other royalties, 20% of the gross amount of fees for technical services or royalties. 3. 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 cinematographic films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. 4. …..’ 6. Para 1 of Article 13 provides that ‘royalties’ and ‘fees for

technical services’ arising in India and paid to resident of Spain may

be taxed in Spain. Para 2 states that such ‘royalties’ or ‘fees for

technical services’ may also be taxed in India. It is undisputed that

insofar as the copyright royalty under consideration is concerned, the

same is liable to tax at the rate of 20% as per para 13(2)(ii) of the

DTAA. In the same manner, fees for technical services also attracts

6 ITA No.202/PUN/2021 GRI Renewable Industries S.L.

tax rate of 20% as per the DTAA. Going with Article 13 of the

DTAA, it is clear that the rate of tax in case of ‘fees for technical

services’ and `other royalties’ as received by the assessee, is 20%.

DTAA, which provides vide para 7, as follows :

‘7. The competent authorities shall initiate the appropriate procedures to review the provisions of Article 13 (Royalties and fees for technical services) after a period of five years from the date of its entry into force. However, if under any Convention or Agreement between India and a third State which is a Member of the OECD, which enters, into force after 1st January, 1990, India limits its taxation at source on royalties or fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of incomes, the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this convention with effect from the date on which the present Convention comes into force or the relevant Indian Convention or Agreement, whichever enters into force later.’ 8. A cursory glance at the above para unfolds that if under any

convention between India and a third State which is a Member of the

OECD, entered into force after 01-01-1990, India limits its taxation

for ‘royalties’ or ‘fees for technical services’ “to a rate lower” or

“scope more restricted” than the rate or scope as set out in the

DTAA, such beneficial rate or scope shall also apply under this

Convention. Thus, the MFN clause contained in the above para 7 of

the Protocol manifests that if India has entered into a Convention

after 01-01-1990 with a third country which is a Member of the

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OECD and under such Convention it has, inter alia, agreed for a

lower rate of taxation vis-à-vis that provided in the DTAA with

Spain, such lower rate of tax will apply under the DTAA with Spain.

India entered into a DTAA with Portuguese Republic vide

Notification dated 16-06-2000. Article 12 of the DTAA with

Portugal, which is an OECD member country and fulfils all other

conditions as prescribed in the Protocol, provides that the ‘royalties’

and ‘fees for technical services’ shall, in the circumstances as are

obtaining in the extant case, be taxed at 10% of the gross amount.

Taking assistance of 10% tax rate as provided in Article 12 of the

Portuguese DTAA, the assessee claimed that the tax rate of 20% as

provided under Article 13 of the DTAA between India and Spain

shall not apply and it will be governed by the reduced rate of taxation

of 10% as per Article 12 of the Portuguese DTAA. The Revenue

jettisoned the applicability of India and Portugal DTAA on the

ground that the import of MFN clause from the Portuguese DTAA

was not notified and hence the Protocol under the DTAA between

India and Spain would have no application.

entered into between India and Spain was signed by both the

countries on 08-02-1993, which entered into force on 12-01-1995

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and was notified on 21-04-1995. The Protocol was appended and

made a part of the Agreement between India and Spain, inter alia,

providing for the MFN clause qua ‘royalties’ and ‘fees for technical

services’ under para 7. Such Protocol was also signed by both the

Governments on the same date, namely, 08-02-1993. The opening

part of the Protocol states that: `At the moment of signing the

Convention between the Government of the Republic of India and

the Government of the Kingdom of Spain for the Avoidance of

Double Taxation and the Prevention of Fiscal Evasion with respect to

taxes on Income and on Capital, the undersigned have agreed upon

the following provisions which shall be an integral part of the

Convention.’ It is overt from the opening part of the Protocol, duly

signed by the competent authorities of both the countries along with

and on the same date on which the main Agreement or Convention

was signed, that the Protocol has been treated as “an integral part of

the Convention”. Once the Agreement between India and Spain was

notified on 21-04-1995, the Protocol, which is an integral part of the

Agreement, also got automatically notified along with the

Agreement. In such a scenario, it is difficult to comprehend the need

for any separate notification for the import of the MFN clause.

9 ITA No.202/PUN/2021 GRI Renewable Industries S.L.

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

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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 sub-

section (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

11 ITA No.202/PUN/2021 GRI Renewable Industries S.L.

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 ITA No.202/PUN/2021 GRI Renewable Industries S.L.

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.

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

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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.

Protocol containing the MFN clause as its integral part, was duly

notified on 21-04-1995, after having entered into force on 12-01-

1995. On such notification of the DTAA, the Protocol containing the

MFN clause triggering the importing of any other DTAA fulfilling

the requisite requirements, including the Portuguese DTAA, got

automatically notified pro tanto, in terms of section 90(1) of the Act

leaving no room for any separate notification for the importation.

The sequitur is that that the authorities below were not justified in

denying the benefit of the straight rate of tax at 10% as per the

DTAA read with Portuguese DTAA and also additionally charging

Surcharge and Education cess.

14 ITA No.202/PUN/2021 GRI Renewable Industries S.L.

income from royalty or fees for technical services, which the assessee

claimed to have received as reimbursement and hence not includible

in its gross revenue for taxability.

claimed a sum of Rs.35,67,719/- as reimbursement on cost-to-cost

basis and did not include the same in the total revenues for the

purpose of offering income for taxation. The AO called upon the

assessee to furnish complete evidence like all invoices, agreements,

ledger extracts and etc. in support of recovery/reimbursement of the

expenses. In the absence of any response coming from the side of

the assessee, the AO treated this amount as a part and parcel of ‘fees

for technical services/royalties’ and thus applied tax rate of 10% plus

applicable surcharge and education cess thereon. The assessee filed

certain evidence before the Dispute Resolution Panel in support of its

contention that the amount was in the nature of reimbursement of

certain expenses by contending that the draft assessment order was

notified on 20-12-2019 and the assessee’s submission on

reimbursement with relevant evidence filed on 19-12-2019, remained

unconsidered. The DRP called for the comments of the AO, who

raised objection to the assessee’s contention. The DRP repelled the

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assessee’s claim of exclusion of the amount of Rs.35,67,716/- from

gross revenue. It further held that the in the scheme of taxation

u/s.115A of the Act, all the receipts shown on gross basis are

considered and hence, the assessee’s stand on reducing certain costs

was not acceptable. As such, no succor was allowed by the DRP,

which culminated into the addition by the AO in the final order.

material on record. It is seen that the assessee offered its income

from ‘royalties’ and ‘fees for technical services’ on gross basis,

albeit at the concessional rate of tax. The assessee claimed that a

sum of Rs.35.67 lakh was received as reimbursement of expenses

which was not liable to be included in the gross receipts. Primarily,

we find that the basic details about the nature of expenses etc. are not

forthcoming. It is not known as to whether such expenses claimed to

be reimbursed were in furtherance of the rendering of ‘fees for

technical services’ or de hors the same. The assessee has not placed

on record invoices raised to the Indian parties towards ‘fees for

technical services/royalties’ to demonstrate if such amounts claimed

as reimbursement were part of ‘royalties/fees for technical services’.

Even the claim of reimbursement without any mark-up has not been

properly established before the Tribunal. In the absence of such

16 ITA No.202/PUN/2021 GRI Renewable Industries S.L.

relevant details, it is difficult to conclude as to whether the amount

claimed as reimbursement should form part of total revenue base for

applying concessional rate of tax.

scheme of taxation of an item of income por una parte u/s 115A of

the Act or under the concerned Article of the DTAA and por otra

parte under the normal provisions of the Act or the Articles of the

DTAA providing for taxation at normal rate. In the former case,

revenue or gross receipt itself is charged to tax though at a

concessional rate of 10% etc., in the latter, it is the income embedded

in the revenue or gross receipt which is charged to tax at normal rate.

Any reimbursement in the latter case cannot be charged to tax

because of the absence of any element of income therein, which is

sine qua non for the chargeability in such a situation. However, in the

former case which proceeds with taxation of the gross

receipts/revenue at a concessional rate of tax, reimbursement of costs

that have contributed to the earning of the revenue have to be

necessarily included. In all cases of taxation of revenue or gross

basis, a fundamental question which needs to be asked is whether a

particular cost has contributed to the earning of the revenue. If the

answer is in affirmative, then its corresponding receipt needs to be

17 ITA No.202/PUN/2021 GRI Renewable Industries S.L.

included in the revenue for applying the concessional rate of tax

irrespective of the nomenclature given to the parties as

reimbursement or revenue. Thus in all cases of concessional taxation

on gross receipt or revenue basis, splitting of total receipt into

reimbursement or revenue, remains neutral to its chargeability. Both

such cases, invariably warrant inclusion of the receipt in the revenue

base for taxation so long as the receipt is relatable to costs incurred

contributing to the earning of the revenue. An assessee cannot be

permitted to opt for concessional rate of taxation on gross receipt

basis and then claim that some part of the receipts should be left out

by describing it as reimbursement. It is patently an absurd

proposition.

above issues are not available on record, we set aside the impugned

order on this score and remit the matter to the file of the AO for

deciding the point on the touchstone of the discussion made supra.

Needless to say, the assessee will be allowed a reasonable

opportunity of hearing.

The claim of the assessee is that the AO did not grant benefit of the

18 ITA No.202/PUN/2021 GRI Renewable Industries S.L.

TDS. The AO is directed to verify the facts and allow necessary

TDS credit as per law.

disposed off accordingly.

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; िदनांक Dated : 15th February, 2022 सतीश आदेश की �ितिलिप अ�ेिषत/Copy of the Order is forwarded to: अपीलाथ� / The Appellant; 1. ��थ� / The respondent 2. 3. The CIT (DRP-3) Mumbai-1, CIT (DRP-3) Mumbai-2, CIT (DRP-3) Mumbai-3, 4. DR, ITAT, ‘C’ Bench, Pune गाड� फाईल / Guard file. 5.

आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

ITA No.202/PUN/2021 GRI Renewable Industries S.L.

Date 1. Draft dictated on 14-02-2022 Sr.PS 2. Draft placed before author 15-02-2022 Sr.PS 3. Draft proposed & placed before JM the second member 4. Draft discussed/approved by JM Second Member. 5. Approved Draft comes to the Sr.PS Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *