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Income Tax Appellate Tribunal, MUMBAI‘I’ BENCH, MUMBAI
By way of this appeal, the assessee appellant has challenged correctness of the Assessing Officer’s order dated 30.07.2018 passed under section 143C(13) r.w.s. 143(3) and 147 of the Income Tax Act 1961 for the assessment year 2010-11.
Assessment year: 2010-11 Page 2 of 14 2. Ground no 1 is general and does not call for any specific adjudication.
In ground no 2, 2.1 and 2.2, which we will take up together, the assessee has raised the following grievances:-
That on facts and in circumstances of the case and in law, Ld. AO/ Dispute Resolution Panel ("DRP") erred in characterizing management fee amounting to INR 960,026 as Fees for Included Services ("FIS") under Article 12(4) of the India-USA Double Tax Avoidance Agreement ("DTAA"). 2.1. That on the facts and circumstances of the case and in law, Ld. AO/ DRP erred in holding that the services rendered by the Appellant 'make available' technical knowledge or know-how or skill to Kelly Services India Private Limited, and hence are taxable as FIS under Article 12(4) of India - US DTAA. 2.2. That on the facts and circumstances of the case and in law, Ld. AO/ DRP erred in holding that the services rendered by the Appellant are ancillary and subsidiary to the enjoyment of rights granted by the Appellant to Kelly Services India Private Limited ("KSIPL") for which the Appellant receives royalty from KSIPL. Notwithstanding and without prejudice, that on the facts and circumstances of the case and in law, Ld. AO/ DRP erred in applying a higher tax rate of 15% as provided under the India - US DTAA in respect of royalty income of Rs. 5,106,777 and management fees income of Rs. 960,026, as against the lower tax rate of 10.3% as provided under the domestic tax provisions of Income-tax Act, 1961
Assessment year: 2010-11 Page 3 of 14 4. The assessee before us is a company incorporated, and fiscally domiciled, in the USA. It is a US tax resident. It carries on the business of staffing and recruitment outside India, and it does not have a PE in India. During the course of impugned assessment proceedings, the Assessing Officer noted that the assessee has received an amount of Rs. 9,60,026/- towards management fees from Kelly Services India Pvt Ltd., which, accordingly to the assessee was not taxable in India in view of provision of article 12(4) inasmuch as it did not satisfy the make available clause therein. The Assessing officer, however, rejected the said claim, of non taxability, in the draft assessment order. Aggrieved assessee raised objection before the DRP but without any success. While rejecting the claim, learned DRP observed, inter alia, as follow:-
4.2.1 As per the Service Agreement between the assessee and KSIPL dated 01.01.2007, the assessee had offered business consulting services e.g. technical assistance, managerial and administrative to KSIPL. The services to be rendered by the assessee to KSIPL include, but were not limited to the following: - • "Advising on implementation of various initiatives, such as global telecommunications applications including implementation of a wide area network for all global operations; • Advising on local strategic planning and guidance for expanding customer business; • Providing support and guidance on establishing and maintaining proper internal controls to meet the Statutory requirements for Customer and Contractor; • Development and consulting on implementation of the Customer's performance evaluation program; • Consulting and strategic planning on future technological globalization; • Human resources consulting, including development of promotion systems, employment benefits, compensation, pension plans and other career development programs; • Consulting and support on legal and tax issues that may arise in the normal business operations of the Customer, including, but not limited to, those in Assessment year: 2010-11 Page 4 of 14 relation to employment law, value added taxes, contracts, and general corporate and business transaction issues; • Providing global insurance policies for property damage, general liability, crime, umbrella liability, error and omissions/ professional indemnity, directors and officers liability, employers liability and employment practices liability; • Directing and administering all significant claims arising from the policies placed by Contractors, selecting, contracting, and managing the insurance broker, negotiating fees for insurance brokerage services, reviewing contracts, full management of workers compensation programs, consulting on corporate policies related to risk issues associates with pandemic preparation; • Provide advice on risk issues related to new business opportunities and new product developments; • Advise and support for cash management including receipts management investments, letters of credit and debt arrangements, management and monitoring, bank fees, planning strategies to maximize cash utilization and monitoring interest rates; • Providing pricing and analytical support for customer bids; • Advice and technical assistance in relation to the other aspects of the Customer's operations, including, but not limited to, assistance in relation to cross border activities; • Advising on the areas of payroll, billing and accounts receivable; • Consulting on safety and security to maintain a safe environment for Customer's employees, customers, and vendors". 4.2.2 As per the Royalty Agreement of the assessee with KSIPL, the INTANGIBLES referred to such intangible items which are important to KSIPL's ability to conduct business and which are used by it in connection with providing the Licensed Services, including but not limited to all Licensed Marks (e.g. trade names, business names, common law trademarks, registered trademarks and service marks), know-how (e.g. trade secrets, industry knowledge, competitor and customer information, best practices, service delivery process, etc), testing and training software (e.g. Pinpoint software and the Keltronics electronic circuitry evaluation); and the Kelly Quality Management System (KQMS). For utilising these rights, the assessee was entitled to receive as Assessment year: 2010-11 Page 5 of 14 royalty a sum calculated @0.25% of KSIPL's total sales, on a quarterly basis. 4.2.3 As per clause (a) of Article 12(4) of the India USA DTAA, "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 are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 (royalty) is received, 4.2.3.1 As per the 'Memorandum of understanding concerning fees for included services in Article 12' between India and USA dated May 15th 1989, it is mentioned that Article 12 includes only certain technical and consultancy services. The technical services require expertise in technology but the consultancy service mean advisory services. It is made clear that the category of consultancy service also includes an advisory service, whether or not expertise in technology is required to perform it. The Memorandum elaborates that paragraph 4(a) includes a technical and consultancy services that are ancillary and subsidiary to the application or enjoyment of an intangible for which a royalty is received under license as described in paragraph 3(a) of Article 12, as well as those ancillary and subsidiary to the application or enjoyment of industrial, commercial, or scientific equipment for which a royalty is .received under release as described in paragraph 3(b) of Article 12. [We are concerned in the present case with FIS related to the royalty payment described in paragraph 3(a) of the India USA DTAA], The Memorandum specifies that in order for a service fee to be considered "ancillary and subsidiary" to the application or enjoyment of some right, property, or information for which a payment described in paragraph 3(a) is received, the service must be related to the application or enjoyment of the right, property or information. In addition, the clearly pre-dominant purpose of the arrangement under which the payment of the service fee and such other payments are made must be the application or enjoyment of the right, property, or information described in paragraph 3. This purpose has to be determined by reference to the facts and circumstances of each case. The Memorandum further mentions the factors which may be relevant to such determination (although not necessarily controlling) include: (i). The extent to which the services in question facilitate the effective application or enjoyment of the right,
Assessment year: 2010-11 Page 6 of 14 property, or information described in paragraph 3; (ii). The extent to which such services are customarily provided in the ordinary course of business arrangements involving royalties described in paragraph 3; Whether the amount paid for the services (or which would be paid by parties operating at arm's length) is an insubstantial portion of the combined payments for the services and the right, property, or information described in paragraph 3; (iv). Whether the payment made for the services and the royalty described in paragraph 3 are made under a single contract for a set of related contracts); and (v). Whether the person performing the services is the same person as, or a related person to, the person receiving the royalties described in paragraph 3 [for this purpose, persons are considered related if their relationship is described in Article 9 (Associated Enterprises) or if the person providing the service is doing so in connection with an overall arrangement which includes the payer and recipient of the royalties!. 4.3 If the Service Agreement entered into by the assessee on 01.01.2007 with KSIPL is considered in the light of the above discussion, it is noted that though it relates to the provisioning of business consulting services including, but not limited to, technical assistance, managerial and administrative, to be used in KSIPL's day- to-day activity, the Service Agreement is in fact ancillary and subsidiary to the enjoyment of the rights granted by the assessee to KSIPL for which the assessee receives royalty from KSIPL. The Service Agreement justifies provisioning of the services by the assessee and holds that these services cannot be procured by KSIPL from independent third parties on the ground of business reasons, including high cost and specialised processes. The assessee is a company incorporated in USA and is engaged in carrying on business of staffing and recruitment outside India. It provides staffing and recruitment services worldwide and claims that it has extensive experience and capabilities that allow it to effectively provide support services to other companies. The Services covered in the Service Agreement have already been detailed in the earlier part of this order and the relevant Service and its connection with the Royalty/License agreement is discussed hereunder: a) As per the License Agreement, the assessee receives royalty in respect of know-how e.g. trade secrets, industry knowledge, competitor and customer information, best practices, service delivery process etc. It is Assessment year: 2010-11 Page 7 of 14 obvious that such know-how can only be in the shape of information/experience and it cannot be an object that can be transferred for use. In the Service Agreement the assessee provides consultancy in the nature of advice on local strategic planning and guidance for expanding customer business which is ancillary to the enjoyment of the intangible right of know-how/industry knowledge/competitor and customer information. b) Similarly, in the Service Agreement, the assessee mentions that it will provide support and guidance on establishing and maintaining proper internal controls to meet the Statutory requirements for itself and KSIPL. This is ancillary and subsidiary to the enjoyment of the intangible right of know-how/best practices/service delivery process. c) In the Service Agreement, it is mentioned that the assessee shall provide services relating to development and consulting on implementation of the KSIPL's performance evaluation program. This is ancillary to the enjoyment of the intangible right of Kelly Quality Management System. d) As per the Service Agreement, the assessee is also required to provide human resources consulting, including development of promotion systems, employment benefits, compensation, pension plans and other career development programs. This is ancillary to the enjoyment of the intangible right of Kelly Quality Management System/Best Practices/industry Knowledge. e) As per the Service Agreement, the assessee provides consulting and support on legal and tax issues to KSIPL. These are subsidiary to the rights of Industry Knowledge. F) As per the Service Agreement, the assessee provides services relating to providing global insurance policies for general liability, umbrella liability employers liability and employment practices liability. It also provides services towards directing and administering all significant claims arising from the policies placed by KSIPL, full management of worker compensation programs, consulting on corporate policies related to risk issues associated with pandemic preparation. These services are ancillary and subsidiary to the enjoyment of the rights of trade names/business names/trade secrets/best practices etc. g) As per the Service Agreement, the assessee provides advice on risk issues related to new business opportunities and new product development. This is subsidiary to the enjoyment of the right of Licensed Marks and Best Practices,
Assessment year: 2010-11 Page 8 of 14 h) As per the Service Agreement, the assessee gives advice and support for cash management, investments, letters of credit and debt arrangements, planning strategies to maximise cash utilisation and monitoring interest rates. It also provides prizing and analytical support for customer bids. It also advises on the areas of payroll, building and accounts receivable These services are ancillary to the rights of know-how/trade secrets/industry knowledge/competitor and customer information/best practices etc. i) As per the Service Agreement the assessee gives advice and technical assistance in relation to the other aspect of KSIPL's operations including, but not limited to, assistance in relation to cross-border activities. It also provides consultancy on safety and security to maintain a safe environment for KSIPL's employees, customers and vendors. These services are ancillary and subsidiary to the rights of know-how/industry knowledge/customer and competitor information/best practices/service delivery process etc. 4.3.1 The nature of the above services are also detailed in para 2.5 & 2.7 of the Objections to the draft order in Form No. 35A. In para 2.7, it is mentioned by the assessee as under: "2.7 Services rendered by the Assessee entailed provision of support services in advising the entities globally on policies and standards based on international best practices, support in terms of IT, financial Junctions, and other business support services. The services were in the nature of support services that merely allowed service recipient to run its business activities more efficiently and as such did not transfer any capability to KSIPL in undertaking such activities independently and without the support of the Assessee..." The above description of the services rendered by the assessee clearly indicates that these are ancillary to the License Agreement for royalty whereby the assessee had provided rights relating to trade secrets, industry knowledge, best practices and service delivery process to KSIPL. 4.3.2 It is also noted that the arguments of the taxpayer are focussed entirely on possible coverage of the fees paid under Article 12(4)(b) and have not focussed on Article 12(4)(a} of the India USA DTAA. The DRP, in view of the above, agrees with the contention of the AO that the Management Fee amounting to Rs. 9,60,026/-received by the assessee from KSIPL is liable to be taxed as FIS
Assessment year: 2010-11 Page 9 of 14 under Article 12(4)(a) of the Indian USA DTAA. The services provided by the assessee are ancillary and subsidiary to the application or enjoyment of the right, property or information for which assessee receives Royalty. The Service Agreement facilitates the effective application or enjoyment of the rights mentioned in the License Agreement and the services are customarily provided in the ordinary course of business arrangement involving the grant of rights in the nature of know-how, licensed Marks, testing & training and Management Systems. The payment for these Services is far less than the Royalty received by the assessee at Rs. 51.06 lakhs. It is also noted that the License Agreement and the Service Agreement are interrelated and the services are provided by the assessee only under both the contracts. 4.4 Without prejudice to the above finding, it is also noted that there are certain aspects of the License Agreement and the Service Agreement which may lead to a conclusion that the services provided can also fall in the category of FIS as per Article 12(4)(b) of the India US DTAA. As per Article 12(4)(b) FIS also includes payment of any kind 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 make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. As per the Memorandum of Understanding between Indian and USA the consultancy services which are not of a technical nature cannot be included services as per Article 12(4)(b). However, services of support on global telecommunications: advice on implementation of various initiatives such as global telecommunication applications including implementation of a wide area network; consulting and strategic planning for future technological globalisation etc. mentioned in the Service Agreement make available technical knowledge and experience and can also be considered as FIS under Article 12{4)(b). To this extent, the appropriate portion of the Management Fee is also be held as FIS. However, it is noted that the assessee has not elaborated on the exact nature of these services and hence no further comments can be made.
The Assessing Officer thus proceeded to hold that the said amount of Rs. 9,60,026/- is taxable in the hands of the assessee. Aggrieved assessee is in appeal before us.
Assessment year: 2010-11 Page 10 of 14 6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
We find that the basic reason for upholding the impugned management fees is that it is “ancillary and subsidiary to the application or enjoyment of an intangible for which a royalty is received under licence as described in paragraph 3(a) of Article 12(4)”. The justification for this approach is assigned as follows:- 4.3.1 The nature of the above services arc also detailed in para 2.5 & 2.7 of the Objections to the draft order in Form No. 35 A. In para 2.7, it is mentioned by the assessee as under: 2.7 Services rendered by the Assessee entailed provision of support services in advising the entities globally on policies and standards based on international best practices support in terms of IT, financial functions, and other business support services. The services were in the nature of support services that merely allowed service recipient to run its business activities more efficiently and as such did not transfer any capability to KSIPL in undertaking such activities independently and without the support of the Assessee..." The above description of the services rendered by the assessee clearly indicates that these are ancillary to the License Agreement for royalty whereby the assessee had provided rights relating to trade secrets, industry knowledge, best practices and service delivery process to KSIPL.
This reasoning, however, does not appeal to us. Article 14(4)(a) deals with the payments for rendition of technical or consultancy services which are ancillary and subsidiary to the application or enjoyment of a right, property or information for which a payment described in Article 12(3) is received. The services in question are independent services on Assessment year: 2010-11 Page 11 of 14 standalone basis, and, as such, article 12(4)(a) does not come into play.
As for the application of article 12(4)(b), we find that there is nothing on record to show that there is any transfer of technology so as to satisfy the make available clause. As for the connotations of “make available”, we find that there are at least two non-jurisdictional High Court decisions, namely Hon'ble Delhi High Court in the case of DIT v. Guy Carpenter & Co Ltd. [2012] 346 ITR 504 and Hon'ble Karnataka High Court in the case of CIT v. De Beers India (P.) Ltd. [2012] 346 ITR 467/208 Taxman 406/21 taxmann.com 214 in favour of the assessee, and there is no contrary decision by Hon'ble jurisdictional High Court or by Hon'ble Supreme Court. In De Beers India (P.) Ltd. case (supra), their Lordships posed the question, as to "what is meaning of 'make available'", to themselves, and proceeded to deal with it as follows: '......The technical or consultancy service rendered should be of such a nature that it "makes available" to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology "making available", the technical knowledge, skill?, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. 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 Assessment year: 2010-11 Page 12 of 14 techniques in the future without depending upon the provider. Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as "fee for technical/included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied.' We are satisfied that this condition is not fulfilled in the present case.
In view of the above discussions, and hearing in mind entirety of the case, we uphold the plea of the assessee the Assessing Officer is, accordingly, directed to delete the impugned addition of Rs. 9,60,026/-.
Ground no 2 is this allowed.
In ground no 3, he assessee has raised the following grievance:- 3. Notwithstanding and without prejudice, that on the facts and circumstances of the case and in law, Ld. AO/DRP erred in applying a higher tax rate of 15% as provided under the India –US DTAA in respect of royalty income of Rs. 5,105,777 and management fees income of Rs. 9,60,026/- as against the lower tax rate of 10.3% as provided under the domestic tax provisions of Income Tax Act, 1961.
So far as this grievance is concerned, is sufficient to take note of the fact that the Assessing Officer has applied the tax rate specified in the India USA DTAA, even though Assessment year: 2010-11 Page 13 of 14 admittedly the tax rate prescribed in the domestic law is lower than the rate so prescribed in the applicable DTAA. The DRP has declined to give relief to the assessee on the ground that “the assessee has specifically opted to be considered under DTAA and has not opted for the domestic law”. The assessee is aggrieved and is in appeal before us.
We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of applicably legal position.
It is only elementary that the provisions of the applicable DTAA come into play duly which these provisions are beneficial to the assessee vis-a-vis the provisions of the domestic law. The provisions of section 90(2) are quite unambiguous on this aspect. The law does not provide for choice, by the assessee, on this aspect. As the provisions of domestic law are clearly beneficial to the assessee, the authorities below have clearly erred in invoking the Indo US DTAA provisions on this aspect. We, therefore, direct the Assessing Officer to apply the beneficial provisions to the assessee, and charge tax on that basis.
Ground no 3 is thus allowed for statistical purposes in the above term.