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Income Tax Appellate Tribunal, DELHI BENCH: ‘G’ NEW DELHI
Before: SHRI R. K. PANDA & MS SUCHITRA KAMBLE
PER SUCHITRA KAMBLE, JM
This appeal is filed by the assessee against the order dated 27/10/2014 passed by the Assessing Officer u/s 144C(3) read with Section 143(3) of the Income Tax Act, 1961 for Assessment Year 2011-12.
The grounds of appeal are as under:-
Appeal against the order under section 143(3) read with Section 144C(13) of the Income-tax Act, 1961 (“the Act”) dated 27 October 2014 for the Assessment Year 2011-2012 passed by the Deputy Director of Income Tax, Circle 3(2), Intl. Taxation, New Delhi
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That on the facts and circumstances of the case and in law, the order passed by the Assessing Officer (“AO") is bad in law as well as in facts.
That on the facts and circumstances of the case and in law, the AO/ Dispute Resolution Panel ("DRP”) has erred in holding that the IT services provided/rendered by the Appellant qualify as fees for technical services as per the India - Belgium tax treaty (read with India-Portugal tax treaty), since such services fall within the meaning of ’make-available’ prescribed in the tax treaty.
That the AO/ DRP did not discuss in detail as to how the group IT services rendered by the Appellant from Belgium qualify the test of “make- available” under the tax treaty.
That on the facts and circumstances of the case and in law, the AO has erred in holding the entire income earned by the assessee as taxable in India, thereby denying the refund claimed.
That without any prejudiced to above, while calculating the demand, the A.O has erred in apply the surcharge and cess on the gross treaty rate of 10% applicable on fees for technical services.
That without any prejudice to above, the AO has erred in computing interest under section 234A the Act.
That on the facts and circumstances of the case, DRP has erred in not examining the validity of such initiation of penalty proceedings u/s 271(1)(c) of the Act.
The Ld. AR submitted that there is delay of 2 days in filing of the present appeal. The Ld. AR submitted that all the Directors of the assessee company are resident of Belgium and the directors authorized to sign and verify the
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appeal were travelling out of Belgium for official work, therefore, there is delay of 2 days in filing the present appeal. The Director of the assessee company has filed affidavit along with the application for condonation of delay. We have gone through the application along with the affidavit. The delay is condoned as the reason for delay is explained by the assessee company.
Assessee filed its return of income on 20-03-2013 declaring NIL income. The case was selected for scrutiny and notice under section 143(2) was issued on 12-08-2013 and was duly served on assessee. In response to notices and questionnaire, C.A. and counsel appeared and submitted details, information and explanations. SOREGAM SA is a tax resident of Belgium. The assessee company is engaged in the business of providing Information Technology Support Services to various group entities. In India, it rendered such services to Magotteaux Industries Private Limited (MIPL). The assessee filed return of income in India declaring NIL taxable income and the amount of the tax withheld by MIPL was claimed as refund in the return of income. In its reply dated 06.11.2013, apart from other submissions, the assessee provided copies of the computation of income alongwith the notes on such computation as annexure II of the reply. The assessee did not offer any income for tax in India and the whole of the amount of Rs. 1,78,10,591/- was claimed as exempt on account of the different provisions of the India Belgium Tax Treaty. Information was given by the assessee in its reply dated 06.11.2013, the details of the transactions with fellow subsidiaries were provided. In reply, the assessee disclosed receipt of Rs. 1,78,10,591/- from MIPL as IT Support Services remittances. This amount was received by the assessee for rendering Information Technology Services under Service Agreement with Magotteaux Industries Pvt. Ltd. A copy of this service agreement was provided during the course of the assessment proceedings. The draft Assessment Order was passed on 12.02.2014 wherein the Assessing Officer treated entire income received by the assessee company as taxable in India as fees for technical services (FTS). The assessee filed objections before the DRP and the DRP vide directions dated
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27.08.2014 dismissed the objections. The Assessing Officer made addition on fees for technical services in respect of royalty for Rs.1,78,10,592/-.
Being aggrieved by the assessment order, the assessee filed present appeal.
The Ld. AR submitted that the assessee company was incorporated and registered under the laws of Belgium and is engaged in providing support services to its group companies. During the year under consideration, the assessee company provided Information Technology (“IT”) support services in India to Magotteaux Industries Private Limited (“MIPL”/“AE”). The assessee company entered into an agreement dated December 3, 2008 with MIPL (effective from January 1, 2008) for rendering IT support services. The assessee company filed its return of income for the present assessment year on March 20, 2013 declaring Nil income. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 was issued on August 12, 2013. The Assessing Officer proposed an addition amounting to INR 1,78,10,592 holding that the amount received by the assessee company from its AE in consideration for provision of IT support services is in the nature of fee for technical services (“FTS”) and therefore, taxable in India in view of the Act read with the India-Belgium Double Taxation Avoidance Agreement (“DTAA”). The assessee company filed objections in Form 35A against the draft assessment order before the Dispute Resolution Panel (“DRP”) on April 3, 2014. The DRP vide directions dated August 27, 2014 held that in view of the protocol to India-Belgium DTAA, definition of FTS as given in Article 12 of India- Portugal shall apply. The DRP further held that the assessee company satisfies the ‘make-available’ requirement and therefore, the amount received is taxable as FTS in India. The Assessing Officer, pursuant to the directions of the DRP, completed the assessment vide order dated October 27, 2014 assessing the income at INR 1,78,10,592 and demand payable was determined at INR 53,24,213.
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The Ld. AR submitted that Ground No. 1 is general in nature. Hence Ground No. 1 is not adjudicated upon.
As regards to Ground Nos. 2, 3 & 4, the Ld. AR submitted that the A.O/DRP erred in holding that IT Services rendered qualify as FTS as per the DTAA. The Ld. AR further submitted that the AO/ DRP held that assessee company satisfies “make-available” condition under India- Belgium DTAA. The Assessing Officer held that Services provided by the assessee company are in the nature of IT support services or routine information technology related work which is not very complex/ highly technical in nature. Further, the Assessing Officer held that during the course of provision of these IT support services, recipient becomes knowledgeable as there is automatic transfer of technical knowledge/ experience. The Ld. AR submitted that the Assessing Officer further observed that there is no specific requirement of training to be impart by the assessee company and relied upon the Authority for Advance Rulings (“AAR”) in case of Shell India Markets Pvt. Ltd. [2012] 342 ITR 223 (AAR), Areva T&D India Ltd. [2012] 346 ITR 456 (AAR) and Mersen India (P.) Ltd. [2013] 353 ITR 628 (AAR).
The Ld. AR submitted that section 90(2) of the Act provides that the provisions of the Act or the DTAA, whichever is beneficial to the taxpayer shall apply. The assessee company is a tax resident of Belgium and therefore, is entitled to be taxed in accordance with the provisions of the India- Belgium DTAA to the extent they are more beneficial. The term FTS is defined under Article 12(3)(b) of the India-Belgium DTAA and includes all kinds of payments in the nature of managerial, technical and consultancy. Further, the protocol to the India-Belgium DTAA provides for taxation of FTS in accordance with the provisions of DTAA between India and a member of OECD entered into after January 1, 1990, where such provisions provide for a lower rate or restrictive scope of taxation, commonly known as most favored nation clause. In this regard, the Ld. AR submitted that the DTAA between India-Portugal (an OECD
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member country), entered into on April 30, 2000, under Article 12 provides for a restricted scope for taxation of amounts as FTS by laying down the make- available condition. The Ld. AR submitted that the IT support services rendered by the assessee company to its AE may qualify as FTS only if they satisfy the make available condition. In other words, the amounts received as consideration for provision of IT support services may not be taxed under Article 12 of the DTAA if the IT services do not 'make available' technology, skill, know-how etc. to its AE. The Ld. AR further submitted that the term ‘make available’ has not been defined in the DTAA. However, reference was made to the Memorandum of Understanding (MoU”) executed between India and US by the Ld. AR which reads as under:
“Generally speaking, 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 may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are 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”
The Ld. AR relied upon the decision of Raymond Ltd. vs. DCIT [2003] 86 ITD 791 (Mum) wherein the Tribunal interpreted the meaning of the term “make-available”. The Ld. AR also relied upon the following case laws:
i. CIT vs. De Beers India Minerals (P.) Ltd. [2012] 346 ITR 467 (Kar) ii. ACIT vs. Petronet LNG Ltd. ITA No. 865/Del/2011
The Ld. AR submitted that in light of the explanation in the MIPL to the India-US tax treaty along with the observations of the various Courts, interpretation of 'make available’ is summarized as under:
-The person acquiring the services is enabled to apply the technology
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contained therein on his own in future without recourse to the service provider;
-Knowledge must remain with service recipient once service has ended, i.e. some sort of durability or permanency of the result must remain once service is rendered;
-Service recipient is at liberty to use the technical knowledge, skill, know- how and processes
The Ld. AR further submitted that during the year under consideration, the assessee company provided IT support services to its AE in India under the Service Agreement dated December 3, 2008. The description and nature of the IT support services provided are in para 2.4 of the agreement which are as under:
“N°1 - Information Technology (“IT”) services:
IT services consist of defining the group IT policy, setting up general guidelines, and ensuring data integrity and systems availability. These services include the following services:
• Recommendations and direction in the field of Information and Communication Technology (“ICT”). • A wide range of services in the fields of IT and communication such as purchase, implementation, maintenance and technical support of internally developed software applications (Data Warehouse, Quote Manager, etc ..) and services as well as commercial ones (e.g. operating systems, productivity applications, server/network, antivirus, corporate websites), hardware (e.g. Desktops, laptops, servers, data center, network and disaster recovery), ERP system (BaaN), infrastructure, and date telecommunication (e.g. Lotus Notes, telephone, fax, Internet, website, mobile phones).
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The mark-up is set at 6%. ”
The Ld. AR submitted that the IT support services consists of defining the group IT policy, setting up general IT guidelines, and ensuring data integrity and systems availability. The services would involve providing recommendations and direction in the field of information and communication technology, purchase, implementation, maintenance and technical support of internally developed and commercial software applications and services, hardware, ERP system, infrastructure and data telecommunication. The Ld. AR submitted that IT support services are merely in the nature of routine IT support services and availing such services in no manner will equip MIPL with technical knowledge, skill or expertise to be able to apply it in future to perform the functions independent of the assessee company. The Ld. AR relied upon the decision in case of Sandvik Australia Pty. Ltd. vs. DDIT [2013] 141 ITD 598 (Pune) wherein the assesse was engaged in providing the IT support services to its group companies in the Asia-pacific region In view of the India- Australia DTAA, it was claimed that the amount received on provision of services was not taxable as the services do not make-available services to its group entities in India. The Ld. AR further submitted that the Tribunal held that the assessee has only provided the back-up services and IT support services for solving IT related problems to its Indian subsidiary. Hence, unless and until the services are made available, same cannot be taxable in India. Therefore, the services rendered by assessee-company to its Indian group companies, though were in the nature of technical services, but were not covered in para (3)(g) to Article 12 of the India Australia Treaty and, hence, the same were held not taxable in India. Further, the Ld. AR relied upon the AAR ruling in the case of Bharti AXA General Insurance Co. Ltd. [2010] 326 ITR 477 (AAR) wherein the applicant, amongst other services, was receiving IT support services like, access to software applications, related services to maintain and support these software applications, remote help desk services, etc. In this case, the AAR held that all the technical or consultancy services
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cannot be brought within the scope of the definition of FTS as provided in India-Singapore DTAA unless they make-available technical knowledge, know- how, etc., which in turn facilitates the person acquiring the services to apply the technology embedded therein. The AAR further held that it will be too much to say that by providing services (providing comments and suggestions after reviewing strategies and plans, giving suggestions so as to bring the products in line with the common practices followed by other AXA entities across the globe), the receiver of services is enabled to apply the technology embedded therein so as to fall within the definition of FTS. The Ld. AR further relied upon the following AAR rulings wherein similar intra group services were provided and the AAR held that dissemination of information, furnishing guidelines and suggesting plans of action aimed at uniformity and seamless quality in business dealings of participating group entities do not per se amounts to making available technical knowledge and experience:
-Ernst & Young (P.) Ltd. [2010] 323 ITR 184 (AAR)
-Invensys Systems Inc. [2009] 317 ITR 438 (AAR)
The Ld AR further submitted that the assessee company renders the IT support services from outside India and no personnel of the assessee company visits India in connection with the provision of such services to MIPL. Additionally, the Ld. AR submitted that no employee of MIPL is being trained in the course of rendering these services to MIPL. The Ld. AR further submitted that the AO/DRP did not specify as to how the IT support services “make- available” knowledge, experience etc. to the recipient and has also not examined as to how the employees of MIPL could have utilized the experience gained by them. Thus, there was no evidence on record that the services rendered by the assessee qualify the test of “make-available”. In this regard, the Ld. AR relied upon the decision of Linklaters LLP vs. DCIT [2017] 185 TTJ 525 (Mumbai) wherein it is held that the view taken by the Revenue was not a plausible one since they were not able to point out as to how there was transfer
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of technical knowledge, skill, experience or know-how, etc., in such manner that the recipients were able to utilize and perform these tasks again on their own without falling back on the assesse for its assistance. It was held similarly in the following cases that since it has not been established by the Department that while rendering the services, technical knowledge, knowhow, skill etc. has been made available so as to enable the recipient to apply them independently, the services cannot be held taxable as fees for technical services:
-Endemol India (P.) Ltd. [2014] 361 ITR 340 (AAR)
-Exxon Mobil Company India (P.) Ltd. vs. ACIT ITA No. 6708 (Mum) of 2011
In view of the above, the Ld. AR submitted that these services do not make available any know-how or skill and do not fall within the ambit of FTS as defined in Article 12 of the India-Belgium DTAA read with India-Portugal DTAA.
The Ld. DR relied upon the assessment order and the DRP directions /order of the CIT(A) and restricted submissions only to specific aspects. On balance aspects, above orders and oral submissions are relied upon. The assessee, a tax resident of Belgium provided services to its Indian AE under the service agreement dated 1.1.2008. The AO treated the consideration received by the assessee from its Indian AE for providing the above services as "fees for technical services". The assessee stated that it is covered under the MFN clause of the Protocol to the DTAA between India and Belgium and accordingly relied upon the definition of FTS as per Indo-Portuguese DTAA and claimed that clause (b) of Article 12(4) is not satisfied and no technical knowledge, experience, skill, know -how etc had been made available to the Indian AE. In the above back drop the undisputed facts are as under:
The assessee has received consideration from its Indian AE in lieu of i. services provided by it;
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The services so provided are in the nature of "Technical or Consultancy" ii. services. In fact the nature of services as per the ledger account of the assessee in the books of the AE as appearing in pages 110 to 112 of the paper book are in the nature of "Consultancy" Services.
The Ld. DR submitted that the services were described as "Information Technology Services" and described in Article 2.4 of the General agreement. The details of the service rendered as per agreement and as reproduced by the Assessment Order in page 3 of the order. The Ld. DR submitted that the language of Article 2.4 of the general terms of service agreement dated 01.01.2008, the services provided by the assessee to its Indian AE consists of the following services :
I. Services to "Define the group IT Policy" (for the AE recipient) - The term 'Policy' has been defined in the Collins Dictionary as "a set of ideas or plans that is used as a basis for making decisions, especially in politics, economics, or business a plan of action adopted or pursued by an individual, government, party, business, etc" Therefore, 'defining the policy' must necessarily involve and mean the process of "Formulation of appropriate IT Policy" for the AE (with reference to and in accordance with the IT Policy of the group).
II. Services to "Set-up guidelines" - Once a policy has been formulated, it follows that a set of guidelines/instructions/dos and don'ts are devised and setup for the successful implementation and compliance of such policy. It is towards this end that the assessee provided the service recipient with necessary "Recommendations and direction in the field of information and communication ("ICT")".
Services to "ensure data integrity and system availability"- This include iii. services such as "purchase, implementation, maintenance and technical support of internally developed software applications (Data Warehouse, Quote
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Manager etc.) and services as well as commercial ones (e.g. operating systems, productivity applications, server/network, antivirus, corporate website), hardware e.g. Desktops, laptops, servers, data center, network and disaster recovery) ERP system,(BaaN), Infrastructure and data telecommunication (e.g. Lotus Notes, telephone, fax internet, website phones.).
The Ld. DR pointed out that all the above 3 services are interconnected and cannot be implemented independent of each other. The Ld. DR submitted that at the top of the hierarchy is the formulation of an appropriate IT policy for the Indian AE which should be compatible and in accordance with the Group IT Policy. In order to ensure that the policy is implemented effectively, a set of guidelines/instructions/dos and don'ts are devised and setup. Thus, next in the line are the "ICT" or recommendations and directions towards this end and finally setting up of the systems apparatus and procedures needed for the effective implementation of the IT Policy of the Indian AE and its seamless integration with the Global IT Policy of the group. This can only be achieved through the process of "Data integration" and "system availability". Towards this end to ensure data integration and availability of system hardware, appropriate software, both that are (a) Internally developed software as well as (b) Commercial software applications and hardware as well as other necessary system and infrastructure requirements need to be purchased, installed and maintained.
The Ld. DR submitted that the services provided by the assessee to its Indian AE must be viewed and the satisfaction of "make available clause of Article 12(4)(b)" of the Indo-Portuguese DTAA must be examined. The Ld. DR pointed out that the very expressions "defining", "setting up", "recommendations", "directions", services for identifying and purchasing appropriate "software" and "hardware" etc. clearly denote something which have been "made available" to the recipient. It cannot be said that the recipient will continue to depend upon the service provider for the formulation of its IT
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Policy or the guidelines and system apparatus for the implementation of such policy. Once the policy is developed it is for the recipient to follow it and modify it, if needed. Once guidelines and directions have been devised and formalized, the recipient of such guidelines need not seek the continual service of the service provider for it. It can issue or modify such guidelines and directions itself in future depending upon the situation and circumstances without depending upon the service provider. Similarly, once system apparatus involving the appropriate hardware and software have been identified, procured, installed and integrated for the effective implementation of the IT Policy of the recipient, the Indian AE need not depend upon the service provider for the same in future. It can itself procure/purchase/assemble the specified hardware or commercial software and develop/configure or modify the internally developed software or other infrastructural requirements. To sum up, the Ld. DR submitted that once the service have been rendered by the assessee, the recipient Indian AE is armed and has been enabled with both the "policy", "guidelines" and the "IT System" necessary for the implementation of such policy. The Indian AE is thus, no longer dependent upon the assessee for availing such services relating to the formulation and implementation of the "policy", "guidelines" and the "IT System". In other words, the technical and consultancy services have been "made available" by the assessee to its Indian AE in lieu of which the consideration was received. Accordingly, the AO and DRP are justified in holding the receipts by the assessee to be in the nature of "fees for technical services". In support of the above, the Ld. DR relied upon the decision of Hon'ble Karnataka High Court in the case of De Beers India Minerals (P) Ltd. (2012) (346 ITR 467) where it was held as under:-
"What is the meaning of “make available". 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
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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". 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. Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology 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 have heard both the parties and perused all the relevant material available on record. SOREGAM SA is a tax resident of Belgium. The assessee company is engaged in the business of providing Information Technology Support Services to various group entities. In India, it rendered such services to Magotteaux Industries Private Limited (MIPL). These facts were not disputed by the Revenue at any point of time. section 90(2) of the Act provides that the provisions of the Act or the DTAA, whichever is beneficial to the taxpayer shall apply. The assessee company is a tax resident of Belgium and therefore, is entitled to be taxed in accordance with the provisions of the India- Belgium DTAA to the extent they are more beneficial. The term FTS is defined under Article 12(3)(b) of the India-Belgium DTAA and includes all kinds of payments in the nature of managerial, technical and consultancy. Further, the protocol to the India-Belgium DTAA provides for taxation of FTS in accordance with the provisions of DTAA between India and a member of OECD entered into after January 1, 1990, where such provisions provide for a lower rate or restrictive scope of taxation, commonly known as most favored nation clause. In this regard, the DTAA between India-Portugal (an OECD member country), entered into on April 30, 2000, under Article 12 provides for a restricted scope
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for taxation of amounts as FTS by laying down the make-available condition. The IT support services rendered by the assessee company to its AE may qualify as FTS only if they satisfy the make available condition. In other words, the amounts received as consideration for provision of IT support services may not be taxed under Article 12 of the DTAA if the IT services do not 'make available' technology, skill, know-how etc. to its AE. The term ‘make available’ has not been defined in the DTAA. However, reference was made to the Memorandum of Understanding (MoU”) executed between India and US by the Ld. AR. The Ld. AR relied upon the decision of Raymond Ltd. vs. DCIT [2003] 86 ITD 791 (Mum) wherein the Tribunal interpreted the meaning of the term “make-available”. The Ld. AR also relied upon the following case laws:
i. CIT vs. De Beers India Minerals (P.) Ltd. [2012] 346 ITR 467 (Kar) ii. ACIT vs. Petronet LNG Ltd. ITA No. 865/Del/2011
The explanation in the MIPL to the India-US tax treaty along with the observations of the various Courts, interpretation of 'make available’ is that the person acquiring the services is enabled to apply the technology contained therein on his own in future without recourse to the service provider; and Knowledge must remain with service recipient once service has ended, i.e. some sort of durability or permanency of the result must remain once service is rendered; as well as Service recipient is at liberty to use the technical knowledge, skill, know-how and processes. During the year under consideration, the assessee company provided IT support services to its AE in India under the Service Agreement dated December 3, 2008. The description and nature of the IT support services provided are in para 2.4 of the agreement. From the records it can be seen that the assessee company renders the IT support services from outside India and no personnel of the assessee company visits India in connection with the provision of such services to MIPL. No employee of MIPL is being trained in the course of rendering these services
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to MIPL. The AO/DRP did not specify as to how the IT support services “make- available” knowledge, experience etc. to the recipient and has also not examined as to how the employees of MIPL could have utilized the experience gained by them. Thus, there was no evidence on record that the services rendered by the assessee qualify the test of “make-available”. In this regard, the Ld. AR relied upon the decision of Linklaters LLP vs. DCIT [2017] 185 TTJ 525 (Mumbai) wherein it is held that the view taken by the Revenue was not a plausible one since they were not able to point out as to how there was transfer of technical knowledge, skill, experience or know-how, etc., in such manner that the recipients were able to utilize and perform these tasks again on their own without falling back on the assesse for its assistance. It was held similarly in the following cases that since it has not been established by the Department that while rendering the services, technical knowledge, knowhow, skill etc. has been made available so as to enable the recipient to apply them independently, the services cannot be held taxable as fees for technical services:
-Endemol India (P.) Ltd. [2014] 361 ITR 340 (AAR)
-Exxon Mobil Company India (P.) Ltd. vs. ACIT ITA No. 6708 (Mum) of 2011
Thus, these services do not make available any know-how or skill and do not fall within the ambit of FTS as defined in Article 12 of the India-Belgium DTAA read with India-Portugal DTAA. The submissions of the Ld. DR that the assessee company is providing make available services and the services are interlinked has not been supported by any documentary evidence which was produced by the assessee company during the assessment proceedings. The Hon’ble Karnataka High Court held that 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. The Hon’ble High Court further held that Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. In other words, payment of
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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. In the present assessee company’s case, the services provided by the assessee company are that of IT support services which are merely in the nature of routine IT support services and availing such services in no manner has given any benefit to MIPL with technical knowledge, skill or expertise to be able to apply it in future to perform the functions independent of the assessee company. Thus, the twin test is not fulfilled in the present case. Therefore, the Assessing Officer was not justified in making additions in this aspect. Ground Nos. 2, 3 and 4 are allowed.
The Ld. AR submitted that as regards to Ground No. 5, the Assessing Officer erred in applying the surcharge and cess on the gross treaty rate of 10% applicable on fees for technical services. The Ld. AR submitted that the AO, in the final assessment order, assessed the income as fee for technical services under Article 12 of the India-Belgium DTAA. Consequently, tax was computed @10%. The AO further applied surcharge at the rate of 2.5% and Education Cess & Secondary and Higher Education Cess at the rate of 3% on the tax rate of 10%. The Ld. AR submitted that the Assessing Officer erred in applying surcharge and cess over and above the tax rate of 10% as per Article 12 of the DTAA between India and Belgium. In this regard, attention is invited to Article 2 of the DTAA which is reproduced as under:
“The existing taxes to which the Agreement shall apply are.
(a) in the case of India :
(i) the income-tax including any surcharge thereon, and
(ii) the surtax,
(hereinafter referred to as "Indian tax")”
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The Ld. AR submitted that the expression ‘tax’ is defined in Article 2(2) of the DTAA to include ‘income tax’ and ‘surcharge’ thereon, so far as India is concerned Article 2(3) further extends the scope of ‘tax’ to also cover any identical or substantially similar taxes which are imposed after the date of signature of the Agreement in addition to, or in place of, existing taxes. The Ld. AR submitted that when Article 2 states that surcharge is included in income tax and the tax rate of 10% for fee for technical services is prescribed in Article 12 shall have to be deemed to include surcharge and since cess is nothing but an additional surcharge, the tax prescribed under DTAA at the rate of 10% shall be deemed to included surcharge and education cess. The Ld. AR relied upon the decision of Elektrobit Automotive GmbH vs. DCIT ITA No. 678/Del/2013 wherein the Tribunal held that education cess is only a surcharge as clarified by the Finance Act and surcharge is only a tax clarified by the Hon’ble Apex Court in case of CIT vs. K. Srinivasan [1972] 83 ITR 346 (SC), therefore, education cess or any other surcharge should not be added separately to the tax rate as per the DTAA. The Tribunal relied on the coordinate Bench decision in the case of Osram India Pvt. Ltd. vs DCIT (ITA No. 4052/Del/2015) to come to this conclusion. The Ld. AR also relied upon the following decisions:
i. DIC Asia Pacific Pte. Ltd. vs. ADIT [2012] 52 SOT 447 (Kolkata) ii. DDIT vs. BOC Group Ltd. [2016] 156 ITD 402 (Kolkata) iii. Capgemini SA vs. DCIT [2016] 160 ITD 13 (Mumbai) iv. Sunil V, Motiani vs. ITO [2013] 59 SOT 37 (Mumbai) v. Parke Davis and Company LLC vs. ACIT [2014] 62 SOT 282 (Mumbai)
In view of the above, the Ld. AR submitted that tax rate mentioned in Article 12 of the India-Belgium DTAA is a gross rate of tax inclusive of surcharge and therefore, since education cess is a form of additional surcharge, education cess or any other surcharge cannot be applied additionally to increase the tax rate mentioned in the DTAA i.e 10%.
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The Ld. DR relied upon the Assessment Order.
We have heard both the parties and perused all the relevant material available on record. The Ld. AR relied upon the decision of Elektrobit Automotive GmbH vs. DCIT ITA No. 678/Del/2013 wherein the Tribunal held that education cess is only a surcharge as clarified by the Finance Act and surcharge is only a tax clarified by the Hon’ble Apex Court in case of CIT vs. K. Srinivasan [1972] 83 ITR 346 (SC), therefore, education cess or any other surcharge should not be added separately to the tax rate as per the DTAA. The Tribunal relied on the coordinate Bench decision in the case of Osram India Pvt. Ltd. vs DCIT (ITA No. 4052/Del/2015) to come to this conclusion. Thus, the issue is squarely covered in favour of the assessee. Ground No. 5 is allowed.
As regards to Ground No. 6, the Ld. AR submitted that the Assessing Officer erred in computing interest under section 234A of the Act and is consequential. The interest under section 234A of the Act is not applicable as the taxes were duly deducted on the subject transaction and deposited by MIPL/AE (i.e. the deduction).
We have heard both the parties and perused all the relevant material available on record. Ground No. 6 is consequential hence do not require any adjudication.
In result, appeal of the assessee is allowed. Order pronounced in the Open Court on 30th November, 2018.
Sd/- Sd/- (R. K. PANDA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 30/11/2018 Copy forwarded to:
20 ITA No. 123/Del/2015
Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT
ASSISTANT REGISTRAR ITAT NEW DELHI
Date of dictation 05.09.2018 Date on which the typed draft is placed before the 05.09.2018 dictating Member Date on which the typed draft is placed before the 15.11.2018 Other Member Date on which the approved draft comes to the Sr. PS/PS Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr. 12.12.2018 PS/PS Date on which the final order is uploaded on the 12.12.2018 website of ITAT Date on which the file goes to the Bench Clerk 12.12.2018 Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order