M/S REDCORE INDIA PRIVATE LIMITED ,BANGALORE vs. THE INCOME TAX OFFICER WARD-5(1)(4), BANGALORE

This is an appeal by the assessee against the order dated 26-10-2017 of the CIT(Appeals) - 5, Bengaluru pertaining to assessment year 2014-15.

On appeal by the assesee, the CIT(A) confirmed the order of the AO for the reasons in paragraph 5 of his order. According to the CIT(A), services rendered by the Singapore entity helped the assessee in improving administration/finance processes, generating better efficiencies/ standardization in their function the result of these services was therefore noticeable in the way the employees function more efficiently. The administrative and financial efficiency is ensured by having a workable system in place. A system which helps in achieving the goals of the organization. The goals of the entity are intertwined with the goals of the group consisting of all the entities that make up the group. Hence, in the interest of the group, a system has been put in place by way of the services Agreement which is shared among all the group entities this way efficiency is automatically ensured and the roadmap to progress ensured. The CIT(A) held that in the light of the function. and services mentioned above, there is clear transfer of knowledge, skill and advice that transfer the experience and the expertise of the advisor to the recipient. The recipient will henceforth be able to use the knowledge skill and expertise that is transferred to conduct his future business. The reports that have to be maintained, generated and reported to the holding company have to be compiled by team India which require necessary skillset to prepare the reports. The procedure to be followed for smooth conducting of business, etc are a result of the training and imparting of knowledge skill and experience that makes team India perform as per the directions of the group. This definition perfectly fits into the functions and the role played by the Redcore Asia rendering the managerial services as discussed in the preceding paras. Hence, in conclusion there is no doubt that there is transfer of knowledge and skills that is made available by the Redcore (Asia) Pte ltd, to the assessee company.

Aggrieved by the order of the CIT(A) assessee has raised ground No.2 to 4 before the Tribunal.

We have heard the rival submissions. Ld counsel for the assessee reiterated submission as were made before the Revenue authorities. Ld DR relied on the order of the CIT(A).

We have carefully considered the rival submissions. The recipient of the payment from the Assessee viz., Redcore Asia is a tax resident of Singapore. The obligation to deduct tax at the time of making payment to a non-resident is dependent on the question whether the sum received by the non-resident from the Assessee is chargeable to tax in India. This will depend upon the character of the income in the hands of Redcore Asia which in turn is dependent on the Double Taxation Avoidance Agreement between India and Singapore (India Singapore DTAA. The case of the revenue is that the nature of payment in the hands of Redcore Asia is Fees for Technical Services (FTS). It is therefore necessary to see the definition of FTS under India Singapore DTAA. Article 12 (4) of the India - Singapore Tax Treaty defines 'Fees for Technical Services' ('FTS') to mean:

A plain reading of the above clause makes it clear that only such technical and consultancy services are covered by Article 12(4) as either (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information referred to in Article 12(3), or (b) ‘make available’ technical knowledge, experience, skill know-how etc. In the present case, only clause 12(4)(b) is applicable because there was no right, property or information that was transferred. The case of the Revenue therefore hinges on the applicability of Article 12(4)(b) which applies to rendering of only such technical or consultancy services as ‘make available’ technical knowledge, experience, skill or know-how etc. In other words, in order to attract the taxability of an income under Article 12(4)(b), not only the payment should be in consideration for rendering of technical or consultancy services, but in addition to the payment being consideration for rendering of technical services., the services so rendered should also be such that ‘make available’ technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.

The definition of ‘fees for technical services’ as given in Explanation 2 to section (1)(vii) of the Act is as follows :-

The meaning of the expression make available were considered by the Tribunal in the case of Raymond Ltd. Vs. DCIT (2003) 80 TTJ (Mum) 120. The Tribunal after elaborate analysis of all the related aspects observed that :-

In Raymond’s case (supra), the Tribunal also held that rendering of technical services cannot be equated with making available the technical services. In the case of CESC Ltd. Vs. DCIT (2003) 80 TTJ (Cal) (TM) 806: (2003) 87 ITD 653 (Cal)(TM) also the question regarding the scope of expression making available came up for the consideration of the Tribunal. In that case, the Tribunal was dealing with the scope of Article 13(4)(c) of the Indo-UK tax treaty which is admittedly in pari materia with Article 12(4) of the India-USA tax treaty. The majority view was that in order to be attracted by the provisions of the said article of the tax treaty, not only the services should be technical in nature but should be such as to result in making the technology available to person receiving the technical services in question. The Tribunal also referred to with approval the extracts from protocol to the Indo-US tax treaty to the effect that ‘generally speaking, technology will be considered made available, when the person acquiring the service is enabled to apply the technology.

In the case of De Beers India Minerals (P.) Ltd (21 taxmann.com 214) (Karnataka HC), the Hon’ble Karnataka High Court had to deal with identical issue of FTS being made available. In this case assessee is a domestic company, engaged in the business of prospecting and mining for diamonds and other minerals. For the purpose of carrying out geophysical survey, etc, assessee entered into an agreement with Furgo, a company based in Netherlands. Furgo had a team of experts who were specialized in performing geophysical survey, etc. The said experts provided technical services to assessee under the said agreement. The learned AO treated the consideration paid to Furgo under the aforesaid agreement as falling within the definition of fees for technical services under India — Netherlands Tax Treaty. Hon'ble jurisdictional Karnataka High Court held that as per the Article 12 of the India Netherlands Tax Treaty, fees for technical services means the payment of any amount to any person in consideration for rendering of any technical services only; if such services make available technical knowledge, expertise, skill, know-how, etc. If the technical knowledge, expertise, skill, know-how, etc. is not made available by the service provider, who renders technical services, it would not constitute fees for technical services. Accordingly, to attract the tax liability, technical knowledge, experience, skill, know- how, etc. which is used by services provider to render the technical services should also be made available to the recipient of the services, so that the recipient also acquires technical knowledge, experience, skill, know-how, etc. so as to render such technical services. Further, court held that merely because business of service recipient is dependent on technical service which he receives from service provider, it does not follow that he is making use of technology which service provider utilizes for rendering technical services. The crux of the matter is after rendering of such technical services by the service provider, whether the recipient is enabled to use the technology which the service provider had used. Therefore, unless the service provider makes available his technical knowledge, experience, skill, know-how, etc. to the recipient of the technical service, the liability to tax is not attracted. Accordingly, if the technology is not made available along with the technical services and what is rendered is only technical services and the technical knowledge is withheld, then, such a technical service would not fall within the definition of technical service in Tax Treaty and not liable to tax. Based on the above requirement of taxation of FTS as above, court held that there is no doubt that the services performed by Furgo are using technical knowledge and expertise but such technical experience, skill or knowledge had not been made available to assessee and accordingly, the said services are not taxable as fees for technical services under India - Netherlands Tax Treaty. The relevant extract of the decision has been reproduced below:

Further, the aforesaid decision in the case of De Beers India Minerals (P.) Ltd has been followed in the case of Sun Microsystem India (P) Ltd (48 taxmann.com 93) (Karnataka), wherein Singapore based company had provided spare management services, provision of buffer stock, defective repair services, managing local repair centers, business planning to address service levels etc to the Indian company. It was held that Singapore Company has not made available any technology or technological services to the Indian company which are required to provide the aforesaid services.

We have already set out the nature of services to be rendered by the Redcore Asia to the Assessee. A perusal of the clauses of Agreement between the assessee and Redcore Asia clearly shows that they are purely in the nature of managerial and advisory services. During the subject AY, the Assessee did not have any employees and thus, the question of transfer of knowledge, skill, and experience does not arise. Thus, the case of the revenue that there was transfer of knowledge, skill, etc. and efficiency in the process of rendering of services by Redcore to the Assessee is incorrect. The fact that the Assessee did not have any employees during the subject AY is evident from the financial statements of the subject AY, as no employee cost has been incurred. Further, the management service agreement, under Article 2(2), clearly states that none of the services provided by Redcore Asia will make available any technical knowledge, experience, skill, know-how, etc. on its own. Further, since the Assessee does not have any employee, there is no question of any training being provided imparting knowledge, experience, etc by Redcore Asia to the employees of the Assessee. Further, the management service agreement at Article 2(3) clearly states that no training shall be provided by Redcore Asia to the employees of the Appellant.

On the facts and circumstances of the case, We are of the view that nothing is made available to the Assessee by the Redcore Asia. Example No. 7 given in the MOU between India and USA on the India USA DTAA throws some more light on the understanding of the Government s of India and the USA on the subject. The example given therein is as follows:- “Facts : the India vegetable oil manufacturing firm has mastered the science of producing cholesterol free oil and wishes to market this product worldwide. It hires an American Marketing consultancy firm to do computer simulation of the world market for such oil and to advise it on marketing strategies. Are the fees paid to the US company for included services ?

For the reasons set out above, we are of the view that learned CIT(A) indeed erred in holding that the monies paid by the assessee to Redcore Asia constitute ‘fees for technical services’ within the meaning of Article 12(4) of the India- Singapore DTAA and are accordingly liable to be taxed in India. Since, the assessee does not have any permanent establishment in India, the incomes so arising to them in India cannot be taxed under Article 7 as ‘business profits’ either. Since the payment by the Assessee to the non-resident is not taxable in the hands of the non-resident in India, there exist no obligation on the part of the Assessee to deduct tax at source on the payment in question. Therefore there was no obligation to deduct tax at source on the part of the Assessee while making payment to the non-resident. Consequently, the sum in question cannot be disallowed u/s.40(a)(ia) of the Act and added to the total income of the Assessee. The addition made is therefore directed to be deleted. Therefore, we direct the Assessing Officer to delete the impugned additions.

Thus ground Nos.2 to 4 are treated as allowed.

Ground Nos.5,6 and 7 raised by the assesee reads as follows:-

On the aforesaid ground of appeal, the findings and conclusion of the CIT(A) were as follows:-

The ld counsel for the assessee submitted before us that in asst. year 2016-17 this sum was written off as a liability not payable by the assessee and offered to tax as income in asst. year 2016-17. His limited prayer was that if the amount is taxed in this year then the income offered to tax in asst. year 2016-17 should be deleted as otherwise there will be double taxation of the same income. In this regard our attention was drawn to the fact that the income was offered to tax in asst. year 2016-17 by drawing our attention to Page Nos.121, 123 and 133 of the assessee’s paper book. We are of the view that the plea made by the ld counsel for the assesee deserves to be accepted. The AO is directed to verify the correctness of the claim of the assessee and amount in question was offered to tax in Asst. year 2016-17. If the same is found to be true then the addition made in asst. year 2014-15 is directed to be deleted.

In the result, appeal by the assessee is partly allowed.