DIMENSION DATA ASIA PACIFIC PTE. LTD,MUMBAI vs. DCIT (IT) 2(1)(2), MUMBAI

These two appeals by the assessee are arising out of the orders of Dispute Resolution Panel-I (WZ), [in short ‘DRP’] in Objection Nos.73 & 74, directions dated 01.12.2016. The Assessments were framed by the Dy. Commissioner of Income Tax (international Taxation)-Range 2(1)(2), Mumbai (in short ‘DCIT’) for the assessment years 2012-13, 2013-14 vide orders of even date 27.01.2017 under section 143(3) read with section 144C(13) of the Income Tax Act, 1961(hereinafter ‘the Act’).

The first common issue in these appeals of assessee is as regards to whether the assessee has permanent establishment in India or not in view of the given facts and circumstances of the case. For this assessee has raised identical worded grounds and the grounds raised

At the outset, the learned Counsel for the assessee stated that the DRP has simply followed its own order in assessee’s own case for AY 2011-12 and has not adjudicated the issue independently. The learned Counsel for the assessee drew our attention to the findings recorded by the DRP in both the assessment years i.e. AY 2012-13 and 2013-14 and the relevant finding as recorded in AY 2012-13 reads as under: - “2.2 As the facts obtaining in this year are in pari material, with the facts in A.Y. 2011-12, respectfully following the above decision, the grounds of objections are rejected.

Apart from the above, nothing was discussed on facts, the learned Counsel for the assessee stated that the Tribunal in AY 2011-12 in order dated 05.05.5017 remanded the matter back to the file of the AO and the same was challenged in writ jurisdiction before Hon’ble Bombay High court and Hon’ble Bombay High Court has quashed the assessment order as without jurisdiction in writ petition No.921 of 2018 dated 06.06.2018 by observing in Para 7 to 12 as under: - “7. We note that, it is an undisputed position before us, that the petitioner is a Foreign Company and an eligible assessee as defined in Section 144C(15)(b)(ii) of the Act. It has been held by this Court in International Air Transport Association (supra) that a Foreign Company is entitled to being assessed in accordance with Section 144C of the Act. It is the above Section 144C of the Act, which provides a separate scheme for the manner in which the Assessing Officer would pass assessment orders under the Act and a separate procedure to challenge an draft order i.e. before an assessment order which is subject to appeal under the Act is passed. The entire object is to ensure that the disputes of Foreign Companies are resolved expeditiously and final assessment orders are not passed without a re-look to the proposed order (draft order), if so desired by the Foreign Company. In essence, it obliges the Assessing Officer to first pass a draft of the proposed assessment order indicating the proposed variation in the income returned. This draft Assessment Order is to be passed under Section 144C(1) of the Act, which entitles an eligible assessee such as a Foreign Company to approach the DRP with its objection to the Draft Assessment order. This is so provided, so that an eligible assessee can have his grievance addressed before the final assessment order is passed. In case, an assessee does not object to the draft assessment order, then a final assessment order is passed in terms of the draft assessment order by the Assessing Officer. It is only on passing of the final assessment order that the assessee, if aggrieved by it, would be able to approach the appellate authorities under the Act. These special rights are made available under Section 144C of the Act to an eligible assessee such as the petitioner. Therefore, it cannot be ignored by passing an final order under Section 144(13) of the Act without preceding it with a Draft Assessment order as required therein.

This “fresh adjudication” itself would imply that it would be an order which would decide the lis between the parties, may not be entire lis, but the dispute which has been restored to the Assessing Officer. According to us, the order dated 31st January, 2018 is not an order merely giving an effect to the order of the Tribunal, but it is an assessment order which has invoked Section 143(3) of the Act and also Section 144C of the Act. This invocation of Section 144C of the Act has taken place as the Assessing Officer is of the view that it applies, then the requirement of Section 144C(1) of the Act has to be complied with before he can pass the impugned order invoking Section 144C(13) of the Act. In fact, Section 144C(13) of the Act can only be invoked in cases where the assessee has approached the DRP in terms of sub- Section 144(C)(2)(b) of the Act and the DRP gives direction in terms of Section 144C(5) of the Act. In this case, the assessment order has invoked Section 144C(13) of the Act without having passed the necessary draft Assessment Order under Section 144C(1) of the Act, which alone would make an direction under Section 144C(5) of the Act by the DRP possible. Thus, the impugned order is completely without jurisdiction.

The learned Counsel for the assessee clearly admitted that there Is no adjudication on merits and facts in AY 2011-12. Hence, independent of finding of AO and DRP and of Tribunal, we are considering the facts as mentioned in AY 2012-13 and 2013-14. The facts in AY 2012-13 in are as under.

The assessee is a Private Limited Company incorporated in Singapore and is engaged in the business of providing management support business to its group entities to the Asia Pacific Region. During the relevant assessment year assessee rendered management support services to its wholly owned subsidiary in India i.e. Dimension Data of India LTD (Formerly known as Datacraft Asia Pte. Ltd) (DDIL) majorly from Singapore. These management support services are rendered in pursuant to agreement for provisions of management, Journal support and administrative services for which it charged fee at cost plus 10% i.e. the management fee. The learned Counsel for the assessee narrated the facts before us that in prior year DDIL, assessee’s wholly subsidiary was awarded a contract by BSNL to set up 6 internet data centers. In connection therewith, the assessee sent its employees from Singapore to India, from time to time and whenever require, to provide DDIL with assistance and guidance in setting up of 6 internet data centers for which it charge a separate fee for the said technical services i.e. service fee. Accordingly, the assessee earned gross receipts from these two distinct sources of income i.e. management fee and service fee. The learned Counsel for the assessee then explained that the number of days, for which the assessee’s employees were sent to India for the said services during the AY 2012-13 and the amount earned has been tabulated as under: - Sr. Particulars Amount (in INR)- Number of solar No AO/6 days. 1. Management fee 16,90,73,060 2 days 2. Service fee 4,01,55,912 171 days Total 20,92,28,972 173 days

The AO and DRP considering the aggregate number of days, for which employees of the assessee visiting India for rendering/ earning management services/ management fee and technical services / technical fee there existed the threshold limit of 30 days as provide under Article 5(6) of the India Singapore Double Taxation Avoidance Agreement (DTAA). It was held that the assessee has services PE in India. Accordingly, the AO attributed the entire receipts to activities in India and allowed the adhoc deduction of 10% of expenditure and thereby treated the balance amount of ₹ 18,83,06,075/- as the taxable income in India i.e. as business profit. The AO taxed the same at the rate of 40%. Aggrieved, now assessee came in appeal before us.

The learned Counsel for the assessee also explained that the number of days, for which the assessee’s employees were sent to India for the said services during the AY 2013-14 and the amount earned has been tabulated as under: - Sr. Particulars Amount (in INR)- Number of solar No AO/5 days. 1. Management fee 30,18,10,059/- 64 days 2. Service fee 1,45,18,591/- 26 days Total 31,63,28,650/- 90 days 9. Before us, the learned Counsel for the assessee argued that the service fee can be considered for Fee for Technical Services (FTS) under section 97 of the Act but argued that the management fees are not taxable in term of section 90(2) of the Act as the assessee is entitled to claim the benefit of DTAA to the extent the same are more beneficial as compared to the provisions of section of the Act. The learned Counsel for the assessee argued that the provisions of the Act applies to both the receipts i.e. the service fee and management fee falls under the purview of section 9(1)(vii) of the Act read with explanation 2 thereto, which defines fee for technical service are includes, “including any lump sum consideration for the rendering of any managerial, technical, or consultancy services”. He argued that under the provisions of section of the Act maximum possible taxability in the hands of the assessee on which all the sources of the income would be at the rate of 10% under section 115A(1)(b) of the Act. Accordingly, he offered the service fee received to tax as fee for technical services under section 9(1)(vii) of the Act and stated that the same should be taxed at the rate of 10% under section 115A(1)(b) of the Act. As regards to the management fee under India Singapore DTAA, in the absence of service PE and as per the provisions of section 90(2) of the Act, the assessee is entitled to claim the benefit of DTAA to the extent the same of which is more beneficial as compared to the provisions of the Act. To support this argument, the learned Counsel for the assessee argued that while doing so, in case of multiple services in India and assessee is entitled to adopt the provisions of the Act for one source and for other sources of income, the beneficial provisions of section of DTAA can be applied. For this he relied on the decision of co-ordinate Bench of Bangalore ITAT in the case of IBM World Trade Corporation Vs. ADIT [2015] 58 taxmann.com 132 (Bangalore - Trib.). In view of the above, he argued that as regards to the management fees the assessee opts to be governed by the India Singapore DTAA. He stated that both the assessee and the AO, both are of the view that the management fee income is business income under Article 7 of the India Singapore DTAA and accordingly, the same is taxable only if the assessee is a permanent establishment in India under Article 5 of the DTAA.

We have heard rival contentions and gone through facts and circumstances of the case. We have gone through the provision of section 90(2) of the act and are of the view that as per Section 90(2), the assessee is entitled to claim benefits of the Double Tax Avoidance Agreement to the extent the same are more “beneficial” as compared to the provisions of the Act. While doing so, in cases of multiple sources of income, an assessee is entitled to adopt the provisions of the Act for one source while applying the provisions of the DTA for the other. This view of ours is supported by the order of this ITAT Bangalore Bench in the case of IBM world Trade Corporation v ADIT (IT) (2015) 58 taxmann.com 132 (Bang) and IMB World Trade Corpn v DDIT (IT) (2012) 20 taxmann.com 728 (Bang). We find from the facts of this case as regards the management fee, the assessee opted to be governed by the India- Singapore DTAA. In fact, both the assessee and the AO are of the view that the Management fee income is business income under Article 7 of the India-Singapore DTAA which would be taxable only if the assessee had a Permanent Establishment in India under Article 5 of the DTAA. As per Article 5(6)(b) of the India-Singapore DTAA, “An enterprise shall be deemed to have a permanent establishment in a Contracting State if it furnishes services, other than services referred to in paragraphs 4 and 5 of this Article and technical services as defined in Article 12, within a contracting through employees or other personnel, but only if… (b) activities are performed for a related enterprise (within the meaning of Article 9 of this Agreement) for a period or periods aggregating more than 30 days in any fiscal year. We find that in this AY 2012-13, since the employees of the assessee had visited India for a period of only 2 days on account of Management fee, the pre-condition contained under Article 5(6)(b) of DTA is not satisfied and accordingly the employees of the assessee could not be considered as Service PE in India. Consequently, in the absence of a PE in India, the Management fee would not be subject to tax in India and the question of determining the profits attributable to PE in India would not arise.

As regards to taxability of service as fees for technical services under India-Singapore DTAA in the absence of Service PE, we are of the view that under the provisions of the India- Singapore DTAA, the Service fee would be taxable as fees for technical services under Article 12(4)(b) as the assessee makes available technical knowledge, experience skill etc to DDIL. Since DDIL did not have qualified technical experts with experience in setting up of IDCs on request, the assessee sent it’s employee who were experts in the field of IDCs to assist and provide guidance to DDIL enabling it to carry out the setting up of the IDCs on it’s own. Since the Service Fee would be taxable as fees for technical services under Article 12(4)(b) of the DTAA, the said services would fall outside the purview of service PE under Article 5(6) of the DTA which provides “6. An enterprise shall be deemed to have a permanent establishment in a Contracting State if it furnishes services, other than services referred to in paragraphs 4 and 5 of this Article and technical services as defined in Article 12.” Accordingly, we are of the view that under the provisions of Article 12(2) of the DTAA, the Service Fee would be chargeable to tax at the rate of 10 percent. This view of ours is supported by the orders of this ITAT in the cases of Sumitomo Corpn vs. DCIT (2008) 114 ITD 61 (Del), Sumitomo Corpn Vs. DCIT (2014) 162 TTJ 46 (Del) and of Bombay ITAT in the case of Kruz Subsea Pte Ltd. v. DDIT (IT) (2015) 172 TTJ 291 (Mum).

As far as AY 2013-14 are concerned, we are of the view that in this assessment year the provisions of the Act, both receipts viz, the Service Fee and the Management fee, falls under the purview of Section 9(1)(vii) read with Explanation 2 thereto which defines fees for technical services which include ..“any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services." According to us, in view of the above provision, the maximum possible taxability in the hands of the assessee on each of the sources of income would be @10 percent under Section 115A(1)(b) of the Act. Accordingly, vis-à-vis the Service Fee the assessee agreed to offer the said receipt to tax as fees for technical services under Section 9(1)(vii) of the Act. Alternatively, also, even under the provisions of the India-Singapore DTAA, the Service Fee would he taxable as fees for technical services under Article 12(4)(b) as the assessee makes available technical knowledge, experience, skill etc. to DDIL. Since DDIL did not have qualified technical experts with experience in setting up of IDCs on request, the assessee sent its employees who were experts in the field of IDCs to assist and provide guidance to DDIL enabling it to carry out the setting up of the IDCs on its own. Since the Service Fee would he taxable as fees for technical services under Article 12(4)(b) of the DTAA, the said services would fall outside the purview of Service PE under Article 5(6) of the DTAA which provides '6 An enterprise shall he deemed to have a permanent establishment in a Contracting State if it furnishes services, other than services referred to in paragraphs 4 and 5 of this Article and technical services as defined in Article 12.."

Since the employees of the assessee had visited India for a period of 64 days on account of Management fee, the pre-condition contained under Article 5(6)(b) of the DTAA was satisfied and accordingly the employees of the assessee constituted a Service PE in India. In light of the above, it would be essential to determine the profits attributable to the said Service PE as per the provisions of Article 7 of the DTAA.

The learned Counsel for the assessee before us, stated that pursuant to the Agreement, the assessee has provided Management. General Support and Administrative Services for an agreed management fee which is calculated at 110 percent of all direct and indirect costs incurred by the assessee for rendering of services i.e. INR 30,18,10,059/- for the year under review. As evident from extract above, Article 7(I) of the India-Singapore DTAA provides for the attribution of profits to a Permanent Establishment and not receipts. The learned Counsel for the assessee stated that the AO erred in treating the gross receipts of INR 30,18,10,059/- as the profit attributable to the Service PE and ought to have determined the profit clement in the said receipt at 10 percent of the costs or 10 / 110 of the gross receipts of 30,18,10,059/- i.e. INR 2,74,37,278. The assessee filed the Agreement wherein it is specified in Pans 4 and 5 that DDIL shall pay the assessee management fee calculated based on 110% of all direct and indirect costs incurred by the assessee in rendering of the management services" and that all direct and indirect costs incurred for the provision of the services shall be allocated to the Company 'DDIL, based on a formula. We are of the view that the above contention of the assessee needs verification of facts by the AO. Hence, we direct the AO to decide the issue by considering the following: i. The service fee is taxable as fee for technical services in both the years i.e. AY 2012-13 and 2013-14. ii. The management fee for AY 2012-13, being in the nature of business profit under the India-Singapore DTAA is not taxable in India as the assessee does not have a service PE because the condition of article 5(6)(b) of the DTAA is not satisfied for the reason that the no. of days of stay of employees is 2 days only. iii. As regards to AY 20113-14, the management fee earned by assessee, the profit attribute to management service PE as per article 7(1) of India Singapore DTAA can be considered.

Both the issues in these appeals of assessee are set aside to the file of the AO to decide in term of the above direction after carrying out verification of facts.

The next issue in these appeals of assessee is as regards to charging of interest 234(b) of the Act.

We find that the assessee is a non-resident and the liability of payment of advance tax is not on the assessee for the reason that the payer has to deduct tax at source under section 195 of the Act at the time of payment. This issue is covered by the decision of Hon’ble Bombay High Court in the case of DIT (International Taxation) v. NGC Network Asia LLC (2009) 313 ITR 187 (Bom.). Hence, while computing tax on income the AO will not charge interest under section 234 B of the Act. We direct the AO accordingly.

In the result, both the appeals of assessee are partly allowed for statistical purposes.