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Income Tax Appellate Tribunal, “L” BENCH, MUMBAI
Before: SHRI C.N. PRASAD, JM & SHRI MANOJ KUMAR AGGARWAL, AM
Per Bench 1. The bunch of captioned appeals by group of Assessee Company for Assessment Years [AY] 2011-12 & 2012-13 contest separate orders of Ld. first appellate authority. Since common issues are involved, we dispose-off the same by way of this common order for the sake of convenience & brevity. First, we take up AY 2011-12 as lead case wherein the following Grounds of Appeals have been raised by the assessee:-
1. The Hon’ble Dispute Resolution Panel (‘DRP) has failed to consider the detailed evidence furnished and the order shows non-application of mind, is erroneous and ought to be quashed.
The learned AO / Hon’ble DRP has erred in assessing various inter-company payments ignoring the detailed documentation and explanations filed by the Appellant during the course of the assessment proceedings on the basis that it does not have any evidentiary value. 3. The Learned AO’s order and finding on the evidence submitted is contrary to the details filed before him and also the Hon’ble DRP. 4. The learned AO/Hon’ble DRP has erred in concluding that the loaned service fee received are in the nature of ‘fees for included services’ and hence, taxable -1767/Mum/2016 McKinsey Group of Companies Assessment Years: 2011-12 & 2012-13 under Article 12 of the India-US Double Taxation Avoidance Treaty (‘India-US Tax Treaty’) and under Section 9(1)(vii) of the Act. 5. The Learned AO/Hon’ble DRP has erred in not applying the principles enunciating in the earlier decisions pronounced by the Hon’ble Income Tax Appellate Tribunal (‘ITAT’) in Appellant’s own case/in case of group companies of the Appellant, wherein it has been held that borrowed service fee received are not taxable as ‘fees for included services’. 6. The learned AO/ Hon’ble DRP has erred in concluding that firm function service fees are in the nature of ‘fees for included services’ and hence, taxable under Article 12 of the India-US Tax Treaty and under Section 9(1)(vii) of the Act. 7. The learned AO/Hon’ble DRP has erred in concluding that firm committee charges are in the nature of ‘royalty’ and hence, taxable under Article 12 of the Indian-US Tax Treaty and under section 9(1) (vi) of the Act. 8. The learned AO/Hon’ble DRP has erred in concluding that knowledge pool charges are in the nature of ‘royalty’ and hence, taxable under Article 12 of the India-US Tax Treaty and under section 9(1)(vi) of the Act. 9. The learned AO/Hon’ble DRP has erred in concluding that regional corporate finance charges in the nature of ‘fees for included services’ and hence, taxable under Article 12 of the India-US Tax Treaty and under section 9(1) (vii) of the Act. 10. Without prejudice to the Appellant’s primary contention that the receipts in respect of loaned service fee, firm function service fee, firm committee charges, knowledge pool charges and regional corporate finance charges are not taxable in India, the Learned AO/Hon’ble DRP has erred in estimating the net profit of the Appellant in respect of these receipts at the rate of 35.52% of the total receipts, on an adhoc basis, and taxing the same accordingly under the provisions of the Act. 11. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned AO/Hon’ble DRP has filed to appreciate and apply the order passed by the Competent Authorities of India and United States of America as per Article 27 of the India-US Tax Treaty in the case of the Appellant for prior years wherein it has been held that income from loaned services, knowledge pool, firm committee services and regional corporate finance services should not be taxable in India in the hand s of the Appellant. The Appellant prays that the principles underlying the order ought to have been applied and pray accordingly. 12. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the Learned AO/Hon’ble DRP has filed to appreciate and apply the order passed by the Competent Authorities of India and United States of America as per Article 27 of the India-US Tax Treaty in the case of the Appellant for prior years wherein it has been held that only to the extent of the mark-up element of 3 percent. The Appellant prays that the principles underlying the order ought to have been applied and pray accordingly. 13. The finding of the Hon’ble DRP that the Appellant had not followed the order passed by the Competent Authorities of India and United States of America as per Article 27 of the India-US Tax Treaty, is erroneous and ought to be set aside. 14. The learned AO has erred in concluding that the reimbursement of other expenses received by the Appellant is taxable in India in the hands of the Appellant, without considering the detailed documentation and explanations filed by the Appellant. 15. The Learned AO has erred in initiating penalty proceedings under Section 271(1)(c) of the Act. -1767/Mum/2016 McKinsey Group of Companies Assessment Years: 2011-12 & 2012-13 2. Facts leading to the same are that the assessee being a foreign entity incorporated in United States of America [USA] was part of Mckinsey Group of Companies. It was engaged in rendering strategic consultancy services in USA and providing certain services to other subsidiaries and branches of its parent company. The assessee filed its return of income on 30/11/2011 at Rs.8.03 Crores. The aggregate receipts of assessee from Associated Enterprises [AE] in India amounted to Rs.157.88 crores during impugned AY and the assessee benchmarked the same by following different methods, which were found to be at Arm’s Length Price. The draft Assessment order u/s 144C(1) read with Section 143(3) dated 31/03/2015 was sent for the directions of Ld. DRP where the assessee raised objections against the draft assessment order. The services being provided by assessee to its AE in India could be categorized under the following broad heads:- No. Head 1. Borrowed Service charges/Loaned Service Income 2. Firm Function Service Charges 3. Firm Committee Charges 4. Regional Corporate Finance charges 5. Knowledge Pool Charges 6. Firm Training Charges 7. Reimbursement of other Expenses The assessee treated the above receipts (except Firm Training Charges) as Business Profits under Article-7 of India-US Double Taxation Avoidance Agreement [DTAA / Treaty] and in the absence of any Permanent -1767/Mum/2016 McKinsey Group of Companies Assessment Years: 2011-12 & 2012-13 Establishment [PE] in India, claimed the same to be not chargeable to tax in India. However, Ld. AO, in the draft assessment order, opined that the same constituted Royalty / Fees for included Services under Article-12 of India-US Treaty and accordingly taxable in the hands of the assessee. The Ld. DRP, on factual matrix and relying on the stand of DRP in earlier assessment years confirmed the stand of Ld. AO vide directions dated 28/12/2015. Pursuant to the said directions, final assessment order dated 06/01/2016 u/s 143(3) read with Section 144C(13) has been passed by Ld. AO wherein the total income of the assessee has been determined at Rs.150.19 Crores after certain additions / adjustments, being taxable @15%. Aggrieved, the assessee is in further appeal before us. 3. The Ld. Senior Counsel for Assessee [AR], at the outset, drew our attention to the fact that the nature & taxability of these services has been settled by way of agreement reached by competent authority in India and USA under Mutual Agreement Procedure [MAP] for AYs 2008-09 to 2009- 10 and the same principle / approach should be applied in the present case. Our attention is drawn to various judicial pronouncements / Tribunal’s order in assessee’s own case and its group companies where the said plea has been accepted. The Ld. Departmental Representative [DR] while contending that the MAP settlement was year-specific could not controvert the same by any binding judicial pronouncement. 4. We have carefully heard the rival contentions and perused several orders of the Tribunal in assessee’s case and in the case of its group ITA NOs.1748-1767/Mum/2016 McKinsey Group of Companies Assessment Years: 2011-12 & 2012-13 companies including MAP settlement terms from AY 2002-03 to 2007-08 & from AY 2008-09 to 2009-10 as placed before us in the paper-book. A perusal of Clause 3.3 of Resolution u/s 90 read with Article 26 of India-USA Treaty reached by competent authority in India and USA under MAP of India-USA DTAC, F.No.480/02/2008-FTD-1 dated 01/10/2015 for AYs 2008-09 to 2009-10 as placed on Page No. 108 of the Paper-book reveals that Knowledge Pool Charges, Borrowed Service Charges, Firm Committee Pool Charge & Regional Corporate Finance Charges have been agreed to be not taxable in India as Royalty or Fees for included Service. Further, Firm Function Service fees payable by Mckinsey India shall not be further taxed in the hands of US recipient, except for a mark-up of 3%. The said settlement / agreement is with respect to amount paid by Mckinsey India to Mckinsey & Co. Inc. or any other Mckinsey entity incorporated in USA. Pursuant to this MAP settlement, the assessee withdrew its appeals for AYs. 2008-09 & 2009-10 before this Tribunal, which is quite evident from the orders of Tribunal dated 29/12/2015 for AY 2008-09 & ITA No.1598/Mum/2014 dated 11/04/2016 for AY 2009-10 as placed on Pages 171 to 173 in the Paper-Book. The terms of the MAP settlement for 2008-09 & 2009-10 has been given effect to by the revenue vide orders dated 18/12/2015 & 21/12/2015 as placed on record.
Proceeding further, we find that Tribunal has accepted the applicability of MAP settlement for AYs 2011-12 & 2012-13 with respect to payment ITA NOs.1748-1767/Mum/2016 McKinsey Group of Companies Assessment Years: 2011-12 & 2012-13 made by Mckinsey India to various Mckinsey entities incorporated in USA by way of following judicial pronouncements:- (i) Mckinsey & Co. Inc. & Others Vs. DCIT [ITA Nos. 702-705/M/2015, ITA Nos. 711-713/M/2015 ITA No. 659/M/2015 dated 16/12/2016 AYs 2011-12 & 2012- 2013] (ii) Mckinsey Inc. & Others Vs. DDIT [ITA Nos. 5406-5407/Mum/2014 dated 08/08/2016 AY 2011-12] (iii) Mckinsey & Co. Inc. & Others Vs. DCIT [ITA Nos. 853-858/Mum/2015, ITA Nos. 860-862/Mum/2015 dated 01/08/2017 AYs 2010-11 & 2011-12] (iv) Mckinsey & Co. & Others Vs. DCIT [ITA Nos. 660-662/Mum/2015 dated 23/06/2017 AY 2011-12] The Ld. Senior Counsel also placed on record documents dated 27/07/2016 evidencing initiation of MAP settlement for AYs 2010-11 to 2012-13 with respect to assessee and its various group concerns. Upon perusal of the same, we find that the assessee and its various concerns have already approached competent authorities to undertake MAP settlement for these years.
In view of the stated facts and following the Tribunal’s order as stated above, we hold that the taxability of the receipts was to be determined as per the MAP settlement. Therefore, the afore-said receipts, being Business Profits was covered by Article-7 of the Treaty and was not in the nature of Royalty or Fees for included services. The revenue has nowhere disputed or established that the assessee had PE in India. Therefore, the said receipts were not chargeable to tax in India except Firm Function Service Charges of Rs.63.02 Crores, which were to be accepted at a mark up of 3% as per MAP settlement of earlier years. Needless to say that the same may McKinsey Group of Companies Assessment Years: 2011-12 & 2012-13 suitably be modified by the revenue, if required, on the basis of outcome of MAP settlement for impugned AYs.
Resultantly, Ground Nos.4,5,7,8,9,11 stands allowed in assessee’s favour. Ground Numbers 1 to 3 are general in Nature. Ground No. 6 stands partly allowed in the sense that Firm Function Charges would be chargeable to tax with a mark-up of 3% in terms of MAP settlement, which is also an alternative Ground No.
12. Ground No. 10 & 13, being alternative ground becomes infructuous. Ground No. 15 contest initiation of penalty, which is premature at this stage and hence dismissed.
The remaining Ground No. 14 contest additions with respect to reimbursement of Firm Training Charges & Other expenses. The Ld. AR, at the outset, submitted that the issue requires re-appreciation by lower authorities since these expenses were mere reimbursements in nature without any profit element and therefore, the assessee be afforded another opportunity to demonstrate the same. The Ld. DR did not raise any serious objections against the same. Resultantly, the issue stands remitted back to the file of Ld. AO for re-adjudication in the light of submissions made by Ld. AR. This ground of appeal
stands allowed for statistical purposes.
9. Resultantly, the assessee’s appeal stands partly allowed in terms of our above order. Now, we take up ITA No. 1749/Mum/2016 AY 2012-13
10. The assessee, being foreign company incorporated in USA, has been assessed at Rs.138.58 Lacs vide final assessment order dated 06/01/2016, ITA NOs.1748-1767/Mum/2016 McKinsey Group of Companies Assessment Years: 2011-12 & 2012-13 which comprised of Loaned Service Income (Fess for included Services) of Rs.79.74 Lacs and Reimbursement of Royalty/Fees for included services for Rs.58.84 Lacs. The Ld. DRP has held that fee for borrowed service rendered by the assessee were in the nature of Royalty / Fees for included Services under Article-12 of the Treaty and further the assessee was not entitled to claim Treaty Benefit.
11. So far as the issue of reimbursement of royalty / fees for included services is concerned, Ld. AR, on similar lines, submitted that the assessee be provided with another opportunity to demonstrate that the same were mere reimbursements in nature and hence not taxable in the hands of the assessee. The Ld. DR fairly conceded with the same. Resultantly, the issues stands remitted back to the file of Ld. AO on similar lines for re- adjudication in the light of the submissions made by the Ld. AR. This ground stands allowed for statistical purposes.
The Ld. Sr. AR pointed out that Loaned Service Income was nothing but Borrowed Service Charges and the assessee was a foreign company incorporated in USA and therefore, governed by India-USA Treaty and also covered by the MAP settlement in similar manner. Our attention is drawn to the order of Tribunal in the case of group concerns for AY 2011-12 & others/Mum/2015 dated 01/08/2017 to submit that similar issues stood in assessee’s favor by the order of the Tribunal. The Ld. DR could not controvert the same in any manner.
ITA NOs.1748-1767/Mum/2016 McKinsey Group of Companies Assessment Years: 2011-12 & 2012-13 13. Upon due consideration, we find that Tribunal in the cited order, placing reliance on the order for AY 2009-10 held that borrowed / loan service charges were not taxable as FTS / Royalty in India and directed the Ld. AO to follow the terms of MAP settlement. We further find that the revenue in AY has 2008-09 & 2009-10 in assessee’s own case has given effect to the terms of the MAP settlement vide orders dated 21/12/2015 which are placed on records. Further, the Ld. AR has already demonstrated that MAP settlement from AY 2010-11 to 2012-13 with respect to the captioned assessee are already in progress. Therefore, on factual matrix, applying the MAP terms of earlier years and cited order of the Tribunal, we uphold the stand of the assessee that Loaned Service Income was not taxable as FIS / Royalty in terms of Article-12 of the Treaty and exempted as Business income in the hands of assessee as per Article-7 since the assessee do not have any PE in India. This ground of assessee’s appeal stands allowed. Resultantly, the assessee’s appeal stands partly allowed in terms of our above order. Appeal Nos. 3 to 16 14. Similarly aggrieved, the other US based group entities of the assessee are in further appeal before us with identical worded grounds of appeal as per the following details:- Appeal No. Name of the Assessee Assessment Year Loaned Service Reimbursement Income of expenses 1750/Mum/2016 McKinsey & Company, Inc. Thailand 2012-2013 2,56,83,102/- Nil 1751/Mum/2016 McKinsey & Company, Inc. Phils 2012-2013 1,03,89,242/- Nil 1752/Mum/2016 McKinsey & Company, Inc. Luxembourg 2012-2013 70,72,659/- Nil 1753/Mum/2016 McKinsey & Company, Inc. France 2012-2013 5,85,66,361/- 1,93,330/- McKinsey Group of Companies Assessment Years: 2011-12 & 2012-13 1754/Mum/2016 McKinsey Incorporated 2012-2013 3,43,19,859/- 25,660/- 1755/Mum/2016 McKinsey & Company Inc. Norway 2012-2013 1,04,31,548/- Nil 1758/Mum/2016 McKinsey & Company Inc. Switzerland 2012-2013 2,24,59,416/- 38,370/- 1759/Mum/2016 McKinsey & Company Inc. Italy 2012-2013 1,37,74,860/- Nil 1762/Mum/2016 McKinsey & Compan, Inc. Japan 2011-2012 2,59,87,776/- 17,016/- 1763/Mum/2016 McKinsey Asia Inc. 2012-2013 1,88,08,091/- Nil 1764/Mum/2016 McKinsey & Company Inc. International 2012-2013 3,43,19,859/- 25,660/- 1765/Mum/2016 McKinsey & Company, Inc. Netherland 2012-2013 1,88,54,072/- 1,99,870/- 1766/Mum/2016 McKinsey & Company Inc. Hong Kong 2012-2013 2,19,47,397/- 9,72,610/- 1767/Mum/2016 McKinsey Knowledge Centre Belgium Inc. 2012-2013 1,08,00,414/- 1,07,950/- Facts being identical as in ITA 1748-1749/Mum/2016, taking the same stand, the issue of reimbursement of expenses stands remitted back to the file of Ld. AO for re-adjudication whereas the addition on account of Loaned Service Income stands deleted in terms of MAP settlement of earlier years. All these appeals stands partly allowed for statistical purposes. Appeal Nos. 17 to 20 15. The other non-US based group entities of the assessee are in further appeal before us against similar additions in the following manner:- Appeal No. Name of the Assessee Assessment Country of Loaned Reimbursement Year Incorporation Service of expenses Income 1756/Mum/2016 McKinsey & Company Service AB 2012-2013 Sweden 1,20,35,027/- Nil 1757/Mum/2016 McKinsey & Company, SL 2012-2013 Spain 1,04,97,042/- Nil 1760/Mum/2016 McKinsey & Company Singapore 2011-2012 Singapore 8,20,20,300/- 17,016/- Pte. Ltd 1761/Mum/2016 McKinsey & Company Inc. Canada 2012-2013 Canada 1,02,20,012/- Nil At the outset, the issue of reimbursement of expenses stands remitted back to the file of Ld. AO on similar lines and therefore, this ground stands allowed for statistical purposes.
Proceeding further, as pointed out by respective representatives, we find that the issue of Loaned Service Income stood in assessee’s favour by ITA NOs.1748-1767/Mum/2016 McKinsey Group of Companies Assessment Years: 2011-12 & 2012-13 several orders of the Tribunal in earlier years in assessee’s own case where it has been held that the impugned services qualifies as Business Income under Article-7 of the Treaty and not taxable since the assessee do not have any PE in India. The relevant portion from latest order of the Tribunal rendered in dated 23/06/2017 is extracted as follows:- 3. At the time of hearing the parties addressed the facts in ITA No. 662/Mum/2015 which is governed by India-Canada Treaty. The remaining appeals namely ITA No. 660/Mum/2015 and ITA No. 661/Mum/2015 are governed by India-Spain and India- Sweden Treaties respectively. It was a common stand of the parties that the relevant clauses were identical to the India-US Treaty. Reverting to the facts in ITA No. 662/Mum/2015 the assessee is a foreign company incorporated in Canada. As in the earlier years, it had entered into international transactions with the its associates concern, Mckinsey & Co., Inc. (Indian Branch) and had provided assistance in the form of borrowed services to Mckinsey India. In consideration for which the assessee received an amount for Rs.7,615,310/- from Mckinsey India. This income was not offered by the assessee for tax in the return of income filed by it on the reasoning that the borrowed services fee earned by the assessee was in the course of the business and therefore, it qualified as profits under Article 7 of the India-Canada Tax Treaty. Since the assessee did not have a permanent establishment in India, its income was stated to be not liable to tax in India. The assessing officer after going through the details of the case held that the borrowed service income earned by the assessee from McKinsey India was in the .nature of fee for Technical Services. The Objections raised by the assessee before the DRP were also rejected following the view taken in the earlier years.
In the said background, the ld. A.R. submitted that both the A.O. and the DRP have followed the view taken in the earlier years on similar set of facts and circumstances. Referring to the impugned order dated 26th November, 2014 passed pursuant to the directions of the DRP by the A.O. u/s 143(3) r.w.s. 144C (13) of the Act our attention was invited to para 5, so as to highlight this fact. It was submitted that the Indo-Canadian Treaty is identical to the Indo-US Tax Treaty and the issue first arose in a group concern on similar set of facts and circumstances in A.Y. 2001-02 and considering identical set of facts the ITAT deleted the addition. Copy of the order placed at paper book pages 59 to 74 in the case of McKinsey & Co Inc (Philippines) vs. Assistant Director of Income Tax, [2006] 99 lTD 549 (Mum) (SMC) was relied upon. Our attention was invited to paper book page 75 to 88, which is a consolidated order passed in assessee's group case which came for consideration for different assessment years by the ITAT whereby the Tribunal granted relief to the assessee following the decision of the Tribunal for AY 2001-02. Inviting our attention to paper book page 101 to 104, the ld. counsel submitted that the issue was carried in MAP and the tax authorities considering the resolution arrived at u/s 90 of the Income Tax Act had issued directions that in view in of MAP ITA NOs.1748-1767/Mum/2016 McKinsey Group of Companies Assessment Years: 2011-12 & 2012-13 resolution order dated 01.10.2015 with USA the appeals pending if any on the issue be withdrawn. Our attention was drawn to paper book page 107 to 109 and it was submitted that considering the said documents along with 114 of the paper book, the departmental directions to the Standing Counsel of the Mumbai High Court were acted upon. Referring to paper book page 117 and 118 it was submitted that the Hon’ble Bombay High Court vide its order dated 23rd January, 2013 in I.T.Appeal No. 1218 of 2011 and others in the case of Director of Income Tax (International Taxation) V. Mckinsey & Company Inc. dismissed the appeals filed by the Revenue as withdrawn. It was further submitted that the similar directions were given to the CIT-DR in the ITAT and he was requested to withdraw the appeals filed before the ITAT in the following cases on the basis of Mutual Agreement Procedure of India-USA DTA:-
1.
M/s Mckinsey & Company Inc. United States – A.Y.2004-05 2. M/s Mckinsey international, Inc. – A.Y.2003-04 3. M/s Mckinsey & Company Inc. Austria – A.Y.2004-05 4.1 The ld. Counsel also invited our attention to the order of the ITAT placed at paper book pages 120 to 122 whereby the appeals filed by the Revenue were dismissed as withdrawn. 4.2 In the said background, our attention was invited to paper book page 36 to 45 and it was submitted that the ITAT vide its order dated 17.4.2015 in ITA No. 7654 to 7661/Mum/2012 & ITA No. 7662 to 7669/Mum/2012 for A.Y.2009-10 decided the appeals of group companies where the tax payer in the present proceedings were also considered and the ITAT in the said consolidated order taking note of the aforesaid MAP proceedings allowed identical appeals of the assessee. Inviting our attention to paper book page 1 to 12 it was submitted that the Tribunal vide order dated 16.12.2016 considering the case covered by the Indo-Canadian Treaty among the other similar Treaties pertaining to assessment years 2011-12 and 2012-13 assessment years in identical group cases in ITA No. 702/Mum/2015 and others on similar ground, allowed the appeals of the assessee. Accordingly, it was submitted that the issue is fully covered by consistent orders of the ITAT in its favour.
5. The ld. D.R. did not dispute the factual position nor any contrary decision was referred to for consideration.
6. We have heard the rival submissions and perused the material available on record. We find that the issue pertaining to borrowed services in the respective group cases and in the assessees before us has been a subject matter for consideration on similar set of facts and consistently considered y the co-ordinate Mumbai Benches over a period of time. Apart from considering the documents to which our specific attention was drawn and the pages referred to in the paper book during the curse of the arguments, it is seen that copy of the consolidated orders pertaining to A.Y.2010-11 in ITA No. 1572/Mum/2014 and other order dated 21-10-2016 has also been placed on record at paper book page 13 to 23. Apart from that, the consolidated order dated 19th June, 2015 has also placed on record vide paper book pages 30-35 n a group case of assessee pertaining to A.Y.2008-09 in ITA No. 8769/Mum/2011. Accordingly, in the light of the consistent orders of the ITAT and in the absences of any contrary decision having been referred to before us or distinction on facts and circumstances, respectfully following the aforesaid orders of the co-ordinate Benches, the A.O. is directed to grant necessary relief to the assessee. -1767/Mum/2016 McKinsey Group of Companies Assessment Years: 2011-12 & 2012-13 There being no contrary facts on records & in view of the admitted position, following judicial precedent, we direct the Ld. AO to grant relief to the assessee on similar lines. Resultantly, this ground of assessee’s appeal stands allowed. All the four appeals filed by the assessee stands partly allowed in terms of our above order. Conclusion 17. All the appeals stands partly allowed in terms of our above order. Order pronounced in the open court on 14th March, 2018.