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Facts
The assessee, a global logistics company, received "network transportation fees" from its Indian Associate Enterprise (AE), Damco India Private Limited (DIPL). While DIPL deducted TDS treating the remittance as FTS, the assessee did not offer it to tax, contending it was business income not taxable in India due to the absence of a Permanent Establishment (PE). The Assessing Officer (AO) classified this income as Fees for Technical Services (FTS) and Royalty, making an addition for AY 2021-22.
Held
The Tribunal, relying on its previous judgments in the assessee's own case, ruled that the network fees are neither Royalty nor FTS under the Income Tax Act or Article 12 of the India-Netherlands DTAA, as the "make available" condition for FTS was not met and the payments were in the nature of reimbursement of cost. Consequently, the Tribunal directed the AO to delete the addition. A separate ground regarding the assessment being time-barred was not pressed by the assessee.
Key Issues
The core issue was whether "network fees" received by the foreign assessee from its Indian AE qualified as Fees for Technical Services (FTS) or Royalty under the Income Tax Act and India-Netherlands DTAA, thereby making it taxable in India.
Sections Cited
Section 143(3), Section 144C(13), Article 13 (India-Netherlands DTAA), Article 12 (India-Netherlands DTAA), Article 7 (India-Netherlands DTAA), Article 5 (India-Netherlands DTAA), Explanation 2 to Section 9(1)(vii), Section 93CA(3), Section 153
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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYA, HONBLE & SHRI RAHUL CHAUDHARY, HONBLE
PER NARENDRA KUMAR BILLAIYA, AM : I.T.A. No. 4345/Mum/2023 & I.T.A. No. 4325/Mum/2023, are two separate appeals by the assessee preferred against the two separate orders dt. 23/10/2023 framed u/s 143(3) r.w.s. 144C(13) of the Act pertaining to AY 2021-22. 2. Since the grievance of the assessee is identical in both the appeals, they were heard together and are being disposed off by this common order for the sake of convenience and brevity.
The common grievance in both the appeals relate to the treatment of network fees earned during the year by the assessee as fees for technical services and royalty under the Income-tax Act and under Article 13 of the India Netherland DTAA. Though, the quantum may differ.
Briefly stated the facts of the case are that the assessee company is engaged in the business of logistics and freight forwarding across the globe. The assessee has various business infrastructures such as IT network, E-commerce portal facilitating interface with customers, network pool of various service providers, such as freight insurance etc.. During the course of scrutiny assessment proceedings the AO noticed that, the assessee has earned its income from services provided to its Indian AE i.e., Damco India Private Limited (DIPL), as network transportation fee. The transportation fee received from DIPL, was subjected to TDS treating the remittance as FTS but in the return of income was not offered to tax treating the same as business income on the ground that there was no PE in India. Since the payment was in the nature of FTS, a showcause notice was issued proposing to treat the transportation fee as FTS. The assessee filed a detailed reply explaining that it is overall responsible for operation and maintenance of the business at global level and since DIPL is part of such network it makes use of facilities like integrated supply chain management, freight forwarding network, Group IT for common platform for integrated and efficient operations. It was explained that, the assesse does not charge any separate charge for use of such facilities. The assessee explained the year-wise split of network fees and network income as per financials of DIPL as under:- Sr. No. Financial Year Network Fee Network Income 1 2012-13 8,46,91,990 2 2013-14 32,41,27,789 3 2014-15 4,71,16,250 4 2015-16 1,03,25,977 5 2016-17 29,53,69,631 6 2017-18 33,36,28,382 7 2018-19 48,50,40,762 8 2019-20 64,97,23,323 9 2020-21 41,06,79,169
From the above chart it was explained that the gross margin in excess of operational costs + arm's length markup, if any, is remitted to the assessee as network fee. The network fee is designed to levy DIPL with the return which would be earned by a local stand-alone freight forwarding and logistics provider. At the same time, the network fee is intended to ensure that if profit of DIPL is less than the arm's length margin, the network income will be paid to DIPL which ensures that DIPL is insulated from the shortfall. From the above chart it was explained that in FY 2013-14 and 2014-15, DIPL has received network income in which it failed to earn profits less than arm's length margin. It was clarified that network fee/network income is not a charge and hence it thus comes under the purview of FTS under Article 12 of India Netherlands Tax Treaty. It was strongly contended that such network fee receipts from DIPL are business income under Article 7 of India Netherlands Tax Treaty and in business of a PE, such network fee receipts are not taxable in India.
The explanation of the assessee did not find favour with the AO who was of the firm belief that as per Explanation 2 to Section 9(1)(vii) of the Act, FTS has been defined as any consideration for rendering any managerial, technical or consultancy services and the taxability of the FTS is also applicable in view of the treaty. Accordingly, the network fees of Rs.41,06,79,169/- was taxed as fees for technical services and royalty.
Objections were raised before the DRP and the DRP after considering the facts and the submissions, was of the opinion that the DRP in AY 2016-17 had upheld the additions made by the AO to the total income of the assessee treating the impugned receipts as FTS. The DRP further observed that the issues at hand is similar to those which were dealt by the DRP in AY 2012-13 and 2013-14. 8. Though the DRP fairly conceded that identical additions were made in assessee's own case for AY 2013-14, 2017-18, 2019-20 and 2020- 21 and the said additions were deleted by the Tribunal and since the decisions of the Tribunal were not accepted by the revenue, the DRP confirmed the action of the AO.
We have given a thoughtful consideration to the orders of the authorities below. The Co-ordinate Bench in ITA No. 7447/Mum/2017 for AY 2013-14; ITA No. 545/Mum/2022 & ITA No. 2240/Mum/2022, for AYs 2018-19 & 2019-20 and ITA No. 909 & 937/Mum/2023, AYS 2017-18 and 2020-21, has deleted the impugned addition. The latest order being that for AY 2017-18 and 2020-21 in ITA Nos. 909 & 937/Mum/2023, the relevant finding of which read as under:- “7. Heard both the sides and perused the material on record. With the assistance of the ld. Representative we have perused all the three judicial pronouncements in the case of the assessee itself as referred supra. The relevant operating part of the decision of ITAT for assessment year 2018-19 vide ITA No. 545/Mum/2022 after considering the decision of ITAT for assessment year 2013-14 is reproduced as under:
“9. We have considered the rival submissions and perused the material available on record. We find that the coordinate bench of the Tribunal in assessee's own case in Damco International BV vs DCIT, in ITA No. 7447/Mum./2017, for the assessment year 2013-14, vide order dated 22/08/2022 held that network fees received by the assessee from Damco India are neither in the nature of Royalty nor Fees for Technical Services. The relevant findings of the coordinate bench of the Tribunal, in the aforesaid decision, are as under:- “6. We have heard submissions made by the rival sides and have examined the orders of authorities below. We have also considered the documents on which rival sides have placed reliance in support of their respective submissions. The assessee during the period relevant to the assessment year under appeal has received network fees from Damco India. The services have been rendered by the assessee in accordance with Network Agreement dated 01/01/2013 (at page 3 of the paper book). The contentions of the assessee is that it does not have Permanent Establishment (PE) in India in terms of Article -5 of India- Netherland DTAA. And by virtue of Article-7 of India Netherland DTAA, network fees earned by the assessee is not taxable in India. At the outset it would be pertinent to mention that the network fee which is subject matter of dispute in the present appeal was earned by the assessee for the period starting from 01/03/2013 to 31/03/2013. For the period starting from 01/04/2012 to 31/12/2012 falling under the same assessment year i.e. assessment year 2013-14, Damco India had agreement with Damco International AS, a Danish entity. Both the agreements i.e. agreement between Damco International AS Damco India and assessee – Damco India are stated to be similar. A perusal of the directions of DRP dated 11/09/2017 would show that the DRP has placed heavy reliance on the directions of the DRP for assessment year 2012-13, wherein instead of present assessee, Damco International AS, a Danish entity was the assessee. In para 4.2 of the DRP directions, the DRP has categorically mentioned that the only change in the impugned
assessment year is that instead of Damco International AS, the Damco India has entered into new agreement w.e.f. 01/01/2013 with Damco International BV (the assessee). Thereafter, the DRP has listed the general/ specific obligations of the assessee and Damco India as per the Network agreement. In the assessment order for assessment year 2013-14 the Assessing Officer while passing the final assessment order reiterated the observations made by the DRP. The Assessing Officer has made no observation that the facts or the agreement in the impugned
assessment year are in any manner at variance with the facts of the earlier agreement between the assessee and Damco International AS. The Assessing Officer based on the observations made by DRP finally concluded that the amount of Rs.8,46,91,990/- is taxable as “Royalty” and