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Facts
The assessee, M/s. Van Oord Dredging and Marine Contractors BV, is a company registered in Netherlands, engaged in international dredging activities. For AY 2020-21, the assessee provided business support services to its associate enterprise in India, VOIPL, and charged Rs. 38,90,57,080. The assessee contended that these fees were a pure allocation of cost without any mark-up and not taxable as Royalty under the India-Netherlands DTAA.
Held
The Tribunal held that the management service fees charged by the assessee represent a pure allocation of actual cost, certified by auditors, and are not taxable in India as royalty. The services provided do not fall within the scope of 'Royalty' as defined in Article 12(4) of the India-Netherlands DTAA, as there was no imparting of know-how or transfer of knowledge. The Tribunal followed its previous decisions in the assessee's own cases for various assessment years.
Key Issues
Whether the management service fees received by the assessee are taxable as 'Royalty' under the Income Tax Act and the India-Netherlands DTAA, or are they a reimbursement of costs without mark-up.
Sections Cited
143(3), 144C(13), 144C(5), 234A, 234B, 270A, Article 12(4) of India-Netherlands DTAA
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Income Tax Appellate Tribunal, MUMBAI BENCH “I”, MUMBAI
Before: SHRI AMIT SHUKLA & SHRI GAGAN GOYAL
PER GAGAN GOYAL, A.M: This appeal by Assessee is directed against the order of AO and Ld. CIT (DRP-2), Mumbai dated 21.06.2023 and 16.02.2023 respectively passed u/s.
2 M/s. Van Oord Dredging and Marine Contractors BV 143(3) r.w.s. 144C(13) and 144C(5) of the Income Tax Act, 1961 (in short ‘the Act’) for A.Y. 2020-21. The assessee has raised the following grounds of appeal:-
Van Oord Dredging & Marine Contractors BV (hereinafter referred to as 'Appellant') craves leave to prefer an appeal against the order passed by the Assistant Commissioner of Income- tax (International Tax), Range 4(3)(1) Mumbai (hereinafter referred to as 'learned AO') under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 ('the Act') pursuant to the directions issued by the Dispute Resolution Panel ('DRP') on the following grounds , each of which is without prejudice to one another: General Ground On the facts and in the circumstances of the case and in law, the learned AO, based on directions of DRP -
1. Erred in making addition of Management service fees amounting to INR 38,90,57,080/- as against loss claimed by the Appellant in the return of income filed for A.Y. 2020-21. Taxability of Management Service Fees of INR 38, 90, 57,080/- On the facts and in the circumstances of the case and in law, the learned AO / DRP have: 2. erred in not appreciating the fact that the Management Service Fees received by the Appellant constitute pure allocation of cost without any mark-up and hence, the same being reimbursement of cost, is not taxable as Royalty under the Act as well as under the Double Taxation Avoidance Agreement ('DTAA') between India and the Netherlands. 3. erred in treating the management service fees received by the Appellant as "Royalty" under Article 12(4) of India Netherlands DTAA, thereby making an addition of INR 38,90,57,080/- to the income of the Appellant.
4. Erred in not appreciating that for the services rendered by the Appellant to qualify as royalty, the same should provide know-how to the recipient.
5. Erred in not appreciating that the services provided by the Appellant are in the nature of business support and administration services and are not in the nature of sharing information concerning industrial, commercial and scientific experience.
3 M/s. Van Oord Dredging and Marine Contractors BV 6. erred in not following the order of the Hon'ble jurisdictional Income-tax Appellate Tribunal ('ITAT'), Mumbai for A.Y. 2009-10 in Appellant's own case which has also been relied upon and followed in subsequent orders passed by ITAT for A.Y.s 2005-06, 2007- 08, 2010-11, 2011-12, 2012-13, 2013-14, 2014-15, 2015-16, A.Y. 2017-18, A.Y. 2018-19 and A.Y. 2019-20.
7. Erred in not appreciating the fact the Hon'ble High Court of Bombay vide its order dated 9 February 2022 has dismissed the appeal filed by the Department against the ITAT order for A.Y. 2009-10. Set-off of management service fees treated as royalty with current year business loss as well as brought forward business loss not allowed Without prejudice to the above grounds, and on the facts and in the circumstances of the case and in law the learned AO / DRP has: 8. Erred in not setting off the current year business losses as well as the brought forward business losses against the addition of Management Service Fees. Set-off of management service fees treated as royalty with brought forward unabsorbed depreciation not allowed Without prejudice to the above grounds, and on facts and in circumstances of the case and in law the learned AO/DRP has: 9. Erred in not setting off the brought forward depreciation against the addition of Management Service Fees. Non-grant of Tax Deducted at Source ('TDS') of INR 3, 89, 05,708/- On the facts and in the circumstances of the case and in law, the learned AO/DRP has: 10. Failed to grant full credit of TDS amounting to INR 3, 89, 05,708 as claimed by the Appellant in its return of income for A.Y. 2020-21. 11. failed to provide any cogent reasons for not granting full credit of TDS amount to INR 3,89,05,708/- despite the same amount appearing in the Form 26AS (i.e. Tax credit statement) for the relevant assessment year. Erroneous levy of interest under section 234A of INR 16, 99,400/- On the facts and in the circumstances of the case and in law, the learned AO/ DRP have:
4 M/s. Van Oord Dredging and Marine Contractors BV 12. Erred in computing consequential interest of INR 16, 99,400/- under section 234A of the Act on the income assessed; Consequential levy of interest under section 234B of INR 1, 69, 94,000/- On the facts and in the circumstances of the case and in law, the learned AO/ DRP have: 13. Erred in levying consequential interest of INR 1, 69, 94,000/- under section 234B of the Act on the income assessed; Erroneous levy of surcharge of INR 19, 45,285/- and education cess of INR 16, 34,040/- on tax computed as per rates prescribed under the India-Netherland DTAA On the facts and in the circumstances of the case and in law, the learned AO/ DRP have: 14. erred in computing surcharge of INR 19,45,285/- and education cess of INR 16,34,040/- on the tax computed as per rates prescribed under the India-Netherlands DTAA; Penalty Without prejudice to the above, and on the facts and in the circumstances of the case and in law, the learned AO has: 15. erred in initiating penalty proceeding under section 270A of the Act, which is applicable in cases of Underreporting or misreporting of income, without considering the full and true disclosures made by the Applicant, both, in the Return of Income as well as during the assessment proceedings. The above grounds of objections are distinct and separate and without prejudice to each other. The appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of appeal, so as to enable the Hon'ble Tribunal to decide the appeal in accordance with the law.
The brief facts of the case are that assessee is a company registered in Netherlands, engaged in the activity of undertaking international dredging, maintenance dredging projects and other dredging related activities. Assessee
5 M/s. Van Oord Dredging and Marine Contractors BV filed its return of income on 03.02.2021 declaring total loss at Rs. 11,28,623/- and claiming refunds of Rs. 5,17,12,427/- out of taxes paid. Case of the assessee was selected for scrutiny under CASS.
During the year under consideration, assessee has not carried out any dredging related contracts in India. However, during the financial year ended 31.03.2020, assessee (VODMC) has provided certain business support services to M/s. Van Oord India Pvt. Ltd. (VOIPL), Associate Enterprise. Thus, assessee had not earned any income from contractual operations in India in the relevant assessment year. VODMC had entered into “Services Agreement” with ‘Van Oord India Private Limited’ (VOIPL), under which it has provided certain assistance and support on continuous basis to VOIPL in the field of personnel and organization, operation support, quality, health, safety and environment, designated personnel offshore, information technology, estimation and engineering, marketing and administrative services in connection with the operations of their business of marine construction and related activities. VODMC also provided certain crew members to VOIPL. In the notes to the Computation of income filed along with the return of India, the assessee had given following note:
“During the financial year ended March 31, 2020, Van Oord Dredging and Marine Contractor BV (VODMC), Netherlands has provided certain business management to Van Oord India Private.
The above services have been rendered entirely from outside India and no role is played by VODMC’s Project Office, in rendering the said services. Since, VODMC’s Project Office has not played any role in rendering the above
6 M/s. Van Oord Dredging and Marine Contractors BV services to VOIPL; the amount charged to VOIPL India has not been included in its books of accounts. For the above services, VODMC has charged Rs.38, 90, 57,080/- on VOIPL”.
The assessee’s main contention had been that, the services rendered in pursuance of the ‘service agreement’ are not in the nature of ‘FTS’ under the DTAA, because there is no “make available” of any technical knowledge, experience, skill, know how or process, etc. That apart, it was stated that VODMC‘s project office has not played any role in rendering of any of the above services, therefore, same are not attributable to its project office also and thus, on this ground also the same is not taxable in India. The assessee was required to furnish the details and the nature of business management services provided and the basis of allocation of cost of services to the Indian entity and was further required to justify, as to why the same should not be held taxable in India. In response to the same, the assessee filed its detailed reply, the content of which has produced by the Ld. Assessing Officer from his order. The Assessing Officer examined the content of the ‘Service Agreement’ entered by the VODMC and VOIPL on 1st April, 2004 and noted the following relevant portion:-
“Service to be performed:
During the term of this Agreement, the Service Company shall on a continuing basis, provide the Service Recipient Company with assistance and support in the field of personnel and organization, operation support, quality, health, safety and environment, designated personnel offshore, information technology, estimation and engineering, marketing and administrative services in connection with the 7 M/s. Van Oord Dredging and Marine Contractors BV operations of their business of marine construction and related activities. The services to be performed under this agreement shall include but not limited to:-
Personnel and Organization Assistance and support in crew management, planning and administration functions and assistance in development of policies in respect of human resource; Operations support Assistance in ensuring that qualifying projects are commenced correctly through project co-ordination and costly errors are avoided or limited; Assistance in project execution and related activities; Quality, health, safety and environment Assistance in formulating business processes for organizational and project matters; Designated Personnel ashore Designating a person ashore to maintain contract the crew of the ship and the Service Recipient Company; Information Technology Providing information technology support during the performance of a project, support with respect to hardware and software and transformation of information; Estimating and Engineering Marketing Advice and support on marketing efforts, product information and support in public relations programs, marketing of the product; Administration Assistance in financial, accounting, auditing and insurance matters; and Legal Provisions of advice and assistance in fiscal and legal matters.
2. Nature and Extent of services A)” …… b) All services to be rendered by the Service Company will be advisory and consultative and the Service Recipient Company shall have the final authority for the implementation of a advice and assistance received. Further, in no case shall the Service Company be held responsible for outcome of the implementation emanating from any advice provided by the Service Company”.
It was also submitted by the assessee that, the assistance to the Indian company was given for the following stages in the dredging contracts namely:-
(i) Pre-bid stage; (ii) Bidding stage; (iv) Post project completion stage.
It was further contended that, the cost of rendering the services is accounted by VODMC and is subsequently allocated to various group entities based on the turnover of each entity vis-à-vis the total turnover of Van Oord Group. It was thus stated that the ‘services fees’ are charged as a percentage of turnover carried out by VOIPL during the year without any mark up.
The Ld. Assessing Officer after analyzing the ‘Service Agreement’ and the submissions of the assessee, observed that, the Indian entity/VIOPL is totally dependent upon the foreign enterprise for its experience in industrial, commercial and scientific field. In fact, starting from the pre-bid stage the assessee company is providing full support services till the post project completion stage. The Indian company is engaged in a highly technical business of dredging activities for which it is completely dependent on the parent company i.e. the assessee company from pre-bid stage till the post-project completion stage. The assessee company is a world leader in this business of dredging and related services and is sharing its experience and information which it has developed over the decades for successful execution of the contracts and business of the Indian Company. The Indian company is also en-cashing on the brand name and experience of the assessee company not only for procuring business and for its successful implementation as well. During the course of assessment proceedings, the assessee was asked to furnish the documentary evidences in support of the business management services, in response to which 10 M/s. Van Oord Dredging and Marine Contractors BV the assessee vide letter has furnished all the evidences. On going through the same he observed that it is providing “user manual” having instructions along with technical design as to how the folders are to be maintained regarding logon instructions, work place securities, accessing network drives, how to open an archive along with technical designs and diagrams, etc. It also contains the standard procedures for inspection, checklist of main equipments, project plan, safety walk, safety work report, drawing solution along with drawing have also been given. The literature regarding marine engineering solutions, main equipments and dredging solutions have also been given in detail along with the terms and designs. This he inferred that it is nothing but sharing of experience of industrial, commercial and scientific in nature and hence payments received by the assessee are to be treated as “royalty” under Article 12(4) of India-Netherland DTAA. He further held that, once these services are taxable as “royalty” then it is not required whether the services have been rendered in India or not.
Order passed by the AO in compliance to the directions issued by Ld. DRP u/s. 144C (5) of the Act made aggrieved the assessee. Being aggrieved the assessee preferred appeal before us against the order of the AO. We have gone through the order of AO passed u/s. 143(3) r.w.s. 144C (13) of the Act, and order of the Ld. DRP passed u/s. 144C (5) of the Act alongwith submissions of the assessee and grounds raised by the assessee.
Issue raised by the assessee is identical and dealt in by the coordinate bench in assessee’s own case vide (A.Y. 2003-04), ITA No.
9. “since the management service fees charged for the aforesaid services provided by the assessee are without any mark-up and represents pure allocation of cost, the same have not been considered as taxable by the assessee.
However, the ld. AO in its draft assessment order dated 27/12/2019 has considered the said payments to be for the use of Information concerning industrial, commercial or scientific experience in India and has accordingly, held the same to be taxable as Royalty in India. The ld. AO held that the said issue is recurring in nature and on verification of the documents provided in the earlier years, it was held that the same evidence the fact that assessee was doing nothing but sharing of experience of Industrial, Commercial and scientific in nature. The ld. DRP following its own direction in case of the assessee for earlier years, approved the draft assessment order passed by the ld. AO vide its directions dated 19/03/2021. The ld. AO in conformity with the directions of the ld. DRP and relying on its decision of the earlier years where the issue is pending adjudication before the Hon’ble High Court for earlier years, passed order dated 28/04/2021 holding that the receipt of MSF fees amounts to Royalty in India. The case of the assessee before us is that, services provided by the assessee do not constitute Royalty as per India- Netherlands Double taxation avoidance agreement ("DTAA). We find that this Tribunal, in assessee’s own case for AY 2009-10 (ITA no. 7589/Mum/2012 dated 07/10/2016), pursuant to analyzing the nature of services envisaged in the service agreement between assessee and VOIPL has held that there is no imparting of any know-how or transfer of any knowledge, skill or experience and hence, none of services provided by assessee in terms of the service agreement falls within the scope of 12 M/s. Van Oord Dredging and Marine Contractors BV "Royalty", as defined in Article 12(4) of India-Netherlands DTAA. Further, the ITAT has given a clear finding that the consideration received by assessee is purely on allocation of actual cost which has been certified by the auditors and hence, the same cannot be reckoned as payment towards "Royalty". The relevant extract of the ITAT's order is reproduced as under:
“As highlighted above, with regard to various streams of services like providing of information technology, operational support marketing, quality, health, safety and environment, estimating and engineering and personal and organization, administration and legal services, it has been held that there is no imparting of any kind of knowledge, skill or experience by way of information concerning industrial, commercial or scientific which is made available to VOIPL. For instance, assessee has stated that, information technology services are provided for use of group companies’ computer system where IT teams provide manual general information without providing any information or method to design or create a computer system. IT is mainly kind of help desk and troubleshooting services which are required on a regular basis. For operational support system also, it mainly provides for checklist for project plans, safety work and inspection plans etc. Similarly, for marketing, the assessee provides for marketing through its website and maintaining it, printing and publishing brochures which can be distributed to its potential clients. It also helps VOIPL to obtain certificate of approval from concerned organizations and obtained the contracts on the regular basis. Regarding quality health and safety environment services, the assessee merely conducts internal audits at regular intervals so that proper adherence to such quality standards and procedures are valid/ should remain valid. Similarly, in the estimating and engineering services 13 M/s. Van Oord Dredging and Marine Contractors BV and other services also, the assessee is mainly providing tender process, helping and preparing (estimates) and bids and plan consisting in local performance and other guarantees to the client of VOIPL etc. For rendering of these services, there is no element of imparting any "know how or there is transfer of any knowledge, skill or experience. Thus, in our opinion, we hold that none of the services provided by the assessee in the term of "service agreement" falls within the scope and ambit of "royalty" as defined in Article 12(4) of the DTAA.
Here again, Management services fees charged is an allocation of cost which is without mark-up, hence it has been stated that the same being in nature of reimbursements do not constitute Royalty as per India-Netherlands Double taxation avoidance agreement (DTAA'). We find that the aforementioned decision of the ITAT in assessee’s own case for AY 2009-10 has also held that the payments received by the assessee are in nature of reimbursement without any mark-up and thereby, such reimbursements cannot be held to be royalty. In any case, it is an admitted fact that, only actual mark-up has been charged by the assessee and the payment has been received purely on allocation of actual cost and the working of cost allocation as reproduced above has not been disputed either by the ld. AO or by the Ld. DRP. The assessee has charged specified percentage of cost incurred by it for rendering aforesaid services which is based on turnover of each entity and the turnover of Van Oord Group as highlighted above which has been certified by the Auditors as given in the paperbook from pages 9 to 11. Once the auditors have certified that, such allocation of costs represents actual expenditures then, we do not find any reason to hold that reimbursement of the cost can be reckoned as payment towards royalty". Further, it is seen that the ITAT in Appellant's own case for the various years has followed the aforesaid ITAT order for AY 2009-10 by observing 14 M/s. Van Oord Dredging and Marine Contractors BV that the management service fees represent pure allocation of actual cost incurred which has been certified by the auditors and accordingly held that the said services are not taxable in India: Assessment year Appeal no. Date of order 2005-06 ITA no 495/Mum/2016 2007-08 ITA no. 496/Mum/2016 28 February 2018 2010-11 ITA no 4136/Mum/2016 5 September 2019 2011-12 ITA no 2029/Mum/2016 31 May 2019 2012-13 ITA no. 1382/Mum/2017 15 July 2022 ITA No. 1146/Mum/2021 M/s. Van Oord Dredging & Marine Contractors B.V 11 2013-14 ITA no. 6140/Mum/2017 10 November 2017 2014-15 ITA no 6141/Mum/2017 2015-16 ITA no. 6726/Mum/2018 24 December 2020 Recently also, the Tribunal in assessee’s own case for AY 2018-19 (ITA no. 672/Mum/2022) and AY 2019-20 (ITA no. 1980/Mum/2022) has passed order dated 31/03/2023 relying upon the aforesaid orders and allowing the appeal in favour of the Assessee. It is seen that the said service agreement continues in AY 2017-18 as well. Also, the fact that management service fees represents pure allocation of actual cost incurred has been certified by the auditors in AY 2017-18. Accordingly, management service fees are not taxable in India based on principles laid down and findings given by ITAT in assessee's own case for AY 2009-10, AY 2010-11, AY 2011-12, AY 2012- 13, AY 2013-14, AY 2014-15, AY 2015-16, AY 2018-19 and AY 2019- 20.
Accordingly, once this issue consistently have been allowed in favour of the assessee, holding that none of the services provided by the assessee in terms of service agreement falls within the scope of Royalty as defined in Article 12(4) of the India Netherlands DTAA and also that the payments received by the assessee are in the nature of reimbursement without any mark-up and therefore, the same cannot be held to be ‘Royalty’ and not taxable in India. Further, Management Services if represents the allocation of the actual cost incurred which has been 15 M/s. Van Oord Dredging and Marine Contractors BV certified by the auditors and the Tribunal has held that Management Services Fee are not taxed in India. Accordingly, this issue is decided in favour of the assessee.”
In view of above findings of coordinate benches, we respectfully followed the same ratio as laid down (supra) and ground no. 1 raised by the assessee is allowed.
In so far as set off of management service fee treated as royalty with current year business loss, brought forward business loss and brought forward unabsorbed depreciation is concerned, since this issue has been decided in favour of the assessee, therefore, it is purely academic in nature and hence, dismissed.
Coming to the issue of short grant of tax deducted at source, it has been stated that in the return of income filed for A.Y.2017-18, assessee had claimed credit of TDS of Rs. 3, 89, 05,708/-, however, the ld. AO has not granted any credit, despite the fact that the same amount appearing in form no. 26AS. Accordingly, we direct the ld. AO to examine the issue and grant appropriate credit of tax after verification.
10. In so far as issues relating to levy of interest u/s. 234A, 234B, surcharge and education cess, once the aforesaid grounds are decided in favour of the assessee, it has become purely consequential in nature.
Lastly, regarding levy of penalty under various sections, in the light of above discussions and our finding, we held that these grounds are premature and to be adjudicated by the AO in the light of this order, therefore, no adjudication is required.