THE TIMKEN COMPANY,KOLKATA vs THE DDIT, INTERNATIONAL TAXATION - 3(1),KOLKATA, KOLKATA

Income Tax Appellate Tribunal, “C” BENCH : KOLKATA

Before: Hon’ble Sri N.V.Vasudevan, JM & Shri M.Balaganesh AM]

ITA No.387&398/Kol/2010&CO.31&32/Kol/2010 The Timken Company 1

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : KOLKATA

[Before Hon’ble Sri N.V.Vasudevan, JM & Shri M.Balaganesh AM]

I.T.A Nos. 387 & 398/Kol/2010 Assessment Years : 2002-03 & 2003-04

A.D.I.T. (International Taxation)-3(1) -vs.- The Timken Company Kolkata Kolkata [PAN : AABCT 9658 F] (Appellant) (Respondent) C.O.Nos.32 & 31/Kol/2010 (A/o I.T.A Nos. 387 & 398/Kol/2010) Assessment Years : 2002-03 & 2003-04

The Timken Company -vs- A.D.I.T. (International Taxation)- 3(1) Kolkata Kolkata [PAN : AABCT 9658 F] (Cross Objector) (Respondent) I.T.A No. 2139/Kol/2013 Assessment Year : 2004-05

The Timken Company -vs.- Asstt.Director of Income Tax Kolkata (International Taxation)-II, Kolkata [PAN : AABCT 9658 F] (Appellant) (Respondent)

I.T.A No. 1268/Kol/2014 Assessment Year : 2005-06

The Timken Company -vs- D.D.I.T. (International Taxation)-3(1) Kolkata Kolkata [PAN : AABCT 9658 F] (Appellant) (Respondent) I.T.A Nos. 2140 & 2141/Kol/2013 Assessment Years : 2006-07 & 2007-08

The Timken Company -vs.- Asstt.Director of Income Tax Kolkata (International Taxation)-II, Kolkata [PAN : AABCT 9658 F] (Appellant) (Respondent)

For the Department : Shri N.B.Som, Addl. CIT, Sr.DR For the Assessee : Shri Ravi Sharma, AR

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Date of Hearing : 20.11.2017. Date of Pronouncement : 29.11.2017. ORDER Per N.V.Vasudevan, JM These appeals relating to the same Assessee for different Assessment Years involve common issues that arise under identical facts and circumstances. These appeals were heard together. We deem it convenient to pass a common order. 2. We shall first take up for consideration appeals and COs for AY 2002-03 & 2003- 04. I.T.A.387& 398/Kol/2010 are appeals by the Revenue against a common order dated.27.11.2009 of. C.I.T.(A)-XXXVI, Kolkata relating to A.Y. 2002-03 & 2003-04. The Assessee has filed C.O.No.32 (in ITA No.397/Kol/2010) & C.O.No.31(in ITA No.398/Kol/2010) against the very same order of CIT(A). The only issue that arises for consideration in Revenue’s appeals for AY 2002-03 & 2003-04 is as to whether the CIT(A) was justified in deleting an addition of Rs.87,65,928 in AY 2002-03 & a sum of Rs.1,65,07,400/- in AY 2003-04 on the ground that the aforesaid sums paid by Timken India Limited (TIL) a subsidiary of the Asssessee by way of reimbursement of certain expenses incurred out of India which were paid by the Assessee and which were reimbursed by TIL to the Assessee in India without any mark up. The only issue that arises for consideration in the Cross-Objections filed by the Assessee is as to whether the CIT(A) was justified in taxing a sum of Rs.1,11,74,863 in AY 2002-03 and Rs.73,19,280 (wrongly mentioned as Rs.1,11,74,863 In CIT(A)’s order) in AY 2003-04 treating the same to be payment of “Fees for Technical Services” rendered or “Fees for Included Services” (FTS). In AY 2002-03, the Assessee has also raised issues challenging the validity of initiation of reassessment proceedings. The issues on merits will be taken up for consideration as it is common in AY 2002-03 & 2003 - 04. 3. We shall first take up for consideration the issue raised in the COs by the Assessee with regard to taxing a sum of Rs.1,11,74,863 in AY 2002-03 and Rs.73,19,280 in AY 2003-04 treating the same to be payment of “Fees for Technical Services” rendered or “Fees for Included Services” (FTS). The Assessee, is a company incorporated in the

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United States of America (USA) and is a tax resident of USA. It is engaged in the business of manufacturing and sale of bearings. Multi National Enterprise (MNE) that have formidable global presence across different countries, in order to control their businesses across the globe perform many functions for their counterparts in the other country in order to manage, supervise, guide, co-ordinate the activities of the group entities. These activities are referred to as intra group services, which are performed by the parent company for their group companies or vice versa. These services may also be performed by any one of the group companies for its fellow group company. These services are referred to as “Home Office Allocation receipts” in the order of assessment and the submissions made by the Assessee before the revenue authorities as well as the Tribunal. Such services rendered to group companies are generally referred to as “Intra Group Services” (IGS). 4. On 2nd Aug., 2000, the Assessee entered into an agreement with TIL, pursuant to which the Assessee agreed to render various services to TIL in USA and no part of the same was to be rendered in India. It was also agreed between the parties that the compensation payable by TIL to the Assessee for the services would cover only the cost actually incurred by the Assessee and that no profit element or mark-up on the cost would be added to it. Article 1.1 of the said Agreement describes the nature of services and it reads thus: ARTICLE 1 SERVICES AND COMPENSATION Section1.1.Provision of Services: Provider shall provide certain services and materials which are necessary for the proper conduct of Recipient's corporate objectives. These services and materials may include management services, management information services, such as information resources, systems development and computer. usage, communication services, engineering services, product, process and tool design services, manufacturing services, capital, planning and inventory management services, metallurgical Services, quality assurance services, damage and failure analysis, marketing, sales and customer services, advertising services, human resources services, procurement services, benefits and payroll administration, finance and accounting services, tax services and legal services as well as any materials related to any of these

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functions which are necessary. Provider may provide these services through its own employees, who may provide the services either at recipient s facilities and place of business on a temporary or expatriate assignment, or by a shorter visit, or at Provider's facilities or place of business, or it may engage independent service providers or consultants who may also provide these services or materials.

Custodial/Stewardship/Governance cost incurred by Provider shall not be invoiced to Recipient and shall remain expenses of Provider. In addition, Provider's costs related to research and development activities will not be invoiced to Recipient pursuant to this Agreement so long as Recipient compensates Provider for the use of any intangible asset produced by virtue of Provider's research and development; activities pursuant to a technology license.”

TIL paid a sum of Rs.1,11,74,863 in AY 2002-03 to the Assessee for various services that it received from the Assessee. The nature of services provided by the Assessee to TIL is given as Annexure-1 (Page-1 to 6) to this order.

It can be seen from Annexure-1 Page-1 to 6 that the nature of services rendered are E- Business, Transfer of Manufacturing process/Technology, global Order fulfilment management, technical support, global availability, development and manufacture of price list capacity support, Emergency Engineering Services, Application of product Engineering, Global Account Management for Deere & Co., Customer Engineering Industrial, S & M Assistance, Evaluation of Manufacturing Processes, process development and capital planning, consulting on facilities issue engineering, Services related to tooling & metrology, tool design, Detail tool design, quality direction and support, EM-Management GWR, Global Management of Computer infrastructure, Corporate help desk services, Global Voice communication support, global Data Telecom support, Global telecom support wireless, information security policies monitoring and control, Data Warehouse loads and support, E-Business training and support, general HRPC admin services, compensation planning, expatriate and admin, Performance Management and management development, Purchasing support of

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direct materials, finding/developing global sources, others like communications, develop strategy BP, Marketing, Marketing communications, Metallurgical services. All these services have been grouped as Business Strategy Development and Business Strategy Development special projects at Page-6 of Annexure-1. These expenses are on account of services provided by Centralised Unit which are initially borne by Centralized Unit. The same are incurred at a centralised level for all the subsidiaries and associated companies, which have been mentioned in Group's Operational structure. For every type and nature of expenses Centralized Unit has a separate and exclusive Cost Center. There are around 47 Cost Centres, which provides various services to all its group companies. The total costs incurred by the cost centres are allocated to the various group companies on a monthly basis. This allocation is done on the basis of "Allocation Key" on a scientific and actual basis. For similar services, the Assessee was to receive a sum of Rs.1,65,07,400/- from TIL for AY 2003-04. 6. As we have already seen the sum of Rs.1,11,74,863 was payable by TIL to the Assessee during the previous year relevant to AY 2002-03. TIL had to deduct tax at source on the aforesaid payment. TIL was of the view that since there was no income chargeable to tax in the hands of the Assessee it was not under any obligation to deduct tax at source on the sums payable to the Assessee. It therefore moved the Authority for Advance Ruling(AAR) for a ruling under Sec.245Q of the Act as to whether it had any obligation to deduct tax at source. The claim of TIL before AAR was that the sum payable to the Assessee under the Agreement dated 2.8.2000 represents only recovery or reimbursement of costs or expenses actually incurred by the Assessee while rendering the said services. Therefore there is no element of profit or income for the Assessee in respect of such payments. The payments by TIL to the Assessee are not chargeable to tax under the Double Taxation Avoidance Agreement entered into by the Government of India with the Government of USA (hereinafter referred to as ‘DTAA’). It was the further plea of TIL before AAR that even assuming that the payment by TIL to the Assessee constitutes "fees for technical services" within the meaning of s. 9(1)(vii) of the Act, s. 44D r/w s. 115A of the Act, provide for a gross basis for taxation of such fees in the hands of the Assessee, being a

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non-resident corporate assessee, at the rate of 20 per cent of such fees. A similar presumptive basis of taxation on gross basis is contained in Sec.44AC of the Act and the Hon’ble Supreme Court in the case of Union of India vs. A. Sanyasi Rao & Ors. 219 ITR 330 (SC) held that in case of presumptive basis of taxation an option for computation of profits under ss. 28 to 43C of the Act should be read in s. 44AC. It was the plea of the Assessee that similar option should be read into the provisions of Sec.44D of the Act r/w Sec.115A of the Act. If it is so read, then on admitted facts that there was no element of mark up in the charges paid by TIL to the Assessee, there would be no income and there would be no obligation to deduct tax at source by TIL.

The AAR in its ruling on the above questions reported as Timken India Ltd. In Re 273 ITR 67 (Authority for Advance Ruling) took the view that the principle laid down by the Hon’ble Supreme Court in the case of A.Sanyasi Rao (supra) in interpreting s. 44AC cannot be called in aid in interpreting s. 44D. The AAR pointed out that the Hon’ble Supreme Court itself observed in regard to s. 44D, among other sections that they relate to a non-resident carrying on business in India and are not much relevant in construing ss. 44AC and 206C of the Act and therefore, it would be futile to contend that interpretation placed on ss. 44AC and 206C would equally apply to s. 44D of the Act. Before the AAR the Assessee had placed reliance on the decision of the ITAT Mumbai in the case of Waterman Steamship Corporation vs. ITO, Bench-D, Mumbai- in ITA No. 4740/Bom/1978 and ITA No. 2888/Bom/1988 (unreported), in which following the decision of Supreme Court in Sanyasi Rao’s case (supra) the Tribunal held that an option in respect of deductions under ss. 28 to 43C should also be read in s. 44D and an option to the assessee to avail benefit of those sections should be given. The AAR did not agree with the aforesaid decision and preferred to hold that the principle laid down in the decision of the Hon’ble Supreme Court in the case of Sanyasi Rao (supra) cannot be read into or applied in the context of the provisions of Sec.44D of the Act.

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The background of the ruling in AAR dated 6.12.2004 is important because the revenue authorities have based their conclusions regarding taxability of the sum in question by relying on the ruling of the AAR.

In the return of income filed by the Assessee for AY 2002-03 in response to notice u/s.148 of the Act dated 27.5.2004, the Assessee declared the same income as was declared in the return of income originally filed. In the return of income, the Assessee specifically pointed out in Note No.1 & 2 to the computation of income (copy at page- 17 of the paper book) that the sum of Rs.1,11,74,863 received by it from TIL was not in the nature of income for the following reason: “Note : 1. The aforesaid payments do not constitute fees for included services within the meaning Article 12(4) of the Indo-US Double Taxation Avoidance Agreement (DTAA) since the company does not make available technical knowledge, experience, skill etc. It represents business profits, which is not taxable in India as such profits are not derived or attributable to a PE in India as defined in Article 5 read with Article 7 of the Indo-US Double Taxation Avoidance Agreement (DTAA)

The receipts representing profits and gains of business are also not taxable in India under the domestic law, since there is no profit element involved in such receipts and there would be NIL taxable income after deduction of expenses of matching amount following the principles laid down by the Hon'ble Supreme Court of India in Union of India vs. A Sanyasi Rao & Others reported in 219 ITR 330 (SC) and that jurisdictional High Court in CIT vs. Dunlop Rubber & Co. Ltd., reported in 142 ITR.”

10.

The AO brought the sum of Rs.1,11,74,863 to tax by following the ruling of the AAR referred to earlier in the case of TIL. The following were the relevant observations of the AO in this regard: “4.1. So far as Reimbursement of Cost of Services provided to Timken-India is concerned, the said issue is covered by the decision of the Hon'ble Authority for Advance ruling in the assessee's own case reported in 273 ITR 67 relating to AY 2002-03. Ld. Authority ruled, " .... sum received by Tunken-USA from the applicant (sic Timken-India) as consideration for services rendered in the USA in pursuance of the Agreement dated August 2, 2000 would be subject to tax in India", having regard to Article 12 of the Indo-US Treaty. While deciding the issue, Ld. Authority observed that Sanyasi Rao's case, 219 ITR 330(SC), will not apply in the facts of the present case. Therefore, respectfully

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following the above. Ruling, sum of money received for so called reimbursement of services provided is also charged to tax in India as per Article 12 of the Treaty.”

11.

Before CIT(A) the Assessee reiterated its submission that the sum in question is reimbursement of actual cost incurred by the Assessee to provide service to TIL and there was no element of profit embedded in such receipt and therefore the receipt in question is not chargeable to tax. The Assessee also pointed out that even assuming the sum in question is in the nature of FTS, the same cannot be brought to tax because as per Article 12(4) of the DTAA, FTS is taxable in the source country only if it makes available technical knowledge, experience, skill etc., to TIL. Since the services rendered by the Assessee to TIL did not make available technical knowledge, experience, skill etc., the receipt in question cannot be brought to tax. The Assessee relied on certain judicial pronouncements in support of the above contention. The Assessee further submitted that the sum in question, if it is regarded as income from business, cannot be brought to tax since under Article 5 read with Article 7 of DTAA, because business income can be brought to tax only if the Assessee has a Permanent Establishment (PE) in India. Since the Assessee did not have a PE in India, the sum in question cannot be taxed as “Business Income”. 12. The CIT(A) did not deal with the above specific submissions of the Assessee but nevertheless confirmed the order of the AO by concluding that the receipt in question was FTS in the hands of the Assessee and therefore chargeable to tax. The following were the relevant observations of the CIT(A). “I have carefully considered the above.

At the outset it must be mentioned that the amounts of Rs.11174863/- and Rs.7319280 for the A. Yrs.2002-03 and 2003-04 respectively stated to be reimbursement of cost of services is actually the consideration for various services rendered to the Timken India, like Management services ; Management Information services , System Development Communication Services , Engineering Services Tool design services , manufacturing services, capital planning and inventory managing services , procurement services, advertisement services etc. The compensation for rendering the above mentioned services is stated to be based on' the cost without any mark obtained. However, from the written submission of the AIR extracted above, it is clear that the cost includes profit. Even otherwise it does not make any

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difference since the services rendered are in the nature of technical services. As enumerated above, most of the services rendered by the appellant were in the nature of technical services and therefore, they are chargeable to tax as per article 12 of the tax Treaty VT between India and USA. Further , the appellant has not substantiated its claim that the above payments were merely reimbursement of expenses incurred by it. …………………. I have also carefully agreement the appellant has entered into with the TIMKEN India. It has listed the following services to be rendered by the appellant as detailed below:- (vii) Management services (viii) Management Information Services - such as Information Resources, Systems Development & Computer Usage, Communication Services, Engineering . Services, Crosses and Tool design services, Manufacturing Services, Capital Planning and Inventory Management Services ,Mettallurgical Services, RGI , Quality Assurance Services, Damage and Failure Analysis , Marketing Sales and Customer Services , Advertising Services , Human Resource Services, Procurement Services Benefits and perol Administration, Finance and Accounting Services , Tax Services and Legal Services. As well as any materials related any of these functions which are necessary.

As can be seen from the above, all the above services are mainly coming under the category of technical services. Therefore, the payments for the above has to be categorized as payment of technical fee.”

Considering the above facts I am of the considered view that the appellant has made payments towards technical fees. In view of the above , the Assessing Officer has rightly treated the receipts of Rs.11174863/- and 7319280/- for the A.Y. 2002-03 and 2003-04 respectively as payments for technical services. Accordingly, the above additions made by the Assessing Officer are confirmed.”

The order of the CIT(A) was a common order for AY 2002-03 & 2003-04. 13. Aggrieved by the order of the CIT(A), the Assessee is in Cross objection before the Tribunal, challenging the action of the revenue authorities in brining to tax the sum of Rs.1,11,74,683/- as FTS. 14. We have heard the rival submissions. The issue for consideration is as to whether the receipt by the assessee from TIL can be said to be in the nature of FTS. We have already set out the details of services rendered by the Assessee to TIL. We shall now examine the relevant clauses of the DTAA to see if the sum received by the Assessee

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a tax resident of USA can be brought to tax as FTS under the Treaty. The relevant articles in the treaty are as follows:

ARTICLE 12: Royalties and fees for included services :

1) Royalties and fees for included services arising in a Contracting State and paid to a resident of the other contracting State may be taxed in that other state. 3) The term ‘royalties’ as used in this Articles means :

(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematography films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition thereof and ; (b) payment of any kind received as consideration for the use of or the right to use, the industrial, commercial or scientific equipment other than payments derived by an enterprise in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 or Article 8.

4) For the purposes of this article ‘fees for included services’ means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provisions of services of technical or other personnel) if such services : a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in para 3 is received; or b) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.

15.

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

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referred to in Article 12(3), or (b) ‘make available’ technical knowledge, experience, skill know-how etc. It is not even Revenue’s case before us that the assessee’s case has anything to do with Article 12(3). 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.

16.

The definition of ‘fees for technical services’ as given in Explanation 2 to section (1)(vii) of the I.T. Act, 1961 is as follows :-

“Explanation 2 : For the purposes of this clause, ‘fees for technical services’ means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provisions of services of technical or other personnel) but does not include consideration for nay construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head ‘salaries’. Section 9(1)(vii) Explanation 2, stops with the ‘rendering’ of technical services. The DTAA goes further and qualifies such rendering of services with words to the effect that the services should also make available technical knowledge, experience, skill etc. to the person utilizing the services. 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 :-

“The words ‘making available’ in Article 13.4 refers to the stage subsequent to the ‘making use of’ stage. The qualifying words is ‘which’ the use of this relative pronoun as a conjunction is to denote some additional function the ‘rendering the services’ must fulfil. And that is that it should also ‘make

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available’ technical knowledge, experience, skill etc. The word which occurring in the article after the word ‘services’ and before the words ‘make available’ not only described or defines more clearly the antecedent noun ‘(services’) but also gives additional information about the same in the sense that it requires that the services should result in making available to the user technical knowledge, experience, skill, etc. Thus, the normal, plain and grammatical meaning of the language employed is that a mere rendering of services is not roped in unless the person utilizing the services is able to make use of the technical knowledge, etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill etc. must remain with the person utilizing the services even after the rendering of the services has come to an end. A transmission of the technical knowledge, experience, skill, etc. from the person rendering services to the person utilizing the same is contemplated by the article. Some sort of durability or permanency of the result of the ‘rendering services’ is envisaged which will remain at the disposal of the person utilizing the services. The fruits of the services should remain available to the person utilizing the services in some concrete shape such as technical knowledge, experience skill etc. 17. In the 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 in pari materia with Article 12(4) of the India-USA tax treaty with which we are presently concerned. 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.

18.

We have already set out the nature of services to be rendered by the assessee to TIL. A perusal of the clauses of Agreement dated 2.8.2000 between the assessee and

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TIL clearly shows that they are purely in the nature of advisory services. Nothing is made available to TIL by the assessee. As to whether or not giving advisory services can be considered to be making available included services, example No. 7 given in the MOU between India and USA on the DTAA throws some more light on the understanding of the Government s of India and the USA on the subject. This example 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 ? Analysis : the fees would not be for included services. The American company is providing a consultancy which involves the use of substantial technical skill and expertise. It is, however, making available to the Indian company any technical experience, knowledge or skill etc. nor is it transferring a technical plan or design. What is transferred to the Indian company through the service contract is commercial information. The fact that technical skills were required by the performer of the service in order to perform the commercial information does not make the service a technical service within meaning of para (4)(b).” This example, set out in the MOU between the Indian and US governments, also makes it clear that consideration for advisory services rendered cannot be treated as fees for included services under Article 12(4)(b). 19. The learned DR placed reliance on a decision of the ITAT Cochin Bench in the case of US Technology Research Pvt.Ltd. Vs. ACIT 61 SOT 19 (Cochin). We have perused the said decision and find that in para-37 of the order, the Tribunal has found as a fact that technology or technique was made available to the recipient. On the facts of the present case, there is no material on record to show that technology was made available and TIL was permitted to apply the technology in the sense that the fruits of the services remained available to TIL in some concrete shape such as technical knowledge, experience skill etc. The learned DR also made submissions that some of the services were rendered by a group company of the Assessee in France

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and therefore the DTAA between India and France will be applicable for such payments and the said treaty does not have “make available” clause. We are of the view that this argument is fallacious because we are in the present case dealing with a payment made to Assessee who is admittedly a tax resident of USA. The receipt in question by the Assessee therefore cannot be looked at from the point of DTAA between France and India.

20.

For the reasons set out above, we are of the view that learned CIT(A) indeed erred in holding that the monies received by the assessee from TIL constitute ‘fees for included services’ within the meaning of Article 12(4) of the India-US treaty, 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. Therefore, we direct the Assessing Officer to delete the impugned additions.

21.

The learned counsel for the Assessee brought to our notice that as against the ruling of the AAR in the case of TIL (supra), the Assessee filed a writ petition before the Hon’ble Calcutta High Court in WP 13932 (W) of 2005 in M/S TIMKEN INDIA LIMITED AND OTHERS Vs.DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 8, KOLKATA AND OTHERS. The Hon’ble Calcutta High Court by its judgement dated 28.3.2016 was pleased to hold that s. 44D r/w s. 115A of the Act, provide for a gross basis for taxation of such FTS in the hands of the Assessee, being a non-resident corporate assessee, at the rate of 20 per cent of such fees. A similar presumptive basis of taxation on gross basis is contained in Sec.44AC of the Act and the Hon’ble Supreme Court in the case of Union of India vs. A. Sanyasi Rao & Ors. 219 ITR 330 (SC) held that in case of presumptive basis of taxation an option for computation of profits under ss. 28 to 43C of the Act should be read in s. 44D. Similar option should be read into the provisions of Sec.44D of the Act r/w Sec.115A of the Act. If it is so read, then if it is found that there was no element of mark up in the charges paid by TIL to the Assessee, there would be no income and there would be no income chargeable to tax in the hands of the Assessee. On the

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above submission, the learned DR’s plea was that the decision of the Hon’ble Calcutta High Court has not attained finality and further no such examination regarding absence of mark up on the charges levied by the Assessee on TIL has been undertaken by the revenue authorities. We are of the view that this plea of the AR is only academic, in view of our conclusion in paragraph 20 that the receipt in question is not FTS and cannot be charged to tax in the hands of the Assessee. Nevertheless, we are of the view that it would be just and appropriate to direct the AO to examine the claim of the Assessee in this regard and if the claim of the Assessee is found to be correct, then the receipt in question cannot be taxed as FTS. We hold and direct accordingly. Thus the relevant grounds of Cross objections by the Assessee are allowed. The conclusions in para-20 & 21 would hold good for AY 2003-04 also as the facts and circumstances are similar. The nature of services rendered for which TIL paid Assessee the sums in question for AY 2003-04 is given as Annexure-2 (Pages 1 to 7). 22. Now we shall deal with the grounds raised by the revenue in its appeals viz., challenging the correctness of the order of CIT(A) deleting the addition of Rs.87,65,928 in AY 2002-03 & a sum of Rs.1,65,07,400/- in AY 2003-04 on the ground that the aforesaid sums paid by Timken India Limited (TIL) a subsidiary of the Asssessee by way of reimbursement of certain expenses incurred out of India which were paid by the Assessee and which were reimbursed by TIL to the Assessee in India without any mark up. The Assessee had received payments from TIL on account of certain services rendered to TIL by some third parties for which the Assessee made payments and which TIL reimbursed to the Assessee. It is the plea of the Assessee that it acted only as a conduit and derived no income from such reimbursements which were at actual amounts spent by the Assessee on behalf of TIL, with no profit element. The plea of the Assessee was that the amount received/receivable from TIL was only reimbursements, without having any element of income is not taxable in India. The sum so received/receivable by the Assessee from TIL for AY 2002-03 & 2003-04 was Rs.87,65,928 and Rs.73,19,280 respectively. These are referred to as “Charge Back

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Receipts” in the orders of the revenue authorities as well as the submissions made before the Tribunal.

23.

As mentioned earlier these expenses are for the services that are provided by various third parties who rise invoice on the Assessee directly. The same are charged back to back by the Assessee to the service recipients including TIL. The break of the reimbursement and heads under which expenses were incurred for AY 2002-03 are given in Annexure-3 (Page-1 to 3) to this order.

The kind of services that are availed by TIL inter alia, includes Legal, Inspection and survey, Global Cargo Insurance, Internet usage, courier, vehicle leasing and rental, usage of various application software, travelling etc. The Legal expense forms the major head under which most of the expenses are booked. The in-house attorneys provide services on Indian law, antitrust advice, affiliation and assistance risks, advice on intellectual property etc. The second main head is the inspection and survey charges of cargo and vehicles, which are done by an Employment agency - "Adecco", based in USA. The third main head of expenses is the "Travelling ". Executives from TIL have to visit Assessee’s office in USA on a regular basis for various business visits, meetings, training etc This is just a reimbursement of the actual travelling costs incurred by the Assessee on behalf of TIL. The nature of expenses incurred in AY 2003-04 is also identical. 24. In the return of income filed for AY 2002-03, the Assessee in Note-3 highlighted that the sum of Rs.87,65,928 was reimbursements and therefore not chargeable to tax, as follows:

“3. The Company has received reimbursements from Timken India Limited (TIL) on account of certain services rendered to TIL by some third parties for which the company has acted only as a conduit. The amount received/receivable from TIL was only reimbursements and without any mark up on the amounts charged by such third parties. Such reimbursements, without having any element of income is not taxable in India.”

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25.

The AO was not satisfied with the aforesaid claim of the Assessee. He observed that expenses claimed as reimbursement included Legal expenses, Inspection & Survey Exp., and airfare, local conveyance, fooding & lodging charges etc. incurred on behalf of employees of TIL who went abroad to attend various Workshop or Seminars, Business Meetings, Training Courses imparted / conducted by the Assessee or its associated enterprises. He was of the view that the fees received for imparting Training, certainly made available technical know-how, experience, skill etc., and therefore was nothing but fees for included services within the meaning of Article 12 of the respective Treaty. He also held that Legal expenses and Inspection & Survey Expenses were incurred for providing Technical Services to Timken-India, These are part and parcel of the Technical Assistance fees paid to the assessee. Since consolidated amount of fees inclusive of all expenses were recovered from TIL by the assessee, the entire sum received is fee for included services. Assessee cannot segregate the various components of expenses included therein because income falling under Article 12 of the treaty is taxable on gross basis without allowing any deduction for expenses incurred. He also held that the Assessee attempted to declare portion of sum received for included services as reimbursement of expenses incurred and doing so was not permissible. Accordingly the AO brought to tax the sum of Rs.87,65,928 as fees for included services. The break of the reimbursement and heads under which expenses were incurred for AY 2003-04 are given in Annexure-4 (Page-1 to 3 ) to this order. 26. Before CIT(A) the Assessee submitted that no services were rendered by the Assessee in consideration of the sum paid as reimbursement by TIL. The Assessee reiterated that the sum in question was merely recovery of actual expenditure incurred by the Assessee on behalf of TIL’s employees. The Assessee was not the ultimate beneficiary of the sum in question. There is no basis on which the AO came to the conclusion that the sum in question was FTS in the hands of the Assessee. Without prejudice to the above submission, the Assessee pointed out that under Article 12(4)(b) of the DTAA it is only when technical or consultancy services rendered by the Assessee makes available technical knowledge, experience or skill that the sum in

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question can be taxed in the hands of the Assessee. Without prejudice to the above submissions, the Assessee submitted that at best the sum in question is taxable only in the hands of the persons who provided the services to TIL and not in the hands of the Assessee. The Assessee also pointed out that the Transfer Pricing Officer scrutinized the details of reimbursements while examining the international transaction of reimbursement by TIL to the Assessee u/s.92 of the Act and found that the Assessee made no profit on such reimbursements and that the reimbursements were at Arm’s Length. 27. The CIT(A) agreed with the submissions of the Assessee. He found from scrutiny of the evidence filed by the Assessee that the reimbursement of expenses were in the nature of commission charges , mobile expenses, Airlines Tickets , VISA CHARGES, Hotel expenses, Apartment rental etc. He held that the above sums were clearly re- imbursements and therefore do not contain the profit element. He also observed that the AO in AY 2004-05 has treated them as reimbursement and not subjected them to tax. The CIT(A) held that the expenses claimed as reimbursement of actual expenses of Rs.8765928/- and Rs.l,65,07,4001 for AY 2002-03 & 2003-04 cannot be categorized as technical services or any other services rendered for the purpose of making profit. Accordingly, he held that taxing them was not justified. The A.O. was directed to delete the addition of Rs.87,65,928/- and Rs..1,65,07,400/- for the assessment Years 2002- 03 and 2003-04 respectively. 28. Aggrieved by the order of the CIT(A), the Revenue is in appeal before the Tribunal. The learned DR made submissions that the CIT(A) based his conclusions only on the basis the action of the AO in not taxing some of the amounts paid by TIL to the Assessee which were claimed as reimbursements in AY 2004-05. He submitted that in AY 2004-05 to the extent the Assessee produced evidence to show actual reimbursement by TIL, the AO accepted that the same are not taxable and brought the remaining sum claimed as reimbursements to tax. According to him in AY 2002-02 & 2003-04, the Assessee has not produced evidence to show that the sums received as charge back from TIL were actual reimbursements.

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29.

He submitted that in the context of obligation to deduct Tax at source, if TIL had made payments directly to the person who rendered services, they would be obliged to deduct tax at source. If the Assessee pays the sums to the person rendering service who is admittedly not a tax resident of India and if TIL subsequently reimburses those expenses, then TIL would avoid tax deduction at source under the garb of reimbursements. According to him therefore the claim of the Assessee should not be accepted. In this regard he made reference to the following decisions CU Inspections 42 ITD 761 (ITAT), Cochin Refineries Vs. CIT 222 ITR 354 (Kerala). We are of the view that this argument of the learned DR cannot be accepted because, we are not deciding the case of TIL in the context of obligation to deduct tax at source. For the very same reason we are of the view that the reliance placed by the learned DR on ITAT Kolkata Bench decision in the case of Ershisanye Construction ITA No.756/Kol/2015 cannot be accepted.

30.

The learned DR relied on the decision of the Chennai ITAT in the case of Van Ord ACZ Marine Limited Vs. ADIT ITA No.1733/Mds/2011 for AY 2003-04 in which similar claim of the Assessee that monies received were not accepted by the Tribunal for the reason that the Assessee did not establish that the services were rendered by the parent company to the subsidiary company on a cost to cost basis. This decision in our view is also not applicable because, in the present case, the parent company did not render any service to the subsidiary company. TIL received services from third parties for which the Assessee paid and later TIL reimbursed the Assessee such costs.

31.

We have considered the submission of the learned DR and are of the view that there is no merit in this appeal by the Revenue. A perusal of the details in Annexure-3 & 4 to this order would go to show that it was third parties who had rendered services to TIL. The actuals billed by the third parties were paid by the Assessee in USA and were later on reimbursed by TIL to the Assessee in India. We are of the view that there is no basis for the AO to conclude that the payment of reimbursements were in the nature of FTS. As rightly contended on behalf of the Assessee, the Assessee was

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not the ultimate beneficiary of the sum in question nor did it render any service to TIL. There is no basis on which the AO came to the conclusion that the sum in question was FTS in the hands of the Assessee. Even assuming that the sum in question is in the nature of FTS, under Article 12(4)(b) of the DTAA it is only when technical or consultancy services rendered by the Assessee makes available technical knowledge, experience or skill that the sum in question can be taxed in the hands of the Assessee. There is no evidence brought on record to show that the technical skill, knowledge etc., were made available to TIL by the Assessee. At best the sum in question is taxable only in the hands of the persons who provided the services to TIL and not in the hands of the Assessee. The Transfer Pricing Officer scrutinized the details of reimbursements while examining the international transaction of reimbursement by TIL to the Assessee u/s.92 of the Act and found that the Assessee made no profit on such reimbursements and that the reimbursements were at Arm’s Length. All these circumstances are sufficient to conclude that the order of the CIT(A) on this issue has to be upheld. We need not go into the question whether assessment order of the AO in AY 2004-05 had any influence on the decision of the CIT(A) as factually we have come to the conclusion that the sums received by the Assessee in question are pure reimbursements on actual with no mark up. We therefore dismiss the appeals of the Revenue for AY 2002-03 & 2003-04. 32. In view of the conclusions on merits as above, we are of the view that Gr.No.1 to 3 raised in CO No.32/Kol/10 for A.Y.2002-03 challenging the validity of initiation of reassessment proceedings, is academic and does not require any adjudication for the present. 33. In the result, ITA No. 397 & 398/Kol/2010 are dismissed while CO No.32/Kol/2010 is partly allowed, while CO No.31/Kol/2010 is allowed.

34.

ITA No.2139/Kol/2013, ITA 1268/Kol/2014, ITA No.2140 & 2141/Kol/2013: (Appeals by Assessee for AY 2004-05 to 07-08): ITA No.2139 is an appeal by the Assessee against the order dated 22.4.2013 of CIT(A)-VI, Kolkata, relating to AY 2004-05. ITA No. 1268/Kol/14 is an appeal by

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the Assessee against the order dated 31.3.2014 of CIT(A)-VI, Kolkata, relating to AY 2005-06. ITA No.2140 & 2140/Kol/13 are appeals by Assessee against order dated 22.4.2013 and 25.4.2013 of CIT(A)-VI, Kolkata, relating to AY 2006-07 & 2007-08 respectively. The issues involved in all these appeals are identical to the issues which we have already dealt with in ITA No. 397 & 398/Kol/2010 and CO No.32/Kol/2010 & CO No.31/Kol/2010 for AY 2002-03 & 2003-04.

35.

Ground No.1.0 to 1.5 in all the appeals by the Assessee are with regard to the action of the Revenue authorities in bringing to tax a sum of Rs.2,25,29,728 in AY 2004-05, Rs.2,70,33,020 in AY 2005-06, Rs.1,98,94,143 in AY 2006-07 & Rs.2,30,99,350 in AY 2007-08 respectively as FTS in the hands of the Assessee. The above payments were received by the Assessee from TIL which was paid by TIL for services rendered agreement dated 2.8.2000. We have elaborately discussed the nature of these services while deciding identical issue in AY 2002-03 & 2003-04. The services rendered by the Assessee through its centralized units are referred to as “Home Office Allocation receipts” in the order of assessment and the submissions made by the Assessee before the revenue authorities as well as the Tribunal. Such services rendered to group companies are generally referred to as “Intra Group Services” (IGS). 36. The nature of the services rendered by the Assessee to TIL are set out in the annexures to this order as follows: For AY 2004-05 For AY 2004-05 the Assessee disclosed receipts from TIL of only Rs.1,90,23,485 and this the actual services provided by Assessee to TIL as per Annexure-5. The AO noticed that in Form 3CEB a figure of Rs.2,25,29,278 was reflected as payment received from TIL. The differential figure of Rs.35,06,243 (2,25,29,278 – 1,90,23,485) as payment made to Timken France. A TDS certificate reflecting turnover of Rs.34,92,626 was furnished. The cost of services received by the Assessee was therefore taken by the AO at Rs.2,25,29,728 as reflected in Form No.3CEB. Annexure-5 gives the details of the Debit Notes and the dates. The

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detailed bill giving description of services is at page-58 to 73 of the paper book filed for AY 2004-05. For AY 2005-06: It can be seen from Annexure-6 that the total amount is Rs.2,66,64,632 whereas as per the order of assessment as well as grounds of appeal before Tribunal the sum in question is shown as Rs.2,70,33,020. According to the AO as per the TDS certificate the total comes to Rs.2,70,33,020. The Assessee’s explanation was that the difference arises on account of exchange rate fluctuation. Annexure-6 gives the details of the Debit Notes and the dates. The detailed bill giving description of services is at page-37 to 71 of the paper book filed for AY 2005- 06. For AY 2006-07 Annexure-7 Annexure-7 gives the details of the Debit Notes and the dates. The detailed bill giving description of services is at page-72 to 97 of the paper book filed for AY 2006- 07. For AY 2007-08 Annexure-8 Annexure-8 gives the details of the Debit Notes and the dates. The detailed bill giving description of services is at page-86 to 98 of the paper book filed for AY 2007- 08. 37. The case of the revenue for regarding the payments received from the Assessee from TIL as FTS is the same reason as was given in AY 2002-03 & 2003-04. We have perused the details and the nature of the expenses set out in Annexure 5 to 8 and the relevant bills in the paper book filed by the Assessee for AY 2004-05 to 2007-08. We find the nature of services is identical as the services rendered in AY 2002-03 and 2003-04. We have already dealt with this issue elaborately in the earlier paragraphs of this order and have concluded that the sums in question cannot be brought to tax as FTS nor as business income. The facts and circumstances in AY 2004-05 to 2007-08 are also identical as the facts and circumstances that prevailed in AY 2002-03 & 2003- 04. The reasons given by us for regarding the sum in question as not taxable will equally apply for AY 2004-05 to 2007-08. For the reasons stated therein, we allow the relevant grounds of appeal of the Assessee for AY 2004-05 to 2007-08.

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38.

The next issues that arise for consideration in appeals by the Assessee is with regard to taxing some of the items of reimbursement of expenses by TIL to the Assessee as FTS. The Assessee had received payments from TIL on account of certain services rendered to TIL by some third parties for which the Assessee made payments and which TIL reimbursed to the Assessee. It is the plea of the Assessee that it acted only as a conduit and derived no income from such reimbursements which were at actual with no profit element. The plea of the Assessee was that the amount received/receivable from TIL was only reimbursements, without having any element of income is not taxable in India. The sum so received/receivable by the Assessee from TIL are referred to as “Charge Back Receipts” in the orders of the revenue authorities as well as the submissions made before the Tribunal. 39. As mentioned earlier these expenses are for the services that are provided by various third parties who rise invoice on the Assessee directly. The same are charged back to back by the Assessee to the service recipients including TIL. The kind of services that are availed by TIL inter alia, includes Legal, Inspection and survey, Global Cargo Insurance, Internet usage, courier, vehicle leasing and rental, usage of various application software, travelling etc. The nature of expenses in all these AYs 2004-05 to 2007-08 is same as it was in AY 2002-03 & 2003-04. We have already seen that in AY 2002-03 & 2003-04, the addition made by the AO treating the amount of reimbursement from TIL as FTS was deleted by the CIT(A) and confirmed by the Tribunal in the earlier part of this order. 40. In AY 2004-05 to 2007-08, the AO examined the claim of the Assessee and accepted that all sums received by the Assessee from TIL cannot be regarded as FTS and he accepted the case of the Assessee with regard to major part of the reimbursement receipts from TIL as not in the nature of income or FTS chargeable to tax. However, the AO picked up some of the items of reimbursement of expenses and held that those were in the nature of FTS chargeable to tax in the hands of the Assessee. The CIT(A) confirmed the orders of the AO for AY 2004-05 to 2007-08. Aggrieved by those additions, the Assessee is in appeal for AY 2004-05 to 2007-08.

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We will now discuss the nature of the sums claimed as reimbursement by the Assessee which were considered as FTS by the AO/CIT(A) in AY 2004-05 to 2007-08.

41.

In AY 2004-05, the AO considered certain items payment towards reimbursements as falling within the ambit of services contemplated under the service agreement dated 2.8.2000. The AO therefore added the aforesaid sums to the total income of the Assessee treating the same as payment of FTS by TIL to the Assessee. The following were the relevant observations of the AO. “5.4. Details of the receipts under this category were called for. On analysis of the items, it was found that. the amounts received under this head included the following: Table -II

Sl.No. Item Description Amount (Rs.) i) Equipment Maintenance 3,15,453.34 ii) Purchase of Software 5,54,288.94 iii) Consultancy Charges 9,941.96 iv) Salary payments 4,14,579.30 v) Training Expenses 75,923.89 Total 1,37,0187.90

Items as noted above are such that they indicate that some services were rendered by Timken USA to Timken India within the holistic framework of the Service Agreements, The items shown above are also not in the nature of ' day to day expenses as claimed by the Authorised Representative , Again, such receipts are covered within the ambit of ‘Fee for Included Services' as per Article 12 of the DTAA between India and USA, From the standpoint of taxability, such receipts as listed in Table –II shown under the description 'Chargeback stands on the same footing as 'home office allocation .Therefore out of the total amount of R.s. 3,087,811. Rs 1.37.0187 is held to be taxable as 'Included Services'.”

42.

On appeal by the Assessee, the CIT(A) confirmed the order of the AO except for the sum of Rs.75,923 which is the last item in the chart given in the earlier paragraph towards training expenses as he found that it was cost of printing study material provided training of employees of TIL in USA. The relevant observations of the CIT(A) are contained in para25 to 40 of his order.

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43.

We have perused the orders of the revenue authorities on this issue. The AO has not given any basis as to how and why the sum of Rs.13,70,187 is considered as part of Home office expenses relatable to Agreement dated 2.8.2000. In this regard the AO has not given any opportunity of being heard to the Assessee and this ground of appeal of the Assessee before CIT(A) is not found by the CIT(A) to be wrong or incorrect. The CIT(A) agrees that these items of expenses are not part of the payments under the service agreement dated 2.8.2000. The following observations of the CIT(A) are relevant in this regard: “21. The appellant has submitted further written submissions vide letter dated 20- 03-2012 against the 'remand report issued. I have considered the submissions made by the appellant and the Assessing Officer's comments in the remand report. It is observed that out of the various chargeback payment made by Timken India, the Assessing Officer has identified chargeback receipts in the nature of Equipment Maintenance, Purchase of Software, Consultancy Charges, Salary Payments and Training Expenses as taxable on the contention that they indicate that some services were rendered by Timken USA to Timken India within holistic framework of service agreement.

22.

The appellant has submitted its submissions supporting non-taxability of the said amounts in the remand proceedings as well as in the submissions filed during appellate proceedings. The appellant contention that chargeback receipts constitute mere reimbursement of expenses and hence cannot be taxed in its hands is not correct. Though from the standpoint of appellant, the said receipts could only be reimbursement but the taxability in its hands needs to be checked based on taxability of the receipts in the hands of ultimate recipient and the appellant.

23.

The Assessing Officer in the remand report has observed that the above payments made by Timken India Ltd. are not in the nature of day to day activities and the payments stand in same footing as home office allocation as taxable in India as fees for included services. The observations of the Assessing Officer that the chargeback payments stand in same footing as home office allocations and hence liable to tax as fees for technical services does not appear to be fully true & correct since the chargeback payment represents services provided by third party in which appellant acted as conduit and claimed as reimbursement by the appellant in some cases and in others it is the allocation of expenses on proportionate basis whereas home office expenses represented services given by the appellant directly under service agreement dated 02-08-2000 to TIL.

24.

In the facts and circumstances the taxability in the hands of appellant needs to be examined based on taxability of such receipts in hands of ultimate

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recipient/service provider. The Assessing Officer has failed to consider the taxability of each item of receipts in India under the Income Tax Act or under the provisions of Treaty (DTAA) and has considered the specified receipts as taxable as fees for technical services generally. Hence, taxability of each of the items is to be examined specifically.”

44.

45.

In AY 2005-06, the AO considered certain items payment towards reimbursements as falling within the ambit of services contemplated under the service agreement dated 2.8.2000. The AO therefore added the aforesaid sums to the total income of the Assessee treating the same as payment of FTS by TIL to the Assessee. The following were the relevant observations of the AO. “5.3. Details of the receipts under this category were called for. On analysis of the items, it was found that. the amounts received under this head included the following: Table -II

Sl.No. Item Description Amount (Rs.) i) Purchase of Software 8023

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ii) Consultancy Charges 4543 iii) Salary payments 534540 iv) Training Expenses 8299 Total 555405

Items as noted above are such that they indicate that some services were rendered by Timken USA to Timken India within the holistic framework of the Service Agreements, The items shown above are also not in the nature of ' day to day expenses’ as claimed by the Authorised Representative , Again, such receipts are covered within the ambit of ‘Fee for Included Services' as per Article 12 of the DTAA between India and USA, From the standpoint of taxability, such receipts as listed in Table –II shown under the description 'Chargeback stands on the same footing as 'home office allocation .Therefore out of the total amount of R.s. 4708040/- , Rs.5554005/- is held to be taxable as 'Included Services'.”

46.

On appeal by the Assessee, the CIT(A) confirmed the order of the AO. The relevant observations of the CIT(A) are contained in para 4.3 to 4.8 of his order. 47. We have perused the orders of the revenue authorities on this issue. The AO has not given any basis as to how and why the sum of Rs.5,55,405 is considered as part of Home office expenses relatable to Agreement dated 2.8.2000. In this regard the AO has not given any opportunity of being heard to the Assessee and this ground of appeal of the Assessee before CIT(A) is not found by the CIT(A) to be wrong or incorrect. The CIT(A) agrees that this item of expenses are not part of the payments under the service agreement dated 2.8.2000. The following observations of the CIT(A) are relevant in this regard: “4.3. In the facts and circumstances of the case, the taxability in the hands of appellant needs to be examined based on taxability of such receipts in hands of ultimate recipient/service provider. The Assessing Officer has failed to consider the taxability of each item of receipts in India under the Income Tax Act or under the provisions of Treaty (DTAA) and has considered the specified receipts as taxable as fees for included services generally. Hence, taxability of each of the items is to be examined specifically.”

48.

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grounds of appeal the Assessee has specifically challenged the action of the CIT(A) in taxing the sum in question in the hands of the Assessee and that taxability of the said sum should be considered only in the hands of the service provider. We agree with the submission of the Assessee and are of the view that on this short ground the addition sustained by the CIT(A) should be deleted and the same is hereby deleted. In view of the aforesaid conclusion, we are of the view that there is no need to look into the description of the service and find out whether it is in the nature of FTS or not and as to whether it would be taxable under DTAA or not and also the effect of the ruling of the AAR in the case of Timken India Ltd (supra) which was overruled by the Hon’ble Calcutta High Court. The addition of Rs.5,55,405 made in AY 2005-06 is directed to be deleted. 49. In AY 2006-07, the AO considered certain items payment towards reimbursements as falling within the ambit of services contemplated under the service agreement dated 2.8.2000. The AO therefore added the aforesaid sums to the total income of the Assessee treating the same as payment of FTS by TIL to the Assessee. The following were the relevant observations of the AO. “5.4. Details of the receipts under this category were called for. On analysis of the items, it was found that. the amounts received under this head included the following: Table -II

Sl.No. Item Description Amount (Rs.) i) Equipment Maintenance 95,985 ii) Purchase of Software 1,52,349 iii) Consultancy Charges 1953 iv) Salary payments 70,28,407 v) Training Expenses 2,70,131 Total 75,48,825

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the same footing as 'home office allocation .Therefore out of the total amount of R.s. 16,046,673//- Rs.75,48,825/- is held to be taxable as 'Included Services'.”

50.

On appeal by the Assessee, the CIT(A) confirmed the order of the AO to the extent of Rs.2,50,287. The relevant observations of the CIT(A) are contained in para 18 to 39 of his order. 51. We have perused the orders of the revenue authorities on this issue. The AO has not given any basis as to how and why the sum of Rs.75,48,825 is considered as part of Home office expenses relatable to Agreement dated 2.8.2000. In this regard the AO has not given any opportunity of being heard to the Assessee and this ground of appeal of the Assessee before CIT(A) is not found by the CIT(A) to be wrong or incorrect. The CIT(A) agrees that this item of expenses are not part of the payments under the service agreement dated 2.8.2000. The following observations of the CIT(A) are relevant in this regard: “19. The appellant has submitted its submissions supporting non-taxability of the said amounts in the remand proceedings as well as in the submissions filed during appellate proceedings. I have considered the details submissions made by the appellant and the observations in the remand report. The appellant contention that chargeback receipts constitute mere reimbursement of expenses and hence cannot be taxed in its hands is not correct. Though from the standpoint of appellant, the said receipts could only be reimbursement but the taxability in its hands needs to be checked based on taxability of the receipts in the hands of ultimate recipient

20.

21 In the facts and circumstances the taxability in the hands of appellant needs to be examined based on taxability of such receipts in hands of ultimate recipient/service provider. The Assessing Officer has failed to consider the

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taxability of each item of receipts in India under the Income Tax Act or under the provisions of Treaty (DTAA) and has considered the specified receipts as taxable as fees for technical services generally. Hence, taxability of each of the items is to be examined specifically.”

52.

From the above observations of the CIT(A) it is clear that the Assessee is not the recipient of the sums in question and it was only a conduit for payment by TIL to a third party service provider. In such circumstances, we fail to see how it can be charged to tax in the hands of the Assessee. In this regard in Ground No.2.0 of the grounds of appeal the Assessee has specifically challenged the action of the CIT(A) in taxing the sum in question in the hands of the Assessee and that taxability of the said sum should be considered only in the hands of the service provider. We agree with the submission of the Assessee and are of the view that on this short ground the addition sustained by the CIT(A) should be deleted and the same is hereby deleted. In view of the aforesaid conclusion, we are of the view that there is no need to look into the description of the service and find out whether it is in the nature of FTS or not and as to whether it would be taxable under DTAA or not and also the effect of the ruling of the AAR in the case of Timken India Ltd (supra) which was overruled by the Hon’ble Calcutta High Court. The addition of Rs.2,50,287 made in AY 2006-07 is directed to be deleted. 53. In AY 2007-08, the AO considered certain items payment towards reimbursements as falling within the ambit of services contemplated under the service agreement dated 2.8.2000. The AO therefore added the aforesaid sums to the total income of the Assessee treating the same as payment of FTS by TIL to the Assessee. The following were the relevant observations of the AO. “5.4. Details of the receipts under this category were called for. On analysis of the items, it was found that. the amounts received under this head included the following: Table -2

Name of Item Description Amount the AE (Rs.) i) Computer Software TERI 969637 ii)Consulting Charges 514705 iii)Staff Training 308302

ITA No.387&398/Kol/2010&CO.31&32/Kol/2010 The Timken Company 31

iv)Relocation Expenses 797358 v)MCI(use of secure Network) 9933161 vi)Laboratory expenses 685849 TIMPL i) Professional/Legal Fees 34214 ii) –do- 11927 iii) –do- 7538 iv) –do- 13678 TIL i) Salary 11908399 ii)Professional Fees 243451 iii)Computer Software 125666 iv)Internet Charges 168277 v)Driving Lesson Charges 29672 vi)Advertising 604295 vii)Storage Charges 679290 viii)Internet Transaction charges 55443 ix)Communication expense 371120 27090862 Total

Items as noted above are such that they indicate that some services were rendered by Timken USA to Timken India within the holistic framework of the Service Agreements, The items shown above are also not in the nature of ' day to day expenses as claimed by the Authorised Representative , Again, such receipts are covered within the ambit of ‘Fee for Included Services' as per Article 12 of the DTAA between India and USA, From the standpoint of taxability, such receipts as listed in Table –II shown under the description 'Chargeback stands on the same footing as 'home office allocation .Therefore out of the total amount of R.s. 42317937/-, Rs.24268627/- is held to be taxable as “Included Service.”

54.

On appeal by the Assessee, the CIT(A) confirmed the order of the AO partially to the extent of Rs.1,23,90,515 and another sum of Rs.5,14,705. The relevant observations of the CIT(A) are contained in para 16 to 79 of his order. 55. We have perused the orders of the revenue authorities on this issue. The AO has not given any basis as to how and why the sum of Rs.2,42,68,627 is considered as part of Home office expenses relatable to Agreement dated 2.8.2000. In this regard the AO has not given any opportunity of being heard to the Assessee and this ground of appeal of the Assessee before CIT(A) is not found by the CIT(A) to be wrong or incorrect. The CIT(A) agrees that this item of expenses are not part of the payments under the service agreement dated 2.8.2000. The following observations of the CIT(A) are relevant in this regard:

ITA No.387&398/Kol/2010&CO.31&32/Kol/2010 The Timken Company 32

“17. The appellant has submitted its submissions supporting non-taxability of the said amounts in the remand proceedings as well as in the submissions filed during appellate proceedings. I have considered the details submissions made by the appellant and the observations in the remand report. The appellant contention that chargeback receipts constitute mere reimbursement of expenses and hence cannot be taxed in its hands is not correct. Though from the standpoint of appellant, the said receipts could only be reimbursement but the taxability in its hands needs to be checked based on taxability of the receipts in the hands of ultimate recipient.

18.

19.

In the facts and circumstances the taxability in the hands of appellant needs to be examined based on taxability of such receipts in hands of ultimate recipient/service provider. The Assessing Officer has failed to consider the taxability of each item of receipts in India under the Income Tax Act or under the provisions of Treaty (DTAA) and has considered the specified receipts as taxable as fees for technical services generally. Hence, taxability of each of the items is to be examined specifically.”

56.

ITA No.387&398/Kol/2010&CO.31&32/Kol/2010 The Timken Company 33

the description of the service and find out whether it is in the nature of FTS or not and as to whether it would be taxable under DTAA or not and also the effect of the ruling of the AAR in the case of Timken India Ltd (supra) which was overruled by the Hon’ble Calcutta High Court. The addition of Rs.1,23,90,51 and another sum of Rs.5,14,705 made in AY 2007-08 is directed to be deleted. 57. In the result appeals for AY 2004-05 to 2007-08 are allowed. 58. In the result ITA No.387 and 398/Kol/2010 being appeals by the revenue for AY 2002-03 & 2003-04 are dismissed. CO No.32/Kol/2010 in ITA No.387/Kol/2010 is partly allowed. CO No.31/Kol/2010 in ITA No.398/Kol/2010 is allowed. ITA No.2139/Kol/2013, ITA 1268/Kol/2014, ITA No.2140 & 2141/Kol/2013 being Appeals by Assessee for AY 2004-05 to 07-08 are allowed.

Order pronounced in the Court on 29.11.2017. Sd/- Sd/- [M.Balaganesh] [ N.V.Vasudevan ] Accountant Member Judicial Member

Dated : 29.11.2017.

[RG Sr.PS]

Copy of the order forwarded to:

1.The Timken Company, C/o Pricewaterhouse Coopers Pvt. Ltd., Plot-Y-14, Block-EP, Sector-V, Salt Lake, Kolkata-700091. 2. Asstt.Director of International Taxation-3(1), Kolkata. 3. C.I.T. (A)-XXXVI, Kolkata. 4. C.I.T.-X, Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.

THE TIMKEN COMPANY,KOLKATA vs. THE DDIT, INTERNATIONAL TAXATION - 3(1),KOLKATA, KOLKATA