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Income Tax Appellate Tribunal, “L” BENCH, MUMBAI
Before: SHRI MAHAVIR SINGH, JM & SHRI MANOJ KUMAR AGGARWAL, AM
O R D E R PER MANOJ KUMAR AGGARWAL (AM) : The above set of two appeals have been filed by separate assesses against separate impugned orders both relating to the Assessment Year [AY] 2011-12. The sole issue raised in both the appeals is with regard to the taxability / nature of borrowed service charges and the applicability of treaty benefits under India-US Tax Treaty. As common issues arise out of these appeals, the same are being disposed-off by this combined order. First, we take up facts in ITA No. 5407/M/2014.
The facts in brief, are that the assessee is a foreign company incorporated in USA and is engaged in the business of providing strategic consultancy services. It filed its return of income for Assessment Year [AY] 2011-12 during November 2011 showing total income at Rs.3,937/- which was processed under Section 143(3) at Rs.79,16,300 vide Assessing Officer [AO] order dated 30.06.2014 after considering directions of Dispute Resolution Panel (DRP)-1, Mumbai under section 144C(5). During the impugned assessment year, the assessee had entered into international transactions with its associated concern, McKinsey and Co., Inc. (India branch) and file transfer pricing audit report in Form 3CEB. The assessee is a part of McKinsey group of entities, the primary business of which is to render strategic consultancy services to their clients, which inter-alia includes the analysis of performance, development, strengths and weaknesses of their clients, improving the profitability and productivity and similar other parameters. In order to analyze these parameters, the entities in various countries make use of certain data, information and other support which is provided by the assessee. The main dispute is with regard to nature and taxability of these services. These services are referred to as the ‘Loaned / Borrowed services. It has been stated that all the services have been performed outside India in the ordinary course of business and hence these constitute business receipt and since assessee has no PE in India, the same are not taxable in India in view of Treaty provisions. Therefore, the assessee claimed the same as exempt in Return of Income in view of beneficial provisions of Double Taxation Avoidance Agreement [DTAA, in short ‘Treaty’] between India and USA. The AO relying on the revenue’s stand in the same matter in earlier years in assessee’s own case, treated the same to be in the nature of Fees for Technical Services [FTS] within the meaning of Section 9(i)(vii) of the Income Tax Act as well as under the provisions of India-USA treaty.
Before DRP, the assessee contended that the same are business receipts and not taxable as FTS as per the treaty provisions. But DRP also relied on its earlier stand in assessee’s own case in similar matter for Assessment Year 2009-2010 and uphold the stand of AO. Finally, the assessment was concluded by AO vide Assessment Order dated 30.06.2014 treating these services as FTS and declared taxable as per statutory provisions @15%. Aggrieved,the assessee is in appeal before us.
Before us, the Ld. Senior Counsel for the Assessee [AR] submitted that the assessee is incorporated and Tax Residence of US and eligible for benefits under India-US Tax Treaty. The Loaned / Borrowed services are not in the nature of Royalty / FTS as assessee only supplies qualitative data and provides advisory support to Mckinsey India, by way of emails or verbally through the telephone. Article 12 of the Treaty includes only certain technical and consultancy services within the ambit of FTS and rendering of these services requires expertise to a particular technology or advisory services. These services should make available experience, skill, know-how or process consisting of the development and transfer of a technical plan or technical design and therefore, the person acquiring the services should be able to apply it. Also, consultancy services which are not of a technical nature cannot be regarded as included services under Para 4(b) of Article 12 of the treaty. The assessee supplies data only and do not make available any technical knowledge, skill and expertise to Mckinsey India. In support, the AR relied upon various judicial pronouncements including various orders of ITAT in his favour for difference assessment years. He further contended that this issue of taxability has been settled in favour of the assessee by way of agreement reached by competent authorities of India and USA under Mutual Agreement Procedure (MAP) for AY 2007-08, 2008-09 & 2009-2010 and the same principle / approach should be applied to the present issue in hand for Assessment Year 2010-2011. The learned representative (DR) for revenue on the other hand has relied upon the stand of DRP panel and supported the views of the lower authorities.
We have heard the rival contentions and perused the material on record. The facts are not in dispute and also the type of services provided is not in dispute. The only dispute is with regard to taxability of these services as FTS or business income. It is admitted fact that the assessee has merely supplied data, information etc. to its India counterpart and has not made any technology available which can be used by Mckinsey India. The assessee is providing these services on regular basis for the past several years and the same are held to be business receipts not taxable as per treaty provisions in assessee’s own case for different assessment years by various authorities including ITAT which are as follows:-
(i)ITA No. 8770/Mum/2011 Mckinsey Knowledge Centre Belgium Vs. ADIT
(International Taxation) for Assessment Year 2008-09 wherein it has been held that:-
“In view of the admitted facts that the issue has been settled under the MAP proceedings arrived at settlement between Government to Government level and therefore, honoring the same, we hold that such a borrowed services is not part of FTS/FIS and hence not taxable in India. Not only this, the Department in the appeal filed before the High Court in the earlier years under Section 260A have later on withdrawn the appeal on the ground that the issues has been settled under MAP. Further, the tribunal invariably in the cases of the assessee have been consistently holding that the services rendered by the assessee do not fall within the ambit of FTS as defined in Article 12 (4) of Indo-US treaty
DTAA. These orders have been followed in the subsequent year in assessment year 2009- 10 by the Tribunal vide order dated 17th April, 2015 a copy of which have been filed in the paper book pages 1 to 9. Accordingly, respectfully following the judicial precedents and also the fact that in the present case, the issue has been settled under the MAP proceedings, we hold that the services rendered by the assessee are not taxable in India under Article 12 and also it is an admitted fact that the assessee do not have any PE in India and therefore the same are not taxable under the treaty.”
(ii)Mckinsey & Co. Inc. (Philippines) Vs. ADIT 99 ITD 549 (ITAT Mumbai) for Assessment Year 2001-02:
“For the reasons set out above, I am of the considered view that the CIT (A) indeed erred in holding that the monies received by the appellant-companies from McKinsey India constitute ‘fees for included services’ within the meanings of Article 12 (4) of the India-US treaty, and accordingly liable to be taxed in India. In my view, the payments in question, for the detailed reasons set out above, cannot be treated as ‘fees for included services’. Since the appellant companies do not have any permanent establishment in India, the income so arising to them in India cannot be taxed under Article 7 as ‘business profits’ either. Therefore I direct the assessing officer delete the impugned additions. The assessee get relief accordingly.”
The Tribunal in all the cases invariably had held that, firstly, such services does not fall within the ambit of fees for Technical Services under Article 12 of the India-US DTAA and moreover, this issue has been settled in assessee’s favour under the MAP proceedings settled by competent Government Authorities.
In view of the above, we see no reason to deviate from the above opinion and accordingly, allow the appeal of the assessee. The impugned payments do not constitute FTS in the hands of the assessee and fall within the ambit ‘Business Profits’ and since assessee do not have any PE in India, the same are not taxable as per statutory provisions / Treaty.
Similar is the issue in ITA No. 5406/M/2014. As the facts are similar in all respect, our decision as above applies to the same mutatis-mutandis.
In the result, both the appeals of the assessee are allowed. Order pronounced in the open court on 8th August, 2016.