MANUFACTURE FRANCAISE DES PNEUMATIQUES MICHELIN,FRANCE vs. ACIT, CIRCLE-2(2)(1), (INTERNATIONAL TAXATION), NEW DELHI

The core issue arising for consideration in this appeal is regarding taxability of receipts from business support services as Fee for Technical Services (FTS) under Article 13 of India – France Double Taxation Avoidance Agreement (DTAA) read with paragraph 7 of its Protocol read with Article 12(4)(a) of India – Portugal DTAA.

Briefly the facts are, the assessee is a non-resident corporate entity incorporated in France and is a tax resident of that country. As stated, assessee is engaged in business of manufacturing and selling of tyres and its related products. It also renders various management services, Information Technology (IT) Support Services and technical services to Michelin group entities. In the year under consideration, the assessee rendered IT support services, management services, engineering services, training services and supplied raw materials and equipment to its group entity in India, i.e., Michelin India Pvt. Ltd. (‘MIPL’), formerly known as Michelin India Tamil Nadu Tyres

Insofar as receipts from rendition of business support services, the assessee claimed that, though, they are qualified as FTS under Article 13(4) of India – France DTAA, however, in terms with paragraph 7 of Protocol to India – France DTAA, the assessee is eligible to claim Most Favoured Nation (‘MFN’) status and more restricted meaning and scope of FTS as per Article 12(4) of India – 2 | P a g e Portugal tax treaty would be applicable. Hence, the receipts are not taxable in India. The Assessing Officer, however, was not convinced with the submission of the assessee. Firstly, he rejected assessee’s claim of benefit under MFN clause in terms of paragraph 7 of Protocol to India – France DTAA by stating that in absence of specific notification of Government of India, benefit of MFN clause cannot be granted to the assessee. Having held so, he proceeded to observe that as per Article 13(4) of India – France DTAA, the business support services provided by the assessee to the Indian entity can be termed as technical services, hence, the receipts from rendition of such services has to be regarded as FTS. Accordingly, he treated the fees received of Rs.74,71,14,383/- as FTS and brought to tax on gross basis by applying the rate of 10%. While doing so, he also negated assessee’s contention that an amount of Rs.5,09,07,356/- forming part of the total receipts is actually cost to cost reimbursement of expenses, hence, should not be treated as FTS.

After considering assessee’s submission, learned Commissioner (Appeals) accepted assessee’s claim of MFN status and held that the more restricted definition of FTS as per Article 12(4) of India – Portugal DTAA would apply to the disputed receipts. However, he observed that there is a combined agreement, wherein, the royalty payment for use of trade-mark and technology and payment for services were quantified. He observed, the Indian entity is paying royalty to the affiliate of the assessee and at the same time making payment towards services rendered by the assessee. Considering these facts, learned Commissioner (Appeals) referred to Article 12(4)(a) of India – Portugal DTAA and held that, since, the fees received by the assessee are in respect of technical or consultancy services, which are ancillary and subsidiary to the application or enjoyment of the right, property or information, for which royalty has been paid, they will fall within the ambit of FTS. Proceeding further, he observed, since, the receipts are covered under Article 12(4)(a) of the India – Portugal DTAA, there is no necessity of applying Article 12(4)(b) of the India – Portugal DTAA, which requires fulfillment of make available condition. Further, referring to Article 12(4)(a) of India – USA DTAA, which according to learned 4 | P a g e Commissioner (Appeals) is akin to Article 12(4)(a) of India – Portugal DTAA, he observed that it is immaterial, whether the payment made for services and royalty are under a single contract or a set of related contract or whether the person performing the service and the person receiving the royalty is the same person or are different persons. Thereafter, analyzing the nature of services rendered by the assessee, learned first appellate authority finally concluded that the receipts are in the nature of FTS in terms of Article 12(4)(a) of India - Portugal DTAA.

Before us, Sh. Rajan Vohra, learned Counsel, appearing for the assessee, first and foremost, brought our attention to the nature of business support services rendered by the assessee to MIPL to substantiate that these services are neither ancillary to any royalty payment nor making available technical know-how.

Further, he submitted, the amount received by the assessee is on account of various business support services (including management support, IT support and other support services) rendered to Indian group entities during the year under consideration. Also, the said services were rendered vide separate agreements with the Indian group entities. Thus, clause (a) of Article 12 of India-Portugal DTAA cannot be invoked on the Appellant.

Without prejudice, he submitted, royalty is paid by Indian group entity to other group entities of assessee located outside India, that too, vide separate agreements. Those royalty payments are in connection with granting license to use technology, trademarks, copyright and patents to manufacture tyres in India. He submitted, in order to invoke Article 12(4)(a), the services should be ancillary and subsidiary to the application or enjoyment of technology, trademarks, marks, copyright and patents granted by other company and not for other areas of business operation of the assessee. He submitted, in the present case, the assessee has received income for various business support services like management support, IT support, engineering and repair services for P&M etc. None of these 6 | P a g e services are given for application or enjoyment of right in use of technology, trademarks, copyright and patents given for manufacturing by other group companies. In fact, the services rendered by the assessee are used for other areas of business operations of the Indian group companies. He submitted, as both the transactions are mutually exclusive and are not dependent on each other, business support services cannot be construed to be ancillary and subsidiary to the receipt of royalty by the group entity of the assessee. Thus, he submitted, the receipts will not fall in clause (a) of Article 12(4) of India-Portugal tax treaty. In support of such contention, learned counsel relied upon the following decisions: i. Russell Reynolds Associates Inc. (ITA No. 1165, 1166/Del/2019), dated 26th April, 2022 ii. Perfetti Van Melle ICT & BV Vs. ACIT, [2022] 138 taxmann.com 337 (Delhi – Trib.) iii. Renaissance Services BV Vs. DDIT [2018] 94 taxmann.com 465 (Mumbai ITAT) iv. Kelly Services Inc. (ITA No. 5527/Mum/2017), dated 16th December, 2019 v. Inter Continental vi. Spencer Stuart International BV (ITA No.6666/Mum/2017), dated 1st April, 2019 vii. Lloyd’s Register Asia (India Branch Officer) Vs. DCIT [2021] 133 taxmann.com 286 (Mumbai – Trib.) viii. SCA Hygiene Products AB (Essity Hygiene And Health AB) Vs. DCIT [2021] (Mumbai – ITAT) ix. Inter Continental Hotels Group (Asia Pacific) Pte Ltd. [2023] 148 taxmann.com 27 7 | P a g e

Without prejudice, learned Counsel submitted, while disposing of the appeal, the first appellate authority has not considered the submissions of the assessee and without providing any opportunity to the assessee to explain the applicability or otherwise of Article 12(4)(a) of India – Portugal tax treaty, has passed the order. Thus, he submitted, the order passed is against the principles of natural justice.

Proceeding further, he submitted that not only the receipts would not fall under article 12(4)(a) of India – Portugal DTAA, but it will also not fall within the ambit of Article 12(4)(b) of India – Portugal DTAA, as, the make available condition is not satisfied. He submitted, the services rendered by the assessee has not made available any technical knowledge, know-how, skill, experience etc. to the Indian entity so as to enable it to apply the technology contained therein independently in future without the aid and assistance of the assessee. Drawing our attention to the meaning of the term ‘make available’ as provided under the Memorandum of Understanding (MoU) to India – USA tax treaty, learned counsel submitted that the expression ‘make available’ would mean that the service recipient is enabled to apply the technology contained therein on his own in future without recourse to the service provider. Knowledge remains with service recipient once service has ended, i.e., some sort of durability or permanency of the result remains with the service recipient once service is rendered. Further, the service recipient is at liberty to use the technical knowledge, skill, know-how and processes. Drawing our attention to the list of services provided to the Indian entity, learned counsel submitted, the services are provided on regular or day-to-day basis in various business operations of the assessee. None of the services are of such nature that once provided will be used by the Indian entity on its own without recourse of the assessee. Thus, he submitted, neither the receipts would fall under Article 12(4)(a), nor Article 12(4)(b) of India – Portugal DTAA.

At this stage, learned Senior Counsel clarified that the assessee is not in appeal against the amount of Rs.4,80,198/- being repair services forming part of the total receipts. Without prejudice, he submitted that an amount of Rs.5,09,07,356/- being cost to cost reimbursement cannot be treated as FTS. 9 | P a g e Explaining further, he submitted that Michelin is a global tyre brand and it releases its annual calendar for Motor sports events, which is held globally at various places. Michelin worldwide entities can participate in these events with their dealers/distributors. He submitted, in the year under consideration, MIPL has also shown its interest to participate in such event, which was organized in France. Therefore, the Indian entity had launched a trade scheme for its dealers and distributors, whereunder, targets were given and on achievement of targets, dealers were eligible for a trip to France. He submitted, expenses were incurred by Indian entity directly for tickets, hotel booking, local travel etc. of dealers.

Learned Departmental Representative strongly relied upon the observations of the Assessing Officer and learned first appellate authority. He submitted, though, royalty and service charges were paid to different entities, but both are related parties and group entities. He submitted, the services provided by the assessee are linked to the manufacturing process for which the other group entity has not only provided trademark, but has also transferred the right to use technology. He submitted, India – Portugal DTAA has to be applied only with reference to rate and scope of services. He submitted, the managerial services provided by the assessee have an element of technical service, therefore, would be covered under Article 12(4) of India – Portugal DTAA.

Insofar as the reimbursement of expenses on cost to cost basis, learned Departmental Representative submitted that neither before the Assessing Officer nor before the first appellate authority, the assessee has furnished any clear evidences, nor the concerned authorities have taken note of actual facts. Therefore, keeping in view the additional evidences furnished by the assessee, the issue can be restored back to the Assessing Officer for fresh examination.

We have considered rival submissions in the light of decisions relied upon and perused the materials on record.

At the time of hearing, learned counsel appearing for the assessee, on instruction, gave up the claim qua the amount of Rs.4,80,198/- received towards repair services. Therefore, the decision of the departmental authorities in respect of the aforesaid amount of Rs.4,80,198/- is upheld.

Insofar as balance amount is concerned, the major part relates to the receipts from business support services and an amount of Rs.5,09,07,356/- is claimed towards cost to cost reimbursement of expenses. Thus, we have to examine the nature of the aforesaid receipts.

At the outset, we proceed to examine, whether an amount of Rs.69,57,26,829/- would fall within the ambit of FTS, as defined under Article 12(4) of India – Portugal DTAA. Before we proceed to decide this issue, it is necessary to observe that, though, the Assessing Officer has rejected assessee’s claim of MFN status and benefit under Article 12(4) of India – Portugal DTAA, however, learned first appellate authority after taking note of paragraph 7 of Protocol to India – France DTAA, has accepted assessee’s claim and held that the nature and character of receipts would be governed by Article 12(4) of India – Portugal DTAA. However, while doing so, he has 13 | P a g e concluded that the receipts towards business support services, being ancillary and incidental to the royalty paid by the Indian entity towards use of trademark and technology will qualify as FTS under Article 12(4)(a) of India – Portugal DTAA. In this context, learned Commissioner (Appeals) has observed that there is combined agreement wherein payment of royalty and payment towards service have both been quantified.

Keeping in perspective the aforesaid observations of learned first appellate authority, let us examine the facts on record. It is observed, assessee has entered into an management service agreement with Indian affiliate, where under, following services are rendered by the assessee:

The preamble of the management service agreement makes it clear that the concerned agreement is different from the trademark and technology licence agreement entered by the assessee with another group entity, i.e., Compagnie Generale Des Etablissements Michelin. It further clarifies that the services covered under the management service agreement are rendered in a field different from that covered by the trademark and technology licence agreement. Further, Article 2 of the management service agreement provides that the fee for services rendered shall be determined based on cost incurred by the assessee, as appearing in its books with a markup of 4%. Whereas, the trademark and technology licence agreement between the Indian entity and another overseas affiliate is for licence to acquire the right to use the intellectual property in order to manufacture Radial Tyres suitable for road conditions in India and other countries. It further clarifies that the licence granted is subject to limitations and restrictions under the agreement and it provides non-exclusive right to use trademarks, copyrights, and patents within the territory to exploit the products, as defined in the agreement. It further grants licencee subject to limitations and restrictions of non-exclusive rights to use the technology within the territory to exploit the products, as defined in the agreement.

Thus, from the aforesaid facts and materials available on record, it becomes absolutely clear that the observations of learned first appellate authority that both the royalty payment and payment towards management services are in terms of a combined agreement, is contrary to facts and materials on record. Rather, not only the Indian entity has entered into the trademark and technology licence agreement with a different 17 | P a g e entity, though, may be of the same group, but the quantification of payment of royalty is totally different from the quantification of service fee under the management services agreement. Not only the management service agreement makes it clear that the services rendered under the said agreement are in a completely different field, than the trademark and technology licence agreement, but it is a fact that both the agreements are not even remotely connected to each other.

Thus, in our considered opinion, the business support service fee received by the assessee from the Indian entity cannot be considered to be ancillary and incidental to the royalty paid by the Indian entity to another group affiliate.

On the contrary, on analyzing the nature of services provided by the assessee under the agreement, it is very much clear that the services are provided on regular day-to-day basis for utilizing in various business operations of the assessee. It is further evident, the assessee has been rendering such services on regular basis and these are not one time services, which once availed, are to be used by the service recipient for 19 | P a g e their future purpose. Since, the Revenue has failed to demonstrate before us that in course of rendition of services, the assessee has made available technical knowledge, know- how, skill etc. to the recipient of service, we are unable to upheld the nature and character of receipt as FTS, even under Article 12(4)(b) of India – Portugal DTAA. Thus, in our view, the amount of Rs.69,57,26,829/- cannot be treated as FTS under the treaty provisions.

Insofar as the amount of Rs. 5,09,07,356/- constituting reimbursement of expenses on cost to cost basis, it is observed, learned first appellate authority, though, has not disputed that the amount in dispute represents cost to cost reimbursement on certain expenses, however, he has held that the said amount has to be treated as FTS, in view of the ratio laid down in certain judicial precedents.

At the time of hearing before us, learned counsel has submitted that the amount in dispute represents cost of various expenses incurred by the assessee on behalf of the Indian entity. In this context, it is submitted that the assessee releases the annual calendar for Motor sports events at various destinations, wherein entities of Michelin Company 20 | P a g e participated with their dealers/distributors. It is submitted, the reimbursement of cost basically relates to the cost incurred in these events by the assessee and thereafter debited on cost to cost basis to the entities of various countries. In this context, learned counsel appearing for the assessee has sought permission of the Bench to rely upon various additional evidences to establish his claim.

Per contra, learned Departmental Representative has submitted that the facts relating to these payments are not, at all, clear and the departmental authorities have not examined the actual facts as no clear evidence was furnished by the assessee. Thus, he has submitted that the issue requires to be restored to the Assessing Officer for examining assessee’s claim.

We find substantial merit in the aforesaid submissions of learned Departmental Representative. In fact, learned counsel appearing for the assessee also agreed for restoration of the issue to the Assessing Officer.

In view of the aforesaid, we direct the Assessing Officer to examine the nature and character of reimbursement of expenses amounting to Rs.5,09,07,356/-, keeping in view the 21 | P a g e additional evidences and various other evidences filed by the assessee and determine whether such amount qualifies as FTS under Article 12(4) of India – Portugal DTAA. However, before deciding the issue, the assessee must be provided a reasonable opportunity of being heard. Ground no. 2 is partly allowed.

Ground no. 3, being premature at this stage, is dismissed.