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Income Tax Appellate Tribunal, DELHI BENCH: ‘D’ NEW DELHI
Before: SHRI G.S. PANNU, PRESIDENET & SHRI SAKTIJIT DEY, VICE-
per se mean that technology, skill etc. are made available to the
service recipients.
In this context, he also drew our attention to Example 7 of the
Memorandum of Understanding to the Tax Treaty. He submitted,
though, the assessee assists the Indian affiliate on various projects,
there is no transfer of technical knowledge that will enable the Indian
affiliate to apply on its own. He submitted, it is rather impossible to
transfer any technology, as the specific market information provided
during rendition of services is frequently subject to change. He
submitted, as a service provider, assessee provided services and
solution to the Indian affiliate on the specific facts of each client.
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Neither the clients nor the Indian affiliate gets enabled or acquires any
technical knowhow in the course of rendition service to undertake that
service by itself given the unique set of facts in each consulting
project. He submitted, the assessee had been rendering consulting
services to the Indian affiliate since the year 2010, which itself proves
that no technology had been made available to the Indian affiliate as it
has remained dependant to the assessee for such services. Thus, he
submitted, the amount received cannot be treated as FIS under the Tax
Treaty. In support of such contention, learned counsel relied upon the
following decisions:
- DCIT vs. Boston Consulting Group (2005) 94 ITD 31; - McKinsey & Co., Inc (Philippines) v. ACIT[2006] 99 ITD 549 (Mumbai); - Everest Global Inc. (P) Ltd. v. ACIT [2022] 143 taxman.com 176 (Delhi-Trib.); - US Technology Resources (P) Ltd. v. CIT [2017] 97 taxman.com 642 (Kerala); - Mark Biosciences Ltd. v ITO [2017] 18 taxmann.com 275 (Ahmedabad-Trib); - DCIT v. Marriot International Design & Construction Services [2022] 139 taxmann.com 494 (Mumbai-Trib); - Sobic Innovative Plastics US, LLC v. DDIT, [2020] 119 taxmann.com 398 (Delhi-Trib.); - Burro Happold Ltd. v. DCIT, [2019] 103 taxman.com 344 (Mumbai-Trib); - C.B.S.E. Ltd. v. DCIT [2005] 275 ITR (AT) 15; - Raymond Ltd. v. DCIT, 86 ITD 791
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Further, he submitted, the decisions relied upon by the Assessing
Officer are distinguishable on facts, hence, not applicable.
Strongly relying upon the observations of the Assessing Officer
and learned DRP the learned Departmental Representative submitted,
as per the terms of the agreement, the nature of services provided by
the assessee are technical or consultancy services, hence, covered
under the definition of FIS under Article 12(4)(b) of the Tax Treaty.
He further submitted, while rendering such services, assessee has also
made available the technical knowledge, skill etc. to its affiliate. Thus,
he submitted, the receipts squarely fall within the ambit of Article
12(4)(b) of the Tax Treaty. In support of such contentions, he relied
upon various decisions referred to by the Assessing Officer and
learned DRP.
We have considered rival submissions in the light of decisions
relied upon and perused the material available on record. Upon
analyzing the consulting service agreement between the assessee and
Bain India, it is observed that the consulting services provided by the
assessee are as under:
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“The nature of services performed by the Parties would vary for each project/case based on specific project requirements. The Parties will provide Professional management consulting services to each other from time to time upon request, including without limitation market research, strategic research and planning, data collection, liaising with clients, in each case as may be arranged and agreed to in any given instance and from time to time between Bain India and Company or the applicable Subsidiary, as applicable.”
As could be seen from the nature of services provided by the
assessee are in relation to market research, strategic research and
planning, data collection, client engagement etc. Article 12(4) of
India-USA DATA defines FIS as under:
“Article 12(4) of the DTAA defines ‘Fee for included Services’ as under:
“Article 12-ROALTIES AND FEES FOR INCLUDED SERVICES
For purposes of this Article, “fee 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 provision 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 paragraph 3 is received ; or (b) make available technical knowledge, experience, skill, know- how, or processes, or consist of the development and transfer of the development and transfer of a technical plan or technical design.”
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As per Article 12(4), FIS includes any payment received towards
rendering technical or consultancy services. In the facts of the present
appeal, admittedly, the departmental authorities have categorically
held that the receipts are covered under Article 12(4)(b). Thus to
qualify under Article 12(4)(b) of the Tax Treaty, the following two
conditions are to be fulfilled:
i) The services rendered must be technical or consultancy services; ii) Rendering of such services result in making available technical knowledge, expertise, skill, knowhow or processes etc.
So firstly it has to be seen whether the services rendered are of
the nature of technical or consultancy. To understand the true import
of the expression of technical or consultancy, it is necessary to refer to
the Memorandum of Understanding to the Tax Treaty. As per the
Memorandum of Understanding, Article 12 includes only certain
technical and consultancy services. Technical services would mean,
services requiring expertise in a technology. Whereas, consultancy
services would mean advisory services. The categories of technical
and consultancy services are to some extent overlapping, because, a
consultancy service could also be a technical services. However, the
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category of consultancy services also includes an advisory service,
whether or not expertise in technology is required to perform it. The
nature of services provided under the agreement, such as, client
engagement, market research, strategic research and planning etc., in
our view, certainly, do not fall under the category of technical
services.
Further, even assuming that they fall under the category of
consultancy services, however, the most crucial condition to be
satisfied to qualify as FIS under Article 12(4)(b) is the make available
condition. In the facts of the present appeal, the departmental
authorities have not brought any material on record to demonstrate
that while rendering services, the assessee had made available
technical knowledge, expertise, skill, knowhow etc. to Bain India to
apply such technology, knowhow etc. independently without the aid
and assistance of the assessee. The fact that Bain India is still
dependent on the assessee for such services is established from the
fact that since the year 2010, the assessee had been providing such
services to Bain India on year to year basis. Had assessee made
available the technical knowledge, knowhow skill etc. to Bain India,
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there would not have been any occasion for the assessee to provide
such services on year to year basis as the making available or transfer
of such technical knowledge, knowhow, skill etc. would have enabled
Bain India to apply them on its own without requiring the assessee to
continue with providing them.
It is further relevant to observe, as per Example 7 of the
Memorandum of Understanding to India-USA DTAA, a receipt
cannot be treated as FTS merely because the service provider while
providing consultancy services has used substantial technical skill and
expertise. Because, while providing such services, the American
Company is not making available to the Indian Company, any
technical expertise, knowledge or skill etc. but is merely transferring
commercial information to the Indian Company by utilizing technical
skill. Thus, keeping in perspective the aforesaid factors as well as the
ratio laid down in the judiciary precedents cited before us, we have no
hesitation in holding that the receipts in dispute are not in the nature of
FIS under Article 12(4)(b) of India-USA DTAA. We order
accordingly.
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In ground no.3, the assessee has challenged the addition of
Rs.10,98,97,261 as FIS under Article 12(4)(b) of Indian-US DTAA.
Briefly, the facts are, in course of assessment proceedings, the
Assessing Officer noticed that in the year under consideration, the
assessee has received an amount of Rs.10,98,97,261 from Bain India
towards reimbursement of client related expenses under a cost
reimbursement agreement. After calling for the necessary details and
examining them, the Assessing Officer concluded that the nature of
receipts is FIS under Article 12(4)(b) of the Tax Treaty. Accordingly,
he added it to the income of the assessee. Though, the assessee raised
objections against such addition, however, learned DRP did not
interfere.
Reiterating the stand taken before the departmental authorities,
learned counsel submitted that the receipts are in the nature of
reimbursement of actual cost without any mark up. He submitted, the
amount represents third party cost incurred by the assessee for
procuring services of market/industries research on behalf of Bain
India and reimbursements are on cost to cost basis. He submitted, the
services provided by the third party to the assessee are industry
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research services which included services and cost pertaining to calls
with subject matter and industries research incurred for and behalf of
the clients. There is no technical skill or knowhow employed in
industries research services. He, thus, submitted, the conditions of
section 12(4)(b) of the Tax Treaty are not satisfied. More so, when the
assessee is providing such services under cost reimbursement
agreement since 2010. He submitted, while deciding the issue relating
to the nature and character of very same receipts and whether it
requires withholding of tax in case of Bain India, the Tribunal in ITA No. 2845/Del/2016 dated 10th November 2021 has held that receipts
being in the nature of cost to cost reimbursement for marketing and
other services rendered by third party, is not taxable in India.
Therefore, withholding of tax is not required. Thus, he submitted, the
decision of the Tribunal squarely covers the issue in favour of the
assessee.
Learned Departmental Representative relied upon the
observations of the Assessing Officer and learned DRP.
We have considered rival submissions and perused the material
on record.
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It is observed, while considering the issue relating to the nature
and character of identical receipts and whether it requires withholding
of tax, the Tribunal in case of the payer i.e. Bain India in assessment
year 2009-10, in the order referred to above, has held that the payment
cannot be treated either as FIS under Article 12(4)(b) of the Tax
Treaty or royalty. Therefore, it was held by the Tribunal that there was
no requirement on the part of the payer i.e. Bain India to withhold tax.
In our considered opinion, the controversy stands resolved by the
aforesaid decision of the Tribunal. Therefore, we hold that the receipts
are not in the nature of FIS under Article 12(4)(b) of the Tax Treaty.
We order accordingly.
Ground no. 4 and 5 being consequential in nature, do not require
adjudication.
In the result, the appeal is allowed as indicated above.
Order pronounced in the open court on 29 .08.2023.
Sd/- Sd/- ( G.S. PANNU ) (SAKTIJIT DEY) PRESIDENT VICE-PRESIDENT Dated: 29th August, 2023 Mohan Lal
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