TS-569-ITAT-2017(Kol)
The Timken Company vs. ITO
A.Ys: 2002-03 to 2007-08,
Date of Order: 29th November,
2017
Facts 1
Taxpayer, a foreign company was engaged in
the business of manufacturing and sale of bearings. Taxpayer entered into an
agreement with its Indian subsidiary company (ICo), for rendering of management
information services (MIS) outside India. For instance, as part of the MIS
services, Taxpayer rendered product, process and tool design services, capital,
planning and inventory management services, quality assurance services, damage
and failure analysis, tax services and legal services etc. As per the
agreement, compensation payable by ICo to the Taxpayer would cover only
reimbursement towards the cost incurred by the Taxpayer without any profit
element or mark-up.
Taxpayer contended that the services
rendered by the Taxpayer to ICo did not make available any technical knowledge,
experience or skill and hence, the payments made by ICo for such services did
not constitute fees for included services (FIS) within the meaning of Article
12(4) of the Indo-US DTAA. It was further contended that income from such
services represents business profits, which, in absence of a PE, were not
taxable in India. Further, in absence of
a profit element, such business receipts were not taxable in India.
The AO held that payments made by ICo were
taxable in India as per Article 12 of Indo-USA DTAA. Aggrieved by the order of
A.O. Taxpayer appealed before CIT(A) who upheld the order of A.O.
Aggrieved, the Taxpayer appealed before the
Tribunal.
Held 1
– For a payment to qualify as FIS under
Article 12, following two conditions should be satisfied:
• Firstly, the payment
should be in consideration for rendering of technical or consultancy services.
• Secondly, the payment
should be in consideration of services which make available technical
knowledge, experience, skill, etc. to the person utilising the services.
– Services rendered by the Taxpayer to ICo
were purely advisory services and no technical knowledge or skill was made
available by the Taxpayer to ICo.
– The Tribunal referred to the example in the
MOU between India and USA, which supported the view that payment for advisory
services does not qualify as FIS under Article 12.
– Further, in absence of a PE in India, the
income form rendering services to ICo was not taxable in India.
Facts 2
During the relevant year, Taxpayer also
received payments from ICo as reimbursements towards payments made by the
Taxpayer to third parties for certain services rendered by third parties to
ICo.
Taxpayer contended that for a payment to
qualify as FIS, it should be made for rendering technical or consultancy
services. Since Taxpayer did not render any service to ICo, payments received
from ICo as cost reimbursement will not qualify as FIS. Further, the amount received from ICo was
purely in the nature of reimbursement of expenses incurred by Taxpayer on
behalf of ICo. Thus, such payments were not taxable in India.
However, AO contended that payment made by ICo
qualified as FIS under Article 12 of India-USA DTAA. On appeal, CIT(A) held
that the payments were in the nature of reimbursement and AO was not justified
in treating such payments as FIS. Aggrieved, AO appealed before the Tribunal.
Held 2
– The services were rendered by third parties
to ICo and Taxpayer merely paid on behalf of ICo. It is such amount which was
reimbursed by ICo to the Taxpayer.
– Taxpayer was not the ultimate beneficiary of
the payment made by ICo nor did it render any service to ICo. It was hence
incorrect for AO to treat such reimbursements as fee for technical services
(FTS).
– Assuming such payments are for services, in
absence of any evidence to show that such services made available technical
knowledge or skill, the payments could not be treated as FIS under the DTAA.
