By GEETA JANI | DHISHAT B. MEHTA
Chartered Accountants
1.
[2020] 115 taxmann.com 129 (Mum.)
General Motors Overseas Corporation
vs. ACIT
ITA Nos. 1282 of 2009; 1986, 2787 of
2014; 381 (Mum.) of 2018
A.Ys: 2004-05, 2008-09 to 2010-11
Date of order: 6th March,
2020
Article 12 of India-US DTAA –
Deputation of skilled employee results in making technology available and
satisfies FIS article under India-US DTAA
FACTS
The assessee, a US resident company,
entered into a Management Provision Agreement (MPA) with its Indian group
company G engaged in the business of manufacture, assembly, marketing and sale
of motor vehicles and other products in India. Under the MPA, the assessee
agreed to provide executive personnel to assist G in its activities of
development of general management, finance, purchasing, sales, service,
marketing and assembly / manufacturing. Further, the assessee agreed to charge
salary and other direct expenses related to such personnel from G.
Past proceedings before AAR
The assessee had made an application
to AAR in the past to ascertain the tax liability of the amount received under
MPA. In the circumstances and on the basis of the facts on record, AAR had
concluded that the services are ‘managerial’ and not ‘technical or consultancy’
in nature and accordingly are not within the scope of charge of Article 12. AAR
had, however, indicated that the amount received by G may trigger taxation if
the assessee has a Permanent Establishment (PE) in India and accordingly the
receipts may constitute business profits. AAR had, however, caveated
(conditioned) its ruling by stating that it had no information or material to
indicate that the employees were rendering services of a nature falling beyond
the terms of the MPA and whether, in fact, there was a PE trigger. AAR also
clarified that the tax authorities can examine the factual position and take
appropriate action if they find the factual situation to be otherwise.
Assessment and appeal proceedings
During the course of assessment, the
facts noted by the A.O. were as follows:
(i) The
assessee had deputed two employees, viz., (i) Mr. A – President and MD of G and
responsible for overall management and direction of G operations; and (ii) Mr.
S – Vice-President (Manufacturing), responsible for overall management of G
facilities to manufacture and assemble products of G according to required
standards;
(ii) The
A.O. also called for a copy of the service agreement of the deputationists
which the assessee failed to produce. The A.O. held that the services rendered
by Mr. S satisfied the make-available requirement and constituted FIS;
(iii)
Seeking to follow the AAR ruling, the
A.O. concluded that the assessee had a PE in India and computed its business
profit by taxing gross receipt at 20% u/s 44D r.w.s. 115A without providing
deduction for any expenses;
(iv) On
appeal, the CIT(A) upheld the A.O.’s order. Being aggrieved, the assessee
preferred an appeal before the Tribunal.
HELD
Services rendered by Mr. A
It was not disputed by the parties
that the services rendered by Mr. A were managerial in nature and in the
absence of charge for managerial service in the FIS Article of the India-US
Treaty, the said payment did not constitute FIS and hence was not chargeable to
tax in India.
Services rendered by Mr. S
The ruling given by the AAR, although
binding on the Commissioner and income tax authorities subordinate to the
Commissioner, is, however, not binding on the Tribunal and only has a
persuasive value for the reason that the Tribunal is not an authority coming
under the Commissioner. However, the dispute can reach the Tribunal when the
authorities bound by the ruling do not follow the ruling for valid or invalid
reasons. Hence, the Tribunal is required to examine the reasons given by the
authorities for not following the AAR ruling.
The caveat portion of the AAR ruling
makes it clear that this ruling was not an absolute and unqualified one. The
AAR ruling on the services rendered by Mr. S was a general, non-conclusive
finding. The power was given to the tax authorities to examine the transaction
/ actual conduct of parties. In the absence of the assessee providing the
service agreement or other documents showing the actual services rendered by
Mr. S, the A.O. had no other option but to examine the MPA and determine the
scope of services provided by Mr. S.
Mr. S, Vice-President
(Manufacturing), was working with the assessee before being sent as an employee
to India. It was obvious that Mr. S had sufficient knowledge and experience of
the technology and its standards used by the assessee in the US. In the
automobile industry, assembly of products and the standards of the company are
patented / protected technology and the owner of the technology charges royalty
for the same. But in the present case no royalty had been charged by the
assessee from G because the assessee had sent its employee to India. This
person was an expert in the technology, experienced in the assembly of products
and well aware of the standards of the company.
The
technology / expertise lay in the technical mind of an employee/s and if key
employee/s having the requisite knowledge, experience and expertise of
technology are transferred from one tax jurisdiction to another tax
jurisdiction, then it is transfer of technology. By sending Mr. S, technology
was made available in India by the assessee.
Computation of income
As regards computation of business profits, the
Tribunal on a co-joint reading of Article 7(3) and section 44D, ruled that
profits need to be taxed at 20% on gross basis as section 44D prohibits
deduction for any expenses.
