Category: Tribunal News : PART B -International Taxation

15.
TS–336–ITAT–2020 (Del.) DDIT vs. Yum
Restaurants Asia Pte Ltd. ITA No.
6018/Del/2012 A.Y.: 2008-09 Date of order: 16^th
July, 2020

Articles 5 and 12 of India-Singapore DTAA – Seconded employee working
under control and supervision of Indian company did not constitute service PE –
Service PE under Article 5(6) and taxability as FTS under Article 12 cannot
co-exist – Services provided did not fulfil ‘make available’ requirement under
Article 12 of India-Singapore DTAA

FACTS

The assessee, a
resident of Singapore, was engaged in franchising of certain restaurant brands
in the Asia Pacific region (including India). It entered into a technology
license agreement with its Indian AE (I Co) for operation of restaurant
outlets. I Co in turn appointed a number of franchisees for operating restaurants
in India under brand names KFC and Pizza Hut.

Mr. V was an
employee of the assessee who had been deputed to India to work under the
control and supervision of I Co. Mr. V was working solely for I Co. However,
the assessee continued to pay remuneration to Mr. V. I Co reimbursed the amount
equivalent to the remuneration of Mr. V (after deducting tax) to the assessee.

The A.O. concluded
that Mr. V constituted service PE of the assessee in India. Hence, the amount
reimbursed by I Co to the assessee was in the nature of FTS and taxable in
India. The A.O. further concluded that the assessee had agency PE in India.

In the appeal,
after referring to relevant clauses of the Deputation Agreement and the
evidence furnished by the assessee, the CIT(A) held that Mr. V was not an
employee of the assessee. Hence, he did not have any right / lien over his
employment. Consequently, there was no service PE of the assessee.

HELD

Service PE

FTS
taxability

Agency PE

•  The A.O. did not
  establish under which limb of definition of agency PE in Article 5(8) of
  India-Singapore DTAA the agency PE of the assessee was constituted in India.

Note: The Tribunal distinguished the Delhi High
Court decision in the case of Centrica India Offshore Pvt. Ltd. [2014] 364 ITR 336 as not applicable to the facts under
consideration. The exact basis of this conclusion is not clear. 

shailesh.kwebmaker

14. [2020] 117
taxmann.com 343 (Delhi-Trib.) Lease Plan India
(P) Ltd. vs. DCIT ITA Nos. 6461 &
6462/Del/2015 A.Ys.: 2009-10
& 2010-11 Date of order: 15^th June, 2020

Articles 11, 12 of
India-Netherlands DTAA; section 9 of the Act – Guarantee charges paid by Indian
company to non-resident AE were not: ‘interest’ under Article 11 as there was
no debt and income was not ‘from debt-claim’; FTS under Article 12(5) as
although provision of guarantee was a financial service, it was not consultancy
service contemplated in Article 12(5)

FACTS

The assessee was
engaged in the business of leasing motor vehicles, financial services and fleet
management. It intended to borrow funds for its business from banks in India.
It had an AE in Netherlands (Dutch Co) with which it entered into an agreement
for provision of guarantee to banks in India. On the strength of such
guarantee, banks lent funds to the assessee. As per the agreement, the assessee
paid guarantee charges to Dutch Co.

Before the A.O.,
the assessee contended that the payment being reimbursement of actual expenses,
it was not chargeable to tax in India and hence the tax was not deductible. The
A.O. concluded that since payment was made to a non-resident for rendering
services, it was covered u/s 9(1)(vii) as FTS. As the assessee had not deducted
tax, the A.O. invoked section 40(a)(i) and disallowed the entire amount.

In appeal, the
CIT(A) confirmed the order.

HELD

Whether
guarantee charges interest?

2   Tribunal
noted that though another Bench had set aside orders for A.Ys. 2007-08 to
2009-10 for considering additional evidence submitted by the assessee, that
option was not open to it because for the years under consideration, CIT(A) had
decided after considering all the documents

Whether
guarantee charges FTS?

shailesh.kwebmaker

13. [2020] 117 taxmann.com
322 (Indore-Trib.) Sanghvi Foods (P.)
Ltd. vs. ITO ITA Nos. 743 &
744/Ind/2018 A.Ys.: 2015-16
& 2016-17 Date of order: 3^rd
June, 2020

Sections 9, 195,
201(1A) of the Act – On facts, since non-resident supplier had ‘business
connection’ in India, the resident payer was required to withhold tax u/s 195

FACTS

The assessee was an
Indian company engaged in the business of manufacturing plants. It had
purchased spare parts for its machinery from a company in Switzerland (Swiss
Co) for which it made payments during F.Ys. 2014-15 and 2015-16. The assessee
did not withhold tax from the payments on the basis that the purchase was
directly made from a non-resident and that, too, for purchase of capital goods.

The Swiss Co had a
wholly-owned subsidiary in India (I Co)
which was primarily engaged in the manufacture and trading of food processing
machinery, spares and components, and also providing repair, maintenance and
engineering services, etc. In addition, it provided marketing support services
to its group companies, including Swiss Co.

In the course of
his examination, the A.O. found the following:

•  While the
  assessee had contended that it was not aware whether Swiss Co had any
  representative in India, it had extensive email communication with I Co. Such
  communication showed:

•  The assessee had
  placed an order on Swiss Co on the basis of the quotation received from I Co;

•  I Co was
  authorised to negotiate, issue quotation, revise quotation and also confirm the
  order;

•  The assessee
  confirmed the order on Swiss Co through I Co;

•  While I Co had an
  active role in concluding the contract, Swiss Co had raised only the final
  invoice.

The A.O. had issued
notice u/s 133(6) of the Act to I Co. In response, I Co provided information
and communication between it and the assessee which supported the findings of
the A.O.

Accordingly, the
A.O. concluded that Swiss Co had ‘business connection’ in India through I Co.
Consequently, the profits arising from the sales to the assessee were subject
to withholding of tax u/s 195 of the Act. Therefore, the A.O. determined 10% of
the amount remitted as net profit and calculated tax @ 41.2% on a gross basis
in respect of both the payments.

In his order, the
CIT(A) observed that the functions performed by I Co proved that it was not a
mere business-sourcing agent but was concluding contracts on behalf of Swiss
Co. This resulted in a business connection in India. He further observed that
irrespective of whether the payment was for the purchase of capital goods, the
payer was obliged to withhold tax once the business connection was established.

HELD

The investigation
of the A.O. and the findings of the CIT(A) show that the role of I Co could not
be ignored at any stage. I Co was involved since the beginning when the assessee
was looking for suppliers of spares. The reply of I Co u/s 133(6) of the Act
further supported this finding.

The activities
performed by I Co for Swiss Co were squarely covered within clauses (a),
(b) and (c) of the definition of ‘business connection’ in Explanation
2 to section 9(1) of the Act.

Based on the facts
and findings on record, Swiss Co had a ‘business connection’ in India through I
Co.

Accordingly, the transaction was subject to section 9(1) and the income
of Swiss Co was deemed to accrue or arise in India. Consequently, in terms of
section 195, the payer was required to withhold tax from the payment ¹.

1   It
appears that both the CIT(A) and the Tribunal have discussed only the issue of
‘business connection’ and have not made any observations on the quantum of
profit determined by the A.O.

shailesh.kwebmaker

18. TS-305-ITAT-2019 (Mum.)

DCIT vs. Reliance Jio Infocomm Ltd.

ITA No.: 936/Mum/2017

A.Y.: 2016-17

Date of order: 10^th May, 2019

Article 7, 12 of India-Singapore DTAA – Provision of
standard bandwidth services could not be classified as FTS or royalty under
India-Singapore DTAA

FACTS

Taxpayer, an Indian company, was engaged in the business of
providing telecom services in India. During the year under consideration,
Taxpayer entered into an agreement with a Singapore Company (FCo) for availing
bandwidth services. As per the terms of the agreement, Taxpayer withheld taxes
on payments made to FCo for rendition of services.

However, Taxpayer subsequently appealed before the CIT(A) u/s
248 of the Act on the ground that the amount paid for bandwidth services was
not taxable in India and hence was not subject to withholding u/s 195 of the
Act on the basis of the following:

Bandwidth charges were in the nature of business income for
FCo and in the absence of permanent establishment (PE) or business connection
in India, it was not taxable under Article 7 of the India-Singapore DTAA.

Provision of the bandwidth services was fully automated and
did not involve any human intervention. Hence, such services did not qualify as
FTS under the Act or the DTAA.

Payments made to FCo were merely for receiving standard
bandwidth services and not for making any use of a ‘process’, whether secret or
not; therefore, it does not qualify as ‘royalty’ under the Act as well as the
DTAA.

CIT(A) observed that
Taxpayer had only received an access to service and all the infrastructure and
processes required for provision of bandwidth services were always used and
remained under the control of FCo and were never given either to Taxpayer or to
any person availing such services. It was thus concluded that the payments made
by Taxpayer to FCo for provision of bandwidth services could not be classified
as FTS or royalty either under the Act or the DTAA. The payment made was in the
nature of business profits, not taxable in India in the absence of PE or any
business connection of FCo in India.

Aggrieved, the AO appealed before the Tribunal¹ .

___________________________________________________

1.  The
AO did not assail the observation of the CIT(A) that payment made for bandwidth
services did not qualify as FTS and hence this aspect was not discussed before
the Tribunal.

HELD

The consideration paid by Taxpayer to FCo for provision of
bandwidth services was in the nature of business income and cannot be
classified as ‘royalty’ under the Act or the DTAA for the following reasons:

Pursuant to the terms of the agreement, Taxpayer had only
received standard facilities, i.e., bandwidth services from FCo.

All infrastructure and processes required for provision of
bandwidth services were always used and under the control of FCo and the same
were never given either to Taxpayer or to any person availing the said service.

Taxpayer did not have access to any process used in providing
the bandwidth services. Besides, since the process involved in providing the
bandwidth services was a standard commercial process that was followed by the
industry players, and the IPR in the process was not owned / registered in the
name of FCo, it did not qualify as a ‘secret process’. Besides, as the payment
was neither towards the use of any equipment nor secret formula or process, it
did not qualify as royalty under the DTAA.

Further, the amendment to
explanation 6 of section 9(1)(vi)² 
will not override the treaty and hence will have no bearing on the
definition of ‘royalty’ as contained in the DTAA.  

___________________________________________________________

2. 
Explanation 6 to section 9(1)(vi) defines a process to include transmission by
satellite, cable, optic fibre or any other similar technology whether or not
such process is secret

shailesh.kwebmaker

17.  TS-311-ITAT-2019
(Kol.)

Outotec (Finland) Oy, Kolkata vs. DCIT (International
Taxation)

ITA No.: 2601/Kol/2018

A.Y.: 2015-16

Date of order: 31^st May, 2019

Article 12(5) India-Finland DTAA – Payment made for
obtaining test results in India is taxable in India under Article 12(5) of
India-Finland DTAA irrespective of whether the testing process is done outside
India

FACTS

Taxpayer, a Finnish
company, earned income from rendering of testing and other services to Indian
customers. Taxpayer contended that the services were carried on from its office
/ laboratories located outside India and none of its employees visited India
for providing these services to Indian customers. Thus, as the services were
performed outside India, income from these services was not taxable in India as
per Article 12(5) of the India-Finland DTAA.

But the AO contended that
the services can be said to be performed only when they were used by the
beneficiary. Since the intended use of the services tested in the laboratories
in Finland was ultimately in India, service can be said to be performed in
India and income from such services were taxable in India under Article 12(5)
of the DTAA.

Taxpayer appealed before
the DRP who upheld the AO’s order. Still Aggrieved, Taxpayer appealed before
the Tribunal.

HELD

Article 12(5) of the DTAA provides that the FTS shall be
deemed to arise in a contracting state where the payer is located. However, as
an exception to this in cases where the services for which the FTS is paid is
performed within a contracting state, then it shall be deemed to arise in the
state in which the services are performed.

For applying the exception
to Article 12(5) it is necessary that the payment should be made for services
and such services should be performed in the other state (i.e., Finland). In
the present case, payment was made not for the testing but for obtaining the
results of the testing which was used in India. Thus, even where testing was
done outside India, the exception of Article 12(5) does not apply.

As services were availed in India, the fee for testing
services was taxable in India.

shailesh.kwebmaker

16.  [2019] 56 CCH 0235
(Pune – Trib.)

Faurecia Automotive Holding vs. DCIT (IT)

ITA No.: 784/Pun/2015

A.Y.: 2011-12

Date of order: 8^th July, 2019

Section 9(1)(vii) of the Act; Article 13 of India-France
DTAA – Reimbursement of salary of seconded employees does not qualify as FTS –
By virtue of the MFN clause in India-France DTAA, managerial services do not
qualify as FTS

FACTS – 1

Taxpayer, a company resident in France, was engaged in
designing and building moulded plastic parts for passenger car interiors.
During the year under consideration, it seconded an employee (Mr. X) to an
Indian group entity (ICo). During the relevant year, Taxpayer paid the salary
to Mr X on behalf of ICo, which was then reimbursed by ICo without any mark-up.
Taxpayer contended that the reimbursement received from ICo was not subject to
tax.

However, the AO contended that the amount received from ICo
was FTS under the Act and hence subject to tax in India.

Aggrieved, Taxpayer appealed before the DRP who upheld the
AO’s order on the contention that Mr. X made available his technical knowledge,
experience and skills, etc. to ICo and hence qualifies as FTS under the DTAA.

However, Taxpayer went in appeal before the Tribunal.

HELD – 1

FTS under the Act is defined to mean any consideration for
the rendition of managerial, technical or consultancy services, unless such an
amount is chargeable to tax under the head ‘salaries’ in the hands of the
recipient.

What is of relevance is the real recipient and not the
literal recipient. If an amount is paid to the expatriate of an NR but the real
recipient is the NR, then the nature of that amount may be FTS. However, if the
real recipient is the employee and the NR is merely a person acting as a post
office on behalf of the employee, then the payment made would be in the nature
of salary. Such amount will then not qualify as FTS.

For the following reasons it can be said that the amount paid
by ICo is in the nature of salary payable by ICo to the employee and the
Taxpayer merely receives it on behalf of the employee and hence such payment
does not qualify as FTS:

•    The remuneration of Mr. X was fixed by ICo;

•    A perusal of the employment agreement clearly
  indicated that Mr. X was employed by ICo and was rendering services to ICo;

•    Mr. X was working under the control and
  supervision of ICo;

•    Taxpayer had no role to play in the rendition
  of services by Mr. X to ICo, except that a part of the salary payable by the
  Indian entity was initially paid by Taxpayer in France, which was later on
  recovered without any profit element from ICo.

FACTS – 2

Taxpayer provided Global Information Support services to ICo
which inter alia included assistance in running the operations of ICo,
technical support, etc. Taxpayer contended that such services did not make
available any technical knowledge, experience, skill or knowhow, etc. to ICo
and hence the fee received for such services does not qualify as FTS under the
DTAA.

The AO, however, contended that the amount received by
Taxpayer was in the nature of ‘royalty’ as well as ‘FTS’ under the Act and also
the DTAA.

Aggrieved, the Taxpayer appealed before the DRP who upheld
the AO’s order. Taxpayer then approached the Tribunal.

HELD – 2

Perusal of the agreement indicates that the services rendered
by the Taxpayer catered to various facets of business operations, including
management, marketing, accounting and finance, human resources, IT support
services, etc. These services are in the nature of managerial services as well
as technical services and hence qualify as FTS under the Act as well as the
DTAA.

However, having regard to the Most Favoured Nation (MFN)
clause of the India-France DTAA, the limited scope of FTS under the India-UK
DTAA is to be read into the India-France DTAA.

Article 13(4) of the
India-UK DTAA defines FTS to mean technical or consultancy services which ‘make
available’ technical knowledge, experience or skill, etc. to the recipient.

As the FTS definition in the India-UK DTAA does not include
‘managerial services’, the services rendered by Taxpayer which are in the
nature of managerial services will not qualify as FTS. Further, as the
technical services rendered by Taxpayer did not make available any technical
knowledge or skill, it will not qualify as FTS under the DTAA.

shailesh.kwebmaker