June 2016

CA Hinesh Doshi

SKF Technologies (India) Pvt. Ltd. vs. DCIT [2016] 68 taxmann.com 318 (Bangalore-Tribunal) dated: 31st March, 2016

Facts:

 • The assessee was engaged in the business of manufacture and trading of oil seals. It had international transactions reported in form 3 CEB filed for the impugned assessment years.
• One of the international transactions as mentioned was payment for group IT services to its AE in Sweden.
• The AO disallowed reimbursement of IT expenditure to its AE in Sweden for non-deduction of tax at source by applying section 40(a)(i). As per the AO no supporting evidence was filed by the assessee to show that these were reimbursement of expenditure. AO also noted that assessee was selling its entire product line in India and there could not be any services rendered by M/s. SKF Data Services in Sweden, for such business operations
• According to the assessee there was no profit element in the reimbursement to its AE in Sweden and thus there was no requirement of TDS on such payment. There were no technical services rendered by AE. Technical services even if it was presumed to have been rendered, unless the \'make available\' clause was satisfied, payments thereof could not be taxed in India.
• The assessee also relied on DTAA between India and Sweden and the protocol indexed to it wherein it was mentioned that India Canada DTAA had to be applied.
• The DRP, upheld order of AO and assessment was completed by making an addition in accordance with AO\'s recommendations.
• Consequently, assessee preferred an appeal before ITAT.

Issue:

• Whether the payment for group IT services to AE would attract disallowance u/s. 40(a)(i) without verifying whether any technical services were rendered by AE to assessee and whether \'make available\' clause in article 12(4) of DTAA between India and Canada were satisfied or not ?

Held:

 • ITAT found that none of the lower authorities had carefully looked into the \'make available\' clause in article 12(4) of the DTAA between India and Canada which was called into operation by the assessee.
• Lower authorities did not look into the applicability of the DTAA in relation to the alleged cost sharing passed on by AE in Sweden, to the assessee for the IT related services.
• Question whether any technical services were rendered by AE in Sweden, to the assessee and how far the \'make available\' clause was or was not satisfied were never verified either by the TPO or the DRP. Hence, this aspect requires a fresh look by the Assessing Officer.
• The orders of the authorities on the aspect of disallowance under section 40(a)(i) are set aside and matter is remitted back to the file of the Assessing Officer for consideration in accordance with law.
• Thus ground of the assessee stands allowed.

Raytheon Ebasco Overseas Ltd. vs. DCIT (2016) TII-61-ITAT-Mumbai dated 11th March, 2016

Facts:

 • The assessee was a company incorporated IN US has entered into a contract with Jindal Tractebel Power Company Limited (JTPCL) to set up a power plant in Karnataka. The nature of services rendered to JTPCL included providing of engineering and designing work for the power plant.
• Overall responsibility and management of the project was carried out by the assessee from outside India and it had no Permanent Establishment (PE) in India and no technical services were provided by the assessee to JTPCL as envisaged by the Act/DTAA.
• AO held that as per section 9(1)(vii) and article 12(4)(b) of DTAA the place that was relevant for taxation purposes was the place where the services had been actually utilised. Also if the fee received by the assessee was for services utilised in India then the income would deem to accrue or arise in India.
• AO held that services rendered by the assessee were fee for included services (FIS) as per the provisions of Article 12(4) (b) of the Indo-US DTAA.
• Aggrieved by the order assessee preferred an appeal before the FAA who held that the AO had rightly assessed such FIS. This was further upheld by the CIT (A).
• Aggrieved assessee filed appeal before Tribunal.

Issue:

• Whether to be classified as FTS the services should enable the service receiver to carry out services by obtaining the technical by obtaining technical knowledge/experience/skill possessed by the service provider?

Held:

• Tribunal was of the opinion that technical services or the start-up services, provided by the assessee, did not include any construction, assembly mining or like projects and therefore the payment received by it would not constitute FTS as per the provisions of the Act.
• Referring to the decision of the Hon’ble Madras High Court delivered in the case of Neyveli Lignite Corporation (243ITR459) the AO held that income had accrued to Hungarian company in India and hence the Indian company was liable for deduction of tax. The Hon’ble court decided the issue in favour of the assessee and held that receipts could not be brought to tax in India, that the payments made by it were not taxable under the provisions of section 9 of the Act.
• As regards whether the services rendered by the assessee could be termed FIS as per the provisions of Article 12 of the DTAA, it is clear that to be classified as FTS the services should enable the service receiver to carry out services by obtaining the technical knowledge/ experience/ skill possessed by the service provider.
• It is possible that service provider may utilise its own technical knowledge in providing the services but that in itself would not render the services being treated as making available to the service receiver.
• If the twin test envisaged in the judgement of De Beers India Minerals (P) Ltd. (346ITR467) is applied to the facts of the case it has to be held that on perusal of the contracts, entered into by the assessee with JTPCL, reveal that the services provided by it under the contracts did not in any way make available technical knowledge and experience skill or know-how to the Indian Company. It had supplied the equipments to Indian company outside India, so the payments made by JTPCL to the assessee would not constitute FIS, as per Article 12 of the Treaty.

Galatea Ltd. vs. Deputy Commissioner of Income-tax [2016] 67 taxmann.com 190 (Mumbai - Trib.) dated 24th February 2016

Facts of the case:

 • The assessee was a company incorporated under the laws of Israel and was tax resident of Israel. It had no business connection in India, nor did it have any P.E. in India.
• The assessee sold to its customers machines and operating software in India. The invoice involved consideration separately for the machine and operating software hence some customers deducted TDS from the payment, treating the same as \'Royalty\' under article 12(3) of the Israel tax treaty.
• However, the assessee was of the view that the aforesaid payments made by the customers did not constitute \'Royalty\', under the Israel tax treaty and the tax was wrongly withheld by the customers, accordingly, it filed its return of income for the impugned assessment year at nil and claimed refund of the tax withheld/deducted by its customers.
• The Assessing Officer treated the same as taxable in the hands of the assessee in India considering the provision of section 9(1) (vi) of the Act.
• The DRP upheld the action of the Assessing Officer without giving any relief to assessee. So the assessee appealed to the Mumbai tribunal.

Issue:

• Whether the sale of operating software is considered as Royalty under article 12(3) of the Isreal tax treaty and the tax deducted was justified?

Held:

• ITAT considered that the undisputed facts are that none of the customers have purchased only machine or only software. The machine sold by the assessee could not be made operational or functional in the absence of operating software along with the application software. The software supplied by the assessee to end user was for integration with the machine supplied by the assessee and that this software had no other independent use as such, except to enable such machine to function. The software supplied by the assessee was meant only and exclusively for the purpose of making the said machine functional.
• Thus, it has to be treated as transaction of sale of machine in the hands of the assessee and the amount bifurcated for software cannot be treated differently as consideration in the nature of \'Royalty\' as envisaged under section 9(1) (vi) and since the assessee has no P.E. in India, as per admitted facts on record, the amount of profit arising on receipt of sale consideration of machine would not be liable to be taxed in its hands in India.
• In the result the appeal of the assessee is allowed.

EXIDE INDUSTRIES LTD KOLKATA Vs DCIT CIRCLE -1 [2016-TII-48-ITAT-KOL-INTL] Dated: 2nd March, 2016

Facts of the case:

 • The assessee is engaged in the business of manufacturing and trading of storage batters and accessories thereof. During the concerned year, the assessee had paid royalty and consultancy fees to a Japanese entity in respect of which tax was not deducted and deposited as per the provisions of section 195. Such fact was disclosed in Clause 17(i) of the tax audit report as well. The said sum was debited in the P/L A/c and claimed as deduction while computing income from business.
• According to the Assessee in respect of the payment in question, there was no liability to deduct TDS and therefore no disallowance u/s 40(a)(i) could be made. By applying the principle of non-discrimination as per Article 24 of the India-Japan DTAA, there could be no disallowance u/s 40(a) (i).
• The AO rejected the claim of the assessee by simply stating that Indo-Japan DTAA was in force since 07-03-1989 and the assessee all across offered similar amount of royalty and technical service to tax. Since this treaty was effective since March 1989, there was no occasion to claim allowability of royalty/technical service by make a new interpretation of the said treaty. Further, no-where it was specifically mention in the tax treaty that such fees was allowable irrespective of tax being deducted or not.
• On appeal, the CIT (A) held that as per the section 40(a) (i), if the tax was not deducted on the amount of technical services or royalty payable to a non-resident, the same had to be disallowed. Hence the CIT (A) confirmed the view taken by the AO.
• Aggrieved by the decision of the orders passed by the CIT (A), the assessee filed an appeal with the Tribunal.

Issue:

 • Whether royalty payments to non-residents can be disallowed in the hands of assessee u/s 40(a) (i) in view of Article 24 of the Indo Japan DTAA, when the similar payments made to residents is not disallowed in the hands of the assessee for non-deduction of TDS?

Held:

 • At the time of hearing it was brought to the notice of the Tribunal that the same issue has already been decided in assesse\'s own case, wherein it was held that the stand of the assessee was that since disallowance on account of non-deduction of tax at source from payments of similar nature made to a resident was liable to be made under Income tax Act, the disallowance u/s 40(a)(ia) on account of non deduction of tax from similar payments made to a non-resident could not be made as it would result in discrimination.
• The Tribunal has observed therein that since royalty payments to residents could not be disallowed for non-deduction of taxes, similar payments made to non-residents could not be disallowed in the hands of the assessee u/s 40(a)(i) as per provision of Article 24 of Indo-Japanese DTAA, it deleted the disallowance made by the AO. Therefore, it directed that disallowance u/s 40(a)(ia) be deleted.
• In the result the appeal of the assessee is allowed.