Income Tax Appellate Tribunal - Delhi
Anand Nvh Products Inc., Gurgaon vs Acit, Circle Int. Tax. 1(1)(1), Delhi on 30 September, 2022
IN THE INCOME TAX APPELLATE TRIBUNAL,
DELHI BENCH: 'D' NEW DELHI
BEFORESHRI SAKTIJIT DEY, JUDICIAL MEMBER
AND
DR. B.R.R. KUMAR, ACCOUNTANT MEMBER
ITA No.1951/Del/2021
Assessment Year: 2017-18
Anand NVH Products Inc., Vs. ACIT,
H. No. 2, A-13, Street DLF Circle-1(1)(1), Intl. Taxation,
City, Phase-1, Gurgaon, Delhi
Haryana
PAN :AANCA0370P
(Appellant) (Respondent)
Appellant by Sh. MukeshButani, Advocate
Sh. SaurabhNandy, Advocate
Ms. NikkyJhamtani, CA
Respondent by Mrs. Sapna Bhatia, CIT (DR)
Date of hearing 05.07.2022
Date of pronouncement 30.09.2022
ORDER
PERSAKTIJIT DEY, JM:
Captioned appeal has been filed by the assessee assailing the final assessment order dated 28.10.2021 passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (for short 'the Act') pertaining to assessment year 2017-18, in pursuance to the directions of learned Dispute Resolution Panel (DRP).ITA No.1951/Del/2021
AY: 2017-18
2. The core issue arising for consideration in this appeal is, whether the amount received by the assessee towards provision of Marketing Support Services (MSS) is in the nature of Fee for Technical Services (FTS)/Fee for Included Services (FIS) under section 9(1)(vii) of the Act and Article 12(4)(b) of India - USA Double Taxation Avoidance Agreement (DTAA), respectively.
3. Briefly the facts are, the assessee is a non-resident corporate entity incorporated in the United States of America (USA). The assessee is a subsidiary of Anand NVH Products Pvt. Ltd. (Anand, India), an Indian Company. Basic activity of the assessee is providing marketing support services to its parent company in India in terms with marketing support services agreement executed on 15.10.2014. In the year under consideration, the assessee received an amount of Rs.5,91,71,530/- from the parent company in India towards provision of marketing support services. Before the Assessing Officer, the assesse submitted that the amount received under the marketing support services agreement, being in the nature of business profit, is not taxable in India in absence of a permanent establishment (PE).The Assessing Officer, however, was not convinced with the submission of the assessee. After analyzing the terms of the
2|Page ITA No.1951/Del/2021 AY: 2017-18 marketing support services agreement he was of the view that the services rendered by the assessee to the parent company in India are in the nature of consultancy services,as, they relate to matters of strategic and operational importance and has helped the parent company in expanding its business. Further, he observed, while providing such services the 'make available' condition in terms with Article 12(4)(b) of the Tax Treaty is also satisfied. Thus, he concluded that the amount received by the assessee from provision of marketing support services to the parent company is in the nature of FIS under Article 12(4)(b) of the Tax Treaty. Accordingly, he added back the amount to the income of the assessee and brought it to tax while proposing a draft assessment order. Against the draft assessment order, the assessee raised objections before learned DRP. However, learned DRP concurred with the view expressed by the Assessing Officer. Further, learned DRP negated assessee's contention that the income earned by the assessee from the provision of marketing support services, having earned in USA, would fall within the exceptions provided under section 9(1)(vii)(b) of the Act.
4. Before us, learned counsel appearing for the assessee submitted, the assessee, being a tax resident of USA, is entitled to
3|Page ITA No.1951/Del/2021 AY: 2017-18 claim benefit under the Tax Treaty. Drawing our attention to the scope of services to be provided by assessee to its parent company, he submitted that none of the services rendered by the assessee to the parent company can be categorized, either as technical or consultancy services. He submitted, the services rendered are purely on the basis of a commercial agreement and there is no express or implied reference to any transfer of technical knowledge, or experience, or skill etc. Elaborating further, he submitted, the services are performed as a service for commercial knowledge as well as regulatory aspect governing the USA market and by no stretch of imagination it can be construed as transfer of technical know-how, experience or skill to the employees of the parent company in India, who in any case do not possess the required experience relevant to the USA market.
5. Drawing our attention to the technical explanation to Article 12(4)(b) of the Tax Treaty, as contained in the Memorandum of Understanding (MoU) annexed to the Tax Treaty, he submitted, FIS excludes any service that does not make technical know-how available to the persons acquiring the service. Thus, he submitted, even assuming but not accepting that the services rendered are in the nature of consultancy services, however,
4|Page ITA No.1951/Del/2021 AY: 2017-18 unless the assessee makes available the technical knowledge, know-how, experience or skill etc. to the recipient of such service, it will not fall within the category of FIS under Article 12(4)(b) of the Tax Treaty. He submitted, in the facts of the present appeal, the department has failed to establish that the assesse has made available technical know-how, knowledge, experience, skill etc. to the recipient of such services, which has enabled the recipient to utilize the same independently without having to depend upon the service provider. Thus, he submitted, the amount received by the assessee from the provision of marketing support services does not qualify as FIS under Article 12(4)(b) of the Tax Treaty. In support of such contention, he relied upon the following decisions:
1. DIT Vs. Guy Carpenter & Co. Ltd. [2012] 18 ITR 333 (Delhi High Court)
2. CIT Vs. De Beers India Minerals (P) Ltd., 346 ITR 467 (Kar.)
3. Fractal Analytics Pvt. Ltd. Vs. DCIT, ITA No. 3511/Mum/2015.
4. DCIT Vs. Forum Homes (P.) Ltd., [2021] 132 taxmann.com 223 (Mumbai -Trib.)
5. H.J. Beinz Company Vs. ADIT, [2019] 108 taxman.com 473
6. Without prejudice, he submitted, the assessee had also earned revenue from provision of marketing support services under the very same marketing support service agreement in assessment year 2016-17. He submitted, while considering the
5|Page ITA No.1951/Del/2021 AY: 2017-18 issue of taxability of the amount received towards marketing support services in assessment year 2016-17, the Assessing Officer has accepted that it is not in the nature of FTS/FIS. Thus, he submitted, facts being identical, there was no justifiable reason for the Assessing Officer to taken a divergent view in the impugned assessment year, as, he should have followed the rule of consistency. In support, he relied upon the decision of the Hon'ble Supreme Court in case of RadhaswamiSatsangVs. CIT, 193 ITR 321.
7. Strongly relying upon the observations of the Assessing Officer and learned DRP, learned Departmental Representative submitted, the services rendered by the assessee are in the nature of consultancy services, as, such services have enabled the parent company in India to not only expand its business in overseas market but has also given an enduring benefit. Thus, he submitted, conditions of FIS as per Article 12(4)(b) is fully satisfied,as, while providing the consultancy services the assessee has also made available the technical know-how, experience, skill, etc. to the parent company.
8. We have considered rival submissions and perused the materials on record. We have also applied our mind to the
6|Page ITA No.1951/Del/2021 AY: 2017-18 decisions cited before us. As discussed earlier, the assessee before us is a wholly owned subsidiary of an Indian entity, viz., Anand NVH Products Pvt. Ltd. The parent company in India manufactures anti-vibration rubber moulded and rubber to metal bonded parts needed for heavy commercial vehicles, light commercial vehicles and passenger car segments. The Indian entity exports its manufactured products to customers situated in USA. As observed by the Assessing Officer, the assessee provides marketing and sales support services to its parent company with all its operations exclusively in USA. For this purpose, the assessee and its parent company have entered into an marketing support services agreement on 15th October, 2014, effective from 26th September, 2014. The scope of service to be provided by the assessee to the parent company as per the marketing support services agreement are as under:
1. Conducting Market Research on the products of the Service Recipient.
2. Keeping the Service Recipient apprised of governmental, business and regulatory developments in the USA, that may impact the Service Recipient's business interests.
3. Gathering information as to the adaptability of the Service Recipient's products, with respect to the target market in USA;
4. Providing expert advice on developing the Service Recipient's marketing strategy and marketing campaigns.
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5. Attending meetings/conference call/video conference for the promotion of the Service Recipient's products;
6. Providing management of the Service Recipient with relevant, reliable, valid, and current information with regard to the products of the Service recipient and with regard to the US market;
7. Gathering the necessary data and analysing and interpreting the information that has been gathered to enhance the marketability of the Service Recipient's products.
9. It is the case of the assessee that the services provided to the parent company are not in the nature of either technical or consultancy services and, even if they are, they do not make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design to the recipient of service. Therefore, it cannot be treated as FIS under section 12(4)(b) of the Tax Treaty. However, the departmental authorities have rejected assessee's claim on both counts. Undisputedly, the assessee is a tax resident of USA, hence, the beneficial provisions of India - USA DTAA would be applicable to the assessee. Keeping in perspective, the aforesaid factual position,it has to be examined, whether the consideration received by the assessee from the provision of marketing support services would amount to FIS
8|Page ITA No.1951/Del/2021 AY: 2017-18 under Article 12(4) of India - USA DTAA. For ready reference, Article 12(4) of India - USA DTAA is reproduced hereunder:
"4. For purposes of this Article, "fees 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 a technical plan or technical design."
10. On a careful reading of Article 12(4), it becomes clear that it defines the term FIS to mean payment received in consideration of rendering of any technical or consultancy services, firstly, if they are ancillary and subsidiary to the application or enjoyment of the right, property, or information for which the payment is received, and, secondly, if they make available technical knowledge, experience, skill, know-how, or processes, or consist of a development or transfer of a technical plan or technical design. In the facts of the present appeal, it is nobody's case that the consideration falls under Article 12(4)(a) of the Tax Treaty. Therefore, we have to examine, whether the consideration received falls within the scope and ambit of Article 12(4)(b). From the scope of services under the marketing support service
9|Page ITA No.1951/Del/2021 AY: 2017-18 agreement as enumerated elsewhere in the order, it can be seen, the services are basically in the nature of market survey and market research for the products of the parent company and getting information regarding the regulatory measures in USA. The scope of services also provide for expert advice on developing market strategy and marketing campaign, attending meetings, conference etc. for the promotion of parent company's products, providing relevant reliable and current information with regard to the products of parent company with regard to USA market and gathering data for enhancing the marketability of parent company products. However, they are not of the nature to term them as either technical or consultancy services. Even assuming that some amount of consultancy is involved, however, the question which begs an answer is whether, make available condition of Article 12(4)(b) is satisfied. Article 12(4)(b) provides that a consideration received from provision of technical or consultancy services can be treated as FIS only when it makes available technical knowledge, experience, skill, know-how or processes to the service recipient.
11. The term 'make available' has been interpreted in various judicial precedents to mean that there must be a transfer of 10 | P a g e ITA No.1951/Del/2021 AY: 2017-18 technical knowledge, experience, skill, know-how etc. from the service provider to service recipient in a manner so as to enable the service recipient to perform such services in future independently without any aid and assistance of the service provider. Nothing has been brought on record by the departmental authorities to demonstrate that there is complete transfer of technical knowledge, know-how, skill etc. to the recipient of service so as to enable him to use such technical know-how, knowledge, experience, skill etc. independently without the aid and assistance of the service provider. The reasoning based on which, the departmental authorities have proceeded to treat the consideration received as FIS is, provision of such services has resulted in enduring benefit to the parent company. The aforesaid interpretation of the departmental authorities is an antithesis to the interpretation given to the term 'make available' by various judicial authorities. The decisions relied upon by learned counsel appearing for the assessee clearly support this view.
12. It is also relevant to observe, while considering identical issue arising out of the very same marketing support service agreement in assessment year 2016-17, the Assessing Officer 11 | P a g e ITA No.1951/Del/2021 AY: 2017-18 himself in an assessment completed under section 143(3) of the Act has accepted assessee's claim that consideration received is not in the nature of FIS. Thus, in view of the aforesaid, we hold that the services provided by the assessee under the marketing support service agreement are neither in the nature of technical or consultancy services under Article 12(4) of India - USA Tax Treaty. Even, assuming that it is in the nature of consultancy services, however, the 'make available' condition provided under Article 12(4)(b) of the Tax Treaty is not satisfied. That being the case, the consideration received cannot be treated as FIS under Article 12(4)(b) of the Tax Treaty. Accordingly, we delete the addition made by the Assessing Officer.
13. In view of our decision, as aforesaid, ground no. 6, having become infructuous, is dismissed.
14. Ground nos. 7 and 8, being consequential in nature, are also dismissed.
15. In the result, appeal is partly allowed, as indicated above.
Order pronounced in the open courton 30th September, 2022 Sd/- Sd/-
(DR. B.R.R. KUMAR) (SAKTIJIT DEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
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ITA No.1951/Del/2021
AY: 2017-18
Dated: 30th September, 2022.
RK/-
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asst. Registrar, ITAT, New Delhi
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