Income Tax Appellate Tribunal - Pune
Sandvik Ab, Pune vs Assessee on 22 May, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
Before Shri R.K. Panda, Accountant Member
and Shri Vikas Awasthy, Judicial Member
ITA No.47/PN/2013
(Assessment Year : 2008-09)
M/s. Sandvik AB,
C/o. Sandvik Asia Private Limited,
Mumbai-Pune Road,
Dapodi, Pune - 411012
PAN No.AAHCS7486E .. Applicant
Vs.
DDIT (International Traction)-II,
Pune .. Respondent
Applicant by : Shri Danesh Bafna
Department by : Shri A.K. Modi
Date of Hearing : 20-05-2015
Date of Pronouncement : 22-05-2015
ORDER
PER R.K. PANDA, AM :
This appeal filed by the assessee is directed against the order dated 27-10-2012 passed u/s.143(3) r.w.s.144C(13) of the DDIT (IT)-II, Pune relating to Assessment Year 2008-09.
2. Facts of the case, in brief, are that the assessee (Sandvik AB) filed its return of income on 30-09-2008 declaring NIL total income. The Assessing Officer referred the matter to the DCIT (Transfer Pricing-IV), Pune u/s.92CA(1) of the I.T. Act for computation of the Arm's Length Price in respect of the international transactions. The TPO vide order dated 31-10-2011 passed u/s.92CA(3) accepted the computation of the Arm's Length Price and did not disturb the TP study of the assessee.
23. The Assessing Officer during the course of assessment proceedings noted that the assessee is a non-resident company incorporated in Sweden. During the impugned assessment year it has received "Management Service Fee" of Rs.7,20,33,841/- from Sandvik Asia Pvt. Ltd., and Rs.1,39,68,410/- from Walter Tools India Pvt. Ltd. In the draft assessment order passed on 26-12- 2011 u/s.143(3) r.w.s.144C addition of Rs.8,60,02,251/- was made by treating the amount received on rendering management services taxable as fees from technical services.
4. Before DRP the assessee submitted that the assessee provides management services to Sandvik Asia Private Limited and Walter Tools India Private Limited in accordance with the Management Services Agreement entered into with these group companies. These services are in the nature of commercial, management, marketing and administrative services. The specification of the services to be provided and the principles of allocating the cost of such services are updated on the intranet annually.
4.1 It was submitted that the purpose of the activities undertaken under the Agreement is to give direction or guidance to various group companies as a whole so that they adopt or follow standard procedures or templates in various matters. By virtue of such managerial intervention, common benefit accrues to the group companies and it is expected that their level of performance will improve. These are non-technical services and are availed by group companies with the intention of carrying on business in line with the best practices followed by Sandvik group.
34.2 It was submitted that as specified in the Agreement, the assessee is a central hub of knowledge relating to the business strategy and Sandvik group policies. The benefit of the same is shared between the group companies to improve the quality of performance and achieve cost rationalisation. The services are not "a one off transaction" but are meant to support SAPL's and WTTPL's functioning on a continuous basis. A fee, based on the actual cost incurred plus a mark- up of 4% is charged for these services and the principles of allocation of the costs are communicated annually.
4.3 The assessee explained in detail that services rendered by it consist of management services, business processes, manufacturing, quality control, logistics and development, marketing, sal support, promotion, human resources, IT support etc. The AO taxed the consideration received for services rendered by it as fees for technical services under Article 12 of India-Sweden Tax Treaty. The AO has stated that Article 12 includes managerial, technical or consultancy services. The services rendered by the assessee are in the nature of managerial and consultancy services. Accordingly, the AO taxed 8.6cr received by the assessee-company.
4.4 The assessee stated that the above payment is not taxable in view of the protocol to DTAA between India and Sweden on Article 12. This protocol provides that incase India enters into any agreement, convention or protocol with a third state, which is a member of OECD and India limits its taxation at source on dividends , interest, royalties or fees for technical services to a rate lower or a scope more restricted then the rate or scope provided for in this convention on the said items of income. The 4 same rate or scope as provided for in that convention or protocol on the said items of income shall also apply under this convention.
4.5 The assessee further stated that in view of the above, the income will not be taxable as DTAA between India and Portugal is more restricted in scope of FTS. Article 12 on 'fees for technical services' in India-Portugal DTAA has 'make available' clause. The services provided by the assessee company were managerial in nature and hence are non-technical. In this connection, the assessee relied on the decision of DCIT Vs Boston Consulting Group Pvt. Ltd 2005 93 TTJ 293 (Mum) wherein it was held that devising, marketing and sales strategies , business strategy and portfolio strategy etc. are not covered under Article 124(b) of India-Singapore DTAA since these services are not technical in nature.
4.6 Relying on various decisions it was submitted that the services rendered by it do not satisfy the make available condition. It was submitted that the term 'make available' has been discussed in detail in • Memorandum of Understanding (MOU) to India -US DTAA • Technical explanation to India-US DTAA • Explanatory Memorandum to India-Australia DTAA 4.7 The assessee submitted that the services rendered by it are essentially "managerial services" to support the day-to-day functioning of the group entities and to share benefit of specialisation to improve quality of performance of the group entities. The definition of fees for technical services in the DTAA between India and Portugal does not cover managerial services.
5Hence, the receipts for such services are not taxable in India.
Therefore, the addition proposed by the AO may be reversed.
5. However, the DRP was also not satisfied with the arguments advanced by the assessee. They observed that the management service agreement between the assessee company and Sandvik Asia Ltd. and between the assessee company and Walter Tools India Private Limited are identical. The DRP referred to the clauses related to 'services' as contained in the agreement which are as under :
"2.1. The Providing Party shall form time to time at the request of the Receiving Party provide the Receiving Party with all or any of the Services under the terms set out in this Service Agreement.
2.2 The Providing Party agrees to perform the Services with reasonable care and skill and within a reasonable time.
2.3. The Providing Party will provide the relevant Services through correspondence, telephone, periodic visits of personnel and other means agreed on from time to time with the Receiving Party.
2.4 This Service Agreement does not apply to activities performed by the Providing Party that constitutes stewardship or control services vis-a-vis the Receiving Party or that is in any other way based on the shareholder- corporation relationship due to the Providing Party's holding of a direct or indirect participation in the Receiving Party."
5.1 They observed that the terms "service" is defined in the definition clause of the agreement which reads as under :
'the support services listed in Schedule 2 of the agreement as may be amended from time to time by the agreement of the parties'.
5.2 They also reproduced the schedule-2 of the agreement which reads as under :
"As specification of the Services provided and of the principles for allocating the costs of such services to the Receiving Party will be updated annually and will be distributed and/or be made available at Sandik's Intranet to the contact persons indicated in Schedule 1 above.6
All information distributed or made available in pursuance to this Schedule 2 constitute Restricted Information."
5.3 The contention of the assessee before the DRP that the nature of the services provided were of managerial services was not accepted by the DRP on the ground that the contention of the assessee is not borne out from the terms of the agreement.
Although the title of the agreement is of managerial service agreement, however, the DRP noted that the nomenclature given by the parties is not determinative of real nature of the transactions. Since the agreement according to the DRP does not list any services provided by the assessee so as to treat the same as managerial service, therefore, the DRP did not accept the contention of the assessee that the services rendered are of marketing, manufacturing and human resources and information technology functions. In view of lack of clarity on part of the assessee to establish that the services rendered by it are eligible for the beneficiary class under India-Portugal treaty, the DRP declined to interfere with the order passed by the Assessing Officer.
6. Based on the order of the DRP the Assessing Officer in the order passed u/s.143(3) r.w.s. 144C(13) on 27-10-2012 made addition of Rs.8,60,02,251/- being income from FTS.
7. Aggrieved with such order of the Assessing Officer the assessee is in appeal before us with the following grounds :
"On the facts and circumstances of the case, and in law;
1. The Ld. Assessing Officer and the Ld. DRP has erred in holding that the Management Service Fees ('MSF') of INR 86,002,251 received by the Appellant, is taxable in India as 'Fees for Technical Services' ('FTS') within the meaning of Article 12 of the India-Sweden read with the protocol thereto.7
2. The Learned ('Ld') Assessing Officer has erred in denying applicability of Double Taxation Avoidance Agreement ('DTAA') between India and Portuguese via the protocol attached to DTAA between India and Sweden, by erroneously misplacing reliance on the AAR decision in the case of Perfetti Van Melle Holdings BV (AAR No 869 of 2010).
3. The Ld. Dispute Resolution Panel ('DRP') has grossly erred in concluding that the Appellant was not able to establish whether the illustrative services rendered were pursuant to Management services Agreement (the 'Agreement') between the appellant and its Indian affiliate and hence erred by declining to interfere with the order of the Ld. Assessing Officer."
8. The Ld. Counsel for the assessee at the outset filed a copy of the order of the Tribunal in assessee's own case for A.Y. 2007- 08 vide ITA No.1720/PN/2011 order dated 28-11-2014 and submitted that under identical circumstances the Tribunal has held that on the principle of the most favoured nation clause the payment received by the assessee company from its Indian subsidiaries cannot be brought to tax. Referring to the list of services for A.Y. 2007-08 and 2008-09 he submitted that the nature of services are identical. He accordingly submitted that in view of the decision of the Tribunal in assessee's own case in the immediately preceding assessment year the addition made by the Assessing Officer should be deleted.
9. The Ld. Departmental Representative on the other hand while supporting the order of the Assessing Officer fairly conceded that the Tribunal has decided the issue in favour of the assessee.
10. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer/ DRP and the and the Paper Book filed on behalf of the assessee. We find the Tribunal in assessee's own case in the immediately preceding assessment year while deciding an identical issue has held that 8 on the principle of most favoured nation clause the payment received by the assessee company from its Indian subsidiaries cannot be brought to tax. The relevant observation of Tribunal from para 8 to 13 of the read as under :
"8. We have heard the rival submissions of the parties and have also considered the written submissions and the precedents and decisions relied on by both the parties. The assessee is tax resident of Sweden. It is claimed that that it does not have a permanent place of business in India (PE). The dispute is in respect of the payment of Rs.5.9 Crores received by the assessee company from its Indian subsidies i.e. Sandvik Asia Pvt. Ltd. (SAPL) and WTIPL. The claim of the assessee is that the assessee received the said payment from its Indian subsidies for rendering the services which are in the nature of commercial, management, marketing and production services. The nature of the services as per the agreement are already mentioned here-in-above. In this case there is no dispute about the legal position that the amount received by the assessee from its Indian subsidies is taxable in India under normal provisions of Act more particularly u/s.
9(1)(vii) r.w.s. 5(2) of the Income-tax Act. The main plank of the argument of the Ld. Counsel is that when the assessee is covered by the beneficial clauses in the treaty entered into as per the provisions of Sec. 90 (2) of the Income-tax Act then even if the assessee's income is taxable in the normal provisions still he can claim the exemption from the tax as per the clauses applicable in the treaty.
8.1 Ld. Counsel argues that the above payment received by the assessee company is not taxable in India in view of the beneficial provisions of the tax treaty between India and Sweden read with the protocol which is integral part of said treaty. He submits that the provisions of tax treaty between India and Sweden read with the protocol relating to the scope and taxation of fees for technical services being more beneficial than the correspondence provisions of the Income-tax Act hence, the assessee may be given the benefit of the treaty between India- Portugal on the basis of Protocol. He submits that without admitting even if the amount received by the assessee is in the nature of fees for technical services (FTS) but going on the principles of most favoured nation (MFN) clause in the protocol attached to the DTAA between India and Sweden, the assessee can claim the exemption from tax in India because subsequently the India has also entered into DTAA with Portugal which is also member of the OECD and fees for technical services are not taxable unless the condition of make available is fulfilled.
8.2 Ld. Counsel placed heavy reliance on the decision of the Hon'ble High Court of Karnataka in the case of CIT, Central Circle, Bangalore and another vs. M/s. De Beers India Minerals Pvt. Ltd. 340 ITR 467 (Kar) and Bharati Axa General Insurance Co. Ltd. Vs. DIT 326 ITR 477. He referred to the assessment order and submits that Assessing Officer has impliedly accepted that the tax treaty between India-Portugal can be applied to the assessee more particularly in the context of the protocol attached to the India and Sweden treaty. There is condition for beginning to tax the fees for technical services (FTS) in the DTAA between India and Portuguese i.e make available and if said condition is not fulfilled in source Country FTS cannot be taxed. The assessee is to be given the benefit of the India-Portuguese treaty 9 on principle of MFN clause which is well recognized in international taxation. He submits that the identical issue has come for the consideration by the ITAT, Pune in the case of Sandvik Australia Pty. Ltd. Vs. D.D.I -International Tax-II, Pune in ITA No. 93/PN/2011 and the assessee's case is squarely covered on the interpretation of a expression-"make available". Per contra, the Ld. DR relied on the written submissions.
9. In this case the only issue to be considered by us is whether the assessee can be given benefit of India-Portuguese treaty on principle of MFN clause? The India entered into DTAA with the Sweden which was notified vide notification no. GR 705/E dated 17.12.1997. Article 12 of the India-Sweden DTAA provides the mode of taxation of the royalties and fees for technical services whether the same are to be taxed in the source country or in the residence country. The definition of the fees for technical services (FTS) is given in Article 12(3)(b) of the Act. It is true that it is a very conservative definition and there is no condition that the technical services should be made available. The India also entered into the treaty with Portuguese republic which was notified vide notification no. GR F42/E dated 16th June, 2000. In the said Treaty, mode of taxation of the fees for technical services (FTS) between two countries is also provided in the Article 12 but instead of fees for technical services the expression used is "fees for included technical services". As per the Article 12(4) fees for included services means payment of fees of any kind other than those mentioned in article 14 and 15 of the said treaty, to any person in consideration of the rendering of any technical or consultancy services (including through the provisions of services of technical or other personal) if such services -
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment describe in para no. 3 is received or
(b) make available technical knowledge, expressions, skill, knowhow or process, or consist of the development and transfer of technical plan or technical design which enables the person acquiring the services to apply the technology contained therein.
The main plank of the argument of the Ld. Counsel is that considering the principle of most favoured nation (MFN) clause in treaty between India and Portuguese unless a condition of make available the technical knowledge or skill or services is fulfilled then said payment cannot be taxed in source country i.e. India.
10. In the case of Sandvik Australia Pty. Ltd. (supra) and following the decision in the case of M/s. De Beers India Minerals Pvt. Ltd. (supra) on the expression "make available" it is held as under "12. The Assessing Officer has already reproduced Article 12 of the India Australia Treaty in his draft assessment order and he has interpreted that as per the Treaty FTS means payment of any kind to any person in consideration for the rendering of any technical or consultancy services if such services make available technical knowledge, experience, skill, know-how or process or consists of development and data of technical plan or technical design. In view of the above rendered by the assessee company to its Indian affiliates are in the nature of FTS or royalties and same is taxable in India. We reproduce herein under the relevant part of Article 12:
10ARTICLE XII - Royalties - 1. Royalties arising in one of the Contracting States, being royalties to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State.
2. Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but the tax so charged shall not exceed:
(a) in the case of :
(i) royalties referred to in sub-paragraph (3)(b) ;
(ii) payments or credits for services referred to in sub- paragraph (3)(d), subject to sub-paragraphs (3)(h) to (l), that are ancillary and subsidiary to the application or enjoyment of equipment for which payments or credits are made under sub-paragraph (3)(b); or
(iii) royalties referred to in sub-paragraph (3)(f) that relate to equipment mentioned in sub-paragraph (3)(b);
10 per cent of the gross amount of the royalties; and
(b) in the case of other royalties :
(i) during the first 5 years of income for which this Agreement has effect :
(a) where the payer is the Government or a political sub-division of that State or a public sector company: 15 per cent of the gross amount of the royalties; and
(b) in all other cases: 20 per cent of the gross amount of the royalties; and
(ii) during all subsequent years of income: 15 per cent of the gross amount of the royalties.
3. The term "royalties" in this Article means payments or credits, whether periodical or not, and however described or computed, to the extent to which they are made as consideration for :
(a) the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trade mark or other like property or right;
(b) the use of, or the right to use, any industrial, commercial or scientific equipment;
(c) the supply of scientific, technical, industrial or commercial knowledge or information;
(d) the rendering of any technical or consultancy services (including those of technical or other personnel) which are ancillary and subsidiary to the application or enjoyment of any such property or right as is mentioned in sub-paragraph (a), or any such equipment as is mentioned in sub-paragraph (b) or any such knowledge or information as is mentioned in sub-paragraph (c);
(e) the use of, or the right to use :
11
(i) motion picture films;
(ii) films or video tapes for use in connection with television; or
(iii) tapes for use in connection with radio broadcasting;
(f) total or partial forbearance in respect of the use or supply of any property or right referred to in sub-paragraphs
(a) to (e);
(g) the rendering of any services (including those of technical or other personnel), which make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or design; but that term does not include payments or credits relating to services mentioned in sub-paragraphs (d) and (g) that are made;
(h) for services that are ancillary and subsidiary, and inextricably and essentially linked, to a sale of property;
(i) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic;
(j) for teaching in or by an educational institution;
(k) for services for the personal use of the individual or individuals making the payments or credits; or
(l) to an employee of the person making the payments or credits or to any individual or firm of individuals (other than a company) for professional services as defined in Article 14.
4. The provisions of paragraphs (1) and (2) shall not apply if the person beneficially entitled to the royalties, being a resident of one of the Contracting States, carries on business in the other Contracting State, in which the royalties arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the property, right or services in respect of which the royalties are paid or credited are effectively connected with such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply.
5. Royalties shall be deemed to arise in a Contracting State when the payer is that State itself or a political sub-division or local authority of that State or a person who is a resident of that State for the purposes of its tax. Where, however, the person paying the royalties, whether the person is a resident of one of the Contracting States or not, has in one of the Contracting States or outside both Contracting States a permanent establishment or fixed base in connection with which the liability to pay the royalties was incurred, and the royalties are borne by the permanent establishment or fixed base, then the royalties shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.
126. Where, owing to a special relationship between the payer and the person beneficially entitled to the royalties, or between both of them, and some other person, the amount of the royalties paid or credited, having regard to what they are paid or credited for, exceeds the amount which might have been expected to have been agreed upon by the payer and the person so entitled in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case, the excess part of the amount of the royalties paid or credited shall remain taxable according to the law, relating to tax, of each Contracting State, but subject to the other provisions of this Agreement.
13. We are concerned with para No.3 of Article 12, which defines the term Royalty. Under the IT Act, the term royalty and expression FTS are classified as two different connotations, i.e. 9(1)(vi) and 9(1)(vii). So far as Article 12 is concerned, FTS is included in the term "royalty" for the purpose of deciding in which contracting state the income from the same is to be taxed. Clause (g) in Article 12(3) goes to the roots of the issue. Main thrust of the argument of the Ld. Counsel is that it is not only sufficient to render the services but the same should be made available to the recipient and this particular important aspect is missed by the DRP/TPO. We find that the expression "making available" is very much important to decide in which contracting state the amount received for rendering the services relating to the technical know-how is to be taxed. The expression "make available" is used in the context of supplying or transferring technical knowledge or technology to another. It is different than the mere obligation of the person rendering the services of that persons own technical knowledge or technology in performance of the services. The technology will be considered as made available when the person receiving the services is able to apply the technology by himself.
14. The expression 'make available' has come for consideration before the Hon'ble High Court of Karnataka in the case of M/s.De Beers India Minerals Pvt. Ltd. (supra). In the said case, the Treaty between India and Netherlands was for the consideration of their Lordships. The assessee in that appeal was a providing company engaged in the business of prospecting and mining for diamonds and other minerals. They have been granted licences (Reconnaissance Permits) by the State Government of Karnataka, Andhra Pradesh and Chhattisgarh. During the early stage, various techniques were employed for the purpose of carrying out geophysical survey, the assessee entered into agreement with M/s.Fugro Elbocon B.V. Netherlands, who had a team of experts specialised in air borne geophysical services for clients. For the technical services rendered by them the said assessee had paid consideration. The Assessing Officer applied Article 12 of the Indo-Netherlands Treaty and held that the same was taxable in the hands of the Netherlands Company. As the wordings of Article 12 in the Indo-Netherlands Treaty are analogous to Article 12 of the India Australia Treaty, as expression 'make available' is also used while determining fiscal jurisdiction of the contracting state, the Hon'ble High Court explained the meaning of the expression 'make available' which was appearing in the Indo-Netherlands Treaty, the Lordships explained the expression as under:
"13. Under the Act if the consideration paid for rendering technical services constitute income by way of fees for technical services, it is taxable. However, Article 12 of the aforesaid India- Netherlands Treaty defines fees for technical services for the purpose of Article 12 which deals with royalties and fees for 13 technical services. The fees for technical services means the payment of any amount to any person in consideration for rendering of any technical services only, if such services make available technical knowledge, expertise, skill, know-how or processes. If the technical knowledge expertise, skill, know how or process is not made available by the service provider, who has rendered technical service for the purpose of Article 12 of DTAA it would not constitute fees for technical services. To that extent the definition of fee for technical services found in the agreement is inconsistent with the definition of fees for technical services provided in Explanation 2 to clause (vii) of sub-section (1) of Section 9. In view of Section 90 the definition of fees for technical services contained in the agreement overrides the statutory provisions contained in the Act. In fact, the latest agreement between India and Singapore further clarifies this position, where they have explained the meaning of the word 'make available'. According to the aforesaid definition fees for technical service means payments of any kind to any person in consideration for services of technical nature if such services make available technical knowledge, experience, skill, know how or processes which enables the person acquiring the service to apply technology contained therein. Though this provision is not contained in India Netherlands Treaty, but virtue of Protocol in the agreement, Clause (iv)(2) reads as under:
"If after the signature of this convention under any Convention or Agreement between India and third State which is a member of the OECD India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention."
14. Therefore the Clause in Singapore agreement which explicitly makes it clear the meaning of the word 'make available', the said clause has to be applied, and to be read into this agreement also. Therefore, it follows that for attracting the liability to pay tax not only the services should be of technical in nature, but it should be made available to the person receiving the technical services. The technology will be considered 'made available' when the person who received service is enabled to apply the technology. The service provider in order to render technical services uses technical knowledge, experience, skill, know how or processes. To attract the tax liability, that technical knowledge, experience, skill, know how or process which is used by service provider to render technical service should also be made available to the recipient of the services, so that the recipient also acquires technical knowledge, experience, skill, know how or processes so as to render such technical Services. Once all such technology is made available it is open to the recipient of the service to make use of the said technology. The tax is not dependent on the use of the technology by the recipient. The recipient after receiving of technology may use or may not use the technology. It has no bearing on the taxability aspect is concerned. When the technical service is provided, that technical service is to be made use of by the recipient of the service in further conduct of his business. Merely because his business is dependent on the technical service which he receives from the service provider, it does not follow that he is making use of the technology which the service provider utilises for rendering technical services. The crux of the matter is after rendering of such technical services by the service provider, whether the 14 recipient is enabled to use the technology which the service provider had used. Therefore, unless the service provider makes available his technical knowledge, experience, skill, know how or process to the recipient of the technical service, in view of the Clauses in the DTAA, the liability to tax is not attracted."
11. Now, the next question is whether the assessee is entitled for the benefits of DTAA between India-Portuguese as second condition make available is not fulfilled. There is a Protocol to the treaty between India and Sweden which is as under:
At the signing of the Convention between the Government of the Republic of India and the Government of the Kingdom of Sweden for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital, the undersigned have agreed that the following shall form an integral part of the Convention :
With reference to Articles 10, 11 and 12 :
In respect of Articles 10 (Dividends), 11 (Interest) and 12 (Royalties and fees for technical services) if under any Convention. Agreement or Protocol between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, or fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items of income shall also apply under this Convention."
11.1 An MFN clause refers to a situation wherein two non-
resident tax payers are given impartial treatment by the concerned country. In DTAAs, MFN clause find place when countries are reluctant to forego their right to tax some elements of the income. An MFN clause can direct more favourable treatment available in other treaties only in regard to the same subject matter, the same category of matter or the same clause of the matter. The protocol attached to the treaty take care of a situation where in cases either of the contracting states enter into a bilateral agreement into the nature of DTAA with the another sovereign state and where the same subject matter has been given more favourable treatment by way of a definition or mode of tax then the parties can claim the benefit on the recognized principle of MFN clause. In his introduction to 'Double Taxation Conventions' (Third Edition) Klaus Vogel has explained the role of the protocol and its role in interpreting the treaty. The same has been considered by the ITAT, Calcutta in the case of DCIT V. ITC Ltd., 76 TTJ 323.
11.2 In the case of Maruti Udyog Ltd., Vs. ADIT reported in (2010) 37 DTR 85 (Delhi) explaining the scope of the protocol it is held as under :
"11.1 It is settled position in law that protocol is an indispensable part of the treaty with the same binding force as the main clauses therein, as protocol is an integral part of the treaty and its binding force is equal to that of the principal treaty. The provisions of the aforesaid DTAA are, therefore, required to be read with the protocol clauses and are subject to the provisions contained in such protocol. Examined in the light of DTAAs between India and UK, USA and Switzerland, we find that in the case before us the assessee had not purchased any property from UTAC France. Therefore, none of the fees i.e., 15 impact testing fees or fee paid for test reports is ancillary and subsidiary as well as inextricably and essentially linked to the sale of a property. Therefore, the decision of the Tribunal, Calcutta Bench in the case of Dy. CIT vs. ITC Ltd. (supra) relied upon by the assessee is not applicable to the facts of the case. In this case the assessee had purchased machines from UK and payments were made to foreign party for installation and commissioning of the machines. The foreign party did not have any PE in India to which such income could be attributed. In this view of the matter it was held that the payments made to foreign party for installation and commissioning of the machines were related to technical services, which were ancillary and subsidiary as well as inextricably and essentially linked to the sale of the property. Hence, the payments made to the foreign party were not liable to be taxed in India. In the decision relied upon by the assessee in the case of Raymond Ltd. vs. Dy. CIT (supra), it was held that no technical knowledge, experience, skills, know-how or process etc. was made available to the assessee company by the non-resident managers of the GDR issue within the meaning of art. 13(4)(c) of the DTAA. Likewise, decisions in the cases of Skycell Communications Ltd. (supra) and NQA Quality Systems Registrar Ltd. (supra) are distinguishable on facts, hence, are not applicable to the facts of the assessee's case."
11.3 It is also worthwhile to refer to the ruling given in the case of Authority for Advanced Ruling (AAA) in the case of Poonavala Aviations reported in 343 ITR 381 though it is having persuasive value which reads as under :
"16. In his introduction to Double Taxation Conventions (Third Edition), Klaus Vogel, has clarified the role of a protocol and its role in interpreting a treaty. He says, "Protocols and in some cases other completing documents are frequently attached to treaties. Such documents elaborate and complete the text of a treaty, sometimes even altering the text. Legally they are a part of the treaty, and their binding force is equal to that of the principal treaty text. When applying a tax treaty, therefore, it is necessary carefully to examine these additional documents". A protocol is said to be a treaty by itself that amends or supports the existing treaty. We cannot also forget the observations of the Supreme Court in Union of India vs. Azadi Bachao Andolan (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC) at p. 751 that "An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief, is that treaties are negotiated and entered into at a political level and have several considerations as their bases". So the argument of the Revenue that the protocol cannot be relied on to understand the scope of taxation cannot be accepted."
12. So far as the present case before us is concerned, on the basis of the protocol to the DTAA between the India and Sweden the assessee can claim the benefit of the conditions imposed for bringing to tax the fees for technical services in the treaty between the India and Portuguese. We, therefore, hold that on the principle of the most favoured nation (MFN) clauses the payment of Rs.5.93 Crores received by the assessee company from its Indian subsidies cannot be brought to tax. We, therefore, allow the grounds taken by the assessee on the above reasons."
1611. Since the nature of services provided by the assessee company to its affiliates during A.Y. 2007-08 and 2008-09 are similar, therefore, following the decision of the Tribunal in assessee's own case in the immediately preceding assessment year and in absence of any contrary material brought to our notice we hold that the Management Service Fees of INR 8,60,02,251/- received by the assessee is not taxable in India on the principle of most favoured nation clause. We hold and direct accordingly. The grounds raised by the assessee are accordingly allowed on the above reasons.
12. In the result, the appeal filed by the assessee is allowed.
Pronounced in the open court on 22-05-2015.
Sd/- Sd/-
(VIKAS AWASTHY) (R.K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
satish
Pune Dated: 22nd May, 2015
Copy of the order forwarded to :
1. Assessee
2. Department
3. DRP, Pune
4. The D.R, "B" Pune Bench
5. Guard File
By order
// True Copy //
Assistant Registrar
ITAT, Pune Benches, Pune