Income Tax Appellate Tribunal - Mumbai
Hsbc Bank Plc, Mumbai vs Dcit (It) 2(2)(2), Mumbai on 16 July, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "I", MUMBAI
BEFORE SHRI G.S. PANNU, VICE PRESIDENT AND
SHRI RAM LAL NEGI, JUDICIAL MEMBER
ITA NO. 7386/MUM/2016 : A.Y : 2011-12
HSBC Bank Plc Vs. DCIT (IT)-2(2)(2),
C/o SRBC & Associates LLP Mumbai. (Respondent)
14th floor, The Ruby,
29, Senapati Bapat Road,
Dadar (W), Mumbai 400 028.
PAN : AABCH3252P (Appellant)
Appellant by : Shri Farrokh Irani &
Shri Raunak Shah
Respondent by : Shri S. Anbuselvan &
Shri V.K. Chaturvedi
Date of Hearing : 28/06/2019
Date of Pronouncement : 16/07/2019
ORDER
PER G.S. PANNU, VICE PRESIDENT The captioned appeal by the assessee is directed against the order of CIT(A)-15, Mumbai dated 31.08.2016, pertaining to the Assessment Year 2011- 12, which in turn has arisen from the order dated 29.05.2015 passed by the Assessing Officer, Mumbai under Section 143(3) r.w.s 144C(3) of the Income-tax Act, 1961 (in short 'the Act').
2. In this appeal, assessee has raised the following Grounds of appeal :-
2 HSBC Bank Plc ITA No. 7386/Mum/2016 "1. The learned CIT(A) erred in treating the reimbursement of expenses amounting to Rs.1,41,81,052 incurred by the Appellant on behalf of HSBC Electronic Data Processing India Private Limited (HDP) as taxable in the hands of the Appellant.
Without prejudice to the above, the learned CIT(A) erred in confirming the addition by concluding that the aforesaid receipt of Rs.1,41,81,052 pertains to the IT related services being rendered by the appellant to HDPI during the year (in addition to Rs.1,65,58,163 already offered to tax by the Appellant as fees for technical services from HDPI towards IT related services)
2. The learned CIT(A) erred in treating the fee for the corporate finance and advisory services i.e. referral fee of Rs.3,12,93,500 received by the Appellant from HSBC Securities and Capital (India) Private Limited (HSCI) as taxable in the hands of the Appellant.
3. The learned CIT(A) erred in treating the protection fees of Rs.1,33,36,290 received by the Appellant from HSBC Asset Management India Private Limited (AMIN) as taxable in the hands of the Appellant.
4. The learned CIT(A) erred in levying the consequential interest under section 234B of the Act."
3. Briefly put, the relevant facts are that the appellant assessee is a company incorporated in the UK and is engaged in the business of providing banking and financial services to individuals and commercial organizations across the world. The assessee also provides support services such as Information Technology (IT), research support, global product management, etc., to its group entities and, it does not have any office or place of business in India. During the assessment proceedings, the Assessing Officer held that certain payments received, viz. (a) reimbursement of expenses; (b) referral fee; and, (c) protection fees from the Indian entity as 'Fees for Technical Services' under the Act as well as under provisions of India-UK Double Taxation Avoidance Agreement (DTAA). The stand of the assessee was that none of the 3 HSBC Bank Plc ITA No. 7386/Mum/2016 payments are covered by the definition of 'Fees for Technical Services' and that since the assessee did not have a Permanent Establishment (PE) in India, hence, such receipts are not taxable in India. This is the precise area of difference between the assessee and the Revenue, which is manifested in the Grounds of appeal enumerated above.
4. Ground of appeal no. 1 pertains to the action of Assessing Officer as well as CIT(A) in treating the reimbursement of expenses incurred by the assessee on behalf of HSBC Electronic Data Processing India Private Limited (HDPI) as taxable in the hands of the assessee. The assessee has submitted that the payment received by it from HDPI is mere cost reimbursement towards payments made by the assessee. The same do not represent the assessee's income and has no nexus to the IT enabled services being provided by the assessee to HDPI. In order to support its claim, the assessee filed sample copies of the invoices raised by the assessee on HDPI's UK Branch which pertains to cost reimbursements (i.e. reimbursement of payroll, rent, other miscellaneous expenses) and invoices raised by the assessee on HDPI for social security related payments of the seconded employee. Such reimbursement of expenses has no nexus with the IT related services rendered by the assessee to HDPI, which has been taxed in the hands of the assessee.
5. Before us, Learned Representative for the assessee referred to the documentation in respect of reimbursement of expenses, and also produced before us samples of supporting evidences in respect of each claim of reimbursement of expenses. He urged us to delete the disallowance made by the lower authorities by noting that the reimbursement of expenses received by the assessee, particularly on the facts of the case, cannot be treated as 4 HSBC Bank Plc ITA No. 7386/Mum/2016 income in the hands of the assessee. In support of his contentions, the Learned Representative relied on the following judgments :
i) DIT (IT) v. A P Moller Maersk AS, 392 ITR 186 (SC)
ii) CIT v. Siemens Aktiongeselschaft, 310 ITR 320 (Bom)
6. The ld. DR appearing for the Revenue, on the other hand, relied upon the orders of the authorities below and submitted that the onus is on the assessee to produce all the evidences of expenditure and that this onus is clearly not discharged by the assessee.
7. We have carefully considered the rival submissions and perused the material on record. We are inclined to uphold the grievance of the assessee. The reimbursement received by the assessee are in respect of specific and actual expenses incurred by the assessee and do not involve any mark-up and the assessee has furnished sufficient evidence to demonstrate the incurring of said expenses. There is thus, no good reason to make any addition to the income in respect of the reimbursement of expenses. The action of the CIT(A), as the Learned Representative rightly contends, is based on pure surmises and conjectures.
8. Here, we would also like to refer to the judgment of A P Moller Maersk AS (supra). In that case, issue related to a foreign company engaged in shipping business, which was a tax resident of Denmark; that it had agents working for it who booked cargo and acted as clearing agents for the assessee; and, that in order to help all its agents across the globe, the assessee had set up and maintained a global telecommunication facility called Maersk net system which was a vertically integrated communication system. The agents would pay for 5 HSBC Bank Plc ITA No. 7386/Mum/2016 the usage of system on a pro-rata basis. According to the assessee, it was merely a system of cost sharing and the payments received by the assessee from its agents in India were in the nature of reimbursement of expenses. The Assessing Officer, however, did not accept this contention and held that the amounts paid by the three agents to the assessee were in the nature of 'Fees for Technical Services' liable to tax in India under Article 13(4) of the Double Taxation Avoidance Agreement between India and Denmark; and, accordingly taxed it at 20% as per Section 115A of the Act. The Tribunal accepted the plea of the assessee and the Hon'ble High Court dismissed the Department's appeal holding that the Tribunal had rightly observed that the Maersk-net- communication-system was an automated software based communication system which did not require the assessee to render any technical services; that it was merely a cost sharing arrangement between the assessee and its agents to efficiently conduct its shipping business; and, that it was a part of the shipping business and could not be captured under any other provisions except under the DTAA. The Hon'ble High Court, dismissing the appeal of the Department, held as under:
"....... the facts that the assessee had its information technology system, that the assessee had appointed agents in various countries for booking of cargo and servicing customers in those countries, preparing documentation, etc., through these agents, that for the sake of convenience of all these agents, a centralised system was maintained to avoid unnecessary cost, that the system comprised booking and communication software, hardware and a data communications network and was, thus, an integral part of the international shipping business of the assessee and ran on a combination of mainframe and non-mainframe servers located in Denmark, that the expenditure incurred for running this business was shared by all the agents and that the systems enabled the agents to co-ordinate cargos and ports of call for its fleet were findings of fact. Once these were accepted, by no stretch of imagination, could the payments made by the agents be treated as fees for technical services.
6 HSBC Bank Plc ITA No. 7386/Mum/2016 The payments were in the nature of reimbursement of cost whereby the three agents paid their proportionate share of the expenses incurred on these said systems and for maintaining those systems. Neither the Assessing Officer nor the Commissioner (Appeals) had stated that there was any profit element embedded in the payments received by the assessee from its agents in India. Once the character of the payment was in the nature of reimbursement of the expenses, it could not be income chargeable to tax. Moreover, freight income generated by the assessee in the assessment years in question was accepted as not chargeable to tax as it arose from the operation of ships in international waters in terms of article 9 of the DTAA. Once that was accepted and it was also found that the Maersk net system was an integral part of the shipping business which was allowed to be used by the agents of the assessee as well in order to enable them to discharge their role more effectively as agents, and the business could not be conducted without it, it could not be treated as any technical services provided to the agents."
9. Quite clearly, payments by way of reimbursement of expenses incurred on behalf of the payer cannot be construed as income chargeable to tax in the hands of the payee, a proposition which is approved by the Hon'ble Bombay High Court in the case of Siemens Aktiongesellschaft (supra). In view of the above discussion, we direct the Assessing Officer to delete the disallowance of expenses sustained by the CIT(A) and hold that no part of reimbursement of expenses received by the assessee on the facts of this case be treated as income of the assessee. The assessee succeeds accordingly on this Ground of appeal.
10. Ground of appeal no. 2 pertains to the action of Assessing Officer in treating the fee for corporate finance and advisory services, i.e. referral fee of `3,12,93,500/- received by the Assessee from HSBC Securities and Capital (India) Private Ltd (HSCI) as 'Fees for Technical Services'. This action has also been affirmed by the CIT(A).
7 HSBC Bank Plc ITA No. 7386/Mum/2016
11. Before us, the Learned Representative for the assessee has explained that the assessee has earned this income on account of referring its client to HSCI for the potential rendering of services by HSCI to the prospective client so referred. In the activity carried out by the assessee, there is no element of managerial, technical or consultancy function discharged by the assessee to be construed as 'Fees for Technical Services' as canvassed by the Assessing Officer. In support of its contention about the issue in hand, the Learned Representative relied on the following judgments:
i) CLSA Ltd. v. ITO(IT) - 2(1) [2013] 31 taxmann.com 5
ii) Cushman & Wakefield (S) Pte Ltd, In Re 305 ITR 208 (AAR)
iii) Real Resourcing Ltd In Re 322 ITR 558 (AAR)
12. The Ld. DR, on the other hand, relied upon the orders of the authorities below and submitted that this income is in the nature of 'Fees for Technical Services' as per the definition provided under the Act and the DTAA.
13. We have carefully considered the rival submissions, perused the relevant material, including the orders of the lower authorities as well as the case laws referred at the time of hearing. During the year under consideration, the assessee had received a sum of `3,12,93,500/- as consideration for introducing ABB Switzerland (client of Assessee) to HSCI. In other words, HSCI had paid a referral fee to assessee for introducing ABB to HSCI. Briefly, ABB Switzerland wanted to increase its equity stake in ABB Ltd. India through a voluntary offer and hence needed the services of a merchant banker in India. As per Section 9 of the Act, income earned by a non-resident is taxable in India if, inter-alia, the non-resident has a business connection in India and the income arises through or from the business connection; or it is in the nature of royalty or 'Fees for Technical Services'. Factually speaking, in 8 HSBC Bank Plc ITA No. 7386/Mum/2016 relation to earning of the said referral fees, the assessee did not carry any activity in India.
14. The AAR in the case of Cushman & Wakefield (S) Pte Ltd., In Re (supra) which was subsequently relied upon in Real Resourcing Ltd. (supra), it has been held that the referral fee did not amount to "royalty" within the meaning of Explanation 2 to section 9(1)(vi) of the Act as there was no imparting of information regarding commercial knowledge or experience. Consideration for information concerning industrial, commercial and scientific experience could be regarded as "royalty" only if it was received for imparting know-how and the like. The referral fee received by the applicant from the Indian affiliate for introducing customers was not royalty income, nor was there any intellectual property involved as there was no sharing of commercial experience or skill with the Indian affiliate.
15. Our coordinate bench in the case of CLSA Ltd. (supra) has examined a similar issue. In the said case, the Assessing Officer held that referral fees was in the nature of fees for technical services received by the assessee and, therefore, the same was chargeable to tax in India. The Revenue therein, relied on Section 5(2) read with Section 9(1) of the Act to contend that the source of the referral fees being the execution of transactions in India through Indian entity on behalf of the referred clients, the right to receive the referral fees arose in India only and, therefore, the income on account of the referral fees was chargeable to tax in India in the hands of the assessee as per the specific provisions contained in Section 5(2)(b) read with Section 9(1)(i) of the Act being the income deemed to accrue or arise in India. The Tribunal held that referral fees received by assessee from Indian company for referring 9 HSBC Bank Plc ITA No. 7386/Mum/2016 international clients could not be treated as 'Fees for Technical Services' under Section 9(1)(vii) of the Act and would not be taxable in India.
16. In the present case as well, referral fees has been received by the assessee on account of the referral made by assessee for the potential rendering of services by HSCI to the prospective client so referred. In the activity carried out by assessee (for which it has earned referral fee from HSCI), there is no element of managerial, technical or consultancy function discharged by assessee. In fact, the services are nothing but commercial services. Accordingly, the referral fees received from HSCI cannot be construed as 'Fees for Technical Services' under Explanation 2 to Section 9(1)(vii) of the Act and, therefore, not subject to tax under Section 9(1)(vii) of the Act. Since neither Section 9(1)(i) or Sections 9(1)(vi) and 9(1)(vii) of the Act bring this income within the scope of the taxing provisions, the referral fees received by the assessee from HSCI cannot be deemed to accrue or arise in India under Section 9 of the Act. Hence, such income is not taxable within the provisions of the DTAA in light of the interpretation given as per Memorandum of Understanding concerning 'Fees for Technical Services' in Article 12 of India- USA DTAA. In view of the above discussion, we direct the Assessing Officer to delete the said addition sustained by the CIT(A), and assessee succeeds on this Ground of appeal.
17. Ground of appeal no. 3 relates to protection fee amounting to `1,33,36,290/- received from HSBC Asset Management India Pvt Ltd (AMIN) as 'Fees for Technical Services'.
18. Before us, Learned Representative for the assessee has explained that 10 HSBC Bank Plc ITA No. 7386/Mum/2016 AMIN provides portfolio management and other services to its clients. The services by AMIN to its customers aim to provide personalized portfolio management services to select clientele depending on the investor's risk appetite, growth expectations and personal investment requirements. In August 2007, AMIN launched a close-ended capital guaranteed product in India from HSBC. In connection with this, AMIN appointed the assessee to provide services relating to provision, maintenance, calculation and publication of the dynamic portfolio methodology on each valuation day. In support of its contention about the issue in hand, the Learned Representative relied on the following judgments:
i) CIT v. De Beers India Mineral Pvt. Ltd. (2012) 21 taxmann.com 214 (Kar.)
ii) DDIT v. Bajaj Allianz General Insurance Co Ltd (2015) 55 taxmann.com 305
19. The Ld. DR, on the other hand, relied upon the orders of the authorities below and submitted that this income is in the nature of 'Fees for Technical Services' as per the definition provided under the Act and the DTAA.
20. We have carefully considered the rival submissions, perused the relevant material, including the orders of the authorities below as well as the case laws referred at the time of hearing. During the year under consideration, the assessee had received a sum of `3,12,93,500/- as consideration for providing services, as a protection fee for guaranteed portfolio performance. From the discussion in the orders of the lower authorities, the material on record and the explanations of the Learned Representative, it is noted that AMIN provides portfolio management and other services to its clients in connection with the HSBC Capital Guard Portfolio, a scheme, which targets to provide principal protection to the
11 HSBC Bank Plc ITA No. 7386/Mum/2016 investors through, inter-alia, a Dynamic Portfolio Methodology with calculated exposure to Performance Assets, Safe Assets and Exit Assets. The scheme seeks to generate capital appreciation by investing in equity/equity related securities while endeavouring to protect the downside by investing in debt/money market instruments/funds. In order to achieve this objective, the exposure to debt is dynamically rebalanced in an attempt to provide downside protection while at the same time maximizing the equity exposure within a defined protection level. In connection with the above scheme, AMIN had appointed the assessee to provide services relating to provision, maintenance, calculation and publication of the Dynamic Portfolio Methodology on each valuation day. Based on the data and information provided by AMIN, assessee creates a model portfolio using the Dynamic Portfolio Methodology and computes the value of the Performance Asset, the Safe Asset and the Exit Asset on the valuation day. Further, the assessee provides rebalancing data (assuming the notional amount of securities that can be bought and sold) which could be used by AMIN for managing the scheme based on the Dynamic Portfolio Methodology. It is not possible for AMIN to independently apply the methodology used by the assessee for providing the aforesaid services. Additionally, the assessee could be liable to pay AMIN an amount equal to the Gap Risk (as defined in the agreement) if at any time before the final valuation day, the Synthetic Portfolio level is less than the Reference Level.
21. In this context, we think it appropriate to refer to the decision rendered in the case of De Beers India Minerals Pvt. Ltd. (supra). In the said case, the Dutch company performed services using technical knowledge and expertise and it had given data, photographs and maps to assessee but they did not make available technical expertise, skill or knowledge in respect of collection 12 HSBC Bank Plc ITA No. 7386/Mum/2016 or processing of data to assessee, which assessee could apply independently without assistance and undertake such survey independently to the exclusion of Dutch company in future. The Hon'ble High Court held that payment made for services in question could not be termed as 'Fees for Technical Services'. In fact, the Hon'ble Karnataka High Court in the case of De Beer India Minerals Pvt. Ltd. (supra) has succinctly adumbrated the position in the following discussion :-
"22. What is the meaning of "make available". The technical or consultancy service rendered should be of such a nature that it "makes available" to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology "making available", the technical knowledge, skill?, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as "fee for technical/included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied."
22. In light of the above legal position, we find that services provided by the assessee do not make available any technical knowledge, experience, skill 13 HSBC Bank Plc ITA No. 7386/Mum/2016 know-how or processes to AMIN within the meaning of Article 13 of the DTAA. Accordingly, the same would not qualify as 'Fees for Technical Services' under Article 13 of the DTAA. Further, given that the services have been provided by the assessee in connection with the business carried on by the assessee in UK, the same are to be treated in the nature of business profits. In this regard, Article 7 of the DTAA provides that business profits earned by an enterprise of UK are taxable in India, only if such enterprise has a PE in India as defined in Article 5 of the DTAA. In the present case, since the assessee does not have a PE in lndia, the protection fee received by the assessee from AMIN is not taxable in India as per the provisions of Article 7 of the DTAA. Hence, we direct the Assessing Officer to delete the said addition as sustained by the CIT(A). Accordingly, on this Ground of appeal also, assessee succeeds.
23. Insofar as Ground of appeal no. 4 is concerned, it relates to charging of interest under Section 234B of the Act which is consequential in nature and does not require any specific adjudication.
24. In the result, the appeal of the assessee is allowed, as above.
Order pronounced in the open court on 16th July, 2019.
Sd/- Sd/-
(RAM LAL NEGI) (G.S. PANNU)
JUDICIAL MEMBER VICE PRESIDENT
Mumbai, Date : 16th July, 2019
*SSL*
14 HSBC Bank Plc
ITA No. 7386/Mum/2016
Copy to :
1) The Appellant
2) The Respondent
3) The CIT(A) concerned
4) The CIT concerned
5) The D.R, "I" Bench, Mumbai
6) Guard file
By Order
Dy./Asstt. Registrar
I.T.A.T, Mumbai