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Judgment
PER VIKAS AWASTHY, JUDICIAL MEMBER:
These three appeals by the assessee for assessment years 2015-16, 2016-17 and 2017-18 are taken up together as the facts germane to the issue and the primary ground in the grounds of appeal in these three assessment years are identical. The appeal of the assessee in ITA No.7767/Del/2019 for AY 2015-16 is taken up as a lead case since this is the first year of dispute. Hence, the facts are narrated from the same appeal.
ITA No. 7767/Del/2019 for AY: 2015-16
This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-42, New Delhi, [hereinafter referred to as “CIT(A)], dated 23.07.2019. The assessee in appeals has challenged the order of CIT(A) on following grounds:
“1.The learned CIT(A) erred in confirming the addition of management service fee of Rs.2,83,04,041/-, received by the appellant, by holding it to be taxable as “fees for technical services” under the provisions of the Act as well as under Article 12 of the Double Taxation Avoidance Agreement between India and China.
2.The learned CIT(A) erred in making the following observations:
“Hence, for the FTS income to be taxable in India, the rendition of services in India is not necessary, it is sufficient that the services are utilized in India.” The appellant objects to the above observations made by the learned CIT(A).
Sh. Sudin Sabnis, appearing on behalf of the assessee submits that the assessee a wholly foreign-owned company established in Shanghai is a tax resident of China. The assessee is a part of Benteler group. The assessee is engaged in manufacturing of automotive components. The assessee provides engineering, forensic, IT, sales, finance, human resources, quality, procurement and related services to its related parties in Asia Pacific region, including India. During the period relevant to the assessment year under appeal, the assessee has provided management and consultancy services to its group company Benteler Automotive India Pvt. Ltd.in India and has charged management and consulting services fee for rendering said services. The services are rendered to the Indian entity under Service Agreement. A copy of Service Agreement is at pages 43 to 49 of the paper-book. The learned counsel contended that undisputedly all services were provided by the assessee to the Indian entity from China. No part of the services were rendered by the assessee in India. It is also not in dispute that the assessee has no Permanent Establishment (PE) in India. Admittedly, these services rendered by the assessee to the Indian entity are in the nature of managerial and technical services. Since, the services were rendered from outside India i.e. China, the fee received for rendering such services does not fall within the ambit of ‘Fee for Technical Services’ (FTS) as defined under Article 12(4) of India -China DTAA. The learned counsel contended that a perusal of clause (4) of Article 12 would show that to fall within the meaning of FTS, the provision of services of managerial, technical or consultancy should have been rendered in the other “Contracting State” (i.e. India in the present case). The Assessing Officer has held that the fee received by the assessee Rs.2,83,04,041/- for rendering such services is taxable in India under Article 12(4) of India – China DTAA. The Assessing Officer also supported its finds by placing reliance on the decision rendered in the case of Ashapura Minichem Ltd. Vs. ADIT, reported as 40 SOT 220 (Mumbai). The learned counsel placed reliance on decision of the Hon’ble Bombay High Court in assessee’s own case i.e. Benteler Automative (China) Investment Ltd. Vs. ACIT, 185 taxmann.com 54 (Bombay), wherein similar argument was raised by the department and reliance was also placed on the decision in the case of Ashapura Minichem Ltd. Vs. ADIT (supra). The Hon’ble High Court rejecting the contention of the department held, that the services rendered to Indian affiliate via email, conference calls and video conferencing from outside India cannot be regarded as services rendered in India. In absence of any specific legal or DTAA provisions, virtually delivered services does not equate to physical rendition of services in India.
Per contra Sh. M.V. Ramesh, Sr. DR, representing the department vehemently defending the impugned order and prayed for dismissing appeal of the assessee. The learned DR submits that it is an admitted fact that the services rendered by the assessee to Indian company is in the nature of management and technical services. The remuneration received for rendering such services fall withing the meaning of FTS under Article 12(4) of DTAA. It is immaterial from where services are rendered, the place of utilization of services is relevant to attract tax liability. The learned DR placed reliance on the decision of Tribunal in the case of Ashapura Minichem Ltd. Vs. ADIT (supra) to support his submissions.
Both parties heard, orders of the lower authorities examined, the decisions and the Service Agreement referred during the course of submissions considered. The limited issue for consideration before us in the present appeal is; Whether the payment received by the assessee during the period relevant to assessment year under appeal for rendering managerial and technical services from outside India, to its Indian AE would fall within the definition of FTS as per Article 12(4) of India – China DTAA? Before proceeding further, it would be imperative to refer to the relevant provision of Article 12 of India – China DTAA. They read as under:
“ARTICLE 12
ROYALTIES AND FEES FOR TECHNICAL SERVICES
1.Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State.
2.However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services.
3.xxx
4.The term "fees for technical services" as used in this Article means any payment for the provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State, but does not include payment for activities mentioned in paragraph 2(k ) of Article 5 and Article 15 of the Agreement.”
From plain reading of clause (4) of Article 12, it emerges that the payment received for provision of services of managerial, technical or consultancy by a resident of a Contracting State (i.e. China in the present case) in the other Contracting State (i.e. India) is in the nature of FTS. In other words, the services in the nature of managerial, technical or consultancy should be rendered by resident of Contracting State in the other Contracting State, for the payments for rendering such services to fall within the ambit of FTS under Article 12(4). The fact that the services in the present case have been rendered by the assessee from outside India are not disputed by the department. It is also not in dispute that the assessee has no PE in India. Thus, the essential condition under Article 12(4) of the DTAA are not met for the payments to constitute FTS in the present case.
We find that identical issue was considered by the Hon’ble Bombay High Court in assessee’s own case. For the sake of completeness, the relevant facts before the Hon’ble High Court are reproduced hereinbelow:
“3.To put it in a nutshell, it is the Petitioner's case that it is a company incorporated under the laws of China and a resident of China. Under the Service Agreement (Exhibit "B" to Petition) entered into by the Petitioner with Benteler India (its subsidiary), the Petitioner supplies technical services to Benteler India. It is conceded before us that any payment made by Benteler India to the Petitioner [for the supply of technical services] would be taxed in India under the provisions of the IT Act, and more particularly Section 9(1)(vii) thereof. However, since India and China have entered into a Double Taxation Avoidance Agreement [for short the "DTAA"], taxation of the Petitioner would be governed by the provisions of the India-China DTAA as they are more beneficial to the Petitioner [Section 90 of the IT Act]. According to the Petitioner, it has no "Permanent Establishment" (for short "PE") in India [as understood in Article 5 of the DTAA], and hence, is not liable to pay any tax in India under Article 7 thereof, for the technical services provided by it to Benteler India. The only other provision under which the Petitioner can be brought to tax in India is Article 12 of the DTAA. According to the Petitioner, even under this Article, the Petitioner cannot be taxed in India because the technical services provided by the Petitioner to Benteler India do not fall within the definition of the words "fees for technical services" (for short also referred to as "FTS"), as understood under Article 12 (4) of the India-China DTAA. According to the Petitioner, though it rendered "technical services" to its subsidiary located in India, namely Benteler India, the wordings of Article 12 (4) clearly indicate that for the services provided by the Petitioner to Benteler India to fall within the meaning of the words "fees for technical services" [as defined in Article 12 (4)], the same would have to be rendered and/or performed by the Petitioner in India and not merely from China. According to the Petitioner, if the technical services provided by it are from China, then those services would not be covered within the definition of "fees for technical services" in Article 12 (4) of the India-China DTAA. Since it is an undisputed fact that the technical services provided by the Petitioner to Benteler India were rendered/performed by the Petitioner from China, and not in India, the payment for FTS would not fall within Article 12 (4) of the DTAA, and hence, cannot be taxed in India. This is the basis on which the Petitioner seeks the reliefs more particularly set out earlier.”
Similar arguments were raised by the department in the said case as were raised before us. The Assessing Officer rejected the contentions of the assessee, inter alia, relying upon decision of the Tribunal rendered in the case of Ashapura Minichem Ltd. Vs. ADIT (supra) and the decision of Authority for Advance Ruling in Guangzhou Usha International Ltd. reported as 62 taxmann.com 96. The Hon’ble Court after considering facts of the case and various decisions held:
“44.We have heard the learned counsel for the parties. We have also perused the papers and proceedings in the above Writ Petition. The first argument canvassed on behalf of the Respondents is that even assuming for the sake of argument that the services to be rendered by the Petitioner are to be physically rendered in India, even then, the facts of the present case would clearly establish that the services were physically rendered in India. This argument is canvassed on the basis that it is an admitted position that the services which were being rendered by the Petitioner to the Benteler India from China was through email communications, conference calls and video conferencing etc. This, according to the Respondents, is an undisputed factual position. According to the Respondents since these services were being rendered virtually through interactive modes on video conferencing or conference calls or emails, the nature and manner in which the services were provided, as per the law prevailing in India, even if done virtually, equates to and is the same as a physical rendition of services in India.
45.At the outset, this argument, though at first blush appears attractive, does not carry much substance. To give a very simple answer to this argument is that why can it not be assumed that Benteler India received these services in China and not in India as sought to be contended by the Respondents. The services may have been rendered in the presence of each other, but by merely saying that because the services were rendered to the Indian entity virtually, would mean that the services were physically rendered in India by the Chinese entity would be too broad a proposition for us to accept. Without there being any specific provision, either in law or in the DTAA, we are unable to accept this broad proposition that because the services were rendered by the Petitioner to Benteler India virtually, the same amounted to the said services being rendered physically [to Benteler India] in India.”
Thus, the Hon’ble High Court did not agree with the proposition of the Department that, because the services were rendered by the assessee to Benteler India through video conferencing, the same were rendered in India and not China.
In light of undisputed facts and the aforementioned decision of Hon’ble Bombay High Court on identical set of facts, we find merit in the submissions of the assessee. Accordingly, he hold that the payments received by the assessee for rendering managerial and technical services from outside India to an Indian company does not fall within the definition of FTS under Article 12(4) of India – China DTAA.
The assessee has filed an Application dated 29.04.2024 under Rule 11 of the Income-Tax (Appellate Tribunal) Rules, 1963 for admission of additional grounds of appeal challenging validity of the assessment order on the ground of limitation. Subsequently, the assessee filed an application dated 22.04.2026 for withdrawal of additional grounds raised vide application dated 29.04.2024. The application of the assessee for admission of Additional Grounds of appeal is thus, dismissed.
ITA No. 1006/Del/2022 for AY 2016-17
ITA No.1007/Del/2022 for AY : 2017-18
Now, we take up appeals of the assessee for AY 2016-17 and 2017-18 against the orders of the Commissioner of Income Tax (Appeals)-42, Delhi, for the respective assessment years. Both the impugned orders are of even date i.e. 16.03.2022.
Both sides are unanimous in stating that the facts and the primary ground in both the impugned assessment years are identical to AY 2015-16. In light of this undisputed position, the findings given by us while adjudicating appeal of the assessee for assessment year 2015-16 would mutatis mutandis apply to the appeals for AYs 2016-17 and 2017-18. For parity of reasons, the impugned orders in the respective appeals are set aside and the appeals are allowed.
To sum up, all the three appeals of the assessee are allowed.