Commissioner Of Income Tax (International Taxation & Transfer Pricing v. M/S. The Timken Company

IN THE HIGH COURT AT CALCUTTA SPECIAL JURISDICTION (INCOME TAX)ORIGINAL SIDE ITAT/79/2022IA No.GA/2/2022 COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION & TRANSFERPRICING)VSM/S. THE TIMKEN COMPANY BEFORE : THE HON’BLE JUSTICE T.S. SIVAGNANAMAndTHE HON’BLE JUSTICE HIRANMAY BHATTACHARYYADate : 4[th] January, 2023 Appearance :Mr. Tilak Mitra, Adv.Mr. Soumen Bhatttacharjee, Adv.…for the appellant. Mr. J.P. Khaitan, Sr. Adv.Mr. Avra Mazumder, Adv.Mr. Binayak Gupta, Adv.Mr. Suman Bhowmik, Adv.Mr. Samrat Das, Adv.…for the respondent. The Court : This appeal filed by the revenue underSection 260A of the Income Tax Act, 1961 (the Act, in brevity)is directed against the order dated 19[th] February, 2020 passedby the Income Tax Appellate Tribunal Kolkata, ‘C’ Bench,Kolkata in ITA No.1276/Kol/2018 for the Assessment Year 2010-11. The revenue has raised the following substantial questions of law for consideration : Though the appellant/revenue have raised foursubstantial questions of law, the same can be grouped intothree categories. Question nos.(a) and (b) deal with theeffect of the ruling rendered by the Authority of AdvanceRuling (AAR). Question no.(c) deals with the services providedby the assessee to Timken India Limited (TIL) and substantialquestion of law no.(d) deals with the services provided by thethird party.On the first two substantial questions of law, we findthat the Tribunal had taken note of its earlier decisions forthe assessment years 2002-03 to 2007-08 and dismissed theappeal filed by the revenue upholding the order passed by theCommissioner of Income Tax (Appeals)-22, Kolkata dated 28[th]March, 2018. Though the revenue had preferred appeals asagainst the said order passed by the Tribunal for theassessment years 2002-03 to 2007-08, those appeals werewithdrawn on the ground of low tax effect. Therefore, we arerequired to consider as to whether the factual finding rendered by the Tribunal is just and proper and, whether the provisionsof Article 12 of the Indo-US Treaty was properly interpreted inthe facts and circumstances of the case. The assessee enteredinto an agreement with TIL dated 2[nd] August, 2000 for providingservices such as management services, management informationservices, information resources, system development etc. Theservices were to be provided through its own employees eitherat the recipients’ facility and place of business on atemporary or expatriate assignment, or by a shorter visit etc.The compensation payable by the recipient was mentioned inSection 1.2 of the said agreement which reads as follows:“Section 1.2Compensation Recipient shall payProvider for all services and materials providedpursuant to this agreement, upon receipt of an invoicefrom Provider. Provider shall provide invoices toRecipient listing the services that Provider hasprovided to Recipient and/or which Provider hasobtained from third parties on behalf of Recipient,during each calendar month. Each invoice shall besubmitted no later than the fifteenth (15[th]) dayfollowing the end of each calendar month. Each invoiceshall identify the compensation that is due to Providerto compensate it for all costs of providing suchservices. Only costs, without any mark-up shall beinvoiced.” The question which came up for consideration before theCIT(A) was interpreting the terms and conditions of thisagreement. The contention of the revenue is that the fee The question which came up for consideration before theCIT(A) was interpreting the terms and conditions of thisagreement. The contention of the revenue is that the fee received is for included services as provided in Article 12 ofthe Indo-US Treaty and, therefore, liable to tax in India. Itis important to note that in terms of paragraph 4(b) of Article12 of the Indo-US Treaty, the scope of Article 12 was explainedby pointing out that generally speaking technology will beconsidered made available when the person acquiring theservices is unable to apply the technology. The fact that theprovision of service may require technical input by the personproviding the service does not par se mean that technicalknowledge, skill etc. are made available to the personpurchasing the service, within the meaning of paragraph 4(b).Similarly, the use of a product which embodies technology shallnot par se be considered to make the technology available.This aspect was considered by the CIT(A) and it was found thatby virtue of the said agreement there is no transfer of atechnical plan or technical design and what was transferredthrough the agreement was commercial information. Furthermore,upon analysis of the agreement it was found that the agreementis purely advisory services and such advisory services cannotbe treated as fees for included services under Article 12(4)(b)of the Indo-US Treaty since there is no technology which ismade available. The Tribunal upon reconsideration of thefactual position found that the clauses in the agreement wouldclearly show that the nature of services is advisory in natureand nothing has been made available to TIL by the assessee. After referring to Example no.7 given in the MoU between Indiaand US on DTAA it was held that consideration for advisoryservices rendered cannot be treated as fees for includedservices under Article 12(4)(b) of the Treaty. That apart itis not in dispute that the assessee does not have any permanentestablishment in India and, income so arising to them in Indiacannot be taxed under Article 7 as ‘business profits’ either.The assessee and the TIL had filed a writ petitionbefore this Court challenging the vires of Section 44D(b) ofthe Act. The Hon’ble Court while framing the issue forconsideration by its judgment reported in (2016)4 TMI 592 Calheld that the issue pertains to machinery of presumptive taxprovided for in the provision and the contention of thepetitioners that apparent shutting out of an assessee’s optionto claim deduction from the gross income in respect of matterscovered by the provisions is unreasonable and as such, fallsfoul of Article 14 of the Constitution. In the decisionrendered in the said writ petition, the Court also examined thebinding nature of the ruling given by the AAR and the followingparagraphs would be relevant: “24.Before coming to the key question as to whetherthe foreign company in this case would be entitled toclaim that its deemed income on account of fees fortechnical services may not be any taxable income atall, the preliminary ground urged by the Union as tothe propriety of the present petition needs to be “24.Before coming to the key question as to whetherthe foreign company in this case would be entitled toclaim that its deemed income on account of fees fortechnical services may not be any taxable income atall, the preliminary ground urged by the Union as tothe propriety of the present petition needs to be addressed. There can be no doubt that by virtue ofSection 245S of the Act, the advance ruling pronouncedby the Authority on December 6, 2004 is binding on theIndian company as the Indian company had sought suchruling. Simultaneously, the ruling is binding on therelevant principal commissioner or commissioner, andthe income tax authorities subordinate to him, inrespect of the Indian company and the relevanttransaction. However, nothing more needs to be read inthe ruling than the answers to the questions renderedtherein. It will be evident from the five questions setout in the ruling that all of them pertained to theIndian company and its obligation while remittingpayment under the agreement of August 2, 2000 to theforeign company.25. Apart from the fact that the opinion of theAuthority is not binding on the foreign company, theopinion has to be confined to the obligation of theIndian company, notwithstanding such opinion havingdwelt on the dictum in A. Sanyasi Rao and finding thesame to be in applicable to the matter before it. Theforeign company is one of the petitioners herein andthe primary contention – that the foreign companyshould be entitled to claim deductions from the paymentfrom the payment that it is entitled to on account oftechnical services under the agreement of August 2,2000 – cannot be seen to be covered by the opinion ofDecember 6, 2004 rendered by the Authority on AdvanceRulings. Even if the name of the Indian company isdeleted as a co-petitioner, the foreign company wouldbe entitled to maintain a petition under Article 226 ofthe Constitution to complain of taxing provision beingunreasonable or ultra vires the Constitution.” The above decision has attained finality as the revenuehad not carried the matter in appeal. This aspect was alsonoted by the learned Tribunal but in its view, as having cometo a factual conclusion that the assessee is rendering onlyadvisory service and it cannot be treated as included servicesunder Article 12(4)(b) and held that the contention of theassessee with regard to the binding nature of the ruling of theAAR has become academic. In our considered view, the agreement between theparties had been properly interpreted by the CIT(A) and on re-examination, the Tribunal also concurred with the CIT(A).Thus, we find no different view is possible than theinterpretation given by the CIT(A) as approved by the Tribunal.Therefore, the order passed by the learned Tribunal is affirmedon this aspect and, accordingly, substantial questions of lawnos.(a) and (b)are answered against the revenue.With regard to the substantial questions of law nos.(c)and (d) are concerned, the only difference being that one ofthe questions pertains to services rendered by the assessee andthe other is service rendered by third party. Once again going back to the agreement between theparties dated 2[nd] August, 2000, in Section 1.2 (quoted above),it has been clearly mentioned that each invoice shall besubmitted no later than 15[th] day following the end of eachcalendar month; each invoice shall identify the compensation Once again going back to the agreement between theparties dated 2[nd] August, 2000, in Section 1.2 (quoted above),it has been clearly mentioned that each invoice shall besubmitted no later than 15[th] day following the end of eachcalendar month; each invoice shall identify the compensation that is due to provider to compensate it for all costs forproviding such services; only costs without any mark-up shallbe invoiced. This aspect was rightly taken note of by theCIT(A) as well as the Tribunal and the issue was decided infavour of the assessee. So far as the services rendered by thethird parties, on facts, the CIT(A) and the Tribunal had foundthat the actuals billed by the third parties were paid by theassessee in USA and were later on reimbursed by TIL to theassessee in India and, therefore, there was no basis for theassessing officer to conclude that the payments ofreimbursement were in the nature of fees for technicalservices. To be noted that the assessee is not the ultimatebeneficiary of the sum in question nor did it render anyservice to TIL. Further, there was no evidence which wasbrought on record to show that the technical skill, knowledgeetc. were made available to TIL by the assessee. Furthermore,the Transfer Pricing Officer (TPO) scrutinised the details ofreimbursements while examining the international transaction ofreimbursement by TIL to the assessee under Section 92 of theAct and found that the assessee made no profit on suchreimbursements and that the reimbursements were at Arm’sLength.Thus, the finding having been rendered after thoroughexamination of the factual position as well as the terms andconditions of the agreement qua Article 12(4)(b) of the Indo-US Treaty, we find no ground to take a different view.Consequently, the substantial question of law nos.(c) and (d)are also answered against the revenue. In the result, the appeal filed by the revenue(ITAT/79/2022) fails and is dismissed. Consequently, the application for stay (IA No.GA/2/2022) also stands closed. (T.S. SIVAGNANAM, J.) (HIRANMAY BHATTACHARYYA, J.) S.Nath/S.Pal/S.Das/As.