Vestas Wind Technology India Private Limited, CHENNAI V. ACIT, CHENNAI

ITA 471/CHNY/2017

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4602 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-05-2017
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 20-04-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 23-02-2017
• Court: TRIBUNAL
• Department Lawyers: GURUBASHYAM JCITD R
• Assessee Lawyers: N V BALAJI
• Keywords: Transfer pricing; Double taxation relief; Permanent establishment

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI , . ! '# BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G.PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A.NO. 471/MDS./2017 / ASSESSMENT YEAR : 2012-13 M/S.VESTA WIND TECHNOLOGY INDIA PVT. LTD., 298,RAJIV GANDHI SALAI, SHOLINGANALLUR,CHENNAI 600 119. VS. THE ACIT, CORPORATE CIRCLE 3(2), CHENNAI 34. [PAN AAACA 9274 F] ( $% / APPELLANT) ( &'$% /RESPONDENT) / APPELLANT BY : MR.N.V.BALAJI,ADVOCATE /RESPONDENT BY : MR.GURUBASHYAM, JCIT,D.R / DATE OF HEARING : 20 .04 .2017 !' / DATE OF PRONOUNCEMENT : 05 .05 .2017 ( / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AG AINST THE ASSESSMENT ORDER PASSED U/S.143(3) R.W.S.144C(5) OF THE ACT DA TED 19.12.2016, WHICH WAS PASSED IN CONSEQUENT TO DIRECTION OF DRP ORDER DATED 07.11.2016 PASSED U/S.144C(5) OF THE ACT. ITA NO.492/MDS./2017 :- 2 -: 2. THE ONLY GROUND IN THIS APPEAL IS THAT THE LD. ASSESSING OFFICER AND THE DRP ERRED IN LAW AND IN FACTS BY HO LDING THAT PAYMENT TOWARDS CORPORATE PERFORMANCE GUARANTEE IS IN THE N ATURE OF FEES FOR TECHNICAL SERVICES UNDER THE PROVISIONS OF THE INC OME-TAX ACT,1961 READ WITH RELEVANT PROVISIONS OF INDIA-DENMARK DOUB LE TAX AVOIDANCE AGREEMENT (DTAA). CONSEQUENTLY, THE LD. ASSESSING O FFICER AND THE DRP ERRED IN HOLDING THAT THE APPELLANT OUGHT TO HA VE DEDUCTED TAX AT SOURCE U/S.195 OF THE ACT, ON THE ABOVE EXPENDITURE . THE LD. ASSESSING OFFICER AND THE DRP ERRED IN LAW BY DISAL LOWING THE ABOVE EXPENDITURE UNDER SECTION 40(A)(I) FOR NON-DEDUCTIO N OF TAX U/S.195 OF THE ACT. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE AO DISALLO WED THIS AMOUNT AS A DEDUCTION HOLDING THAT AS THE PAYMENT WAS IN THE NA TURE OF FTS, THE SAME WAS LIABLE FOR TDS U/S 195, AND HENCE NON DEDUCTION OF TAX ATTRACTS PROVISION OF 40(A)(I). IN DRAFT ASSESSMENT ORDER, T HE AO FOUND THAT THE AMOUNT PAID BY ASSESSEE COMPANY TO ITS PARENT COMPA NY WHICH HAS BEEN CLASSIFIED AS MANAGEMENT FEE IN THE FINANCIAL STATE MENTS IS NOTHING BUT FEE FOR TECHNICAL SERVICES (FTS). ADMITTEDLY, THE PAREN T COMPANY GUARANTEE (PCG) IS PROVIDED TO THE CUSTOMERS BY THE ASSESSEE WHEREVER THE CUSTOMERS SEEK PCG.THF THE QUESTION ARISES AS TO WHY THE CUST OMERS SEEK GUARANTEE OF THE PARENT COMPANY IN RESPECT OF CONTRACTUAL OBLIGA TIONS OF THE ASSESSEE. THE ANSWER TO THIS QUESTION IS OBVIOUSLY TECHNICAL COMPETENCE POSSESSED BY THE PARENT COMPANY COMPARAED TO9 THE ASSESSEE COMPA NY. IN CASE OF ANY ITA NO.492/MDS./2017 :- 3 -: NON-PERFORMANCE OF THE ;PRODUCT SUPPLIED BY THE ASS ESSEE TO ITS CUSTOMERS WHICH ARE COVERED UNDER PARENT COMPANYS GUARANTEE THE LIABILITY TO RECTIFY THE DEFECTS IN THE PRODUCTS LIES NOT ONLY WITH THE ASSESSEE COMPANY BUT ALSO WITH ITS PARENT COMPANY. THUS, THE PARENT COMPANY I S REQUIRED TO RENDER TECHNICAL SERVICES WHENEVER WARRANTED AS RECTIFICAT ION OF DEFECTS INVOLVES TECHNICAL SKILLS. EVEN IF THE SERVICES ARE RENDER ED BY THE ASSESSEE COMPANY IN CASES WHERE PERFORMANCE GUARANTEE IS INVOKED BY THE CUSTOMERS, IT IS THE RESPONSIBIOITY OF THE PARENT COMPANY TO RENDER TECH NICAL ASSISTANCE, CONSULTANCY SERVICES AND ENSURE THAT THE PRODUCTS P ERFORM TO THE SATISFACTION OF THE CUSTOMERS. THEREFORE, THE PARENT COMPANY HAS TO RENDER TECHNICAL SERVICES TO THE CUSTOMERS OR IT HAS TO SUPERVISE AN D GUIDE THE ASSESSEE COMPANY IN RENDERING THE SERVICES AS THE PARENT COM PANY IS UNDER CONTRACTUAL OBLIGATIONS TO DO SO UNDER THE PCG. THE REFORE, THE AMOUNT PAID BY THE ASSESSEE TO ITS PARENT COMPANY IS NOTHING BU T FTS TO BE RENDERED BY THE PARENT COMPANY WHENEVER SUCH SERVICES ARE WARRA NTED IN ORDER TO SET RIGHT THE NON-PERFORMING PRODUCTS COVERED UNDER PCG . THEREFORE, ASSESSEES CONTENTION THAT CORPORATE PERFORMANCE GUARANTEE FEE WOULD NOT FALL UNDER THE AMBIT OF FTS IS NOT ACCEPTABLE. 3.1 THE PARENT COMPANY, VESTAS DENMARK HAVING AGA REED TO PROVIDE PCG TO THE CUSTOMERS OF ITS SUBSIDIARY I.E. ASSESSEE CO MPANY IS UNDER CONTRACTUAL OBLIGATION TO SUPERVISE AND ENSURE THAT THE AGREED PERFORMANCE BETWEEN THE ASSESSEE COMPANY AND ITS CUSTOMERS IS DELIVERED BY ITS SUBSIDIARY WITHIN THE TIME LINES AGREED UPON IN THE CONTRACT AGREEMENTS T O THE SATISFACTION OF THE CUSTOMERS. THEREFORE, THE SUPERVISORY SERVICES UNDE RTAKEN BY THE PARENT ITA NO.492/MDS./2017 :- 4 -: COMPANY IN ENSURING TIMELY DELIVERY BY ITS SUBSIDIA RY FALLS UNDER THE CATEGORY OF TECHNICAL SERVICES. IN THIS REGARD RELIANCE IS P LACED ON THE DECISION REPORTED IN ITO VS. SMS SCHOLEMANNSIEMAS AKTIEGESAL LSCHAFT (ITAT,HYD.) 57 ITD 254. 3.2. AS PER SEC.9 OF THE ACT FEE FOR TECHNICAL SER VICES IS DEFINED TO MEAN ANY CONSIDERATION (INCLUDING ANY LUMP SUM CONSIDERA TION) FOR RENDERING OF ANY MANAGERIAL TECHNICAL OR CONSULTANCY SERVICES (I NCLUDING THE PROVISIONS OF SERVICES OF TECHNICAL OR OTHER PERSONNEL). AS DISCU SSED IN THE AFOREMENTIONED PARAGRAPHS, THE AMOUNT RECEIVED BY THE PARENT COMPA NY IS TOWARDS CONSIDERATION FOR RENDERING MANAGERIAL (INCLUDING S UPERVISORY) SERVICES AND TECHNICAL CONSULTANCY SERVICES. THE LD. ASSESSING OFFICER DISALLOWED THIS AMOUNT AS A DEDUCTION HOLDING THAT THE PAYMENT IS I N NATURE OF FTS AND THE SAME WAS LIABLE FOR TDS U/S.195 OF THE ACT. HENCE, NON-DEDUCTION OF TDS ATTRACTS PROVISIONS OF THE SECTION 40(A)(IA) OF THE ACT. AGGRIEVED BY THE ACTION OF AO , THE ASSESSEE RAISED THE OBJECTIONS B EFORE THE DRP. 3.3. THE DRP OBSERVED THAT THE TERMS OF THE AGRE EMENT ARE SUCH THAT THE POST SALES OBLIGATIONS OF THE ASSESSEE (CONTRACTOR) AND THE AE (GUARANTOR) ARE COTERMINOUS. SOME OF THE CLAUSES OF THE AGREEME NT ARE AS FOLLOWS:- 3: NOTWITHSTANDING ANYTHING IN THIS GUARANTEE TO T HE CONTRARY GUARANTOR SHALL NOT UNDER THIS GUARANTEE OR ANY OF ITS PROVIS IONS HAVE BEEN ANY GREATER OBLIGATIONS OR LIABILITY THAN THIS CONTRACT OR UNDER THE CONTRACTS AND THE LIMITATIONS AND EXCLUSIONS OF OBLIGATIONS A ND LIABILITY INCLUDED IN THE CONTRACTS SHALL EQUALLY LIMIT AND EXCLUDE LI ABILITY AND OBLIGATIONS OF GUARANTOR UNDER THIS GUARANTEE. ITA NO.492/MDS./2017 :- 5 -: 4: THE DISCHARGE BY THE GUARANTOR OF ANY OF ITS OB LIGATIONS UNDER THIS GUARANTEE OR BY ANY; THIRD PARTY SHALL EFFECTIVELY AND TO SIMILAR EXTENT DISCHARGE THE OBLIGATIONS OF CONTRACTOR UNDER THE C ONTRACTS AND THE DISCHARGE BY CONTRACTOR OR ANY THIRD PARTY OF ANY O F CONTRACTORS OBLIGATIONS UNDER THE CO9NTRACTS SHALL EFFECTIVELY AND TO SIMILAR EXTENT DISCHARGE THE GUARANTOR OF ITS SIMILAR OBLIGATIONS UNDER THIS GUARANTEE. 6: THE OBLIGATIONS OF GUARANTOR HEREUNDER SHALL CO NTINUE IN FULL FORCE UNTIL ALL OF CONTRACTORS OBLIGATIONS AND LIABILITIES UND ER THE CONTRACTS HAVE BEEN FULLY DISCHARGED. THUS, OBSERVED BY DRP THAT THE CLAIM OF ASSESSEE TH AT THE CONSIDERATION PAID TO THE AE FOR PROVIDING PERFORMANCE GUARANTEE TO CUSTOMERS IS IN FACT, THE PAYMENT FOR POST SALES REPAIR AND MAINTEN ANCE OF THE WTGS OF THE ASSESSEE. THE PCG IS OFFERED BY THE VESTAS, DEN MARK AND ACCEPTED BY THE CUSTOMERS OF THE ASSESSEE BECAUSE OF CREDIBL E BRAND NAME AND GLOBAL REPUTATION OF THE VESTAS GROUP WHICH IS ULTI MATELY BUILT ON THE FOUNDATION OF TECHNICAL COMPETENCE. AS SALES AND PO ST SALES MAINTENANCE IS AN INTEGRATED PACKAGE, THE AE AUTOMATICALLY ASSU MES THIS OBLIGATION AND ASSUMES RESPONSIBILITY FOR PROVISION OF TECHNIC AL SERVICES. THE ARGUMENT OF THE ASSESSEE THAT THE OBLIGATION OF THE AX WOULD START ONLY WHEN THE DEFECT IS REPORTED, IS INCONSEQUENTIAL. TH US IT IS VERY CLEAR THAT THE ASSESSEE HAS MADE PAYMENT TO THE AX, WHICH IS S HOWN TINDER THE HEAD MANAGEMENT SERVICES, FOR THE SERVICES TECHNICA L IN NATURE. ITA NO.492/MDS./2017 :- 6 -: 3.4 TAXABILITY OF A RECEIPT ACCRUING TO A NON-RES IDENT AS FEES FOR TECHNICAL SERVICES IN INDIA IS GOVERNED BY SECTION 9(1)(VII) OF THE ACT, THE SAID SECTION PROVIDES THAT INCOME BY WAY OF FTS PAYABLE BY A PERSON WHO IS A RESIDENT IN INDIA IS DEEMED TO ACCR UE OR ARISE IN INDIA, EXCEPT WHERE THE FEES ARE PAYABLE IN RESPECT OF SER VICES UTILIZED IN A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON OU TSIDE INDIA OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY S OURCE OUTSIDE INDIA. I) EXPLANATION 2 TO THE SAID SECTION DEFINES FTS TO MEAN ANY CONSIDERATION (INCLUDING ANY LUMP SUM CONSIDERATION ) FOR THE TENDERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICE S (INCLUDING THE PROVISION OF SERVICES OF TECHNICAL OR OTHER PERSONN EL) BUT DOES NOT INCLUDE CONSIDERATION FOR ANY CONSTRUCTION, ASSEMBL Y, MINING OR LIKE PROJECT UNDERTAKEN BY THE RECIPIENT OR CONSIDERATIO N WHICH WOULD BE INCOME OF THE RECIPIENT CHARGEABLE UNDER THE HEAD SALARIES. FURTHER, THE DRP OBSERVED THAT IN THE ABSENCE OF AN Y SERVICE THE PAYMENT CANNOT BE TERMED AS FTS, IS NOT MAINTAINABLE AS ADM ITTEDLY THERE IS PCG AGREEMENT IN EXISTENCE FOR THE RELEVANT YEAR AND AS SESSEE HAS MADE PAYMENT TO THE AE FOR PARENT COMPANY GUARANTEE. HEN CE, THE DRP CAME TO A CONCLUSION THAT THE PAYMENT IS IN THE NATURE OF F TS WHICH WAS LIABLE TO BE TAXED IN INDIA SINCE SERVICES WERE IN RESPECT OF TH E BUSINESS FOR EARNING INCOME IN NDIA IN TERMS OF EXPLANATION 2 TO SEC.9(1 )(VII) OF THE ACT, RELYING IN THE DECISION OF CHENNAI TRIBUNAL IN THE CASE OF FOS TER WHEELER FRANCE S.A (2016) 67 TAXMANN.COM 120. CONSEQUENTLY, THE ASSES SMENT ORDER WAS ITA NO.492/MDS./2017 :- 7 -: PASSED IN CONSEQUENT TO DIRECTION OF DRP ORDER DATED 07.1 1.2016. NOW, THE ASSESSEE IS IN APPEAL BEFORE US. 4. BEFORE US, LD.A.R SUBMITTED THAT SIMILAR ISSUE WAS CONSIDERED BY THIS TRIBUNAL IN EARLIER OCCASION IN ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2011-12 VIDE ORDER DATED 22.04.2016 WHEREIN IT WAS HELD AS UNDER:- 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EI THER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECO RD. THE TRANSFER PRICING OFFICER PROCEEDED ON THE PRESUMPTI ON THAT WHAT WAS PAID BY THE ASSESSEE IS INTEREST. A PERUS AL OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA A ND DENMARK CLEARLY SHOWS THAT WHAT WAS PAID BY THE ASS ESSEE IS NOT INTEREST. IT IS A PAYMENT FOR THE SO-CALLED GU ARANTEE SAID TO BE GIVEN BY THE PARENT COMPANY. THE QUESTION ARISE S FOR CONSIDERATION IS WHAT KIND OF SERVICES ARE RENDERED BY THE PARENT COMPANY AND WHETHER SUCH SERVICES ARE RENDER ED IN INDIA AND WHETHER SUCH PAYMENT IS LIABLE FOR TAXATI ON IN INDIA. THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT SIN CE THE PAYMENT DOES NOT PARTAKE THE CHARACTER OF INTEREST, IT WOULD NATURALLY BE A BUSINESS PROFIT FOR THE PARENT COMPA NY. IN THE COURSE OF ITS BUSINESS ACTIVITY, THE PARENT COMPANY OF THE ASSESSEE GIVES GUARANTEE TO INDIAN CUSTOMERS FOR PE RFORMANCE IN CASE THE ASSESSEE-COMPANY FAILS TO PERFORM ITS O BLIGATIONS. THE AGREEMENT, NAMELY, PERFORMANCE GUARANTEE AGREEM ENT, IS SILENT IN RESPECT OF DISPUTE RESOLUTION. AN INDIAN COMPANY OR CUSTOMER NATURALLY CANNOT BE EXPECTED TO TRAVEL ALL THE WAY TO DENMARK FOR ENFORCING THIS GUARANTEE. THIS GUARANT EE AGREEMENT DOES NOT PROVIDE FOR ANY ARBITRATION IN I NDIA. THEREFORE, IT HAS TO BE EXAMINED WHETHER THE GUARAN TEE SAID TO BE GIVEN BY THE PARENT COMPANY IS ENFORCEABLE IN IN DIA? IF IT IS NOT ENFORCEABLE IN INDIA, WHETHER SUCH KIND OF AGRE EMENT IS FOR ITA NO.492/MDS./2017 :- 8 -: BUSINESS PURPOSE OR NOT? IT ALSO NEEDS TO BE EXAMI NED WHEN THE PARENT COMPANY GIVES GUARANTEE TO INDIAN CUSTOM ERS IN RESPECT OF THE PRODUCT SOLD BY THE ASSESSEE-COMPANY IN INDIA, WHETHER THE ASSESSEE-COMPANY CAN BE CONSIDERED AS PERMANENT ESTABLISHMENT IN INDIA IN RESPECT OF THE INCOME EARNED BY THE ASSESSEE IN THE FORM OF GUARANTEE PER FORMANCE FEE? THESE ASPECTS WERE NOT CONSIDERED EITHER BY T HE TRANSFER PRICING OFFICER OR BY THE DISPUTE RESOLUTION PANEL. THEREFORE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE MATTER NEEDS TO BE RE-EXAMINED. ACCORDINGLY, THE ORDERS OF THE LOWER AUTHORITIES ARE SET ASIDE. THE ISSUE OF PERFORMANC E GUARANTEE FEE IS REMITTED BACK TO THE FILE OF THE ASSESSING O FFICER. THE ASSESSING OFFICER SHALL REFER THE MATTER TO THE DRP . THE DRP SHALL EXAMINE THE ISSUE IN THE LIGHT OF THE MATERIA L AVAILABLE ON RECORD AND THEREAFTER DECIDE THE ISSUE AFTER GIVING REASONABLE OPPORTUNITY TO THE ASSESSEE. THEREAFTER, THE ASSES SING OFFICER SHALL PASS NECESSARY ORDER UNDER SECTION 144C(13) O F THE ACT. 5. THE LD.D.R SUBMITTED THAT EARLIER THE TRIBUNAL REMITTED THE ISSUE TO THE FILE OF AO ON THE REASON THAT IT WAS CONSIDE RED AS INTEREST INSTEAD OF FTS. IN THE PRESENT CASE, IT WAS CONSID ERED AS FTS ON WHICH THE ASSESSEE IS LIABLE TO DEDUCT TDS. HENCE, THE ABOVE DECISION OF TRIBUNAL CANNOT BE APPLIED. IN THE PRESENT CASE, THE AO CONSIDERED THE SAME AGREEMENT AS IN ASSESSMENT YEAR 2011-12 EN TERED WITH THE PARENT COMPANY UNDER WHICH THE PARENT COMPANY IS RE QUIRED TO PROVIDE PERFORMANCE GUARANTEE. ON THIS, THE CONTEN TION OF THE LD.A.R IS THAT THIS IS A CORPORATE PERFORMANCE GUARANTEE F EE, IF IT IS PAID BY ITA NO.492/MDS./2017 :- 9 -: THE ASSESSEE IS TOWARDS GUARANTEE EXTENDED BY PARE NT COMPANY I.E. VESTAS DENMARK IN RELATION TO PERFORMANCE OF CONTRA CTUAL OBLIGATIONS OF THE ASSESSEE. HENCE, THE SAID PAYMENT WOULD NOT FALL UNDER THE DEFINITION OF FEES FOR TECHNICAL SERVICES AND IT WA S COVERED BY ARTICLE-7 OF DTAA WITH DENMARK. IN OUR OPINION, THERE IS A CO NTRARY TREATMENT GIVEN BY THE AO IN THE ASSESSMENT ORDERS 2011-12 & 2012-13. IN VIEW OF THIS, IT IS APPROPRIATE TO REMIT THE ENTIRE ISSU E TO THE FILE OF AO TO EXAMINE THE ISSUE IN THE LIGHT OF THE ORDER OF TRIB UNAL CITED SUPRA IN ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2011-12 ALO NG WITH AGREEMENT WITH PARENT COMPANY BY THE ASSESSEE. WITH THIS OBSERVATION, WE REMIT THE ISSUE TO THE FI LE OF AO FOR FRESH CONSIDERATION WITHOUT COMMENTING ANYTHING ON MERIT. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 05 TH MAY, 2017, AT CHENNAI. SD/ - SD/ - ( . ) ( G.PAVAN KUMAR ) ! / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER #$ / CHENNAI %& / DATED: 05 TH MAY, 2017. K S SUNDARAM ITA NO.492/MDS./2017 :- 10 - : &'(()*( +* / COPY TO: ( 1 . / APPELLANT 3. ( ,(- . / CIT(A) 5. */0 (1 / DR 2. / RESPONDENT 4. ( , / CIT 6. 02(3 / GF