MCKINSEY BUSINESS CONSULTANTS SOLE PARTNER LTD LIABILITY COMPANY MEPE, MUMBAI V. DDIT (IT)4(1), MUMBAI

ITA 5452/MUM/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 88256 (ITAT-MUMBAI)
• Duration Of Justice: 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-02-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 09-02-2015
• Assessment Year: 2011-2012
• Appeal Filed On: 28-08-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: DIVESH CHAWLA SH RI S P
• Keywords: Business income; Transfer pricing; Double taxation relief; International transaction; Permanent establishment
• Section: 234B; 90

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH L, MUMBAI BEFORE SHRI N. K. BILLAIYA ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO. 5452/MUM/2014 ASSESSMENT YEAR: 2011-12 M/S. MCKINSEY BUSINESS CONSULTANTS SOLE PARTNER LIMITED LIABILITY COMPANY MEPE C/O, SRBC & ASSOCIATES LLP 14 TH FLOOR, THE RUBY, SENAPATI BAPAT MARG, DADAR (W) MUMBAI 400 028 PAN:-AAECM 7576 N VS. DDIT (IT) 4(1) SCINIDA HOUSE, BALLARD ESTATE MUMBAI 400 038 (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI PORUS KAKA & DIVESH CHAWLA REVENUE BY : SH RI S. PADMAJA DATE OF HEARING : 09 .02.2015 DATE OF ORDER : 13 .02.2015 O R D E R PER AMIT SHUKLA, JM: THE AFORESAID APPEAL HAS BEEN FILED BY THE ASSESSE E, AGAINST FINAL ASSESSMENT ORDER DATED 30.06.2014, PASSED U/S 143(3 ) R.W.S. 144C(13) IN PURSUANCE OF DIRECTIONS GIVEN BY THE DISPUTE RES OLUTION PANEL-II MUMBAI (DRP), DATED 16.06.2014, FOR THE A.Y. 2011- 12. IN THE GROUNDS OF APPEAL THE ASSESSEE HAS RAISED FOLLOWING GROUNDS : ITA NO. 5452/MUM/2014 ASSESSMENT YEAR: 2011-12 2 1. THE LEARNED AO/ HON'BLE DISPUTE RESOLUTION PANEL ('DRP') HAS ERRED IN CONCLUDING THAT BORROWED SERVICE RENDERED BY THE APPELLANT ARE IN THE NATURE OF 'ROYALTY' UNDER ARTI CLE 7 OF THE INDIA-GREECE DOUBLE TAXATION AVOIDANCE AGREEMENT (' INDIA- GREECE TAX TREATY'). 2. THE HON'BLE DRP'S ORDER AND FINDING ON THE EVIDE NCE SUBMITTED IS CONTRARY TO THE DETAILS FILED BEFORE THE LEARNED AO AND IS ALSO CONTRARY TO THE RECORD AND ORDER OF THE DRP. 3. THE LEARNED AO/ HON'BLE DRP HAS ERRED IN NOT FOL LOWING THE EARLIER DECISIONS PRONOUNCED BY THE HON'BLE ITAT IN THE CASE OF GROUP COMPANIES OF THE APPELLANT WHEREIN THE ITAT H AS HELD THAT THE BORROWED SERVICE CHARGES RECEIVED BY THE APPELL ANT'S GROUP COMPANIES IS NOT TAXABLE IN INDIA. 4. WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED A O / HON'BLE DRP HAS FAILED TO APPRECIATE AND APPLY THE ORDER PA SSED BY THE COMPETENT AUTHORITIES OF INDIA AND UNITED STATES OF AMERICA AS PER ARTICLE 27 OF THE INDIA- US DOUBLE TAXATION AVO IDANCE AGREEMENT (INDIA-US TAX TREATY') IN THE CASE OF THE APPELLANT'S GROUP COMPANIES FOR PRIOR YEARS WHEREIN IT HAS BEEN HELD THAT INCOME FROM BORROWED SERVICES SHOULD NOT BE TAXABLE IN INDIA IN THE HANDS OF THE APPELLANT. THE APPELLANT PRAYS THA T THE PRINCIPLES UNDERLYING THE SAID ORDER OUGHT TO HAVE BEEN APPLIED AND PRAY ACCORDINGLY. 5. THE LEARNED AO HAS ERRED IN LEVYING INTEREST UND ER SECTION 234D OF THE ACT, SINCE NO REFUND OF RS 8,120 HAS BE EN GRANTED TO THE APPELLANT TILL DATE. 6. THE LEARNED AO HAS ERRED IN CHARGING INTEREST UN DER SECTION 234B OF THE ACT. 7. THE LEARNED AO HAS ERRED IN INITIATING PENALTY P ROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. 2. BRIEF FACTS OF THE CASE ARE THAT ASSESSEE, MCKIN SEY BUSINESS CONSULTANTS SOLE PARTNER LIMITED LIABILITY, IS A FO REIGN COMPANY INCORPORATED IN GREECE. THE ASSESSEE HAD ENTERED IN TO INTERNATIONAL TRANSACTION WITH ITS ASSOCIATE CONCERN, MCKINSEY AN D COMPANY INC INDIA ITA NO. 5452/MUM/2014 ASSESSMENT YEAR: 2011-12 3 BRANCH DURING THE FINANCIAL YEAR RELEVANT TO THE A. Y. 2011-12. THE ASSESSEE HAS PROVIDED ASSISTANCE IN THE FORM OF BOR ROWED SERVICE TO MCKINSEY INDIA, IN CONSIDERATION FOR WHICH, THE AS SESSEE RECEIVED AN AMOUNT OF RS.50,103/- FROM THE INDIAN COMPANY. THE SAID INCOME WAS NOT OFFERED FOR TAX BY THE ASSESSEE IN THE RETURN O F INCOME AS THE SAID INCOME WAS EARNED IN THE COURSE OF BUSINESS OF THE ASSESSEE AND THEREFORE, IT QUALIFY AS BUSINESS PROFITS UNDER ART ICLE 3 OF INDIAN-GREECE DTAA. SINCE THE ASSESSEE DOES NOT HAVE ANY PERMANEN T ESTABLISHMENT (PE) IN INDIA AND THEREFORE, ITS INCOME IS NOT LIAB LE TO BE TAXED IN INDIA. IN THE DRAFT ASSESSMENT ORDER, THE AO OBSERVED THAT ASSESSEES CONTENTION CANNOT BE ACCEPTED, BECAUSE SIMILAR REAS ONS FOR NON- ACCEPTANCE BY THE AO HAS BEEN DISCUSSED IN THE ASSE SSMENT ORDERS FOR THE EARLIER YEARS IN THE CASE OF THE ASSESSEE AS WE LL AS IN THE CASES OF THE GROUP ENTITIES. THUS, IN VIEW OF THE FINDINGS G IVEN IN THE ASSESSMENT ORDERS FOR THE EARLIER YEARS OF THE GROUP ENTITIES, THE SAID AMOUNT OF INCOME IS TO BE TAXED AS FEES FOR TECHNICAL SERVIC ES WITHIN MEANING OF SECTION 9(1)(VII) AND ALSO UNDER THE PROVISIONS OF INDIA-GREECE DTAA. 3. BEFORE THE DRP, THE ASSESSEE RAISED OBJECTIONS T HAT, INDIA-GREECE DTAA DOES NOT HAVE SPECIFIC ARTICLE FOR TAXATION OF SERVICES WHICH ARE IN THE NATURE OF STRATEGIC/MANAGEMENT/CONSULTANCY SERV ICES. IN ABSENCE OF SPECIFIC ARTICLE FOR TAXATION OF FEES FOR SUCH SERV ICES IN THE DTAA, THE INCOME IN THE NATURE OF FEES FOR SERVICES RENDERED BY THE ASSESSEE WILL BE LIABLE TO BE TAXED UNDER ARTICLE 3 AS BUSINESS P ROFITS. IT WAS ALSO BROUGHT TO THE NOTICE BEFORE THE DRP THAT ITAT MUMB AI BENCH, IN SIMILAR CASES OF ASSESSEES GROUP COMPANIES FOR PAS T YEARS IT HAS BEEN HELD THAT BORROWED SERVICE CHARGE RECEIVED BY THE A SSESSEE CANNOT BE CONSIDERED AS FEES FOR TECHNICAL SERVICES. THE DR P HELD THAT THE INCOME ITA NO. 5452/MUM/2014 ASSESSMENT YEAR: 2011-12 4 WILL TAXABLE UNDER XVII (1) OF THE INDO-GREECE DTAA AND ACCORDINGLY, WOULD BE TAXABLE IN INDIA AND THERE IS NO EXPRESS P ROVISION TO THE CONTRARY MADE IN THE DTAA. ARTICLE 6 OF THE DTAA IS ALSO NOT APPLICABLE. JUST BECAUSE THE TREATY IS SILENT ON THE PARTICULAR TYPE OF INCOME, IT CANNOT BE SAID THAT SUCH INCOME WILL BE AUTOMATIC Q UALIFIED AS BUSINESS INCOME. UNDER THESE CIRCUMSTANCES, THE PROVISIONS O F THE INDIAN INCOME TAX ACT HAVE TO BE CONSIDERED AND APPLIED. THUS, TH E SERVICES RENDERED BY THE ASSESSEE COMPANY ARE CLEARLY TAXABLE AS FEE S FOR TECHNICAL SERVICES U/S 9(1)(VII). 4. BEFORE US, LEARNED SENIOR COUNSEL, SHRI PORUS KA KA SUBMITTED THAT THERE IS NO FTS CLAUSE IN THE INDO-GREECE DTAA AND THEREFORE, SUCH AN INCOME IF AT ALL CAN BE TAXED AS BUSINESS INCOME UN DER ARTICLE 3. HOWEVER, SUCH A BUSINESS INCOME CAN BE TAXED AS BUS INESS INCOME UNDER ARTICLE 3, ONLY WHEN ASSESSEE HAS A PERMANENT ESTABLISHMENT IN INDIA. ADMITTEDLY ASSESSEE DOES NOT HAVE PERMANENT ESTABLISHMENT IN INDIA, THEREFORE, THE AMOUNT RECEIVED BY THE ASSESS EE FOR RENDERING OF SERVICES CANNOT BE TAXED IN INDIA. HE FURTHER SUBMI TTED THAT IN THE GROUP CASES OF THE ASSESSEE, THE TRIBUNAL IN SERIES OF DE CISIONS, IN THE CONTEXT OF OTHER DTAAS, WHERE FTS CLAUSE IS ENSHRINED HAVE HELD THAT, IT IS NOT FEES FOR TECHNICAL SERVICES, AS AND THERE IS NO MAK E AVAILABLE OF TECHNICAL KNOWHOW ETC. IN THE CONTEXT OF INDO-THAILAND TREATY AND INDIA- INDONESIA TREATY WHERE THERE IS NO FTS CLAUSE, THE TRIBUNAL HAS HELD THAT IT IS TO BE TREATED AS BUSINESS INCOME. SINCE, ASSESSEE DOES NOT HAVE ANY PERMANENT ESTABLISHMENT, THEN IT CANNOT BE TAXED IN INDIA. HE SPECIFICALLY DREW OUR ATTENTION TO THE DECISION OF ITAT MUMBAI BENCH IN THE CASE OF MCKINSEY AND COMPANY (THAILAND), ITA NO . 7624/MUM/2010, ITA NO. 5452/MUM/2014 ASSESSMENT YEAR: 2011-12 5 ORDER DATED 10.07.2013. THUS, THE ISSUE INVOLVED IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE. 5. ON THE OTHER HAND LD. DR STRONGLY RELIED UPON TH E ORDER OF THE DRP AS WELL AS ORDER OF THE AO. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDER. THE SOLE ISSUE ARISING IN THIS APPEAL IS, WHETHER THE FEES FOR BORROWED SERVICES RENDERED BY THE ASSESSEE IS TAXABLE IN INDIA AS FTS OR NOT. THE ASSESSEES CASE IS THAT IN ABSENCE OF FTS CLAUSE IN THE INDIA-GREECE DTAA, THE FEES RECEI VED BY THE ASSESSEE IS NOTHING BUT BUSINESS INCOME, WHICH FALLS WITHIN THE AMBIT OF BUSINESS PROFIT UNDER ARTICLE 3 OF INDO-GREECE DTAA. SINCE, SUCH A BUSINESS PROFIT CAN ONLY BE TAXED AS IS ATTRIBUTABLE TO THE PERMANE NT ESTABLISHMENT, THEREFORE, IN THIS CASE WHEN THERE IS NO PERMANENT ESTABLISHMENT THE SAID BUSINESS INCOME CANNOT BE TAXED IN INDIA. ON T HE OTHER HAND DEPARTMENTS CASE IS THAT ARTICLE 17 PROVIDES THAT THE DOMESTIC LAW WILL GOVERN THE ASSESSMENT AND TAXATION OF INCOME WHEREV ER, THERE IS NO PROVISION IN THE TREATY, ACCORDINGLY, THE SAID INCO ME IS TO BE TAXED AS FTS UNDER SECTION 9(1)(VII) OF THE INDIAN INCOME-TA X ACT. A BARE PERUSAL OF ARTICLE 17 MAKES IT ABUNDANTLY CLEAR THAT IT DEA LS WITH RESIDUAL ITEMS OF INCOME WHICH ARE NOT COVERED BY ANY OF THE ARTIC LES OF THE TREATY. HOWEVER, IN THIS CASE THE ASSESSEE HAS EARNED INCOM E BY RENDERING THE SERVICES IN THE COURSE OF ITS BUSINESS AND THEREFOR E, IT IS NOTHING BUT BUSINESS PROFIT WHICH IS COVERED UNDER ARTICLE 3. A DMITTEDLY THE ASSESSEE DOES NOT HAVE PE IN INDIA THE SAME CANNOT BE HELD T O BE TAXED IN INDIA AS PER THE EXPRESS PROVISION OF ARTICLE 3. EXACTLY SIMILAR NATURE OF CASE HAS BEEN DEALT BY THE TRIBUNAL IN THE CASE OF MCKIN SEY COMPANY, (THAILAND) (SUPRA)WHEREIN THE TRIBUNAL OBSERVED AND HELD AS UNDER:- ITA NO. 5452/MUM/2014 ASSESSMENT YEAR: 2011-12 6 7. PRESENTLY WE ARE DEALING WITH A SITUATION IN WH ICH THE ASSESSEE EARNED INCOME BY RENDERING THE SERVICES WH ICH ARE IN THE COURSE OF ITS BUSINESS. ORDINARILY, SUCH INCOME WOULD REMAIN UNDER ARTICLE 7, UNLESS SPECIFICALLY DEALT BY OTHER ARTICLES. THE CASE OF THE AO IS THAT ARTICLE 12 IS APPLICABLE. WE HAVE NOTICED THAT SUCH ARTICLE DEALS ONLY WITH 'ROYALTIES' AND R IOT 'FEES FOR INCLUDED SERVICES'. OBVIOUSLY, THE APPLICATION OF A RTICLE 12 IS RULED OUT. IN THAT VIEW OF THE MATTER, SUCH INCOME WOULD REMAIN INCLUDED UNDER ARTICLE 7 AND WILL NOT MOVE IN THE L AP OF ARTICLE 22, WHICH DEALS WITH ITEMS OF INCOME NOT EXPRESSLY DEAL T WITH IN THE OTHER ARTICLES OF THE DTAA. AS THE NATURE OF THE EX TANT INCOME IS SUCH WHICH IS OTHERWISE SPECIFICALLY COVERED UNDER ARTICLE 7, IT CANNOT BE CONSIDERED IN THE RESIDUAL PROVISION OF A RTICLE 22. 8. ONCE THERE IS AN INCOME IN THE NATURE OF 'BUSINE SS PROFITS', ITS TAXABILITY CAN BE CONSIDERED ONLY WITHIN THE AMBIT OF ARTICLE 7 OF THE DTAA. AS THE ASSESSEE IS A TAX RESIDENT OF THAI LAND, THE BUSINESS PROFITS CAN. BE TAXED IN INDIA ONLY IF THE ENTERPRISE CARRIES ON BUSINESS IN INDIA THROUGH A PERMANENT ES TABLISHMENT (PE) SITUATED IN INDIA. AS IT IS NOT THE CASE OF TH E A.O. THAT THE ASSESSEE HAS A PE IN INDIA, THE AMOUNT OF INCOME WO ULD FALL UNDER ARTICLE 7 BUT CEASE TO BE TAXABLE IN INDIA BE CAUSE OF THE ABSENCE OF THE PE. 9. WHICHEVER WAY WE MAY VIEW THE INCOME, THE OPINIO N OF THE AUTHORITIES BELOW OF INCLUDING IT UNDER ARTICLE 12 OR UNDER ARTICLE 22 IS NOT SUSTAINABLE. THE AMOUNT FALLS UNDER ARTIC LE 7 AS 'BUSINESS PROFITS' AND IS HENCE NOT CHARGEABLE TO T AX BECAUSE OF THE ABSENCE OF ANY PE IN INDIA. WE, THEREFORE, HOLD THAT THE AMOUNT. OF RS.79.99 LAKH FALLS UNDER ARTICLE 7 AND NOT UNDER ARTICLE 12 OR ARTICLE 22 OF THE DTAA. 10. SECTION 90 DEALS WITH THE CONSEQUENCES OF AGREE MENT WITH FOREIGN COUNTRIES OR SPECIFIED TERRITORIES. SUB-SEC TION (1) PROVIDES THAT THE CENTRAL GOVERNMENT MAY ENTER INTO AN AGREE MENT WITH THE GOVERNMENT OF ANY COUNTRY OUTSIDE INDIA OR SPEC IFIED TERRITORY OUTSIDE INDIA, INTER ALIA, FOR GRANTING OF RELIEF I N RESPECT OF INCOME ON WHICH TAX IS PAYABLE BOTH IN INDIA AND THE OTHER COUNTRY. SUB- SECTION (2) OF SECTION 90 PROVIDES THAT WHERE THE C ENTRAL GOVERNMENT HAS ENTERED INTO AN AGREEMENT WITH THE G OVERNMENT OF ANY COUNTRY OUTSIDE INDIA OR A SPECIFIED TERRITO RY OUTSIDE INDIA, AS THE CASE MAY BE, UNDER SUB-SECTION (1) FOR GRANT ING RELIEF OF TAX, OR AS THE CASE MAY BE, AVOIDANCE OF DOUBLE TAX ATION, THEN, IN RELATION TO THE ASSESSEE TO WHOM SUCH AGREEMENT APP LIES, THE PROVISIONS OF THIS ACT SHALL APPLY TO THE EXTENT TH EY ARE MORE BENEFICIAL TO THAT ASSESSEE. IN OTHER WORDS IF A PA RTICULAR ITEM OF ITA NO. 5452/MUM/2014 ASSESSMENT YEAR: 2011-12 7 INCOME IS TAXABLE UNDER THE INCOME-TAX ACT, 1961, T HEN IT SHALL CEASE TO BE TAXABLE IN INDIA, IF THE DTAA PROVIDES EXEMPTION IN RESPECT OF SUCH INCOME. THE CORE OF THE MATTER IS T HAT THE DTAA OVERRIDES THE REGULAR PROVISIONS OF THE ACT, IN SO FAR AS IT IS MORE BENEFICIAL TO THE ASSESSEE. IF THE DT A PROVIDES FO R A MORE LIBERAL MODE OF COMPUTATION OF INCOME, THEN IT IS THIS MODE OF COMPUTATION, WHICH NEEDS TO BE FOLLOWED NOTWITHSTAN DING ANY CONTRARY PROVISION CONTAINED IN THE ACT. HOWEVER, I F THERE IS NO SPECIFIC PROVISION IN THE DTA CONCERNING A PARTICUL AR ASPECT, THEN IT IS THE BASIC LAW, THAT IS, THE ACT, WHICH APPLIE S. AS WE ARE DEALING WITH A SITUATION IN WHICH INDIA HAS ENTERED INTO A DTAA WITH THAILAND AND THE NATURE OF RECEIPT IS COVERED UNDER ARTICLE 7 BUT IN THE PRESENT CIRCUMSTANCES IT IS NOT CHARGEAB LE TO TAX IN INDIA, PATENTLY THE CONSIDERATION OF THE PROVISIONS OF THE ACT IS RULED OUT. WE, THEREFORE, OVERTURN THE IMPUGNED ORD ER ON THIS ISSUE AND HOLD THAT THE AMOUNT IN QUESTION IS NOT I NCLUDIBLE IN THE TOTAL INCOME OF THE ASSESSEE. SINCE, SIMILAR PROVISIONS ARE APPEARING IN INDO-GRE ECE DTAA, WE HOLD THAT THE FEES RECEIVED BY THE ASSESSEE CANNOT BE TA XED IN INDIA AS FTS. ACCORDINGLY GROUND 1 TO 4 RAISED BY THE ASSESSEE AS TREATED AS ALLOWED. 7. SO FAR AS THE ISSUE RAISED IN GROUND NO. 4, THE SAME HAS BECOME ACADEMIC IN VIEW OF THE FINDING GIVEN ABOVE. 8. SO FAR AS THE ISSUE RELATING TO CHARGING OF INTE REST U/S 234B, IT HAS BEEN ADMITTED BY BOTH THE PARTIES THAT THIS ISSUE I S NO LONGER RES- INTEGRA IN VIEW OF THE DECISION OF HONBLE JURISDIC TIONAL HIGH COURT IN THE CASE OF DIT VS. NGC NETWORK ASIA LLC (2009) 313 ITR 187 (BO M). ACCORDINGLY, THE SAID GROUND IS TREATED AS ALLOWED. 9. SO FAR AS THE ISSUE OF LEVY OF INTEREST U/S 234D , THIS MATTER IS RESTORED BACK TO THE FILE OF THE AO, AS THE ASSESSE E HAS CLAIMED IN ITS GROUND OF APPEAL THAT NO REFUND HAS BEEN GRANTED TO THE ASSESSEE. THIS FACT NEEDS TO BE VERIFIED BY THE AO AND APPROPRIATE RELIEF MAY BE GIVEN, IF ADMISSIBLE IN LAW. GROUND NO. 7 IS PREMATURE AND ACCORDINGLY SAME IS DISMISSED. ITA NO. 5452/MUM/2014 ASSESSMENT YEAR: 2011-12 8 10. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 13 TH DAY OF FEBRUARY, 2015. SD/- SD/- (N.K. BILLAIYA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 13.02.2015 *SRIVASTAVA COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR L BENCH //TRUE COPY// BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.