ACIT (IT) 3(2)(1), MUMBAI V. MERRILL LYNCH INTERNATIONAL, MUMBAI

ITA 6240/MUM/2018

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 5099 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-10-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Assessment Year: 2014-2015
• Appeal Filed On: 31-10-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Double taxation relief; Source of fund; Services rendered outside India; Deemed to accrue or arise in india; Date of conversion; Capital Gains
• Section: 143(3); 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL I , BENCH MUMBAI BEFORE SHRI M.BALAGANESH, AM & SHRI AMARJIT SINGH, JM ITA NO. 6240 /MUM/201 8 ( ASSESSMENT YEAR : 2014 - 15 ) & ITA NO. 6241 /MUM/201 8 ( ASSESSMENT YEAR : 2013 - 14 ) ASST. COMMISSIONER OF INCOME TAX, (INTERNATIONAL TAXATION) 3(2)(1), ROOM NO.1607, 16 TH FLOOR AIR INDIA BUILDING NARIMAN POINT, MUMBAI 400 021 VS. M/S. MERRILL LYNCH INTERNATIONAL C/O. M/S. G.M. KAPADIA & CO., 1007, RAHEJA CHAMBERS 213, NARIMAN POINT MUMBAI 400 021 PAN/GIR NO. AABCM1 026G (APPELLANT ) .. (RESPONDENT ) REVENUE BY MS. NEHA THAKUR ASSESSEE BY SHRI NITESH JOSHI DATE OF HEARING 10 / 10 /2019 DATE OF PRONOUNCEMENT 11 / 10 /2019 / O R D E R PER M. BALAGANESH (A.M) : THESE APPEAL S IN ITA NO S . 6240/M UM/2018 & 6241/MUM/2018 FOR A.Y. 2013 - 14 & 2014 - 15 RESPECTIVELY ARISE OUT OF THE ORDER BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - 57, MUMBAI IN APPEAL NO. CIT(A) - 57/ARR.591/2018 - 19 , CIT(A)57/ARR.221/2018 - 19 RESPECTIVELY DATED 24/08/2018 (LD. CIT(A) IN S HORT) AGAINST THE ORDER OF ASSESSMENT PASSED ITA NO. 6240 & 6241/MUM/2018 M/S. MERRILL LYNCH INTERNATIONAL 2 U/S.14 4C (1) R.W.S. 143(3) AND 92CA(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS ACT) DATED 31/01/2018 & 31/03/2016 RESPECTIVELY BY THE LD. JOINT COMMISSIONER OF INCOME TAX (OSD) (INTERNATIONAL TAX ATION) - 3(1)(1), MUMBAI (HEREINAFTER REFERRED TO AS LD. AO). 2. THE FIRST COMMON ISSUE INVOLVED IN THESE APPEALS IS AS TO WHETHER THE LD. CIT(A) WAS JUSTIFIED IN HOLDING THAT THE FEES RECEIVED FROM INDIAN COMPANIES BY THE ASSESSEE WITH REGARD TO IN VESTMENT BANKING TRANSACTIONS CARRIED OUT OVERSEAS CANNOT BE DEEMED TO ACCRUE OR ARISE IN INDIA IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 3. THE BRIEF FACTS OF THIS ISSUE ARE THAT THE ASSESSEE IS A COMPANY INCORPORATED IN UK AND IS REGISTERED AS A FORE IGN INSTITUTIONAL INVESTOR (FII) WITH SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI). DURING THE YEAR UNDER CONSIDERATION, THE ASSES SEE HAD INVESTED IN THE INDIAN S TOCK MARKET BY WAY OF DIRECT PURCHASE OF EQUITY SHARES AND BY WAY OF CONVERSION OF GLOBAL DEP OSITORY REC EIPTS (GPRS) INTO EQUITY SHARES. THE LD. AO OBSERVED IN HIS ORDER THAT ASSESSEE FILED COPIES OF THE ELECTRONIC CONTRA CT NOTES, COPY OF THE ISSUE OF F OREIGN CURRENCY C ONVERTIBLE B ONDS (FCCB) AND ORDINARY SHARES (THROUGH DEPOSITORY RECEIPT MECHANI SM) SCHEME 1993, DEALING WITH THE MANNER OF COMPUTATION OF CAPITAL GAINS ON SALE OF SHARES RECEIVED ON CONVERSION OF GPRS. THE LD. AO OBSERVED THAT IN SUPPORT OF THE PURCHASE PRICE, THE ASSESSEE HAD FILED SAMPLE COPIES OF THE MARKET PRICE OF SHARES ON THE DATE OF CONVERSION OF THE GPR INTO SHARES. THE ASSESSEE WAS ASKED TO SHOW - CAUSE AS TO WHY THE UNDERWRITING FEES RECEIVED BY IT SHOULD NOT BE TAXED AS FEE S FOR TECHNICAL SERVICES RECEIVED IN INDIA. THE ASSESSEE IN RESPONSE THERETO , SUBMITTED BEFORE THE LD. AO THAT T HE ASSESSEE HAD UNDERTAKEN INVESTMENT BANKING TRANSACTION S ITA NO. 6240 & 6241/MUM/2018 M/S. MERRILL LYNCH INTERNATIONAL 3 OVERSEAS IN RESPECT OF WHICH IT HAD RECEIVED CERTAIN SUMS FROM INDIAN COMPANIES , THAT THE AFORESAID ACTIVITY WAS CARRIED OUTSIDE INDIA AND HENCE THERE IS NO INCOME FROM SUCH ACTIVITY WHIC H IS RECEIVED OR DEEMED TO BE RECEIVED BY THE ASSESSEE IN INDIA. THE INCOME FROM THESE TRANSACTIONS WHICH TAKE PLACE OUTSIDE INDIA DOES NOT FALL WITHIN THE SCOPE OF THE TOTAL INCOME UNDER SECTION 5 OF THE INCOME - TAX ACT AND HENCE NOT INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE SINCE THE RECEIPT IS NOT ACCRUING OR ARISING ON INDIA. ALTERNATIVELY, IT WAS ALSO STATED THAT EVEN IF THE SAID INCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA , IT WOULD NOT BE TAXABLE AS PER ARTICLE 13 OF THE INDO - UK DTAA AS THE RENDER ED SERVICES DOES NOT SATISFY THE 'MAKE AVAILABLE' CLAUSE. 3.1. THE LD. AO DID NOT HEED TO THE CONTENTIONS OF THE ASSESSEE AND PROCEEDED TO HOLD THAT THE SAID UNDERWRITING FEES RECEIVED IS DEEMED TO ACCRUE OR ARISE IN INDIA AND IS TAXABLE AS FEE FOR TECHNI CAL SERVICES BOTH UNDER THE ACT AS WELL AS UNDER INDIA UK DTAA BY OBSERVING AS UNDER: - AS PER THE SCHEME OF THE GOVT. OF INDIA, INDIA, INDIAN COMPANIES CAN ACCESS GLOBAL MARKET AND TAP THE FUNDS AVAILABLE OUTSIDE INDIA FOR ITS OWN PURPOSE BY MAKING USE O F OVERSEAS DEPOSITORY BANKS WHICH MAY BE AUTHORIZED TO ISSUE GLOBAL DEPOSITORY RECEIPTS OR FOREIGN CURRENCY CONVERTIBLE BONDS. THE UNITS OF THESE INSTRUMENTS ARE AVAILABLE FOR PURCHASE BY ANY NON RESIDENT DIRECTLY FROM THE SAID OVERSEAS DEPOSITORY BANK. THE DIFFERENCE AND SIMILARITY IN THESE TWO INSTRUMENTS IS THAT WHILE GDR'S ARE IN THE NATURE OF EQUITY SHARES THAT MAY BE TRADED ON THE STOCK EXCHANGE OF THE COUNTRY OF ISSUE AND ENTAIL ALL BENEFITS TO THE HOLDERS AS A NORMAL EQUITY SHARE OF THE COMPANY, WHILE FCCB IS AN INSTRUMENT WHEREIN THE RETURN IS FIXED BY WAY OF AN INTEREST PAYMENT. HOWEVER, BOTH THESE INSTRUMENTS ARE CAPABLE OF BEING CONVERTED INTO NORMAL EQUITY SHARES OF THE ISSUING COMPANY AT THE RATES AS PREVAILING IN THE INDIAN ST OCK MARKET AS ON THE DATE OF CONVERSION. THERE IS NO RESTRICTION ON THE USAGE OR UTILIZATION OF THE FUNDS SO GENERATED BY THE ISSUING COMPANY. THUS, ALL RECEIPTS ON ACCOUNT OF ISSUE OF GDR & FCCB ITA NO. 6240 & 6241/MUM/2018 M/S. MERRILL LYNCH INTERNATIONAL 4 ARE IN THE NATURE OF A NORMAL FUND FOR THE ISSUING COMPANY A ND IT LOOSES ITS SPECIAL CHARACTER OF HAVING BEEN RECEIVED OUTSIDE INDIA. ON RECEIPT OF THE SAID FUND BY THE ISSUING COMPANY, THE ISSUING COMPANY CAN UTILIZE FOR ITS OWN PURPOSES. THUS, THE ULTIMATE BENEFIT OF THE SERVICES RENDERED BY THE OVERSEAS DEPOSITO RY BANK IS THE ISSUING INDIAN COMPANY. THUS, THE CONTENTION THAT THESE SERVICES HAVE BEEN RENDERED OUTSIDE INDIA AND HENCE THE RECEIPTS ON ACCOUNT OF THESE SERVICES CANNOT BE SAID TO BE ACCRUING IN INDIA IS INCORRECT AS THE SERVICES HAVE EVENTUALLY BEEN UT ILIZED IN INDIA. MOREOVER, THERE HAS BEEN AN AMENDMENT IN THE INCOME - TAX ACT V? WHEREIN AN EXPLANATION TO SEC 9(1) HAS BEEN INCLUDED RETROSPECTIVELY WITH EFFECT FROM 01.06.1976, THE PROVISION IS REPRODUCED AS UNDER : 'FOR THE RE MOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT FOR THE PURPOSES OF THIS SECTION, WHERE INCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA UNDER CLAUSES (V). (VI) AND (VII) OF SUB - SECTION (1), SUCH INCOME SHALL BE INCLUDED IN THE TOTAL INCOME OF THE NON - RESIDENT, WH ETHER OR NOT THE NON - RESIDENT HAS RESIDENCE OR PLACE OF BUSINESS OR BUSINESS CONNECTION IN INDIA.' IN VIEW OF THE ABOVE AMENDMENT, WHAT IS ESSENTIAL NOW IN CASES OF SERVICES RENDERED OUTSIDE INDIA IS THAT 1) IT SHOULD BE ACCRUING OR ARISING IN INDIA AND 2 ) IT SHOULD FALL UNDER THE CLAUSE OF FEES FOR TECHNICAL SERVICES, ROYALTY OR INTEREST. THE SERVICES RENDERED HAVE BEEN ULTIMATELY BEEN UTILIZED IN INDIA' AND ACCORDINGLY THE SAID RECEIPT IS ACCRUING OR ARISING IN INDIA. FURTHER THE SERVICES OF INVESTMENT BANKING ALL WITHIN THE DEFINITION OF FEES FOR TECHNICAL SERVICES WITHIN THE MEANING OF INCOME - TAX ACT AND HENCE IS TAXABLE UNDER THE INCOME - TAX ACT . THE PAYEE HAS MADE AVAILABLE THE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW - HOW OR PROCESSES, TO THE PAY ER AND, HENCE THE PAYMENTS FALLS IN THE CATEGORY OF FEES OF TECHNICAL SERVICES. 7. THE CONTENTION OF THE ASSESSEE THAT THE SAID INCOME IS EXEMPT UNDER THE PROVISIONS OF DTAA IS ALSO NOT ACCEPTABLE FOR THE FOLLOWING REASONS: A) THE ASSESSEE IS A NON RESID ENT AND HENCE AS PER THE PROVISIONS OF SEC 90(2) HAS AN OPTION TO BE GOVERNED BY EITHER THE INCOME - TAX ACT OR THE DTAA WHICHEVER IS MORE BENEFICIAL TO THE ASSESSEE. IN THE INSTANT CASE, THE ASSESSEE HAS CHOSEN TO BE GOVERNED BY THE PROVISIONS OF THE INDIAN INCOME - TAX ACT AS FAR AS ITS INCOME FROM CAPITAL GAIN IS CONCERNED. THIS CHOICE OF BEING GOVERNED BY THE INCOME - TAX ACT HAS TO BE CONSISTENT WITH ITA NO. 6240 & 6241/MUM/2018 M/S. MERRILL LYNCH INTERNATIONAL 5 RESPECT TO ALL SOURCES OF INCOME AND HENCE THE RECEIPTS ON ACCOUNT OF RENDERING OF SERVICES WILL ALSO HAVE TO BE GOVERNED BY THE PROVISIONS OF INDIAN INCOME - TAX ACT ALONE. B) THE PROVISIONS OF SECTION 9(1)(VII) APPLICABLE IN THIS CASE IS AS UNDER - INCOME BY WAY OF FEES FOR TECHNICAL SERVICES PAYABLE BY '(B) A PERSON WHO IS A RESIDENT, EXCEPT WHERE THE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILIZED IN A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA; EXPLANATION 2 : FOR PURPOSE OF THIS CLAUSE ' FEES FOR T ECHNICAL SERVICES' MEANS ANY CONSIDERING (INCLUDING ANY LUMP SUM CONSIDERATION) FOR THE RENDERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISION OF SERVICES OF TECHNICAL OR OTHER PERSONNEL).' C) THE NATURE OF SERVICES RENDE RED BY THE ASSESSEE IS HIGHLY TECHNICAL AND IS TAXABLE AS FEES FOR TECHNICAL SERVICES UNDER THE INDIAN INCOME - TAX ACT. D) WITHOUT PREJUDICE TO THE ABOVE, THE CONCEPT OF 'MAKE AVAILABLE' IS NOT DEFINED WITHIN THE DTAA AND HENCE A GENERAL INTERPRETATI ON WOULD MEAN THAT THE PERSON PROVIDING THE SERVICES MERELY ENABLES THE ACQUIRER TO USE THE KNOWLEDGE AND THE PROVIDER DOES NOT PARTICIPATE IN THE ACT OF DOING THE JOB HIMSELF. HOWEVER IN THE INSTANT CASE, THE ASSESSES HAS ACTUALLY RENDERED SUCH SERVICES. THUS, THE RECEIPTS ON ACCOUNT OF INVESTMENT BANKING ARE TAXABLE AS FEES FOR INCLUDED SERVICES WITHIN THE MEANING OF ARTICLE 13 OF THE INDIA - UK DTAA ALSO . 3.2. THE LD. AO IN PARA 8 OF HIS ORDER ALSO OBSERVED THAT THIS ISSUE HAD BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THIS TRIBUNAL FOR A.Y.2005 - 06, 2007 - 08 , 2008 - 09 AND 2009 - 10. HOWEVER, SINCE THE DECISION OF THE TRIBUNAL HAS BEEN APPEALED BY THE REVENUE BEFORE THE HONBLE BOMBAY HIGH COURT, THE SAID ADDITION WAS MADE BY THE LD. AO FOR THE YEAR UNDER CON SIDERATION ALSO IN ORDER TO KEEP JUDICIAL CONSISTENCY. ACCORDINGLY, THE LD. AO TAXED A SUM OF USD 8 , 60 , 389 / - EQUIVALENT TO RS.4,64,18,041/ - AS FEES FOR TECHNICAL SERVICES IN THE ASSESSMENT. THE LD. CIT(A) BY PLACING ITA NO. 6240 & 6241/MUM/2018 M/S. MERRILL LYNCH INTERNATIONAL 6 RELIANCE ON THE ORDER OF THE TRIBUNAL FOR EARLIER YEARS DELETED THE SAID ADDITION. 4. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. 5. WE HAVE HEARD RIVAL SUBMISSIONS. THE LD. DR VEHEMENTLY RELIED ON THE ORDER OF THE LD. AO. WE FIND THAT THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y.2008 - 09 IN ITA NO.940/MUM/2012 DATED 08/08/2013 HAD DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE BY OBSERVING AS UNDER: - 4. HAVING CONSIDERED THE RIVAL SUBMISSIONS AND CAREFUL PERUSAL OF THE RECORD WE NOTE THAT THE ASSESSEE IS A COM PANY INCORPORATED UNDER THE LAWS OF UNITED KINGDOM AND OPERATING AS FII IN INDIA. THE ASSESSEE ALSO ACTS AS LEAD MANAGER AND UNDERWRITER TO THE ADRS/GDRS ISSUED BY INDIAN COMPANIES ABROAD FOR RAISING CAPITAL. SINCE THE ASSESSEE HAS UNDERTAKEN INVESTMENT BA NKING TRANSACTIONS OVERSEAS IN RESPECT OF WHICH IT HAD RECEIVED CERTAIN AMOUNT FROM INDIAN COMPANIES, IT WAS CLAIMED BY THE ASSESSEE THAT THE AFORESAID ACTIVITY CARRIED ON OUTSIDE INDIA AND HENCE THERE IS NO INCOME FOR SUCH ACTIVITIES WHICH IS RECEIVED OR DEEMED TO BE RECEIVED BY THE ASSESSEE IN INDIA. THUS THE ASSESSEE CONTENDED BEFORE THE AO THE INCOME FROM THESE TRANSACTIONS OUTSIDE INDIA DOES NOT FALL WITHIN THE SCOPE OF TOTAL INCOME U/S 5 OF THE ACT. SINCE IT DID NOT ACCRUE OR ARISE IN INDIA ALTERNATIV ELY THE ASSESSEE CONTENDED THAT THE SAID INCOME WOULD NOT BE TAXABLE AS PER ARTICLE 13 OF INDO - UK DTAA AS THE ACTIVITY OF RENDERING SERVICES DO NOT SATISFY THE MAKE AVAILABLE CLAUSE. THE AO DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND HELD THAT THE SERVICES RENDERED BY THE ASSESSEE HAVE BEEN UTILISED IN INDIA, THEREFORE, THEY ARE TAXABLE AS FEES FOR TECHNICAL SERVICES U/S 9(1)(VII) OF THE ACT. ON APPEAL, THE CIT(A) DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE BY FOLLOWING THE ORDER OF THIS TRIBUNAL IS ASSESSEES OWN CASE IN ASSESSMENT YEAR 2005 - 06. WE NOTE THAT FOR THE ASSESSMENT YEAR 2005 - 06 THE TRIBUNAL HAS DECIDED THIS ISSUE IN PARA 6 AS UNDER: 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RECORD AS WELL AS GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE FIND THAT THE ISSUE UNDER CONSIDERATION IS SQUARELY COVERED BY THE DECISION OF ITAT MUMBAI BENCHES IN THE CASE OF RAYMOND LTD. V. DC I T (SUPRA), WHEREIN IT WAS HELD THAT NEITHER MANAGEMENT COMMISSION, NOR UNDERWRITING COMMISSION NOR EVEN SELLING ITA NO. 6240 & 6241/MUM/2018 M/S. MERRILL LYNCH INTERNATIONAL 7 COMMISSION/CONCESSION WOULD AMOUNT TO FEES FOR TECHNICAL SERVICES WITHIN MEANING OF DTA A WITH UK AND, CONSEQUENTLY, THERE WAS NO OBLIGATION ON PART OF ASSESSEE - COMPANY TO DEDUCT TAX UNDER SECTION 195. THE CIT(A) FOLLOWING THE SAID DECISIO N HELD THAT THE FEE RECEIVED BY THE ASSESSEE IS NOT LIABLE TO TAX IN INDIA AS THE SAME DOES NOT CONSTITUTE FEES FOR TECHNICAL SERVICES UNDER THE INDIA - UK DTAA READ WITH THE MEMORANDUM OF UNDERSTANDING FORMING PART OF THE INDIA - USA DTAA AS THE TECHNICAL SE RVICES WERE NOT MADE AVAILABLE BY THE ASSESSEE TO THE INDIAN COMPANIES. THEREFORE, WE FIND NO INFIRMITY IN THE FINDINGS OF THE CIT(A) AND HENCE, THE ORDER OF THE CIT(A) IS HEREBY UPHELD. 5. FOLLOWING THE EARLIER ORDER OF THIS TRIBUNAL WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE IMPUGNED ORDER OF THE CIT(A). 6. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED. 5.1. SIMILAR VIEWS WERE TAKEN BY THIS TRIBUNAL IN ASSESSEES OWN CASE UPTO A.Y.2012 - 13. RESPECTFULLY FOLLOWING THE SAID DECISION, WE DO N OT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A) DELETING THE ADDITION. ACCORDINGLY, THE GROUNDS RAISED BY THE REVENUE FOR A.Y.2013 - 14 ARE DISMISSED. 5.2. THE DECISION RENDERED FOR A.Y.2013 - 14 WOULD APPLY WITH EQUAL FORCE FOR A.Y.2014 - 15 ALSO IN VIEW OF THE IDENTICAL FACTS EXCEPT WITH VARIANCE IN FIGURES. 6. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 11 / 10 /2019 SD/ - ( AMARJIT SINGH ) SD/ - (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED 11 / 10 / 2019 KARUNA , SR.PS ITA NO. 6240 & 6241/MUM/2018 M/S. MERRILL LYNCH INTERNATIONAL 8 COPY OF THE ORDER FORWARDED TO : BY ORDER, ( ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . //TRUE COPY//