AI Insights
The case involves Trigo SAS, a company based in France, appealing against the assessment order by the Assistant Commissioner of Income Tax (International Taxation), Pune, which treated the management service fees received from Trigo India as 'fees for technical services' under the Income Tax Act, 1961. The dispute centered on the interpretation of the India-France and India-UK Double Taxation Avoidance Agreements (DTAAs) and whether the services provided by Trigo SAS fell under the definition of 'technical services'. The Tribunal examined the nature of the services provided and referenced previous judgments and CBDT circulars to arrive at its decision.
Appeal details
Counselvise Citation
[2023] 140 COUNSELVISE.COM (IT) 137562 (ITAT-PUNE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
7 month(s) 11 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
29-03-2023
Appeal Filed By
Assessee
Order Result
AllowedAllowed
Bench Allotted
C
Next Hearing Date
14-02-2023
Assessment Year
2019-2020
Appeal Filed On
17-08-2022
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “C” : PUNE BEFORE SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER AND DR. DIPAK P. RIPOTE, ACCOUNTANT MEMBER I.T.A.No.631/PUN./2022 Assessment Year 2019-2020 Trigo SAS, C/o. Trigo Quality Production Services Pvt. Ltd., 101-103, Fortune Business Centre, Baner, Pune – 411 007. PAN AAFCT1290F vs. The ACIT (International Taxation), Circle-2, BO Bhavan, Plot No.1, S.No.47, Pune Satara Road, Parvati, Pune. PIN – 411 009. Maharashtra. (Appellant) (Respondent) For Assessee : Shri Ketan Ved For Revenue : Shri Pankaj Kumar Date of Hearing : 15.02.2023 Date of Pronouncement : 30.03.2023 ORDER PER SATBEER SINGH GODARA, J.M. : This assessee’s appeal for Assessment Year 2019- 2020, arises against ACIT (IT), Circle-2, Pune’s assessment dated 13.09.2021 framed vide Din & Order No.ITBA/AST/F/ 144C/2021-22/1035521764(1) in furtherance to the CIT- (DRP-3), Mumbai-2, Mumbai’s directions in Objection No. 104304/2021-22 dated 23.11.2021 in Din & Order No.ITBA/ DRP/F/144C(5)/2022-23/1042967033(1) dated 06.05.2022, in proceedings u/s.143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (in short "the Act"). 2 ITA.No.631/PUN./2022 Trigo SAS, Pune. Heard both the parties. Case file perused. 2. The assessee pleads the following substantive grounds in the instant appeal : “The appellant objects to the order of the learned Assistant Commissioner of Income Tax (International Tax) ["AO"] dated June 20, 2022 for the aforesaid assessment year on the following among other grounds : 1. The learned AO, pursuant to the directions of the Hon'ble DRP, erred in making the addition of management service fees amounting to Rs.2,25,04,122 received by the appellant by treating .it as fees for technical services. 2. The learned AO, pursuant to the directions of the Hon'ble DRP, erred in holding that the services rendered by the appellant includes elements of both 'consultancy' and 'technical' services and therefore falls within the purview of definition of fees for technical services as per Article 13(4) of the India-France Double Taxation Avoidance Agreement ('DTAA' or 'Tax Treaty') as well as under the restrictive scope of definition of fees for technical services under Article 13(4) of the India-UK DTAA. 3. The learned AO, pursuant to the directions of the Hon'ble DRP, erred in placing reliance on the CBDT Circular No.3/2022 dated 03 February, 2022 to deny the benefit of importing the India-UK DTAA in view of the MFN clause in 3 ITA.No.631/PUN./2022 Trigo SAS, Pune. the Protocol to India-France DTAA under without appreciating that : - It is a well settled position of law that a CBDT Circular is binding only on the Department, and it cannot bind the Appellant and Appellate forums. - The CBDT Circular imposing a requirement of separate notification for importing the beneficial treatment from another DTAA overlooks the plain language of section 90(1) of the Income tax Act, f961 ('Act') and the Protocol, which treats the MFN clause an integral part of the Double Taxation Avoidance Agreement ('DTAA' or 'Tax Treaty'). Accordingly, once a DTAA is notified, all of its integral parts which includes the Protocol, get automatically notified. - As the aforesaid Circular attaches a new disability of a separate notification, it cannot operate retrospectively to the transactions which have taken place in prior assessment year and hence would not apply to the Appellant's case under consideration. 4. The learned AO erred in levying interest under section 234D of the Act. 5. Each one of the above grounds of appeal is without prejudice to the other. 4 ITA.No.631/PUN./2022 Trigo SAS, Pune. 6. The Appellant reserves the right to amend, alter or add to the grounds of appeal.” 3. Coming to instant sole substantive issue of correctness of the learned lower authorities action treating the assessee’s management services fee receipts of Rs.2,25,04,122/- as fee for technical services, we note that the learned DRP’s directions rejecting it’s contentions read as follows : 5 ITA.No.631/PUN./2022 Trigo SAS, Pune. 6 ITA.No.631/PUN./2022 Trigo SAS, Pune. 7 ITA.No.631/PUN./2022 Trigo SAS, Pune. 8 ITA.No.631/PUN./2022 Trigo SAS, Pune. 9 ITA.No.631/PUN./2022 Trigo SAS, Pune. 4. The Revenue could hardly dispute that the above sole issue of taxability of assessee’s management services fees taxability as “fee for technical services” is indeed a recurring one between the parties since preceding assessment year as well which involving a common share services agreement with the group entity M/s. Trigo Quality Production Services Pvt. Ltd. And that this tribunal’s coordinate bench’s order in its own case ITA.No.768/PUN./2018 for assessment year 2014-15 decided on 14.09.2021 has already rejected the department’s stand as follows : “9. Grounds No.3 & 4 pertains to confirming of addition of management service fees amounting to Rs.88,21,345/- received by the assessee treating it as ‘fees for technical services’. 10 ITA.No.631/PUN./2022 Trigo SAS, Pune. 10. The assessee has received management services fees of Rs.88,21,345/- from Trigo India. The Assessing Officer held that the assessee provided services in the nature of managerial, technical or consultancy services to the Indian Entity. He, therefore, held that the services provided by the assessee are in the nature of ‘managerial, technical or consultancy services and hence, they are taxable as ‘fees for technical services’ u/s.9(1)(vii) of the Act. 11. That before the Ld. CIT(Appeal), the assessee had submitted that it had rendered various management services such as legal services, financial services, human resources services, IT and telecom services, operational support services, quality services etc. to Trigo India. This umbrella of services was claimed to be managerial services by the assessee. The case of the assessee is primarily that in his case, one has to apply the more beneficial Indo UK DTAA as mandated by the Protocol 7 of the Indo France DTAA. The assessee claimed that he is protected from taxation of the managerial fees received by the more beneficial Indo UK DTAA. The assessee also relied heavily on the decision of the Hon’ble Delhi High Court in the case of Steria India Ltd., 72 11 ITA.No.631/PUN./2022 Trigo SAS, Pune. taxmann.com 1( Del) which according to the assessee is on identical facts. 12. The Ld. CIT (Appeal) on this issue whether more beneficial Indo UK DTAA would be applicable to the case of the assessee as mandated by Protocol 7 to the Indo France DTAA, held that in the light of explicit Protocol to the Indo France DTAA, the assessee is entitled to seek the benefit of a more beneficial Indo UK DTAA. That also, the Hon’ble Delhi High Court in the case of Steria India Ltd. (supra.) had held that assessee’s claim covers under Article 13(4) of the Indo UK DTAA and after going through the relevant Article 13(4) of the Indo UK DTAA, it was evident found by the Ld. CIT(Appeal) that the said article is more restrictive and does not include managerial services in the definition of FTS. However, the services would be termed as consultancy services. Therefore, the Ld. CIT(Appeal) opined that admitted services rendered by the assessee which are claimed to be managerial, were actually consultancy services. Thereafter, the Ld. CIT(Appeals) proceeded to examine the taxability of consultancy services under a more restrictive definition of FTS in the Indo UK Treaty. Finally, the Ld. CIT(Appeal) at Para 6.12 as per reasoning given in the prior paragraphs of his order observed that the bouquet of services rendered 12 ITA.No.631/PUN./2022 Trigo SAS, Pune. by the assessee include elements of both ‘consultancy’ and ‘technical’ services and therefore, not only are the payments received for the same FTS as per Article 13(4) of the Indo France DTAA, but are also FTS even in the more restrictive definition of FTS in Article 13(4) of the Indo UK DTAA. Therefore, the Ld. CIT(Appeal) held that services rendered by the assessee being consultancy in nature is taxable, both under the domestic law as well as under Article 13 of the Indo France DTAA and accordingly, the action of the Assessing Officer to tax fees for advisory services of Rs.88,21,345/- as FTS under the Income Tax Act and under the DTAA was confirmed. 13. The Ld. Counsel for the assessee at the time of hearing referred to a decision of Pune Bench of the Tribunal in the case of M/s. Faurecia Automotive Holding Vs. DCIT, ITA No.784/PUN/2015 for the assessment year 2011-12 dated 08.07.2019 wherein in the list of services which the assessee, therein, had provided to the Indian Entity as appearing at Para 8 of the said order were almost identical to the services rendered by the assessee herein to Trigo India in the present case. In the said decision the Tribunal has dealt with Article 13(4) of the Indo UK DTAA and the observation of the Tribunal was that the realm of services provided by the 13 ITA.No.631/PUN./2022 Trigo SAS, Pune. foreign entities to the Indian entity, it did not result in making available any technical knowhow etc. to the India entity. The term ‘make available’ had come up for consideration before the Hon’ble Karnataka High Court in the case of CIT Vs. De Beers India Minerals Pvt. Ltd. (2012) 346 ITR 467 (kar.), wherein it has been held that this term means that the payer of the services should be able to utilize the acquired knowledge or knowhow at his own in future without the aid of the service provider. The Authority for Advance Ruling in Production resources group, in Re (2018) 401 ITR 56 AAR has also held that “make available” connotes something which results in transmitting the technical knowledge so that the recipient could derive an enduring benefit and utilise the same in future on his own without the aid and assistance of the provider. 14. Reverting to the facts of the present case, whatever services were provided by the assessee to Trigo India, no technical knowledge was made available by the assessee to the Indian Entity. Rather, it is a case of providing a service involving technical knowledge, which got consumed with its provision itself. Since such services simply involve use of technical knowledge and do not result into handing over some technical know-how to the 14 ITA.No.631/PUN./2022 Trigo SAS, Pune. recipient of the services. The Pune Bench of the Tribunal on this issue in the case of M/s. Faurecia Automotive Holding Vs. DCIT (supra.) has held as follows: “18.10. When we advert to the nature of the Technical services rendered by the assessee, it gets axiomatic that no technical knowledge was made available by the assessee to Faurecia India for its use thereafter. Rather, it is a case of providing a service involving technical knowledge, which got consumed with its provision itself. Since such services simply involve use of technical knowledge and do not result into handing over some technical knowhow to Faurecia India, the same, in our considered opinion, cannot be termed as “Fees for technical services” under the DTAA. 18.11. Thus, it is overt that the total amount received by the assessee for rendition of services to Faurecia India, which is a mixed bag of Managerial and Technical services, does not eventually make available any technical knowledge, experience, skill, know-how etc. to the India entity and hence the same cannot in our considered opinion be considered as `Fees for technical services’ under Article 13(4) of the 15 ITA.No.631/PUN./2022 Trigo SAS, Pune. DTAA with France when read with the Protocol and Article 13(4) of DTAA with the UK. 19. Reliance of the ld. AO on the Explanation below section 9(2) of the Act is of no consequence. This Explanation simply states that income of a non- resident shall be deemed to accrue or arise in India, inter alia, under clauses (vi) or (vii) of sub-section (1) of section 9 and shall be included in the total income of the nonresident, whether or not — (i) the non- resident has a residence or place of business or business connection in India; or (ii) the nonresident has rendered services in India. In the instant appeal, the issue is whether the services rendered by the assessee fall within the definition of `Royalties’ or `Fees for technical services’ u/s 9(1)(vi) or (vii) of the Act. We have held that section 9(1)(vi) is not attracted. Albeit section 9(1)(vii) is attracted, but the amount ceases to be `Fees for technical services’ in the light of the DTAA. Thus, there is no quarrel on whether or not the assessee has a place of business or business connection in India or it has rendered services in or outside India. The position would have been otherwise if the assessee had been covered u/s 9(1)(vi) or (vii) and not getting immunity under the 16 ITA.No.631/PUN./2022 Trigo SAS, Pune. DTAA and then claiming that no income on this score should be included in its total income as either it had no place of business in India etc. or the services were not rendered in India. As such, the reliance of the ld. AO on the Explanation below section 9(2) of the Act, for fortifying his point of view that the amount in question be charged to tax, is pointless. 20. As the extant payment received by the assessee can neither be construed as `Royalty’ u/s 9(1)(vi) of the Act nor as `Fees for technical services’ under the DTAA, the same cannot be included in the total income of the assessee. Ex consequenti, we overturn the impugned order on this score and order the deletion of the addition.” 15. The Ld. DR could not bring on record any materials/evidences to suggest that the facts and circumstances in the case of the present assessee was different from the case of the M/s. Faurecia Automotive Holding Vs. DCIT (supra.). Moreover, on going through the services agreement, it is absolutely clear that whatever services were rendered by the assessee to the Trigo India was services of such nature which got immediately consumed on delivery. There is no part of technical know- 17 ITA.No.631/PUN./2022 Trigo SAS, Pune. how made available by which the Indian Entity could have used services later on its own. Respectfully following the decision of the Pune Bench of the Tribunal in the case of M/s. Faurecia Automotive Holding Vs. DCIT (supra.), on the same parity of reasoning and taking guidance from the decision of the Hon’ble Karnataka High Court in the case of CIT Vs. De Beers India Minerals Pvt.Ltd (supra.), we allow Grounds No. 3 & 4 of the assessee.” 5. Learned CIT-DR at this stage invited our attention to the CBDT’s circular no.3/2022 dated 03.02.2022 that the earlier Most Favourable Nation “MFN” clause benefit is no more available to the assessee in the specified change in circumstances. We note in this backdrop that this tribunal’s yet another learned coordinate bench’s order in ITA.No.202/ PUN./2021 GRI Renewable Industries S.L., vs. ACIT dated 15.02.2022 has held the foregoing CBDT’s circular to be carrying only prospective effect whereas we are in assessment year 2019-20 only. Learned coordinate bench’s detailed discussion to this effect reads as follows : 10. “It would be prudent to take cognizance of the CBDT Circular No.3/2022 dated 03-02-2022 providing clarification and laying down certain pre-requisites for deriving the benefit of the MFN clause in the Protocol to 18 ITA.No.631/PUN./2022 Trigo SAS, Pune. India’s DTAAs with certain countries. The CBDT has summed up its opinion in para 5 of the Circular, reading as under:- “5. In view of the above, it is hereby clarified that the applicability of the MFN clause and benefit of the lower rate or restricted scope of source taxation rights in relation to certain items of income (such as dividends, interest income, royalties, Fees for Technical Services, etc.) provided in India's DTAAs with the third States will be available to the first (OECD) State only when all the following conditions are met: (i) The second treaty (with the third State) is entered into after the signature/ Entry into Force (depending upon the language of the MFN clause) of the treaty between India and the first State; (ii) The second treaty is entered into between India and a State which is a member of the OECD at the time of signing the treaty with it; (iii) India limits its taxing rights in the second treaty in relation to rate or scope of taxation in respect of the relevant items of income; and 19 ITA.No.631/PUN./2022 Trigo SAS, Pune. (iv) A separate notification has been issued by India, importing the benefits of the second treaty into the treaty with the first State, as required by the provisions of sub-section (1) of Section 90 of the Income Tax Act, 1961. If all the conditions enumerated in Paragraph 5(i) to (iv) are satisfied, then the lower rate or restricted scope in the treaty with the third State is imported into the treaty with an OECD State having MFN clause from the date as per the provisions of the MFN clause in the DTAA, after following the due procedure under the Indian tax law.” 11. A look at the above para deciphers that the benefit of a lower rate of taxation or restricted scope of source taxation rights, as contained in the MFN clause with reference to ‘royalty’ and ‘fees for technical services’ etc. provided in the India’s DTAAs with second State, can be availed under the DTAA with the first State only when the four conditions are fulfilled. There is no dispute that conditions enshrined under points (i) to (iii) are fulfilled in the instant case. The condition under point (iv) states that a separate notification should be issued by India importing the benefit of the second treaty into treaty with the first State as required u/s 90(1) of the Act. 20 ITA.No.631/PUN./2022 Trigo SAS, Pune. Thus, it becomes ostensible that the CBDT has mandated the issuance of a separate notification for importing the benefits of a treaty with second State into the treaty with the first State by relying on provisions of sub- section (1) of Section 90 of the Income Act, 1961. Let us examine the prescription of section 90(1) of the Act which has been invoked as a shield for stipulating the fourth requirement. This section provides that: `The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,— (a) for the granting of relief in respect of - (i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or.......and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.’ In our opinion, the Circular specifying the need for a separate notification for importing the beneficial treatment from another Agreement as a corollary of section 90(1) of the Act, overlooks the plain language of the section seen in juxtaposition to the language of the Protocol, which treats the MFN clause an integral part of the Agreement. What is amply borne out from the language of section 90(1) is that a notification may be made for implementing the agreement that the Central Government has entered into with the 21 ITA.No.631/PUN./2022 Trigo SAS, Pune. Government of any country outside India for the granting the relief. Reference to the expression `make such provisions as may be necessary’ for the purpose of notification in the Official Gazette, is to adopt the manner of notifying as may be necessary for implementing the agreement and not that the notification is to be issued piecemeal and in a truncated manner. On notifying the Agreement or Convention, all its integral parts, get automatically notified. As such, there remains no need to again notify the individual limbs of the Agreement so as to make them operational one by one. 12. It is trite law that a circular issued by the CBDT is binding on the AO and not on the assessee or the Tribunal or other appellate authorities. It has been held so authoritatively in CIT Vs. Hero Cycles Pvt. Ltd. (1997) 228 ITR 463 (SC) as reiterated in CCE Vs. M/s. Ratan Melting and Wire Industries (2008) 220 CTR 98 (SC). Ex consequenti, the Circular transgressing the boundaries of section 90(1) of the Act, cannot bind the Tribunal. 13. Notwithstanding the above, it can be seen that the CBDT has panned out a fresh requirement of separate notification to be issued for India importing the benefits of the DTAA from second State to the DTAA with the first 22 ITA.No.631/PUN./2022 Trigo SAS, Pune. State by virtue of its Circular, relying on such requirement as supposedly contained in section 90(1) of the Act. In our considered opinion, the requirement contained in the CBDT circular No.03/2022 cannot primarily be applied to the period anterior to the date of its issuance as it is in the nature of an additional detrimental stipulation mandated for taking benefit conferred by the DTAA. It is a settled legal position that a piece of legislation which imposes a new obligation or attaches a new disability is considered prospective unless the legislative intent is clearly to give it a retrospective effect. We are confronted with a circular, much less an amendment to the enactment, which attaches a new disability of a separate notification for importing the benefits of an Agreement with the second State into the treaty with first State. Obviously, such a Circular cannot operate retrospectively to the transactions taking place in any period anterior to its issuance. In view of the foregoing discussion, we are satisfied that the requirement of a separate notification for implementing the MFN clause, as per the recent CBDT circular dt. 03-02-2022, cannot be invoked for the year under consideration, which is much prior to the CBDT circular of the year 2022. 14. To summarize, the DTAA between India and Spain, having the Protocol containing the MFN clause as its integral 23 ITA.No.631/PUN./2022 Trigo SAS, Pune. part, was duly notified on 21-04-1995, after having entered into force on 12-01-1995. On such notification of the DTAA, the Protocol containing the MFN clause triggering the importing of any other DTAA fulfilling the requisite requirements, including the Portuguese DTAA, got automatically notified pro tanto, in terms of section 90(1) of the Act leaving no room for any separate notification for the importation. The sequitur is that that the authorities below were not justified in denying the benefit of the straight rate of tax at 10% as per the DTAA read with Portuguese DTAA and also additionally charging Surcharge and Education cess.” 6. Faced with the situation, we accept the assessee’s arguments of it’s substantive grounds challenging correctness of learned lower authorities action treating its management services fee of Rs.2,25,02,122/- as fee for technical services in foregoing terms. Ordered accordingly. 7. This assessee’s appeal is allowed in above terms. Order pronounced in the open Court on 30.03.2023. Sd/- Sd/- [DR. DIPAK P. RIPOTE] [SATBEER SINGH GODARA] ACCOUNTANT MEMBER JUDICIAL MEMBER Pune, Dated 30 th March, 2023 VBP/- 24 ITA.No.631/PUN./2022 Trigo SAS, Pune. Copy to 1. The appellant 2. The respondent 3. The CIT (DRP-3), Mumbai-2, Mumbai 4. The Pr. CIT (IT & T.P), Pune. 5. D.R. ITAT, Pune “C” Bench, Pune 6. Guard File. //By Order// Assistant Registrar, ITAT, Pune Benches, Pune.
