WNS NORTH AMERICA INC., MUMBAI V. ADIT (IT) 2(2), MUMBAI

ITA 8621/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9135 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-12-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 11-12-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 10-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Double taxation relief; Retrospective amendment; Permanent establishment; Onus to prove
• Section: 143(3); 5(2); 234B; 90

Judgement Text

, , , , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES L, MUMBAI .. , ! '# $% , & !, ' BEFORE SHRI R.S.SYAL, AM AND SHRI AMIT SHUKLA, JM ./ ITA NO.8621/MUM/2010 ( &) * &) * &) * &) * / / / / ASST YEAR : 2006-2007) M/S.WNS NORTH AMERICA INC. GATE 4, GODREJ & BOYCE COMPLEX PIROJSHANAGAR, VIKHROLI (WEST) MUMBAI 400 079. PAN : AAACW5493Q. THE ASSTT.DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) 2(2) MUMBAI. ( +, / // / APPELLANT) ) ) ) ) / VS. ( -.+,/ RESPONDENT) +, / // / 0 0 0 0 / APPELLANT BY : S/SHRI PORUS KAKA & MANISH KANTH -.+, / 0 / 0 / 0 / 0 / RESPONDENT BY : SHRI MAHESH KUMAR ) / # / / / / DATE OF HEARING : 11.12.2012 12* / # / DATE OF PRONOUNCEMENT : 14.12.2012 !$ !$ !$ !$ / / / / O R D E R PER R.S.SYAL, AM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE ASSESSING OFFICER ON 28.10.2010 U/S 144C(13) READ WITH SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (HEREIN AFTER CALLED THE `ACT) IN RELATION TO THE ASSESSMENT YEAR 2006-2007 . 2.1. FIRST ISSUE RAISED IN THIS APPEAL IS AGAINST T HE HOLDING THE MARKETING AND MANAGEMENT FEES RECEIVED BY THE ASSES SEE FROM WNS INDIA AS COVERED UNDER ARTICLE 12 OF INDIA-US DOUBL E TAXATION AVOIDANCE AGREEMENT. BRIEFLY STATED THE FACTS OF T HE CASE ARE THAT THE ASSESSEE IS A COMPANY INCORPORATED IN UNITED STATE OF AMERICA. IT ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 2 PROVIDED MARKETING, MANAGEMENT AND SALES SUPPORT SE RVICES TO WNS GLOBAL SERVICES PRIVATE LIMITED (HEREINAFTER CALLED WNS INDIA). THE ASSESSEE FILED ITS RETURN DECLARING INCOME OF ` 2,38,78,407. DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS OBSERVED BY THE A.O. THAT THE ASSESSEE RECEIVED A SUM OF ` 41,02,61,224 TOWARDS MARKETING AND MANAGEMENT FEES FROM WNS INDIA COMPRI SING OF TWO PARTS VIZ., PROVISION OF MARKETING AND MANAGEMENT S ERVICES OUTSIDE INDIA AMOUNTING TO ` 36,88,13,733 AND PROVISION OF MARKETING AND MANAGEMENT SERVICES IN INDIA AMOUNTING TO ` 4,14,47,491.THE ASSESSEE WAS CALLED UPON TO EXPLAIN AS TO WHY THE E NTIRE MARKETING AND MANAGEMENT FEES SHOULD NOT BE TREATED AS FEES FOR INCLUDED SERVICES AND ASSESSED TO TAX AS PER ARTICLE 12(4)( B) OF INDIA-US DOUBLE TAXATION AVOIDANCE AGREEMENT (HEREINAFTER CA LLED THE DTAA). THE ASSESSEE STATED THAT IT ENTERED INTO A GREEMENT WITH WNS INDIA FOR PROVIDING MARKETING AND SALES SERVICES , INTER ALIA , IDENTIFYING CUSTOMERS AND ESTABLISHING CONTACTS, SO LICITING INQUIRIES FROM THE CUSTOMERS, MEETING WITH SUCH CUSTOMERS AND MARKET THE BUSINESS OF WNS INDIA. THE ASSESSEE ALSO UNDERTOOK TO APPOINT ADVERTISING AGENCIES TO PREPARE, PLAN AND EXECUTE A DVERTISING OF WNS INDIAS BUSINESS IN NEWSPAPERS, MAGAZINES ETC. IT W AS STATED THAT PAYMENT FOR RENDERING SUCH MARKETING AND MANAGEMENT SERVICES WAS NOT IN THE NATURE OF FEES FOR INCLUDED SERVICES (H EREINAFTER CALLED THE FIS) AS DEFINED UNDER ARTICLE 12 OF THE DTAA. IT WAS ALSO STATED THAT THE ASSESSEE DID NOT MAKE AVAILABLE ANY KNOWLEDGE, EXPERIENCE OR SKILLS ETC. TO WNS INDIA. THE ASSESSEE FURTHER A RGUED THAT AN ORDER ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 3 WAS PASSED U/S 195(2) IN THE CASE OF WNS INDIA AND T HE CIT(A) WAS PLEASED TO HOLD THAT THE PAYMENT BY WNS INDIA TO THE ASSESSEE DID NOT QUALIFY AS FEES FOR INCLUDED SERVICES UNDER THE DTAA. THE ASSESSING OFFICER DID NOT CONCUR WITH THE SUBMISSIO NS ADVANCED ON BEHALF OF THE ASSESSEE. HE OBSERVED THAT THE ASSESS EE-COMPANY PROVIDED MARKETING, MANAGEMENT SERVICES ON RECEIVIN G INSTRUCTIONS FROM WNS INDIA. THE RENDERING OF SUCH SERVICES ALSO REQUIRED VARIOUS ADMINISTRATIVE AND OPERATIONAL SUPPORT SERV ICES FOR UNDERTAKING THE ABOVE BUSINESS ACTIVITIES. HE ALSO CONSIDERED THE FACT THAT THE ASSESSEES PERSONNEL VISITED WNS INDIA TO P ROVIDE MANAGERIAL SERVICES WHICH AMOUNTED TO RENDERING OF EXPERTISE AND TECHNICAL KNOWLEDGE FOR CONDUCT OF THE INDIAN CONCE RN. IN THE BACKGROUND OF SUCH FACTS, THE AO HELD IN THE DRAFT ORDER THAT THE ENTIRE MARKETING AND MANAGEMENT FEES OF ` 41.02 CRORE RECEIVED BY THE ASSESSEE WAS LIABLE TO TAX AS FIS UNDER ARTICLE 12 OF DTAA AT THE RATE OF 15% ON GROSS BASIS. THE DISPUTE RESOLUTION PANEL (HEREINAFTER CALLED THE DRP) UPHELD THE A.O.S DRAFT ORDER ON THIS ISSUE BY HOLDING THAT THE AMOUNT FALLS UNDER ARTICLE 12 OF D TAA. IT DID NOT FIND ANY FORCE IN THE RELIANCE ON BEHALF OF THE ASS ESSEE ON THE DRPS ORDER IN THE CASE OF WNS INDIA FOR THE A.Y. 2006-20 07, AS IN ITS OPINION THE ISSUE IN THAT CASE WAS OF DISALLOWANCE U/S 40(A)(I) OF THE ACT AND SINCE THE ITAT HAD HELD THAT NO TAX WAS DED UCTIBLE, THE PANEL HAD TO DELETE THE DISALLOWANCE MADE. THE A.O. IN TH E IMPUGNED ORDER DATED 28.08.2010 CONSIDERED THE ENTIRE MARKETING AN D MANAGEMENT FEES OF ` 41,02,61,224 RECEIVED BY THE ASSESSEE AS LIABLE TO TAX AS FIS ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 4 UNDER ARTICLE 12 OF THE DTAA AT THE RATE OF 15% ON A GROSS BASIS. THE ASSESSEE IS AGGRIEVED AGAINST SUCH TREATMENT GI VEN BY THE AO TO THE CONSIDERATION FOR MARKETING AND MANAGEMENT SERV ICES. 2.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. BEFORE WE PROCEED FURTHER IT I S PERTINENT TO NOTE THAT FOR PROVIDING THE MARKETING AND MANAGEMENT SER VICES TO WNS INDIA IN INDIA, THE EMPLOYEES OF THE ASSESSEE VISIT ED INDIA DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION. AS PER ARTICLE 5(2) OF THE DTAA, THE EXISTENCE OF THE ASSESSEES EMPLOYEES IN INDIA CONSTITUTED A SERVICE PE IN INDI A. THAT IS HOW THE ASSESSEE OFFERED INCOME FOR TAXATION UNDER ARTICLE 7 OF THE DTAA. THE SHORT CONTROVERSY BEFORE US IS TO DECIDE THE NA TURE OF ` 41.02 CRORE WHICH HAS BEEN TREATED BY THE REVENUE AS FIS UNDER ARTICLE 12 AND THE ASSESSEE IS CLAIMING A PART OF IT, REPRESEN TING CONSIDERATION OF ` 4.14 CRORE FOR RENDERING MARKETING AND MANAGEMENT S ERVICES IN INDIA, AS BUSINESS PROFITS UNDER ARTICLE 7. 2.3. AT THE VERY OUTSET WE WANT TO MAKE IT CLEAR THAT IDENTICAL ISSUE CAME UP FOR ADJUDICATION BEFORE THE TRIBUNAL IN ASS ESSEES OWN CASE FOR THE ASSESSMENT YEAR 2004-2005. THE TRIBUNAL VI DE ITS ORDER DATED 25.11.2011 IN ITA NOS.1993 & 1994/MUM/2009 FOR THE SAID ASSESSMENT YEAR HAS DECIDED THIS ISSUE IN ASSESSEE S FAVOUR BY HOLDING THAT THE FEES RECEIVED BY THE ASSESSEE FOR PROVISION OF MARKETING, MANAGEMENT AND SERVICES CANNOT BE CONSI DERED AS FEES ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 5 FOR INCLUDED SERVICES AS PER ARTICLE 12 OF THE DTA A. DESPITE THAT, THE LEARNED DEPARTMENTAL REPRESENTATIVE FORCEFULLY ARGUED THAT THE RELEVANT PROVISIONS OF SECTION 9(1)(VII) WERE NOT C ONSIDERED BY THE TRIBUNAL IN RIGHT PERSPECTIVE AND IF SUCH PROVISION S HAD BEEN CORRECTLY CONSIDERED, THE DECISION WOULD HAVE BEEN OTHERWISE. IN THE OPPOSITION, THE LEARNED AR RELIED ON THE IMPUGNED O RDER IN THIS REGARD. 2.4. HAVING HEARD THE RIVAL SUBMISSIONS ON THE POINT AND CONSIDERED THE RELEVANT MATERIAL ON RECORD, WE DO N OT FIND ANY FORCE IN THE ARGUMENTS PUT FORTH ON BEHALF OF THE REVENUE FOR TWO REASONS. FIRSTLY, THE ASSESSING OFFICER TREATED THIS AMOUNT AS FEES FOR INCLUDED SERVICES UNDER ARTICLE 12(4)(B) OF THE DT AA BY RELYING ON SIMILAR VIEW TAKEN BY HIM IN EARLIER YEAR. SUCH EAR LIER YEARS ORDER PASSED BY THE A.O. HAS BEEN EVENTUALLY CONSIDERED A ND OVERTURNED BY THE TRIBUNAL. IN THIS ORDER IT HAS BEEN HELD BY THE TRIBUNAL THAT THE AMOUNT IS NOT TAXABLE AS FIS UNDER ARTICLE 12(4)(B) . THERE IS ABSOLUTELY NO DIFFERENCE IN THE FACTS AND LEGAL POS ITION PREVAILING IN THE EARLIER YEAR VIS--VIS THE CURRENT YEAR. AS SUCH, THERE CAN BE NO QUESTION OF DEVIATING FROM THE VIEW TAKEN BY THE TR IBUNAL IN SUCH EARLIER YEAR, WHICH WE FULLY SUBSCRIBE TO. 2.5. THE SECOND REASON FOR NOT ACCEPTING THE LEARNE D DEPARTMENTAL REPRESENTATIVES CONTENTION FOR CONSIDERING THE ISS UE AS PER SECTION 9(1)(VII) OF THE ACT IS THAT PRIMARILY THE AO IN TH E IMPUGNED ORDER ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 6 HAS RELIED ON ARTICLE 12 OF THE DTAA TO HOLD THE AM OUNT AS FIS. NOWHERE DID HE REFER TO SECTION 9, DIRECTLY OR INDI RECTLY TO FIX THE TAXABILITY OF THIS AMOUNT AS FIS UNDER THE PROVISIO NS OF THE ACT. HOWEVER, WITH A VIEW TO PROVIDE COMPLETENESS TO THI S ORDER, WE WOULD LIKE TO NOTE THAT THE SCOPE OF SECTION 9(1)(V II) IS SOMEWHAT DIFFERENT IN COMPARISON WITH THE ARTICLE 12(4)(B). IN ORDER TO ROPE IN ANY AMOUNT WITHIN THE PURVIEW OF FIS UNDER THE ARTI CLE 12(4)(B) OF DTAA, WHICH HAS BEEN INVOKED BY THE AO, IT IS ESSE NTIAL THAT THE PAYMENT SHOULD BE TO `MAKE AVAILABLE TECHNICAL KNO WLEDGE, EXPERIENCE, SKILL, KNOW-HOW OR PROCESSES, OR CONSIS T OF THE DEVELOPMENT AND TRANSFER OF A TECHNICAL PLAN OR TEC HNICAL DESIGN. ON THE CONTRARY, THERE IS NO SUCH REQUIREMENT OF `MAKI NG AVAILABLE ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES. SIM PLE RENDITION OF SUCH SERVICES IS SUFFICIENT. IT IS NOT THE CASE OF THE REVENUE THAT THE ASSESSEE MADE AVAILABLE SOME MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES TO WNS INDIA. EVEN IF WE CONSIDER FOR A MOM ENT THAT THE MARKETING AND MANAGEMENT SERVICES RENDERED BY THE A SSESSEE WERE IN THE NATURE OF TECHNICAL SERVICES AS PER SECTION 9(1 )(VII), THE SAME WOULD NOT BECOME FIS AS PER THE DTA BECAUSE OF THE LANGUAGE OF ARTICLE 12(4)(B) WHICH MANDATES THAT SUCH SERVICES MUST BE MADE AVAILABLE TO THE PAYER OF THE CONSIDERATION. AS THE ASSESSEE IN THE INSTANT CASE HAS NOT MADE AVAILABLE ANY TECHNICAL K NOWLEDGE, EXPERIENCE, SKILL ETC. TO WNS INDIA, IN OUR CONSIDE RED OPINION, THE SAME CANNOT BE SUBJECTED TO TAX BY CONSIDERING THE PROVISIONS OF SECTION 9(1)(VI) ON STAND ALONE BASIS. WE WILL DISC USS INFRA IN A LITTLE ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 7 MORE DETAIL THAT THE PROVISION OF THE ACT OR THE RE LEVANT DOUBLE TAXATION AVOIDANCE AGREEMENT, WHICHEVER IS MORE BEN EFICIAL TO THE ASSESSEE, SHALL APPLY. AS THE PROVISIONS OF ARTICL E 12(4)(B) ARE BENEFICIAL TO THE ASSESSEE IN COMPARISON WITH SECTI ON 9(1)(VI), IT IS THE PRESCRIPTION OF ARTICLE 12, WHICH SHALL APPLY IN SU PERSESSION OF SECTION 9(1)(VI) OF THE ACT. WE, THEREFORE, HOLD THA T THE MARKETING AND MANAGEMENT SERVICES RENDERED BY THE ASSESSEE TO WNS INDIA ARE NOT CHARGEABLE TO TAX AS FIS UNDER ARTICLE 12 OF THE DT AA. THE IMPUGNED ORDER IS, THEREFORE, REVERSED TO THIS EXTE NT. 2.6. AS WE HAVE HELD IN THE FOREGOING PARA T HAT THE AMOUNT OF ` 41.02 CRORE CANNOT BE CONSIDERED AS FIS, NATURALLY THE AMOUNT RECEIVED BY THE ASSESSEE ON THIS SCORE NEEDS TO BE EXAMINED FROM THE ANGLE OF TAXABILITY UNDER OTHER PROVISIONS. IT IS IMPORTANT TO NOTE THAT THE ASSESSEE FILED ITS RETURN DECLARING TOTAL INCOM E OF ` 2,38,78,407 BY INTER ALIA TREATING THE SUM OF ` 4.11 CRORE BEING THE CONSIDERATION FOR THE PROVISION OF MARKETING AND MANAGEMENT SERVICES IN INDIA AS FALLING UNDER ARTICLE 7. THE AO HAS TREATED THE ENT IRE AMOUNT OF ` 41.02 CRORE AS FIS AND THUS COMPUTED THE TOTAL INCO ME BY IGNORING THE INCOME OFFERED BY THE ASSESSEE. AS SUCH THE B USINESS INCOME SHOWN BY THE ASSESSEE AS PER ARTICLE 7 SHALL REVIVE AND BECOME TAXABLE. THE AO IS DIRECTED TO INCLUDE SUCH AMOUNT IN THE TOTAL INCOME OF THE ASSESSEE. IN SO FAR AS THE REMAINING RECEIPTS OF ` 36.18 CRORE, BEING THE CONSIDERATION FOR THE PROVISION OF MARKETING AND MANAGEMENT SERVICES OUTSIDE INDIA IS CONCERNED, THE SAME CANNOT BE ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 8 SUBJECTED TO TAX IN INDIA BECAUSE SUCH INCOME CANNO T BE SAID TO HAVE ACCRUED OR ARISEN TO THE ASSESSEE OR DEEMED TO HAVE BEEN ACCRUED OR ARISEN TO THE ASSESSEE IN INDIA. EVEN THE EXISTENC E OF THE SERVICE PE IN INDIA WILL NOT MAKE IT TAXABLE BECAUSE OF NO INV OLVEMENT OF SUCH PE IN EARNING THIS INCOME FOR WHICH THE SERVICES WE RE RENDERED OUTSIDE INDIA. 3.1. SECOND ISSUE RAISED IN THIS APPEAL IS AGAI NST THE REIMBURSEMENT OF INTERNATIONAL TELECOM CONNECTIVITY CHARGES RECEI VED BY THE ASSESSEE FROM WNS INDIA WHICH HAVE BEEN HELD BY THE AO TO BE TAXABLE UNDER ARTICLE 12 OF THE DTAA AS ROYALTY. THE FACTS APROPO S THIS ISSUE ARE THAT THE ASSESSEE RECEIVED REIMBURSEMENT OF LEASE L INE CHARGES AMOUNTING TO ` 6,41,87,580 FROM WNS INDIA. THE A.O. CALLED UPON THE ASSESSEE TO EXPLAIN AS TO WHY THE REIMBURSEMENT OF SUCH EXPENSES SHOULD NOT BE CONSIDERED AS ROYALTY LIABLE TO TAX U NDER ARTICLE 12 OF DTAA. THE ASSESSEE SUBMITTED THAT WNS INDIA IS IN TH E BUSINESS OF PROVIDING SOFTWARE AND IT ENABLED SERVICES TO CLIEN TS LOCATED OUTSIDE INDIA. FOR TRANSMITTING THE DATA FROM THE UNIT OF T HE WNS INDIA TO THE CUSTOMERS LOCATED OUTSIDE INDIA, WNS INDIA AVAILED T HE SERVICES OF THE DOMESTIC AS WELL AS INTERNATIONAL TELECOM OPERA TORS. THE ASSESSEE PAID THESE INTERNATIONAL TELECOM CONNECTIVITY CHARG ES TO THE INTERNATIONAL TELECOM OPERATORS FOR THE SERVICES UT ILIZED BY WNS INDIA OUTSIDE INDIA AND THE SAME WAS ACCORDINGLY RE IMBURSED BY WNS INDIA TO THE ASSESSEE. IT WAS STATED THAT THESE RECOVERIES REPRESENTED REIMBURSEMENT AT COST OF THE EXPENSES I NCURRED BY THE ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 9 ASSESSEE FOR AND ON BEHALF OF WNS INDIA WITHOUT ANY MARK UP. SIMILAR SUBMISSIONS WERE ALSO ADVANCED BEFORE THE D RP CONTENDING THAT THE REIMBURSEMENT OF INTERNATIONAL TELECOM CON NECTIVITY CHARGES WAS WITHOUT ANY PROFIT ELEMENT AND HENCE THE SAME C OULD NOT BE CONSIDERED AS ITS INCOME. NOT CONVINCED WITH THE A SSESSEES SUBMISSIONS, THE A.O. TREATED THE PAYMENT RECEIVED FROM WNS INDIA TOWARDS REIMBURSEMENT OF INTERNATIONAL TELECOM CONN ECTIVITY CHARGES AMOUNTING TO ` 6.41 CRORE AS ROYALTY TAXABLE AS PER ARTICLE 12 OF THE DTAA. IN REACHING THIS CONCLUSION, THE A.O. FOLLOWE D HIS ORDER FOR THE EARLIER YEAR ON THIS ISSUE. THE ASSESSEE IS BE FORE US ASSAILING THE TREATMENT GIVEN BY THE AUTHORITIES BELOW TO SUCH RE IMBURSEMENT OF EXPENSES AS ROYALTY. 3.2. THE LD. AR RELIED ON THE ORDER PASSED BY THE T RIBUNAL FOR THE EARLIER YEAR DECIDING SUCH ISSUE IN FAVOUR OF THE A SSESSEE. PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENTATIVE OPPOSED SUC H VIEW TAKEN BY THE TRIBUNAL AND INSISTED THAT THE SAME SHOULD N OT BE FOLLOWED DUE TO INSERTION OF EXPLANATION 5 BY THE FINANCE ACT, 2 012 W.R.E.F. 1.6.1976 WHICH GIVES PROPER MEANING TO CLAUSE (IVA ) TO EXPLANATION (2) BELOW SECTION 9(1)(VI). HE SUBMITTED THAT THE CLA USE (IVA) CLEARLY PROVIDES THAT ROYALTY MEANS ANY CONSIDERATION FOR ` THE USE OR RIGHT TO USE ANY INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EQUIPM ENT... INVITING OUR ATTENTION TOWARDS EXPLANATION (5) INSERTED BY THE FINANCE ACT, 2012 WITH RETROSPECTIVE EFFECT, THE LD. DR STATED T HAT THE SAME CLARIFIES THAT `THE ROYALTY INCLUDES CONSIDERATIO N IN RESPECT OF ANY ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 10 RIGHT, PROPERTY OR INFORMATION WHETHER OR NOT -- (A ) THE POSSESSION OR CONTROL OF SUCH RIGHT, PROPERTY OR INFORMATION IS W ITH THE PAYER; (B) SUCH RIGHT, PROPERTY OR INFORMATION IS USED DIRECTL Y BY THE PAYER . IT WAS CONTENDED THAT THE INSERTION OF EXPLANATION (5) BY THE FINANCE ACT, 2012 WITH RETROSPECTIVE EFFECT ALSO COVERING T HE YEAR UNDER CONSIDERATION HAS CHANGED THE ENTIRE COMPLEXION OF THE CASE AND IT HAS NECESSITATED OBSERVING DEPARTURE FROM THE EARLI ER ORDER OF THE TRIBUNAL WHICH WAS PASSED WITHOUT THE ASSISTANCE OF SUCH LEGISLATIVE AMENDMENT COMING ON THE STATUTE AFTER THE PASSING O F SUCH ORDER. THE LEARNED DEPARTMENTAL REPRESENTATIVE CONTENDED THAT THE PAYMENT RECEIVED BY THE ASSESSEE IN THE INSTANT CASE IS IN RESPECT OF ALLOWING WNS INDIA THE USER OF THE EQUIPMENT WITHOUT TAKING I TS PERSONAL POSSESSION AND HENCE CONSIDERATION FOR SUCH USER AM OUNTS TO ROYALTY. IT WAS, THEREFORE, SUBMITTED THAT THE ORDER PASSED BY THE TRIBUNAL FOR THE EARLIER YEAR SHOULD NOT BE FOLLOWED BECAUSE OF INSERTION OF EXPLANATION (5) BY THE FINANCE ACT, 2012 WITH RETROSPECTIVE EFFECT COVERING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION. 3.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PE RUSED THE RELEVANT MATERIAL ON RECORD. HERE AGAIN IT IS NOTICED THAT S IMILAR ISSUE WAS RAISED BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE F OR THE EARLIER YEAR. VIDE THE AFORE-NOTED ORDER, THE TRIBUNAL HAS HELD T HAT THE REIMBURSEMENT OF LEASE LINE CHARGES RECEIVED BY THE ASSESSEE FROM WNS INDIA IS NOT CHARGEABLE TO TAX IN INDIA AS SUCH PAYMENT WAS NOT IN RESPECT OF USE OF ANY EQUIPMENT SO AS TO BE CALL ED AS ROYALTY. ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 11 FURTHER THE TRIBUNAL HELD THAT IT WAS A CASE OF REI MBURSEMENT OF THE LEASE LINE CHARGES WHICH DID NOT INCLUDE ANY MARK U P OR PROFIT AND SUCH REIMBURSEMENT OF ACTUAL EXPENSES COULD NOT TRE ATED AS ROYALTY INCOME CHARGEABLE TO TAX. 3.4. NOW WE TAKE UP THE CONTENTION OF THE LD. DR URGING US TO DEVIATE FROM THE VIEW CANVASSED BY THE TRIBUNAL IN THE EARLIER YEAR. THE CONTENTION OF THE LD. DR IS TWO-FOLD. FIRST, TH AT ANY RETROSPECTIVE AMENDMENT TO THE PROVISIONS OF THE ACT IS RELEVANT FOR DETERMINING THE TAXABILITY OR DEDUCTIBILITY OF AN AMOUNT EVEN U NDER THE PROVISION OF THE DTAA AND SECOND, THE AMOUNT IN QUESTION, WHEN EXAMINED IN THE LIGHT OF EXPLANATION 5 TO SEC. 9(1)(VI) INSE RTED RETROSPECTIVELY CLEARLY, BRINGS IT IN THE SCOPE OF `ROYALTY. 3.5. WE ESPOUSE THE FIRST SEGMENT OF THE CONTEN TION OF THE LD. DR THAT THE RETROSPECTIVE AMENDMENT TO THE PROVISIONS OF THE ACT PER SE SHOULD BE CONSIDERED FOR DETERMINING THE TAXABILITY OF THE AMOUNT EVEN UNDER THE DTAA. IT IS TRITE THAT UNDER NORMAL CIRCUMSTANCES THE RETROSPECTIVE AMENDMENT OF ANY PROVISION OF THE ACT MANDATES IT TO BE FOLLOWED FROM THE DATE FROM WHICH SUCH RETROSPEC TIVE EFFECT IS GIVEN. IN SUCH A SITUATION IT IS CONSIDERED AS IF FOR ALL PRACTICAL PURPOSES THE PROVISION WAS THERE ON THE STATUTE FRO M SUCH EARLIER DATE. ACCORDINGLY THE ASSESSMENTS AND OTHER PROCEEDINGS U NDER THE ACT HAVE TO MOVE WITH THE PRESUMPTION OF EXISTENCE OF S UCH PROVISION FROM THE EARLIER DATE. ANY ASSESSMENT ORDER, WHICH WHEN ORIGINALLY PASSED IN ACCORDANCE WITH THE LAW AS PREVAILING AT THAT POINT OF TIME, ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 12 SHALL REQUIRE AMENDMENT IF THERE IS SOME RETROSPECT IVE AMENDMENT TO THE PROVISION GERMANE TO THE ISSUE, OF COURSE, SUB JECT TO OTHER PROVISIONS OF THE ACT. 3.6. HOWEVER, POSITION IS SLIGHTLY DIFFERENT WHEN THERE IS A DOUBLE TAXATION AVOIDANCE AGREEMENT WITH ANOTHER COUNTRY. SUB-SECTION (1) OF SECTION 90 OF THE ACT PROVIDES THAT THE CENTRAL GOVERNMENT MAY ENTER INTO AN AGREEMENT WITH THE GOVERNMENT OF ANY OTHER COUNTRY FOR THE GRANTING OF RELIEF OF TAX IN RESPECT OF INCOME ON WHICH TAX HAS BEEN PAID IN TWO DIFFERENT TAX JURISDICTIONS. SUB-S ECTION (2) OF SECTION 90 UNEQUIVOCALLY PROVIDES THAT WHERE THE CENTRAL GO VERNMENT HAS ENTERED INTO AN AGREEMENT WITH THE GOVERNMENT OF AN Y COUNTRY OUTSIDE INDIA UNDER SUB-SECTION (1) FOR GRANTING RE LIEF OF TAX OR FOR AVOIDANCE OF DOUBLE TAXATION, THEN, IN RELATION TO THE ASSESSEE TO WHOM SUCH AGREEMENT APPLIES, ` THE PROVISIONS OF THIS ACT SHALL APPLY TO THE EXTENT THEY ARE MORE BENEFICIAL TO THAT ASSE SSEE . THE CRUX OF SUB-SECTION (2) IS THAT WHERE A DTAA HAS BEEN ENTER ED INTO WITH ANOTHER COUNTRY, THEN THE PROVISIONS OF THE ACT SHA LL APPLY ONLY IF THEY ARE MORE BENEFICIAL TO THE ASSESSEE. IN SIMPLE WORDS, IF THERE IS A CONFLICT BETWEEN THE PROVISIONS UNDER THE ACT AND T HE DTAA, THE ASSESSEE WILL BE SUBJECTED TO THE MORE BENEFICIAL P ROVISION OUT OF THE TWO. IF THE PROVISION OF THE ACT ON A PARTICULAR IS SUE IS MORE BENEFICIAL TO THE ASSESSEE VIS-A-VIS THAT IN THE DTAA, THEN SUCH PROVISION OF THE ACT SHALL APPLY AND VICE VERSA . THE HONBLE SUPREME COURT IN THE CASE OF CIT V. P.V.A.L. KULANDAGAN CHETTIAR ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 13 [(2004) 267 ITR 654 (SC)] HAS HELD THAT THE PROVISIONS OF SECTIONS 4 AND 5 ARE SUBJECT TO THE CONTRARY PROVISION, IF ANY , IN DTAA. SUCH PROVISIONS OF A DTAA SHALL PREVAIL OVER THE ACT AND WORK AS AN EXCEPTION TO OR MODIFICATION OF SECTIONS 4 AND 5. SIMILAR VIEW HAS BEEN TAKEN BY THE HONBLE JURISDICTIONAL HIGH COURT IN CIT V. SIEMENS AKTIONGESELLSCHAFT [(2009) 310 ITR 320 (BOM .)] . IN THE LIGHT OF THE ABOVE DISCUSSION IT BECOMES VIVID THAT IF TH E PROVISIONS OF THE TREATY ARE MORE BENEFICIAL TO THE ASSESSEE VIS--VI S ITS COUNTERPART IN THE ACT, THEN THE ASSESSEE SHALL BE ENTITLED TO BE RULED BY THE PROVISIONS OF THE TREATY. 3.7. WE COME BACK TO THE CONTENTION OF THE LD. DR THAT THE RETROSPECTIVE AMENDMENT TO THE PROVISIONS OF THE AC T SHOULD BE CONSIDERED FOR DETERMINING THE TAXABILITY OF THE AM OUNT EVEN UNDER THE DTAA. THIS CONTENTION, IN OUR CONSIDERED OPINIO N, IS PARTLY CORRECT. ANY AMENDMENT CARRIED OUT TO THE PROVISIO NS OF THE ACT WITH RETROSPECTIVE EFFECT SHALL NO DOUBT HAVE THE EFFECT OF ALTERING THE PROVISIONS OF THE ACT BUT WILL NOT PER SE HAVE THE EFFECT OF AUTOMATICALLY ALTERING THE ANALOGOUS PROVISION OF T HE TREATY. THERE ARE CERTAIN PROVISIONS IN SOME TREATIES WHICH DIREC TLY RECOGNIZE THE PROVISIONS OF THE DOMESTIC LAW. FOR EXAMPLE, ARTICL E 7 IN CERTAIN CONVENTIONS PROVIDES THAT THE DEDUCTIBILITY OF EXPE NSES OF THE PERMANENT ESTABLISHMENT SHALL BE SUBJECT TO THE PRO VISIONS OF THE DOMESTIC LAW. IN SUCH A CASE, IF ANY RETROSPECTIVE AMENDMENT IS MADE ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 14 TO THE PROVISIONS OF THE ACT GOVERNING THE DEDUCTIB ILITY OF THE EXPENSES, THE SAME SHALL APPLY UNDER THE TREATY AS WELL. 3.8. ARTICLE 23 IN CERTAIN TREATIES INCLUDING TH AT OF INDIA WITH MAURITIUS IS ` ELIMINATION OF DOUBLE TAXATION. PARA 1 OF ARTICLE 23 IN MAURITIUS TREATY PROVIDES THAT: THE LAWS IN FORCE IN EITHER OF THE CONTRACTING STATES SHALL CONTINUE TO GOVERN THE TAX ATION OF INCOME IN THE RESPECTIVE CONTRACTING STATES EXCEPT WHERE PROV ISIONS TO THE CONTRARY ARE MADE IN THIS CONVENTION. FIRST PART OF PARA 1 OF ARTICLE 23 MAKES OUT A GENERAL RULE THAT IF INCOME OF THE P ERMANENT ESTABLISHMENT IS TO BE COMPUTED IN INDIA, THEN THE PROVISIONS OF THE ACT SHALL GOVERN THE TAXATION OF INCOME IN INDIA. H OWEVER, THE SECOND PART OF PARA 1 OF ARTICLE 23 CONTAINS A QU ALIFICATION, WHICH MAKES THE OPERATION OF THE FIRST PART OF PARA 1 OF ARTICLE 23 SUBJECT TO THE FULFILLMENT OF SUCH STIPULATION. THE WORD EXCE PT IS THE DIVIDING CONTOUR BETWEEN THE MAIN PROVISION AND THE QUALIFI CATION PART. THE PORTION STARTING THEREAFTER ENUMERATES THE QUALIFIC ATION, WHICH IS : `WHERE PROVISIONS TO THE CONTRARY ARE MADE IN THIS CONVENTION. WHEN WE READ FULL TEXT OF PARA 1 OF ARTICLE 23, IT B ECOMES MANIFEST THAT IF THERE IS SOME PROVISION IN THE TREATY CONTR ARY TO THE DOMESTIC LAW, THEN IT IS THE PROVISION OF THE TREATY WHICH S HALL PREVAIL. THUS THE GENERAL RULE CONTAINED IN THE FIRST PART OF PAR A 1 OF ARTICLE 23, BEING THE APPLICABILITY OF THE DOMESTIC LAW, HAS C AST A SHADOW ON ANY PROVISION TO THE CONTRARY IN THE TREATY. IN CASE T HERE IS NO CONTRARY PROVISION IN THE TREATY, THEN IT IS THE DOMESTIC LA W WHICH SHALL APPLY. ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 15 IF HOWEVER, THERE IS SOME PROVISION IN THE TREATY C ONTRARY TO THE DOMESTIC LAW THEN IT IS SUCH CONTRARY PROVISION OF THE TREATY WHICH SHALL OVERRIDE THE PROVISION IN THE DOMESTIC LAW IN THE COMPUTATION OF INCOME AS PER THE TREATY. COMING BACK TO OUR CONTEX T, IF THE RETROSPECTIVE AMENDMENT IS IN THE REALM OF A PROVIS ION OF WHICH NO CONTRARY PROVISION IS THERE IN THE TREATY, THEN SUC H AMENDMENT WILL HAVE EFFECT EVEN UNDER THE DTAA AND VICE VERSA. 3.9. ARTICLE 3(2) IN MOST OF THE TREATIES INCLU DING THE INDIA-USA DTAA PROVIDES THAT ANY TERM NOT DEFINED IN THE CONV ENTION SHALL UNLESS THE CONTEXT OTHERWISE REQUIRES, HAVE THE MEA NING WHICH IT HAS UNDER THE LAWS OF THAT STATE CONCERNING TAX TO WHIC H THE CONVENTION APPLIES. THE NITTY-GRITTY OF ARTICLE 3(2) IN THE PR ESENT CONTEXT IS THAT IF A PARTICULAR TERM HAS NOT BEEN DEFINED IN THE TREAT Y BUT THE SAME HAS BEEN DEFINED IN THE ACT AND FURTHER THERE IS A RETR OSPECTIVE AMENDMENT TO THAT TERM UNDER THE ACT, IT IS THIS AM ENDED DEFINITION OF THE TERM AS PER THE ACT, WHICH SHALL APPLY IN THE T REATY AS WELL. IF HOWEVER A PARTICULAR TERM HAS BEEN SPECIFICALLY DEF INED IN THE TREATY, THE AMENDMENT TO THE DEFINITION OF SUCH TERM UNDER THE ACT WOULD HAVE NO BEARING ON THE INTERPRETATION OF SUCH TERM IN THE CONTEXT OF THE CONVENTION. A COUNTRY WHO IS PARTY TO A TREATY CANNOT UNILATERALLY ALTER ITS PROVISIONS. ANY AMENDMENT T O TREATY CAN BE MADE BILATERALLY BY MEANS OF DELIBERATIONS BETWEEN THE TWO COUNTRIES WHO SIGNED IT. IF THERE IS NO AMENDMENT TO THE PRO VISION OF THE TREATY BUT THERE IS SOME AMENDMENT ADVERSE TO THE ASSESSEE IN THE ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 16 ACT, WHICH PROVISION HAS BEEN SPECIFICALLY DEFINED IN THE TREATY OR THERE IS NO REFERENCE IN THE TREATY TO THE ADOPTION OF SUCH PROVISION FROM THE ACT, AGAIN THE MANDATE OF SECTION 90(2) SH ALL APPLY AS PER WHICH THE PROVISIONS OF THE ACT OR THE TREATY, WHI CHEVER IS MORE BENEFICIAL TO THE ASSESSEE SHALL APPLY. GOING BY SU CH RULE, THE AMENDMENT TO THE ACT SHALL HAVE NO UNFAVORABLE EFFE CT ON THE COMPUTATION OF TOTAL INCOME OF THE ASSESSEE. 3.10. REVERTING TO THE FACTS OF THE EXTANT CASE, W E OBSERVE THAT THE TERM ROYALTY HAS BEEN DEFINED IN THE DTAA AS PER ARTICLE 12(3). SUCH DEFINITION OF THE TERM ROYALTY AS PER THIS A RTICLE IS EXHAUSTIVE. PURSUANT TO THE INSERTION OF EXPLANATION (5) BY THE FINANCE ACT, 2012, NO AMENDMENT HAS BEEN MADE IN THE DTAA TO BRING THE DEFINITION OF ROYALTY AT PAR WITH THAT PROVIDED UNDER THE ACT. SU BJECT MATTER OF THE EXPLANATION IS OTHERWISE NOT A PART OF THE DEFINITI ON OF ROYALTY AS PER ARTICLE 12. AS SUCH, IT IS CLEAR THAT THE CONTENTIO N OF THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT THE RETROSPECTIVE INSERTION OF EXPLANATION 5 TO SECTION 9(1)(VII) SHOULD BE READ I N THE DTAA ALSO, CANNOT BE COUNTENANCED. 4.1. BE THAT AS IT MAY, WE TAKE UP THE SECOND ASPE CT OF THE CONTENTION OF THE LD. DR ON THIS ISSUE, AS PER WHIC H HE STATED THAT ON MERITS, THE EXPLANATION 5 HAS MADE THE AMOUNT IN Q UESTION AS ROYALTY. WE FIND THAT THE RECEIPT OF ` 6.41 CRORE CANNOT BE CONSIDERED AS ROYALTY EVEN UNDER THE AMENDED PROVISIONS OF THE ACT. THE FACTS ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 17 ARE VERY BRIEFLY RECAPITULATED THAT THE ASSESSEE RE CEIVED THE SAID SUM AS REIMBURSEMENT OF CHARGES FROM WNS INDIA WHICH WE RE PAID BY IT FOR LEASE LINE TO MCI WORLDCOM ETC. IN OTHER WORDS, THE LEASE LINE SERVICES WERE AVAILED BY WNS INDIA FROM MCI WORLDCO M ETC., FOR WHICH THE ASSESSEE ORIGINALLY MADE THE PAYMENT TO S UCH OPERATORS ON BEHALF OF WNS INDIA AND SUBSEQUENTLY RECOVERED THE S AME FROM WNS INDIA AT COST WITHOUT ANY MARK UP. THE QUESTION IS WHETHER UNDER THESE CIRCUMSTANCES IT CAN BE SAID THAT THE A SSESSEE GOT THIS CONSIDERATION OF ` 6.41 CRORE IN THE NATURE OF ROYALTY? THE CASE OF TH E LEARNED DEPARTMENTAL REPRESENTATIVE RESTS ON CLAUSE (IVA) OF EXPLANATION (2) TO SECTION 9(1)(VI) ALONG WITH EXPLANATION (5). IT HAS BEEN CONTENDED THAT THE AMOUNT BE CONSIDERED AS ROY ALTY IN THE HANDS OF THE ASSESSEE BECAUSE IT IS FOR ALLOWING THE USE OF EQUIPMENT. WE ARE UNABLE TO COMPREHEND THIS POINT OF VIEW FOR THE REASON THAT SUCH CHARGES WERE NOT RECOVERED BY THE ASSESSEE BECAUSE OF PROVIDING ANY ACCESS TO LEASE LINES OWNED OR HELD BY IT. THE MAND ATE OF CLAUSE (IVA) OF EXPLANATION 2 ALONG WITH EXPLANATION 5 TO SECTIO N 9(1)(VI) IS TRIGGERED WHEN THE CONSIDERATION IS RECEIVED FOR T HE USE OR RIGHT TO USE ANY INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EQUIPM ENT. THE LD. DR VIGOROUSLY ARGUED THAT THE PAYMENT RECEIVED BY THE ASSESSEE IN THE INSTANT CASE IS IN RESPECT OF ALLOWING WNS INDIA TH E USER OF THE EQUIPMENT WITHOUT TAKING ITS PERSONAL POSSESSION AN D HENCE CONSIDERATION FOR SUCH USER AMOUNTS TO ROYALTY. THE RE IS A BASIC FALLACY IN THIS CONTENTION. THE INTERNATIONAL TELE COM OPERATORS WHO EVENTUALLY RECEIVED THE AMOUNT FOR ALLOWING THE USE OF EQUIPMENT ARE ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 18 DIFFERENT PARTIES AND THE ASSESSEE SIMPLY GOT THE R EIMBURSEMENT OF THE AMOUNT PAID BY IT TO SUCH TELECOM OPERATORS. THIS A MOUNT CAN BE CONSIDERED AS ROYALTY ONLY IN THE HANDS OF THE OWNE R OR LESSOR OR ANY OTHER PERSON ENTITLED TO PERMIT THE USE OF EQUIPMEN T AND EARNING INCOME IN HIS OWN RIGHT FROM ALLOWING THE USE OF S UCH EQUIPMENT TO OTHERS. BY NO STRETCH OF IMAGINATION AN INTERMEDIA RY, WHO MAKES PAYMENT TO THE OWNER OF EQUIPMENT ON BEHALF OF SOME PERSON AND THEN GETS REIMBURSED FOR THE SAID PAYMENT, CAN BE C ONSIDERED AS AN OWNER OR LESSOR ETC. OF THE EQUIPMENT SO AS TO BE C ONSIDERED U/S 9(1)(VI). THE SAID AMOUNT MAY BE CONSIDERED AS ROYA LTY IN THE HANDS OF MCI WORLDCOM AND OTHER INTERNATIONAL OPERATIONS U NDER THE PROVISIONS OF THE ACT, WHO OWN THE EQUIPMENT AND AL LOWED USE OR RIGHT TO USE SUCH EQUIPMENT TO WNS INDIA. THE ASSES SEE IN THE INSTANT CASE SIMPLY PAID A SUM OF ` 6.14 CRORE TO MCI WORLDCOM ETC. IN THE FIRST INSTANCE AND THEN RECOVERED THE SAME FROM WNS INDIA. THUS IT IS EVIDENT, THE SAID SUM IS NOT ROYALTY EVEN AS PER SE CTION 9(1)(VI) OF THE ACT. 5.1. HAVING HELD THAT THE AMOUNT IS NOT IN TH E NATURE OF ROYALTY IN THE HANDS OF THE ASSESSEE, THE NEXT QUESTION WHICH ARISES FOR OUR CONSIDERATION IS AS TO WHAT IS THE CORRECT NATURE O F THIS AMOUNT AND WHETHER IT IS TAXABLE AS BUSINESS PROFITS AS PER AR TICLE 7 ? THERE IS NO DISPUTE ON THE LEGAL ISSUE THAT THE REIMBURSEMENT O F EXPENSES WITHOUT ANY MARK UP CANNOT BE CONSIDERED AS INCOME IN THE H ANDS OF THE ASSESSEE SO AS TO ATTRACT TAXABILITY. ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 19 5.2. REIMBURSEMENT OF EXPENSES MEANS THAT THE EXPENSES EARLIER INCURRED BY A PERSON ON BEHALF OF ANOTHER ARE RECOV ERED AS SUCH. ORDINARILY THERE IS NO ELEMENT OF PROFIT IN SUCH RE IMBURSEMENT. SINCE THERE IS NO MARK-UP IN SUCH RECOVERY, THERE CAN BE NO QUESTION OF IMPUTING ANY INCOME ON THIS ISSUE IN THE HANDS OF R ECIPIENT. HOWEVER, THE ONUS TO PROVE THAT THERE IS NO ELEMENT OF PROFIT IN SUCH REIMBURSEMENT IS ALWAYS ON THE ASSESSEE. MERE NOMEN CLATURE OF `REIMBURSEMENT IS NOT RELEVANT. THE ASSESSEE IS RE QUIRED TO LEAD EVIDENCE TO SHOW THAT THE EXPENSES INCURRED ARE EQU AL TO THE AMOUNT RECOVERED. IF THE AO, ON EXAMINATION OF THE EVIDENC E, COMES TO THE CONCLUSION THAT THE RECEIPT IS HIGHER THAN THE AMOU NT SPENT, THEN THE EXCESS IS ALWAYS TAXABLE, NOTWITHSTANDING THE FACT THAT THE ASSESSEE NAMED AND CLAIMED IT AS REIMBURSEMENT OF EXPENSES. NOT ONLY THE REIMBURSEMENT OF EXPENSES SHOULD BE WITHOUT PROFIT ELEMENT, NO ATTEMPT SHOULD BE MADE TO BIFURCATE THE PRICE OF A CONTRACT INTO DIFFERENT PARTS WITH THE INTENTION OF AVOIDING TAX BY SLICING AWAY A PART OF THE TOTAL CONSIDERATION OF A CONTRACT, WHEN THE TAXATION IS ON GROSS BASIS AS A PERCENTAGE OF CONTRACT VALUE. THE ASSESSEE CANNOT BE ALLOWED TO SHOW SOME PART OF THE CONTRACT PRICE DIS TINCTLY AS REIMBURSEMENT OF EXPENSES, EVEN WITHOUT ANY MARK-UP , AND HENCE CLAIM EXEMPTION IN THIS REGARD, WHEN INCURRING OF EXPENSES FOR WHICH SUCH REIMBURSEMENT IS CLAIMED, ARE TOWARDS TH E PERFORMANCE OF CONTRACT. ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 20 5.3. DIFFERENT CONSEQUENCES FOLLOW IN THE HANDS O F THE PAYER AND PAYEE FOR MAKING A CLAIM OF REIMBURSEMENT OF EXPEN SES HAVING PROFIT ELEMENT; OR TREATING A PART OF CONTRACT VALU E AS REIMBURSEMENT OF EXPENSES EVEN WITHOUT ANY MARK-UP. WHEREAS IN S OME CASES SUCH CLAIM FOR REIMBURSEMENT MAY BE TAX NEUTRAL, WHILE I N OTHERS IT MAY HAVE BEARING ON TAX LIABILITY. FROM THE ANGLE OF PA YEE, IT WILL BE TAX NEUTRAL IF THERE IS QUESTION OF COMPUTING BUSINESS PROFITS AS PER ARTICLE 7 BECAUSE OF COMPUTATION OF SUCH INCOME ON NET BASIS. BUT, IT WILL AFFECT TAX LIABILITY, IF THE TAX IS TO BE COMP UTED AS PER ARTICLE 12 BY TREATING THE AMOUNT AS ROYALTY OR FEES FOR TECHN ICAL SERVICES WHEREIN THE TAX LIABILITY IS DETERMINED ON THE GROS S AMOUNT ITSELF. IN THE HANDS OF NON-RESIDENT PAYER, THE CLAIM FOR TREA TMENT OF HEAD OFFICE EXPENDITURE AS REIMBURSEMENT OF EXPENSES SHA LL HAVE BEARING ON THE COMPUTATION OF DEDUCTION OF HEAD OFFICE EXPE NDITURE AS PER SECTION 44C OF THE ACT. IN THE LIKE MANNER, THERE A RE SEVERAL PROVISIONS INCLUDING CHAPTER X, WHICH AFFECT THE AM OUNT OF TOTAL INCOME OR THE TAX LIABILITY BY WRONG TREATMENT OF P AYMENT OF EXPENSES AS REIMBURSEMENT OF EXPENSES. THE CRUX OF THE MATTER IS THAT THE PAYMENT OF EXPENSES IS TO BE DISTINGUISHED FROM AND NOT INTERMINGLED WITH THE REIMBURSEMENT OF EXPENSES IN THE HANDS OF PAYER AS WELL AS PAYEE. IN FACT, IT IS THE SUBSTANC E OF THE TRANSACTION WHICH MATTERS. THE REAL CHARACTER OF A TRANSACTION CANNOT BE CLOAKED UNDER SOME SUPERFICIAL NAME. ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 21 5.4. ADVERTING TO THE FACTS OF THE INSTANT CASE W E FIND THAT THE ASSESSEE UNDERTOOK TO CARRY OUT THE MARKETING AND S ALES PROMOTION ACTIVITIES ON BEHALF OF WNS INDIA BY IDENTIFYING THE CUSTOMERS AND ESTABLISHING CONTACT; SOLICITING INQUIRIES FROM CLI ENTS AND RENDERING SUCH SERVICES AS MAY BE REQUIRED TO PRESENT AND MAR KET THE BUSINESS OF WNS INDIA. ON THE OTHER HAND, THE PAYMENT CLAIMED AS REIMBURSEMENT IS ADMITTEDLY FOR THE USE OF INTERNAT IONAL TELECOM CONNECTIVITY PAID BY THE ASSESSEE TO THE INTERNATIO NAL TELECOM OPERATORS, FOR TRANSMITTING THE DATA BY WNS INDIA TO ITS CUSTOMERS LOCATED OUTSIDE INDIA. THE INTERNATIONAL TELECOM CO NNECTIVITY CHARGES ARE NOT RELATED IN ANY MANNER WITH THE RENDERING OF MARKETING AND MANAGEMENT SERVICES. BY NO STANDARD, SUCH A CLAIM F OR REIMBURSEMENT OF EXPENSES CAN BE CONSIDERED AS DIVI SION OF THE CONTRACT PRICE SO AS TO GAIN SOME TAX ADVANTAGE. 5.5. NOW LET US SEE, WHETHER THE CLAIM FOR REIMBU RSEMENT OF EXPENSES IN THE HANDS OF THE ASSESSEE IS WITH OR WI THOUT ANY PROFIT COMPONENT. IT GOES WITHOUT SAYING THAT IF REIMBURSE MENT INCLUDES SOME PROFIT ELEMENT, THEN THE TAX LIABILITY CANNOT ESCAPE. IT IS NOTICED THAT THE ASSESSEE MADE A CATEGORICAL CLAIM THAT THE INTERNATIONAL TELECOM CONNECTIVITY CHARGES WERE PAID TO THE INTER NATIONAL TELECOM OPERATORS FOR THE SERVICES UTILIZED BY WNS INDIA OU TSIDE INDIA AND THE SAME WERE REIMBURSED BY WNS INDIA WITHOUT ANY MARK UP. THIS CONTENTION WAS RAISED NOT ONLY BEFORE THE A.O. BUT THE DRP AS WELL. SUCH CONTENTION HAS REMAINED UNCONTROVERTED BY THE AUTHORITIES ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 22 BELOW. THIS SHOWS THAT THE ASSESSEE HAS DISCHARGED THE BURDEN CAST UPON IT TO PROVE THAT THE LEASE LINE CHARGES RECOVE RED BY IT FROM WNS INDIA WERE WITHOUT ANY MARK UP SO AS TO ATTRACT ANY POSSIBLE TAXATION UNDER ARTICLE 7 OF THE DTAA. ONE CAN POSSIBLY CONTE ND THAT SINCE THE AO TAXED THE GROSS AMOUNT OF SUCH REIMBURSEMENT AS ROYALTY, THERE COULD HAVE BEEN NO OCCASION FOR HIM TO DEAL WITH TH E CONTENTION OF THE ASSESSEE OF NOT HAVING EARNED ANY PROFIT IN SUC H REIMBURSEMENT TO FIND OUT AND THUS TAX SUCH PROFIT ELEMENT FROM SUCH REIMBURSEMENT. HOWEVER, AN IMPORTANT FACTOR WHICH HAS PERSUADED US TO HOLD THAT THERE IS NO MARK UP IN SUCH REIMBURSEMENT IN THE PR ESENT CASE IS THAT THE ASSESSING OFFICER FOLLOWED THE VIEW TAKEN BY H IM IN EARLIER YEAR ON THIS ISSUE. WHEN HIS ORDER FOR THE EARLIER YEAR CAME UP FOR ADJUDICATION BEFORE THE TRIBUNAL, A CATEGORICAL FIN DING HAS BEEN RECORDED BY THE TRIBUNAL THAT THERE IS NO MARK UP IN REIMBURSEMENT OF LEASE LINE CHARGES. THERE IS NOTHING ON RECORD TO SHOW THAT EITHER THE FACTS OF THE CURRENT YEAR ARE DIFFERENT FROM THOSE OF THE PRECEDING YEAR OR THE VIEW TAKEN BY THE TRIBUNAL HAS BEEN MODIFIED OR REVERSED BY THE HONBLE HIGH COURT ON THIS ISSUE. FURTHER, THERE IS NOTHING TO DEMONSTRATE THAT THE REVENUE PREFERRED ANY MISCELLA NEOUS APPLICATION AGAINST SUCH ORDER, IF IT WAS CONVINCED THAT THE FINDING OF THE TRIBUNAL FOR WAS INCORRECT. IN VIEW OF THESE FA CTS, WE ARE NOT INCLINED TO ACCEPT THE CONTENTION OF THE LD. DR FOR REMITTING THE MATTER TO THE FILE OF AO FOR VERIFYING IF THERE IS ANY PROFIT ELEMENT IN SUCH REIMBURSEMENT AND THEN DETERMINE TAX LIABILITY ACCORDINGLY. ONCE IT IS HELD THAT THERE IS NO PROFIT ELEMENT IN SUCH REIMBURSEMENT, ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 23 IT BECOMES MANIFEST THAT THE GROSS INCOME OF ` 6.14 CRORE RECOVERED BY THE ASSESSEE FROM WNS INDIA IS EQUAL TO THE SAME AMOUNT PAID BY IT TO MCI WORLDCOM ETC., THEREBY LEAVING NO SURPLUS LIABLE TO TAX UNDER ARTICLE 7 OF THE DTAA. THIS ISSUE IS DECIDED IN ASSESSEES FAVOUR AND THE CONSEQUENTIAL GROUND IS ALLOWED. 6.1. NEXT ISSUE RAISED IN THIS APPEAL IS AGAINST T AXABILITY OF REIMBURSEMENT OF OTHER EXPENSES AMOUNTING TO ` 4,10,70,798 FROM WNS INDIA. THIS AMOUNT REPRESENTS REIMBURSEMENT OF E XPENSES INCURRED ON EMPLOYEES OF WNS INDIA ON THEIR VISITS ABROAD. THE ASSESSEE CLAIMED THAT SINCE THESE AMOUNTS WERE PURE REIMBURSEMENT AND HENCE NOT TAXABLE. THE A.O. HELD SUCH AMOUNT AS TAXABLE UNDER ARTICLE 12 AS FEES FOR INCLUDED SERVICES. 6.2. HAVING HEARD THE RIVAL SUBMISSIONS ON THIS ISS UE AND PERUSED THE RELEVANT MATERIAL ON RECORD, IT IS THE COMMON S UBMISSIONS BY BOTH THE SIDES THAT SIMILAR ISSUE WAS INVOLVED IN THE AP PEAL FOR SOME OTHER YEAR AND THE TRIBUNAL HAS RESTORED THIS MATTER TO THE LOWER AUTHORITIES FOR DECIDING IT AFRESH AFTER VERIFYING THE RELEVANT DETAILS. AS THE ISSUE STANDS COVERED BY THE EARLIER ORDER OF THE TRIBUNAL , TO WHICH BOTH THE SIDES ARE AGREEABLE, WE SET ASIDE THE IMPUGNED ORDE R ON THIS ISSUE AND REMIT THE MATTER TO THE FILE OF A.O. FOR DECIDING I T AFRESH AS PER LAW AFTER ALLOWING A REASONABLE OPPORTUNITY OF BEING HE ARD TO THE ASSESSEE. ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 24 7. THE LAST ISSUE IS ABOUT THE LEVY OF INTEREST U/S S 234B AND 234C. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD WE FIND THAT THE ISSUE OF CHARGING OF INT EREST U/SS 234B AND 234C IN THE PRESENT CASE IS NO MORE RES INTEGRA IN VIEW OF THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) V. NGC NETWORK ASIA LLC [(2009) 313 ITR 187 (BOM.)] IN WHICH IT HAS BEEN HELD THAT WHEN THE DUTY IS CAST ON THE PAYER TO DEDUCT TAX AT SOURCE, ON FAILURE OF THE PAYER TO DO SO, NO INTEREST CAN BE CHARGED F ROM THE PAYEE ASSESSEE U/S 234B. THE SAME VIEW HAS BEEN REITERATE D IN DIT (IT) V. KRUPP UDHE GMBH[(2010) 38 DTR (BOM.) 251] . AS THE ASSESSEE BEFORE US IS A NON-RESIDENT, NATURALLY ANY AMOUNT P AYABLE TO IT WHICH IS CHARGEABLE TO TAX UNDER THE ACT, IS OTHERWISE LI ABLE FOR DEDUCTION OF TAX AT SOURCE. IN THAT VIEW OF THE MATTER AND RESPE CTFULLY FOLLOWING THE ABOVE PRECEDENTS, WE HOLD THAT NO INTEREST CAN BE CHARGED U/SS 234B AND 234C OF THE ACT. THIS GROUND IS ALLOWED. 8. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 14 TH DAY OF DECEMBER, 2012. !$ / 12* 3!)4 2 / 5 SD/- SD/- (AMIT SHUKLA) (R.S.SYAL) & ! & ! & ! & ! / JUDICIAL MEMBER ! ! ! ! / ACCOUNTANT MEMBER MUMBAI ; 3!) DATED : 14 TH DECEMBER, 2012. DEVDAS* ITA NO.8621/MUM/2010 M/S.WNS NORTH AMERICA INC. 25 !$ / -&#'6 76*# !$ / -&#'6 76*# !$ / -&#'6 76*# !$ / -&#'6 76*#/ COPY OF THE ORDER FORWARDED TO : 1. +, / THE APPELLANT 2. -.+, / THE RESPONDENT. 3. 8 () / THE DRP-II, MUMBAI. 4. 8 / CIT 5. 6;5 -&#&) , , / DR, ITAT, MUMBAI 6. 5< = / GUARD FILE. !$) !$) !$) !$) / BY ORDER, .6# -&# //TRUE COPY// > > > >/ // /? @ ? @ ? @ ? @ ( DY./ASSTT. REGISTRAR) , , , , / ITAT, MUMBAI