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The case revolves around the taxability of certain receipts by M/s. Qlik Tech International AB, a Swedish company, from its Indian subsidiary, Qlik Tech India Pvt. Ltd. The receipts were for rendering back office support services, which the assessee argued were not taxable in India as they did not constitute FTS and were not rendered within India. The Income Tax Department, however, treated these receipts as FTS, leading to the dispute. The tribunal examined the definitions under the Income Tax Act and the India-Sweden Double Taxation Avoidance Agreement (DTAA), along with the Most Favored Nation (MFN) clause, and found in favor of the assessee, aligning with previous rulings in similar cases.
Appeal Details
Counselvise Citation
[2022] 140 COUNSELVISE.COM (IT) 115324 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
2 month(s) 5 day(s)
Appellant
Respondent
Appeal Type
Income Tax (International Taxation) Appeal
Pronouncement Date
27-11-2022
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
B
Next Hearing Date
22-11-2022
Assessment Year
2018-2019
Appeal Filed On
21-09-2022
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL BENGALURU “B” BENCH, BENGALURU Before Shri Smt. Beena Pillai, Judicial Member and Ms. Padmavathy S., Accountant Member IT(IT)A Nos. 896 & 897/Bang/2022 (Assessment Years: 2018-19 & 2019-20) M/s. Qlik Tech International AB No. 1&2, The Millennia Tower A, 4th Floor Murphy Road, Ulsoor Bangalore 560008 PAN – AAACQ2234R vs DCIT (IT), Circle - 2(1) 4th Floor, 80 Feet Road BMTC Building Koramangala Bengaluru 560095 (Appellant) (Respondent) Assessee by: Ms. Sanjana Dawar, CA Revenue by: Shri Manjunath Karkihalli, CIT-DR Date of hearing: 23/11/2022 Date of pronouncement: 28/11/2022 O R D E R Per: Padmavathy, A.M. These appeals are against the order of the DCIT, Circle 2(1), Bengaluru passed under Section 143(3) r.w.s. 144C(130 of the Income Tax Act, 1961 (the Act) for assessment years 2018-19 and 2019-20 dated 25.07.2022. 2. The only issue contended by the assessee in this appeal is treatment of receipts of the assessee from rendering back office support services to be in the nature of fees for technical services and therefore liable to tax in India. IT(IT)A Nos. 896 & 897/Bang/2022 2 3. The assessee is a company incorporated under the laws of Sweden and is engaged in the business of sale of software products and rendering information technology services. The assessee has entered into an agreement with its subsidiary M/s. Qlik Tech India Pvt. Ltd. for sale of software and for rendering corporate management, finance back office services. For AY 2018-19 the assessee filed return of income on 29.11.2018 and for AY 2019-2020 on 26.11.2019 declaring a total income of Rs. Nil. The case was selected for scrutiny under CASS for verification of the huge refund claim of the assessee and receipt of large foreign remittance in comparison to the receipts shown in tax. The statutory notices under Sections 143(2) and 142(1) of the Act calling for various details were served upon the assessee. The assessee received the following payments from Qlik Tech India Pvt. Ltd.: - i. Rs.24,18,21,953 for AY 2018-19 and Rs. 44,64,77,577/- for AY 2019- 20 from sale of software ii. Rs.1,30,83,974 for AY 2018-19 and Rs.1,04,08,150/- for AY 2019-20 from rendering corporate management/finance back office operations 4. The assessee did not offer the sale of software to tax in India on the ground that the same is not taxable since the assessee is selling on the off the shelf software and the consideration pertains to copy righted article and not for a copy right and there is no transfer of any rights with respect to the copy right of the software. The AO accepted the submissions of the assessee and in the course of assessment did not make any addition towards income generated out of sale of software by relying on the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT. 5. With regard to the receipts towards back office services the assessee entered into an agreement with Qlik India Ltd., whereby the assessee agreed to provide assistance to Qlik India in respect of certain back office support IT(IT)A Nos. 896 & 897/Bang/2022 3 operations, through its shared services center. (pages 107 to 113 of the Paper Book). As per the said agreement, the assessee agreed to provide the following assistance to QlikTech India : - General Ledger related services - closing of local books and group reporting activities on a monthly basis - statutory filings of local tax and local financial statements - assistance with audit related work • Revenue Operations related services - reviewing closed orders and preparing and issuing of invoices - support to sales related to technical admin in ERP • Expenses, Banking & AP related services - handling of 011 accounts payable invoices, including reminders - handling cash disbursements and receipts - reviewing and payment of all travel expense claims - payroll related payments • Payroll related services - administrating info sharing with outsourcing provider - review of payroll runs. 6. The assessee received a sum of Rs.1,30,83,974/- (Rs.1,04,08,150 for AY 2019-20) from Qlick India for provision of shared services. The assessee did not offer the same to tax on the ground that these services are rendered outside India and therefore no part of the income is taxable in India as deemed income and also that the services rendered are not in the nature of either technical, consultancy or managerial in nature. It was the plea of the assessee that it being a non-resident, in terms of section 5(2)(b) & (c) of the Act, it is only income that is chargeable to tax in India that which accrue or arise in India or is deemed to accrue or arise in India. Since the services in question was rendered outside India, payment cannot be regarded as income that accrues or arises in India. Assessee also pointed out that payment in question cannot be regarded as “Fees IT(IT)A Nos. 896 & 897/Bang/2022 4 for Technical Services” (FTS). The assessee brought to the attention of the AO the provisions of section 9(1)(vii) which defines the terms of FTS to mean any consideration for rendering any managerial, technical or consultancy services. The assessee, therefore, submitted that the receipt in question cannot be brought to tax as FTS. 7. Without prejudice to the above submission, the assessee submitted that in terms of Article 12(3) (b) The term 'fees for technical services' means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provisions of services by technical or other personnel. The definition under the Act and DTAA is therefore one and the same as far as FTS is concerned. In terms of Article 12(2) of the DTAA, it is taxable in the State in which it arises, i.e., India. The assessee submitted that under article 12 of the India-Sweden DTAA, FTS cannot be brought to tax in India because under the protocol to the India-Sweden DTAA if under any Convention, Agreement or Protocol between India and a third State which is a member of the OECD, India limits its taxation at source on, inter alia, fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in the India-Sweden DTAA, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items of income shall also apply under the India-Sweden DTAA. Such terms contained in a DTAA are referred to as the Most Favoured Nation ("MFN") clause. The assessee therefore submitted that on the basis of the MFN clause as contained in the Protocol to the India-Sweden DTAA, the assessee referred to the India-Portuguese DTAA, which imposes more restrictions for taxation of FTS by source state by adding a condition that the FTS must “make available” technical knowledge, experience, skill, know-how or processes or consist of the development and IT(IT)A Nos. 896 & 897/Bang/2022 5 transfer of a technical plan or technical design which enables the person acquiring the services to apply the technology contained therein. 8. The assessee submitted that it was a tax resident of Sweden and therefore it was entitled to avail the benefit of the MFN clause as contained in the Protocol to the India-Sweden DTAA by virtue of which, it can claim the benefit of the "make available" condition imposed for bringing to tax the fees for technical services in the India-Portuguese DTAA. It was submitted that since the provisions of India Sweden DTAA read with India-Portuguese DTAA are more beneficial as compared to the provisions of the Act, the same will override the provisions of the Act, to the extent to which the provisions of the said DTAAs are more beneficial. The assessee placed reliance on the decision of the jurisdictional High Court in the case of Apollo Tyres Ltd., vs CIT and claimed that a separate notification is not required to be issued by the Central Government for applying India Sweden DTAA in this case. 9. The assessee submitted that for the purposes of the services, as provided by the assessee to Qlik India, to be covered under the definition of FIS/ FTS as contained in the India-Portuguese DTAA, it is important that the said services fall in the nature of technical or consultancy services as the definition of the term FIS/ FTS in the DTAA covers only technical and consultancy services and does not cover services which are managerial in nature. It was submitted by the assessee that the services provided by the assessee, even if considered to be managerial in nature, the same would not fall in the nature of technical or consultancy services and accordingly, would not fall within the definition of FIS/ FTS as contained in the India Portuguese DTAA. Therefore, the same would not be liable to tax in India under Article 12 of DTAA. IT(IT)A Nos. 896 & 897/Bang/2022 6 10. The AO, however, did not agree with the submissions made by the assessee and he held that services were in the nature of technical or consultancy services which are to be regarded as FTS for the reason that these services rendered by the assessee are not limited to the year of receipt alone but will be having continued applicability. The AO held that the consultancy services were made available to the assessee and therefore remuneration received towards provision of such consultancy services is taxable in India as per Article 12(2) of the India – Sweden DTAA provisions also. The AO relied on the decision of the Authority for Advance Ruling in the case of M/s. Areva T&D India Ltd. 19 taxmann.com 171 in this regard. 11. With regard to the applicability of MFN clause to the assessee, the AO held that – “7.0 Considering all the above, the receipts by the assessee company on account of shared services, amounting to Rs.1,30,83,974/- is taxable in India as fees for technical services, both as per the provisions of section 9(1)(vii) of the IT Act and Article 12(2) of the India-Sweden DTAA.” 12. The DRP upheld the decision of the AO on the ground that the India Portugal DTAA is prior to India Sweden DTAA and therefore the reliance in MFN clause by the assessee is misplaced. The DRP further held that the assessee does not satisfy the conditions specified in para 5 of the circular no.3/2022 dated 3/2/2022 and accordingly upheld the treatment of receipts from Qliktech India as FTS. IT(IT)A Nos. 896 & 897/Bang/2022 7 13. The learned AR reiterated the submissions made before the lower authorities. The learned A.R. further submitted that the issue is covered by the decision of the coordinate bench of the Tribunal in assessee’s own case in IT9TP)A No. 173/Bang/2021 dated 06.07.2021. 14. The ld DR placed reliance on the order of the lower authorities. 15. We heard the rival submissions and perused the material on record. We notice that the coordinate bench in assessee’s own case has considered the similar issue and held that – 22. We have heard the rival submissions. The learned Counsel for the assessee drew our attention to the decision of the ITAT Pune Bench in the case of Sandvik AB Vs. DDIT (2015) 61 taxmann.com 31 (Pune – Trib.). In the aforesaid decision, the Hon’ble Pune Bench had to consider the effect of the protocol of DTAA between India-Sweden with regard MFN Clause. The facts of the case before the Pune Tribunal were that the assessee, a non-resident company, incorporated in Sweden had received 'Management Service Fee' from Indian AEs for direction or guidance relating to business strategy and its group policies. The Assessing Officer taxed the consideration received for services rendered by it as fees for technical services under article 12 on the ground that article 12 included managerial, technical or consultancy services. The assessee stated that the above payment was not taxable in view of the protocol to DTAA between India and Sweden on article 12 and that the services provided by the assessee company were managerial in nature and, hence, were non-technical. The DRP did not accept the contention of the assessee that the services rendered were in nature of marketing, manufacturing and human resources and information technology functions and in view of lack of clarity on part of the assessee to establish that the services rendered by it were eligible for the beneficiary clause under India-Portugal treaty, the DRP declined to interfere with the order passed by the Assessing Officer. On further appeal, the Pune ITAT, held that as per the protocol, on the principle of the most favoured nation (MFN) clauses received by the assessee company from its Indian subsidies. If under any Convention. Agreement between India and a third State which is a member of the OECD, India limits its taxation at source on IT(IT)A Nos. 896 & 897/Bang/2022 8 dividends, interest, royalties, or fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in this convention on said items of income, same rate or scope as provided said items of income shall also apply under this Convention. On the basis of the protocol to the DTAA between the India and Sweden the assessee can claim the benefit of the conditions imposed for bringing to tax the fees for technical services in the treaty between the India and Portugal. The Tribunal noted that India entered into DTAA with the Sweden which was notified vide notification no. GR 705/E dated 17.12.1997. Article 12 of the India-Sweden DTAA provides the mode of taxation of the royalties and fees for technical services whether the same are to be taxed in the source country or in the residence country. The definition of the fees for technical services (FTS) is given in Article 12(3)(b) of the Act. It is true that it is a very conservative definition and there is no condition that the technical services should be made available. The India also entered into the treaty with Portuguese republic which was notified vide notification no. GR F42/E dated 16th June, 2000. The Tribunal accepted the argument that considering the principle of most favoured nation (MFN) clause in treaty between India and Portuguese unless a condition of make available the technical knowledge or skill or services is fulfilled then said payment cannot be taxed in source country i.e. India. 23. We are of the view that the assessee is entitled to take the benefit of MFN Clause rely on the provisions of Article 12(4)(v) of the India Portuguese DTAA and claim that the receipts can be brought to tax only if the services provided makes available technical knowledge, experience, skill, etc., to the person acquiring the services. The decision of the Pune Tribunal in the case of Sandvik AB (supra) clearly supports the plea of the assessee in this regard. 24. The meaning of the expression make available were considered by the Tribunal in the case of Raymond Ltd. Vs. DCIT (2003) 80 TTJ (Mum) 120. The Tribunal after elaborate analysis of all the related aspects observed that :- “The words ‘making available’ in Article 13.4 refers to the stage subsequent to the ‘making use of’ stage. The qualifying words is ‘which’ the use of this relative pronoun as a conjunction is to denote some additional function the ‘rendering the services’ must fulfil. And that is that it should also ‘make available’ technical knowledge, experience, skill etc. The word which IT(IT)A Nos. 896 & 897/Bang/2022 9 occurring in the article after the word ‘services’ and before the words ‘make available’ not only described or defines more clearly the antecedent noun ‘(services’) but also gives additional information about the same in the sense that it requires that the services should result in making available to the user technical knowledge, experience, skill, etc. Thus, the normal, plain and grammatical meaning of the language employed is that a mere rendering of services is not roped in unless the person utilizing the services is able to make use of the technical knowledge, etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill etc. must remain with the person utilizing the services even after the rendering of the services has come to an end. A transmission of the technical knowledge, experience, skill, etc. from the person rendering services to the person utilizing the same is contemplated by the article. Some sort of durability or permanency of the result of the ‘rendering services’ is envisaged which will remain at the disposal of the person utilizing the services. The fruits of the services should remain available to the person utilizing the services in some concrete shape such as technical knowledge, experience skill etc. 25. Going by the nature of services enumerated in the present case, we are of the view that the services were purely in the nature of back office services and nothing can be regarded as having been made available to the recipient of services. As per the terms of the Service Agreement, it is clear that the assessee only provides corporate back office services to QlikTech India and such services are not consultancy services and the same do not involve transfer of any technical knowledge or skill or experience to the recipient. The CIT(A) has erred in law and on facts in stating that, since the business model and the accounting and financial policies of the business remains the same, the consultancy services could be utilised by the Indian entity in its business year after year, thereby satisfying the 'make available' condition. On the contrary, the CIT(A) has failed to appreciate that the year on year rendition of services by the assessee to the Indian entity proves that technical knowledge is not transferred or made available to the Indian entity for independently function without the aid of the assessee. We therefore agree with the plea of the assessee and hold that the sum received towards shares services were not in the nature of FTS and cannot be brought to tax in India as “FTS”. The sum in question cannot be taxed as business profits also, as under IT(IT)A Nos. 896 & 897/Bang/2022 10 Article 7(1) of DTAA, as the receipts in question cannot be attributed to the permanent establishment. Ground No.3 is accordingly allowed. 16. It is the contention of the DRP that the assessee does not satisfy the conditions of circular no 3/2022, we will first look at the relevant clause in the circular – 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 lndia 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 (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. 17. With regard to the first condition, the second treaty between India and Portuguese is entered into on 30.4.2000 (refer page no 762 of paper book) and the treaty between India and Sweden was entered into on 25.12.1997 (refer page 777 of paper book). Accordingly in our view the first condition is satisfied. Portuguese is a member of the OECD as per the list of OECD member countries IT(IT)A Nos. 896 & 897/Bang/2022 11 furnished in page 785/786 of paper book accordingly the second condition is also satisfied. With regard to the third condition the relevant extract of the protocol reads as under – In respect of Articles 10 (Dividends), 11 (Interest) and 12 (Royalties and fees for technical services) if under any Convention. Agreement or Protocol between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, or fees for technical services to a rate lower or a scope more restricted than the rate or scope provided for in t is Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items of income shall also apply under this Convention. 18. From the above protocol, it is clear that the condition in clause 5(iii) of the circular above stands satisfied. Further with regard to the condition in 5(iv) we see merit in the argument of the learned AR that the language of the protocol clearly states that the protocol shall be for an integral part of the convention and accordingly Notification no.705€ dated 17.12.1997 duly notifies the protocol as mentioned in clause 5(iv). We notice that the Pune Bench of the Tribunal in the case of GRI Renewable Industries vs ACIT (ITA No.202/PUN/2021 dated 15.02.2022) has considered a similar issue and held that – 14. To summarize, the DTAA between India and Spain, having the Protocol containing the MFN clause as its integral part, was duly notified on 21-04-1995, after having entered into force on 12-011995. 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 . IT(IT)A Nos. 896 & 897/Bang/2022 12 19. Considering the facts of the case for the years under consideration and respectfully following the decision of the coordinate bench in assessee’s own case and the decision of the Pune Bench in the case of GRI Renewable Industries (supra) we hold that the sum received towards shares services were not in the nature of FTS and cannot be brought to tax in India as “FTS”. The sum in question cannot be taxed as business profits also, as under Article 7(1) of DTAA, as the receipts in question cannot be attributed to the permanent establishment. Accordingly the additions made in both assessment years towards this is deleted 20. In the result, the appeals filed by the assessee are allowed. Dictated and pronounced in the open Court on 28 th November, 2022. Sd/- Sd/- (Beena Pillai) (Padmavathy S) Judicial Member Accountant Member Bengaluru, Dated: 28 th November, 2022 Copy to: 1. The Appellant 2. The Respondent 3. The DRP-2, Bengaluru 4. The CIT - 5. The DR, ITAT, Bengaluru By Order Assistant Registrar ITAT, Bengaluru n.p. / Desai S Murthy /
Other Referred Cases
Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT, Apollo Tyres Ltd. vs CIT, Sandvik AB Vs. DDIT, Raymond Ltd. Vs. DCIT, GRI Renewable Industries vs ACIT
Laws Referred To
Income Tax Act, 1961
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