Case Law Details
Electrical material Center Co. Ltd. Vs DDIT (International Taxation) (ITAT Bangalore)
No Permanent Establishment Created as Engineers Stayed Less Than 182 Days in India; FTS Not Taxable in India Without Specific DTAA Clause; ITAT Rejects Man-Day Calculation for PE Determination Under Tax Treaty; Service Income Held Non-Taxable in India Due to Absence of PE Under DTAA; ITAT Distinguishes Virtual Service Cases While Deciding PE Issue; Taxability of Technical Service Fees Sent Back to AO Due to Lack of Work Details; Residual Article in India-Saudi Arabia DTAA Bars Taxation of FTS in India
The Bangalore ITAT partly allowed the appeal filed by the assessee for Assessment Year 2010-11 concerning the taxability of payments received for services rendered in India. The primary issues before the Tribunal were whether the assessee had constituted a Permanent Establishment (PE) in India under the India-Saudi Arabia Double Taxation Avoidance Agreement (DTAA), whether the receipts constituted royalty or fees for technical services (FTS), and whether such receipts were taxable in India.
The Revenue’s case was that the receipts constituted royalty taxable under section 115A of the Income-tax Act and the India-Saudi Arabia DTAA at the rate of 10%. The Assessing Officer also held that the assessee had a service PE in India because four service engineers were present in India for 90 days each. According to the Revenue, man-days of services rendered were to be considered for determining PE existence, leading to a conclusion that the threshold under the DTAA was crossed.
The assessee argued that the receipts were not royalty but FTS and that the India-Saudi Arabia DTAA did not contain a specific article dealing with taxation of FTS. It was further contended that since the assessee had no PE in India, the receipts were not taxable in India. The assessee also argued that only “solar days” and not “man-days” should be considered while determining the existence of a PE under Article 5(3)(b) of the DTAA. Reliance was placed on the Tribunal ruling in Clifford Chance vs. DCIT.
The Tribunal first examined whether the assessee had a PE in India. It observed that under the India-Saudi Arabia DTAA, the relevant threshold for constituting a PE depended on the period of stay in India. Referring to the decision in Clifford Chance vs. DCIT, the Tribunal held that only solar days are to be counted and not man-days. It reproduced the reasoning from that decision that multiple counting of common days would lead to absurd results, since several employees staying in India simultaneously cannot result in the number of days exceeding the actual days in a year.
The Tribunal distinguished the Revenue’s reliance on the decision in ABB FZ-LLC vs. DCIT. It noted that in ABB FZ-LLC, the services involved managerial and consultancy functions that could be rendered through virtual modes such as e-mail, internet, and video conferencing without physical presence. In contrast, in the present case, the only invoice raised by the assessee was for the stay of four engineers in India based on man-days spent in India. There was no allegation by the Revenue that any services were rendered remotely or through virtual means. Accordingly, the Tribunal held that the ABB FZ-LLC decision was not applicable on the facts of the present case.
Applying the principle laid down in Clifford Chance, the Tribunal concluded that the assessee’s stay in India was only 90 solar days. Since this period was less than the threshold of 182 days prescribed under Article 5(3)(b) of the India-Saudi Arabia DTAA, the Tribunal held that no PE existed in India.
The Tribunal next examined whether FTS would nevertheless be taxable in India in the absence of a specific FTS article in the DTAA. The assessee relied on the decision of the Madras High Court in Bangkok Glass Industry Co. Ltd. vs. ACIT. The Tribunal compared Article 22 of the India-Thailand DTAA with Article 22 of the India-Saudi Arabia DTAA. Under Article 22(1) of the India-Saudi Arabia DTAA, items of income not dealt with in the foregoing articles are taxable only in the contracting state of residence. The Tribunal observed that the exceptions provided in Article 22(2) did not include FTS. Accordingly, it held that if the receipts were characterized as FTS, they would not be taxable in India and would instead be taxable only in Saudi Arabia.
The Tribunal then considered the issue of whether the receipts constituted royalty or FTS. It noted that the Assessing Officer himself had recorded that the exact nature of work performed by the four service engineers in India had not been furnished by the assessee. In the absence of complete details, the Tribunal held that this issue could not be conclusively decided. It therefore restored the matter to the file of the Assessing Officer for fresh examination after giving adequate opportunity to the assessee to furnish all necessary details.
Accordingly, the appeal was partly allowed for statistical purposes.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal is filed by the assessee and this is directed against the assessment order dated 10.05.2013 for A. Y. 2010 – 11 passed by the A. O. u/s 143 (3) r.w.s. 144C of the I T Act, 1961.
2. The grounds raised by the assessee are as under:-
“The grounds stated hereunder are independent of and without prejudice to one another. The Appellant submits as under:
1. Holding the payments received by the appellant as royalty under the Income-tax Act, 1961 (`Act’) and under the Double Taxation Avoidance Agreement between India and Saudi Arabia (`DTAA’)
On the facts and in the circumstances of the case, the learned Assessing Officer (`AO’) erred in law and facts in holding and the learned Dispute Resolution Panel (`DRP’) erred in law and facts in confirming the fees received by the appellant for services rendered as royalty under the Act and the DTAA and accordingly taxing the fees under section 115A of the Act.
2. Holding that where there is no specific Article for taxability of particular payment in the DTAA, the provisions of the Act would be applicable
a) On the facts and in the circumstances of the case, the learned AO erred in law in holding and the learned DRP erred in law in confirming that where there is no specific Article for taxability of a particular payment in the DTAA, the provisions of the Act would be applicable.
b) On the facts and in the circumstances of the case, the learned AO erred in law in taxing the fees received by the appellant under section 115A of the Act irrespective of there being no Article in the DTAA for taxation of fees for technical services and the appellant not having Permanent Establishment (PE’) in India.
3. Holding the appellant to have constituted a Service PE in India
On the facts and in the circumstances of the case, the learned AO erred in law in:
a) Holding that the appellant has constituted a PE in India under the DTAA, due to presence of four service engineers in India for 90 days each.
b) Considering man-days of services rendered instead of the period for which activities continues in India (i.e. solar days) as per Article 5(3)(b) of the DTAA.
c) The learned DRP erred in not adjudicating on this ground in detail based on above facts and law.
4. Levy of interest under section 234B of the Act
On the facts and in the circumstances of the case, the learned AO has erred in levying interest of INR 319,893 under section 234B of the Act.
5. Penalty proceedings under section 271(1)(c)
The learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act.
6. Relief
a) The appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto.
b) The appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal.
b) Further, the appellant prays that all the above adjustments / additions / disallowances made by the learned AO and upheld by the learned DRP are bad in law and liable to be deleted.”
3. Learned AR of the assessee submitted that the case of the revenue is this that the receipt in question is Royalty and therefore, as per DTAA between India and Saudi Arabia and u/s 115A of I T Act, it is taxable @ 10% and the case of the assessee is his that the receipt in question is not Royalty and it is FTS and therefore, it is not taxable because there is no specific provision for taxability of FTS in this treaty between India and Saudi Arabia. He further submitted that the A. O. has also stated in the assessment order that solar days (360) are to be considered and not man days (90) for the purpose of deciding the existence of PE in India and on this basis, he held that there is PE in India and therefore, the income in question is taxable @ 40%. He submitted that only solar days can be considered for this purpose and in support of this contention, he placed reliance on the tribunal order rendered in the case of Clifford Chance vs. DCIT as reported in 76 TTJ 0725/82 ITD 0106. As against this, learned DR of the revenue placed reliance on the tribunal order rendered in the case of ABB FZ – LLC vs. DCIT in IT (TP) A No. 1103/bang/2013 dated 21.06.2017. He submitted a copy of this tribunal order and drawn our attention to Para 46 of this tribunal order. In rejoinder, the learned AR of the assessee drawn our attention to Para 49 of this tribunal order and submitted that in that case, the dispute was about service PE without physical presence of the employees and it is noted by the tribunal that service, information, consultancy, management etc. can be provided with various virtual modes like e mail, internet, video conference etc. and therefore physical presence of employee is not essential.
4. We have considered the rival submissions. We have to decide this issue first that whether there is PE or not in India because if a PE is there, income is taxable @ 40% and if no PE is there, income whether Royalty or FTS is taxable @ 10%. In our considered opinion, there is no PE because as per the tribunal order cited by the learned AR of the assessee having been rendered in the case of Clifford Chance vs. DCIT (Supra), only solar days are to be considered and not man days. The decision of tribunal is this: “Multiple counting of the common days is to be avoided so that the days when two or more partners were present in India, together, are to be counted only once. Multiple counting would lead to absurd results. For example, if 20 partners were present in India together for 20 days in one fiscal year, multiple counting would result in 400 days. There cannot be more than 365 days in a year.” Regarding the tribunal order cited by the learned DR of the revenue having been rendered in the case of ABB FZ – LLC vs. DCIT (Supra), we would like to observe that in the present case, this tribunal order is not relevant because of difference in facts. In that case, the assessee had rendered managerial and consultancy services and as per the tribunal, these services can be rendered without physical presence of the employees. In the present case, as per the invoice on page 37 of the paper book, the assessee has raised a bill of USD 57,764 for 2063 man days @ USD 28 per day. This is not a case of the revenue that any other invoice is raised by the assessee. When admittedly, the only invoice raised is in respect of stay of 4 Engineers in India on the basis of man hours spent by them in India, it cannot be said that any other service was rendered in the present case without physical presence by way of virtual modes like e mail, internet, video conference etc. and therefore, physical presence of employee is not essential. Because of these differences in facts, this tribunal order cited by the learned DR of the revenue is not applicable in the present case. We, therefore, follow the tribunal order cited by the learned AR of the assessee having been rendered in the case of Clifford Chance vs. DCIT (Supra) and hold that in the present case, the stay in India of the assessee was only 90 days and since it is less than 182 days as required under Article 5 (3) (b) of the India SA DTAA, there is no PE.
5. Now the second issue to be decided is this that whether the impugned receipt is Royalty or FTS and the third issue to be decided is this that whether the income is taxable in India if it is FTS. If it is found that the income is taxable even if it held to be FTS than the second issue will be of academic interest only because both these incomes i.e. Royalty & FTS are taxable at the same rate i.e. 10%. Hence, we first decide the 3rd issue. Regarding this issue, this is the submission of the learned AR of the assessee that in the DTAA between India and Saudi Arabia, there is no clause regarding taxation of FTS and therefore, FTS is not taxable in India. In support of this contention, he placed reliance on a judgment of Hon’ble Madras High Court rendered in the case of Bangkok Glass Industry Co. Ltd. vs. ACIT as reported in 2015 (4) TMI 503. He filed a copy of this judgment. We have gone through this judgment. We find that in Para 8 of this judgment, it is noted that as per the assessee in that case, FTS was not taxable as Royalty under Article 12 of DTAA between India & Thailand. The case of the A.O. in that case was that this receipt is not taxable as Business Profit under Article 7 of DTAA between India & Thailand. The A.O. held in that case that the impugned receipt will fall under Article 22 i.e. residual clause and could be taxed only in the contracting state where the income arose. We reproduce the said clause of DTAA between India & Thailand. This reads as under:-
“Article 22
Other Income
Items of income of a resident of a Contracting State, wherever arising, not expressly dealt with in the foregoing Articles may be taxed in that State. Such items of income may also be taxed in the Contracting State where the income arises.”
6. Now we reproduce the said clause of DTAA between India & Saudi Arabia also. This reads as under:-
“Article 22
Other Income
1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this convention shall be taxable only in that contracting State.”
7. There are some exceptions provided in Article 22 (2) where Article 22 (1) is not applicable but those exceptions do not include FTS. Therefore, we are of the considered opinion that in view of Article 22 (1) of DTAA between India & Saudi Arabia, FTS is not taxable in India because it will fall in Article 22 (1) and as per this Article, income is taxable in the state of residence i.e. Saudi Arabia.
8. Now, we have to decide the second issue as to whether the impugned receipt is Royalty or FTS. In this regard, we find that the A.O. has noted in Para 5 of the assessment order that the exact details of the work done by the four service Engineers of ELEMAC in India were never furnished. In the absence of the complete details, this issue cannot be decided. We feel it proper to restore this after to the file of the A. O. for a fresh decision with the direction that the assessee should provide all details required by the A.O. The A. O. should decide this issue afresh after providing adequate opportunity of being heard to the assessee.
9. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on the date mentioned on the caption page.
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