General Motors Overseas Corporation Vs ACIT (ITAT Mumbai)
Conclusion: Once the domestic law prohibits allowing any deduction for the purpose of calculating ‘fees for technical services/fees for included services’, then, the same was not an allowable deduction and, therefore, AO and CIT(A) were right in holding that the assessee was liable to be taxed on gross basis rather than on net basis.
Held: Assessee -company was incorporated in and tax resident of United States of America (‘USA’). It was engaged in the business of providing management and consulting services solely to the group entities worldwide. Assessee submitted that in view of Article 7 of the Indo-US DTA, the net profit was required to be taxed instead of the gross profit as was wrongly done by AO and confirmed by CIT(A). Assessee contended that it had only received cost of expatriate employees on reimbursement and there was no profit element. It was held that the benefit of Article 7(3) is subject to the limitation provided under the domestic law (44D of the Act). Once the domestic law prohibits allowing any deduction for the purpose of calculating ‘fees for technical services/fees for included services’, then, the same is not an allowable deduction and, therefore, AO and CIT(A) were right in holding that the assessee was liable to be taxed on gross basis rather than on net basis. The argument that the provision which was beneficial to the assessee should be applied, i.e. treaty provision rather than the domestic law, is in accordance with Section 90. However, if the domestic law prohibits grant of any deduction, the same cannot be granted. There is no contradiction in the treaty provision or domestic law, rather the treaty provisions provide by incorporation the applicability of domestic laws for computing the profit of the assessee. There was no ambiguity either in the treaty provisions or in the domestic law or in Section 90. Deduction to assessee was to be given for the purpose of computing the profit if such deduction was permissible under the domestic law. Since no deduction was permissible under the domestic law, therefore, the assessee was not entitled to any deduction.
FULL TEXT OF THE ITAT JUDGEMENT
The appellant has filed the above noted appeal feeling aggrieved by the order passed by the Commissioner (Appeals) on 28.11.2008 on the following grounds :-
“Income assessed as “Fees for Technical Services”
1. The learned CIT(Appeals) erred in fact and also in law in partially confirming the view of the AO holding that the amount invoiced by the appellant to General Motors India Ltd. (‘GMIL’) under the Management Provision Agreement dated December 26, 1995 is chargeable to tax as “Fees for Technical Services” in so far as it is pertains to the amount attributable to services rendered by Vice President Manufacturing.
2. The learned CIT(Appeals) erred in fact and in law in not considering the argument of the Appellant that the AO had not provided reasonable opportunity to the Appellant to submit the documentary evidence and to present the facts of the case.
3. The learned CIT(Appeals) erred in fact and in law in confirming the action of the AO in computing tax by applying the provision of Section 44D of the Act in complete disregard to the facts of the Appellant’s case and also the provisions of the Double Tax Avoidance Agreement with USA *“the DTAA”+.
4. The learned CIT(Appeals) also erred in fact and in law in completely ignoring the provisions of Article 12 Para 6 of the DTAA in levying tax as “Fees for Technical Services”, while holding that the Appellant has permanent establishment in India and the said services are attributable to the said permanent establishment.
Adjustment under Section 92 of the Act :
5. The learned CIT(Appeals) erred in confirming the action of the AO in invoking the provisions of Section 92 of the Act and adding 10% mark up on the invoices billed by the appellant to GMIL.
6. The learned CIT(Appeals) erred in fact and in law in confirming the action of the AO in making the above adjustment without giving any reasoning and without dealing with the arguments advanced by the Appellant.
7. Without prejudice to the above, the learned CIT(Appeals) erred in not accepting the argument of the Appellant that the AO erred in not providing any evidence that the transaction entered by the appellant with GMIL is not at arm’s length.
8. Without prejudice to the above, the learned CIT(Appeals) erred in not accepting the argument that the AO erred in not providing any basis for mark up at 10% to the amount involved by the appellant to GMIL.
Reversal of invoices raised in the earlier years
9. The learned CIT(Appeals) erred in rejecting the contention of the Appellant that the amount of US$ 2,19,132.16, being the invoices raised in the earlier years, offered to tax in earlier assessment years and reversed during the year is required to be reduced from the total income.
Interest under Section 234B of the Act
10. The learned CIT(Appeals) erred in not accepting the claim of the Appellant that no interest under Section 234B of the Act was payable by the Appellant as the entire income of the Appellant was subject to withholding tax.”
Brief background
I. The Appellant is a company incorporated in and tax resident of United States of America (‘USA’). It is engaged in the business of providing management and consulting services solely to the group entities worldwide.
II. The Appellant entered into a Management Provision Agreement (‘MPA’) dated December 26, 1995 effective from April 16, 1994 with General Motors India Limited (‘GMIL’) . GMIL is engaged in the business of manufacture, assembly, marketing, and sale of motor vehicles and other products in India. GMIL has a separate ‘technical information and assistance agreement’ with M/s Adam Opel AG.
III.Under the MPA, the Appellant was to provide executive personnel in connection with development of general management, finance, purchasing, sales, service, marketing and assembly/ manufacturing activities to GMIL. Further, as per clause 4 of the MPA, GMOC was to charge salary and other direct expenses related to such personnel from GMIL.
IV. To ascertain the tax liability, if any, of such amounts receivable under the MPA, the Appellant filed an application before Authority of Advance Ruling (AAR).
V. it was the submission of The AR that AAR vide its order dated August 19, 1997 specifically negated that the amounts constitute fee for technical services (‘FTS’) but held that GMOC (referred to as XYZ in the ruling) constitutes Permanent Establishment (‘PE’) in India and any amount received by it will be taxable as business profits under Article 7 of the India-USA Tax Treaty (‘DTAA’)
VI. It was the contention of the AR that out of expatriates mentioned above, during the subject year only following two personnel were assigned to GMIL under the provisions of
President and Managing Director – Mr. Aditya Vii; and Vice President manufacturing – Mr. Satyasree Veerpaneni
VII. In relation to above, the Appellant raised invoices for US$ 284,288.28 on GMIL. In view of the ruling delivered by AAR, such amounts were disclosed as business receipts in the Return of Income (Rol). Further, given that these amounts as invoiced to GMIL were on “cost as incurred basis”, therefore in absence of any profit element, no business income was computed in the ROI ( return of Income ) filed.
VIII. Accordingly, the Appellant filed it ROI for the subject year 2004-05 on 30 October 2004 declaring an interest income of Rs. 2,291 under normal provisions of the Act.
IX. After filing the return of income by the assessee, the assessing officer had issued the notices under section 143 (2) and 142 (1) Of the Act and the assessee was called upon to file the copy of the service agreement of the Deputationist vide order sheet entry dated 20 February 2006. However despite that, the representative of the assessee had not filed the service agreement of the employees on deputation.
X. The assessing officer left with no other option, had taxed the entire receipt of USD 28428828 as business income under article 7 of Indo US DTAA on gross basis. It was further noted in paragraph 8 of the assessment order that “no profit on this receipt has been shown by the assessee claiming the same as reimbursement of cost”. Further it was mentioned that as per Article 7 of the treaty, the income of PE is to be computed in accordance with domestic law as provided in paragraph 3 of Article 7.
XI. Feeling aggrieved by the order passed by the assessing officer, the assessee preferred an appeal before the Commissioner (Appeals). However the CIT(A) had also decided the issue against the assessee. The finding recorded by the Ld. CIT(A) in paras 6 to 9 of the order dealing with the contention of the assessee in the order impugned before us were as under:
“6. During the appeal proceedings, appellant further submitted the designation & work profile of Mr. Aditya Vij (President and Managing Director) and Mr. Satyasree Veerapaneni (Vice President Manufacturing) as under.
“1. Mr. Aditya Vij
Qualification : Chartered Accountant and MBA
Designation : President and Managing Director
Work Profile : As per the MPA between GMIL & GMOC work profile of
President & Managing Director is as under :
“President and Managing Director – will be Chief Executive and Operating Officer of GMI and will be responsible for overall management and direction of GMI operations. The President and Managing Director will be formally appointed to such office by GMI and will discharge his or her powers and duties from that office.
2. Mr. Satya Veerapaneni
Qualification : B. Tech.
Designation : Vice President (Manufacturing)
Work Profile :
As per the MPA between GMIL & GMOC work profile of Vice President
(Manufacturing) is as under :
“Vice President of manufacturing Engineering – will be responsible for overall management of GMI facilities to manufacture and assemble products of GMI according to required standards and for production of such products according to those standards.”
7. It was submitted that the services rendered by above persons deputed to India are in the nature of managerial services and not in the nature of technical or consultancy services. It was further contended by appellant that as per article 12 of the India-US double tax avoidance agreement, the services provided by employees deputed to India are not in the nature of “fees for included services”. From the definition of “fees for included services”, it will be observed that fees for included services” means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.
8. The appellant further contended that the services provided by Mr. Aditya Vij and Mr. Satya Veerapaneni can be considered as fees for included services only if they ‘make available’ technological knowledge, experience, skill, know-how or process, which enable the person obtaining the services to apply the same. But in the case of appellant company, no expertise or know-how has been ‘made available’ to the Indian company by reason of rendering the said services. In this connection the appellant relied on the following decisions :
1) Raymond Ltd. v. Deputy Commissioner of Income Tax (86-ITD-791)
2) Intertek Testing Services India Pvt. Ltd. (AAR 760 of 2007)
3) ISRO Satellite Centre [ISAC] (AAR 765 of 2007)
4) De Beers India Minerals Pvt. Ltd. (297 ITR 176)
5) M/s. Cushman & Wakefield (S) Pte. Ltd. (218 CTR 238)
8.1 The appellant further submitted that GMIL has a separate “Technical Information & Assistance Agreement” with M/s. Adam Opel AG, a company incorporated in Germany. As per the said agreement, M/s. Adam Opel AG is to provide technology license and technical assistance, technical personnel and training to the employees of GMIL to produce vehicles at GMIL’s production facilities in India and distribute those vehicles in the Territory, as per the engineering standards and designs established thereof by Adam Opel AG.
8.2 As per the aforesaid agreement, Adam Opel AG is to receive inter alia royalty and fees for services rendered from GMIL.
9. I have perused the fact of the case and also analysed para 2 and 4 of MPA. Further I have also analysed article 12 of the India-US treaty and various case laws submitted by appellant. Also, I have also gone through the Advance Ruling given in the case of the appellant wherein the services rendered by the expat at the post of Managing Director and Vice President (Manufacturing) was examined and after examining the said services, it was held that the services rendered by the expat is managerial services. In my view, the services rendered by the expat deputed by GMOC to India cannot be held as in the nature of fees for included services as per Article 12 of Indo-US DTAA since it does not make available any technological, experience, skill, know-how or process, which enable the person obtaining the services to apply the same. However, that payment has to be taxed under the head business income. Further, in the case of Vice President (Manufacturing), he is qualified, well experienced technical personnel. His services were made available to the Indian subsidiary. His technical experience was utilized by the Indian subsidiary in its day today production activities. Hence, the payment will come under the purview of fees for included services.”
XII. Feeling aggrieved by the order passed by the CIT(A), the assessee is in appeal on the grounds mentioned hereinabove. In fact , grounds raised by the assessee in all the assessment years are common. Therefore, we are taking the appeal No. 1282/M/09 as the lead case with the consent of both the parties and deciding the appeals by passing a composite and common order in all the appeals mentioned in the cause title.
SUBMISSIONS OF THE AR
XIII. Firstly, learned AR submitted that once a finding has been given by the Authority for Advance Ruling (AAR) in respect of the services rendered by the President, Managing Director, Vice President of Marketing, holding that the services rendered by these persons would not fall within the definition of fees for included services (FIS in short) then, the lower authorities and the Tribunal are precluded from taking a contrary view and decision of the AAR is binding on the tribunal. In support of the above said contention, the
Ld.AR had drawn our attention to para 2, 5 , 29 and 30 of the order passed by the AAR wherein it was held as under:-
a) Responsibility, duties and qualification of the personnel assigned under MPA — refer para 2 and 5 on page 41 to 42 of paper book
“2 … …. Under the management provision agreement, the applicant is to make available executive personnel for development of general management, finance and purchasing, service, marketing and assembly/manufacturing activities. The agreement indicates the responsibilities and duties of each of the five resident expatriates under the said agreement as under.
(i) President and managing director -Will be the chief executive and operating officer of “AB” and will be responsible for overall management and direction of “AB” operations. The president and managing director will be formally appointed to such office by “AB” and will discharge his or her powers and duties from that office.
(ii) Vice-president of marketing-Will be responsible for development and administration of AB’s dealer network, sales and marketing of “AB” products and service.
(iii) Vice-president of finance – Will be responsible for managing all the financial operations of ‘AB”.
(iv) Vice-president of manufacturing engineering – Will be responsible for overall ,.. management of “AB” facilities to manufacture and assemble products of “AB” accordin to required standar,csnrr–id for production of such–pro–du–cts according to those standards;
(v) Vice-president of supplier development and materials management – Will be responsible for managing the purchasing and “AB” materials, including development of local suppliers.
5. The bio-data of the five expatriate personnel which need not be extracted here in full, indicate that four of them are bachelors in electrical, industrial, mechanical/electrical engineering and two of them also possess degrees in business administration whereas the fifth one has a degree only in business administration.”
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“29 ………… It is true that four out of five of the deputationists are engineers. But these are days in which even engineers have to qualify in management skills. The authority has no information or material on record to indicate that the employees were rendering services of a nature falling beyond the terms of the agreement. In the circumstances, the authority has no option but to conclude that the services of the nominees of “XYZ” are “managerial” and not “technical or consultancy” services within the meaning of Article 12. The authority, however, leaves it open to the concerned authorities, in appropriate proceedings, to examine the factual position and take appropriate action if they find that the factual situation is otherwise.
30.In the result, the Authority finds, on the facts available to it, that the services of the five nominees of `XYZ’ are not covered by the expression ‘included services’in art. 12. The consideration received by `XYZ’ for these services is therefore, assessable not under art. 12 but as business profits under art. 7 r/w 5(2)(1) of the DTAA. There was some discussion before the authority as to the manner in which the business profits attributable to the PE(i.e the services) should be computed and whether in computing such profit and deduction of expenses incurred to earn them is permissible or not. The Ld. counsel stated that he was not praying for a ruling on that aspect and that he would be satisfied with a ruling on the first question set out in the application . The authority therefore refrain from going into the question of expressing any view thereon.”
XIV. The Ld.AR had also drawn our attention to section 245 S of the Income Tax Act,1961. This section provides that ruling of AAR passed in case of an applicant is binding on Income tax authorities in respect of such applicant. The relevant extract of the section is reproduced hereunder:
“245S. (1) The advance ruling pronounced by the Authority under section 245R shall be binding only—
(a) on the applicant who had sought it;
(b) in respect of the transaction in relation to which the ruling had been sought; and
(c) on the Commissioner, and the income-tax authorities subordinate to him, in respect of the applicant and the said transaction.
(2) The advance ruling referred to in sub section (I) shall be binding as aforesaid unless there is a change in law or facts on the basis of which the advance ruling has been pronounced.”
As demonstrated above, given that all the above conditions are satisfied in instant case, the AAR ruling was binding on tax authorities and the Ld. AO and CIT(A) were bound to follow the same. Therefore, on this count also the order passed by Ld. AO and the CIT(A) to the extent it confirms the addition made by Ld. AO is not sustainable in law.
XV. The Ld.AR had also relied upon the following decisions in support of his contention that the decision of the advance authority is binding on the tribunal:-
A. Decision of Hon’ble Supreme Court in the case of Columbia Sportswear Company reported in 5 Taxmann.com. 470
B. Decision of Hon’ble Jurisdictional High Court in the case of Prudential Assurance co Ltd reported in 191 Taxman 62
XVI. Secondly, it was submitted by the Ld. AR that the revenue had been examining the activities of the assessee for the last many years and there is no change in facts. Therefore the principle of consistency should be followed by the lower authorities. Our attention was drawn to the decision in the case of Radhasoami Satsang, reported in 193 ITR 321 (SC) and Bharat Sanchar Nigam Ltd. (183 of 2003)
XVII. Thirdly, it was submitted by the Ld.AR that as per the provision of the DTAA , the technology was not made available by the assessee to the Indian company and therefore the assessee cannot be held liable for taxation for FIS. It was submitted that make available is a sine qua non for the purpose of invoking the FIS and in the absence of making available the technology, FIS cannot be charged/assumed. Learned AR in support of the above contention had filed the written submissions to the following effect :
” 15.4. Without prejudice to the above, the Appellant wish to submit that the amounts charged by GMOC under the MPA were not in nature of FTS either under the Act or the DTAA. In support, it is reiterated that under the MPA, the Appellant had only assigned personnel to GMIL and not rendered any services per se. In support, attention is invited to the clause 8 of the MPA. Relevant extract is reproduced below for your Honor’s ease of reference. (Refer para 8 on page 6 of Convenience Set)
“No guaranty or warranty of any nature is expressly or impliedly extended by GMOC with respect to the provision of services, personnel, information, or other assistance under this Agreement. Further, GMOC will not be liable to GMT or anyone else for direct, consequential, or other damages of any kind or nature arising out of or alleged to result from the furnishing of such services, personnel, information, or other assistance.”
Basis the above, it cannot be alleged that the amounts received was in relation to rendition of any services constituting FTS under the Act and/ or DTAA.
15.5. Moreover, reference is invited to para 8(d) above, wherein it has been reproduced that AAR in its ruling had held that the amounts to be received by GMOC are not in nature of FTS under Article 12 of the DTAA.
In view of the above, it is again reiterated that the amounts received by the Appellant under MPA from GMIL were not in nature of the FTS. Without prejudice to the above, the detailed analysis of chargeability of the aforesaid amount as FTS under the Act/DTAA has been provided hereunder.
Under the Act
15.6. Under the Act, definition of FTS is provided under explanation 2 to section 9(1)(vii). The relevant extract has been reproduced below:
“For the purposes of this clause, fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”. “
15.7. The aforesaid definition provides following two exceptions to the definition of FTS:
a) consideration for any construction, assembly, mining or like project undertaken by the recipient; or
b) consideration which would be income of the recipient chargeable under the head “Salaries” in the hands of the recipient.
Thus, in case any of the aforesaid conditions above are satisfied, the amount received/ receivable would not be chargeable as FTS under the provisions of the Act.
Applicability of exception (b) above in instant case
15.8. In the instant case, as already submitted above GMOC charges GMIL for salary and other direct costs of the personnel assigned to latter. Thus, salary for such personnel is paid by GMOC and corresponding amount is charged from GMIL. Such amounts paid by GMOC to assigned personnel is chargeable to tax in hands of such personnel as income chargeable under the head ‘Salaries’. The Appellant also withheld taxes on such payments under section 192 of the Act and deposited the same with Indian Government. Further given that such salary arises on account of services rendered in India, the same were offered to tax by such personnel as Salary income in their India tax return.
15.9. Thus, exception (b) above is applicable in instant case. In support, reference is invited to following judicial precedents.
