Case Law Details
N.M. Rothschild & Sons Limited Vs DCIT (ITAT Delhi)
ITAT Delhi held that services rendered under Intra Group Service Agreement do not make available technical knowledge and hence would not fall within the definition of FTS as provided under Article 13(4) of India UK DTAA and hence not taxable in India.
Facts- Vide the present appeal, the assessee submits that the Assessing Officer erred in making an addition of Rs.2,47,83,056/- earned for services rendered under group service agreement and Rs.4,34,67,740/- towards fee for advisory services (aggregating to Rs.6,82,50,796/-) by treating it as Fees for Technical Services (FTS) under Article 13 of the India UK DTAA without appreciating the fact that the services rendered by the assessee do not make available technical knowledge to the recipient of services and hence not taxable in India.
Conclusion- The Tribunal in assesses own case for the assessment years 2018-19 and 2019-20 and ITA 1382/Del/2022 by order dated 30.06.2023 held that the fee received towards services rendered under group service agreement would not fall within the definition of FTS as provided under Article 13(4) of India UK DTAA.
Held that the factual matrix of the case is same and identical for the AY 2018-19 the DRP followed its directions and findings given for the AY 2018-19 even for the AY 2020-21 which is under consideration. Therefore, facts being identical respectfully following the order of the Tribunal for the assessment years 2018-19 and 2019-20 we hold that the receipts towards services rendered under Intra Group Service Agreement would not fall within the definition of FTS as provided under Article 13(4) of India UK DTAA and hence not taxable at the hands of the assessee in India.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal is filed by the assessee against the final assessment order dated 20/01/2023 passed u/s 143(3) r.w.s. 144C(13) pursuant to the directions of the DRP dated 08/12/2022 passed u/s 144C(5) of the Act for the AY 2020-21. The assessee in its appeal raised the following grounds: –
1.0 On the facts and in the circumstances of the case and in law, the order passed by the Learned Assessing Officer (‘Ld. AO’) under section 143(3) read with section 1440(13) of the Income-tax Act, 1961 (“Act”) is bad in law and void ab initio.
1.1. On the facts and in the circumstances of the case and in law, the notice issued under section 143(2) of the Act by the Assistant Commissioner of Income-tax, (National Faceless E-Assessment Centre)-1(1)(2), Delhi to initiate the assessment for AY 2020-21 is without jurisdiction in terms of Central Board of Direct Taxes (“CBDT”) order (No. F. No. 18713/2.02.0-YYA-i) dated 31 March 2021.
1.2. On the facts and in the circumstances of the case and in law, the Ld. DRP in contravention of the provisions of section 144C and principles of natural justice, erred in not issuing the DRP directions to the Appellant.
1.3. On the facts and in the circumstances of the case and in law, the Ld. AO erred in issuing the final assessment order dated 20 January 2023 based on the DRP directions purportedly dated 04 November 2022. By doing so, the Ld. AO has passed the final assessment order under section 143(3) read with section 1440(13) of the Act beyond the timeline provided under section 1440(13) of the Act.
1.4. On the facts and in the circumstances of the case and in law, the final assessment order under section 143(3) read with section 1440(13) of the Act dated 20 January 2023 and the DRP directions under section 1440(5) of the Act purportedly dated 04 November 2022 are barred by time limitation provided under section 153 of the Act, and hence deserve to be held as bad in law and time barred.
2. On the facts and in the circumstances of the case and in law, the Ld. AO erred in making the addition of amount of INR 2,47,83,056/- earned for services rendered under group services agreement by treating it as Fees for Technical Services (‘FTS’) under Article 13 of the India-UK Double Taxation Avoidance Agreement (‘DTAA’) without appreciating the fact that the services rendered by the Appellant do not make available technical knowledge to the recipient of the services and hence not taxable in India under Article 13 of the DTAA.
2.1 Without prejudice to the Appellant’s contention that none of the services rendered under the group services agreement are taxable in India under the Article 13 of the India-UK DTAA, the learned AO has erred in not restricting the addition to only a sum of INR 77,96,582/- out of INR 2,47,83,056 /- earned for services rendered under group services agreement as attributable to the specific services identified by the Ld. AO as FTS in the final assessment order dated 20 January 2023.
3. On the facts and in the circumstances of the case and in law, the Ld. AO erred in making the addition of amount of INR 4,34,67,740/- earned for fees for advisory services by treating it as FTS under Article 13 of the India-UK DTAA without appreciating the fact that the services rendered by the Appellant do not make available technical knowledge to the recipient of the services and hence not taxable in India under Article 13 of the DTAA.
4. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in making incorrect assertions of facts and making the additions to the income of the Appellant with a pre- determined mindset against the Appellant.
The Appellant craves leave to add, to amend, to substitute, to withdraw, to modify, to alter and / or re-instate the foregoing grounds of the appeal on or before the time of hearing.”
2. The Ld. Counsel for the assessee, at the outset, submits that ground nos. 1 to 1.4 of grounds of appeal are not pressed. In view of the submissions of the Ld. Counsel grounds no. 1 to 1.4 of the grounds of appeal are dismissed as not pressed.
3. Coming to ground nos. 2 & 3 of grounds of appeal the Ld. Counsel for the assessee submits that the Assessing Officer erred in making an addition of Rs.2,47,83,056/- earned for services rendered under group service agreement and Rs.4,34,67,740/- towards fee for advisory services (aggregating to Rs.6,82,50,796/-) by treating it as Fees for Technical Services (FTS) under Article 13 of the India UK DTAA without appreciating the fact that the services rendered by the assessee do not make available technical knowledge to the recipient of services and hence not taxable in India. Ld. Counsel submits that in so far as the fee earned for services rendered under group service agreement is concerned, identical issue came up for consideration before this Tribunal in assessee own case for the assessment years 2018-19 and 2019-20 and the Tribunal by its order dated 30.06.2023 in ITA Nos. 517/Del/2022 and 1382/Del/2022 held that since make available condition provided under Article 13(4)(c) remains non compliant the receipts would not fall within the definition of FTS as provided under Article 13(4) of India UK DTA.
4. The Ld. Counsel for the assessee further submits that in the current assessment year assessee has rendered one more additional service details of which are placed at page 71 of Paper Book. Ld. Counsel submits that these are only advisory services rendered by the assessee supporting RCIPL in organization of the agreement between RCIPL and the third party (client) for rendering financial advisory services in connection with divestment of client’s portfolio under a Fee Letter. Nature of advisory services are identifying potential buyer for the client, provided support in preparation of management presentation and other material for distribution to potential buyers, all of which was based on the inputs received from the client and supported in coordination of marketing exercise and supported RCIPL in advising on potential transaction options and evaluation of pros and cons of such options. The Ld. Counsel for the assessee submits that rendering of any of these advisory services do not result in transfer of technical knowledge, knowhow, skill, etc. and, therefore, make available condition provide under Article 13(4)(c) is not complied. In such a situation, the fee received for advisory services would not fall within the definition of FTS as provided under Article 13(4) of India UK DTAA. The Ld. Counsel submits that the findings given by the Tribunal in respect of Intra Group Services will also apply to the fee received towards advisory services. The Ld. Counsel for the assessee further submits that neither the AO not the DRP has provided any reasoning as to how the advisory services rendered by the assessee to RCIPL during the year specifies make available clause and is taxable as FTS under Article 13 of India UK DTAA.
5. On the other hand, the Ld. DR supported the orders of the AO as well as the DRP.
6. Heard rival submissions, perused the orders of the authorities below. We observed that the Tribunal in assesses own case for the assessment years 2018-19 and 2019-20 and ITA 1382/Del/2022 by order dated 30.06.2023 held that the fee received towards services rendered under group service agreement would not fall within the definition of FTS as provided under Article 13(4) of India UK DTAA. While holding so the Tribunal observed as under: –
“7. We have considered rival submissions in the light of the decisions relied upon and perused the materials on record. Undisputedly, the assessee has entered into intra group services agreement with various group entities, including the Indian AE. In terms with the group services agreement, the assessee renders following services:
Human resource management: NMR manages payroll processes, recruitment, performance management, pensions, learning and development for operating entities including Rothschild India; Internal Audit: NMR is responsible for conduct of global internal audit assurance programme;
Corporate events: NMR manages corporate events, memberships, sponsorships and hospitality functions in order to perform event management services at a centralized level;
Group Finance: NMR is responsible for management reporting (including forecasts, planning and budgeting), financial reporting and capital planning. These include balance sheet reporting, funding, liquidity and regulatory issues, P&L reporting, covering actual results, forecasts and budgets, with the focus on divisional performance; Global Finance: NMR produces global management information for financial advisory business of the Group. It provides decision support for the management and co-ordinates global fee sharing, global expense policies and pipeline reporting;
Legal and compliance: NMR provides legal and regulatory advice in terms of monitoring of compliance with legal and regulatory matters. It includes liaising with regulators, new client acceptance and name protection/trademarks. It also provides services to implement compliance rules within the Group and assist local teams to be compliant.
Global Planning: Under this, NMR supports management committees annual planning process;
Marketing: NMR provides support for collating credentials for marketing to clients, which includes league tables, tombstones, deal announcements, regional performance slides, preparation of marketing materials such as global divisional, sector and product brochures and flyers, crisis management etc.
8. The cost incurred by the assessee for performing this services are allocated to the group companies, including the India AE on the basis of applicable allocation keys, such as, time spent, activity level or head count. The costs incurred are cross charged to the group companies on cost plus 5% basis. The short issue arising for consideration is, whether the amount received by the assessee through cost recharge from Indian AE is in the nature of FTS under Article 13(4)of India – UK DTAA. Before we proceed to decide this issue, it is necessary to look into the definition of FTS under Article 13(4) of the Treaty, which reads as under:
“Article 12 (4): For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term “fees for technical services” means payments of any kind of any person in consideration for the rendering of any
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 of this article is received ; or
(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received ; or
(c) make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design.”
9. A careful reading of Article 13(4) makes it clear that FTS means payments of any kind in consideration for rendering of any technical or consultancy services, which firstly, are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment of the nature of royalty is received. Secondly, they must be ancillary and subsidiary to the enjoyment of the property for which the payment in the nature of royalty is received. Thirdly, the services ‘make available’, technical knowledge, experience, skill, knowhow or processes or consists of development and transfer of a technical plan or technical design. The facts on record reveal that the first two conditions noted above do not apply to the fees received as such fees are not for any services, which are ancillary and subsidiary to any payment made in the nature of royalty. Beside the aforesaid two categories, where the payment can fit in as FTS is the category where the services rendered make available technical, experience, skill, know-how, processes etc. Thus, the first condition, which needs to be satisfied, is the services rendered must be in the nature of technical or consultancy services.
10. As discussed earlier, under the group services agreement the assessee provides services in the nature of management, such as, payroll processes, recruitment, performance management, pensions, learning and development for operating entities, including the Indian AE. The assessee also conducts a global internal audit assurance programme. It also manages corporate events, memberships, sponsorships and hospitality functions in order to perform professional event management services at a centralized level. It also involve intra-group finance activities, such as, management reporting, financial reporting and capital planning, which includes, balance-sheet reporting, funding, liquidity and regulatory issues, profit and loss reporting, covering actual results, forecast and budges with the focus on divisional performance. It also produces global management information for financial advisory business of the group. It provides decision support for the management and co-ordinates global fee sharing, global expenses policies and pipeline reporting. The assessee provides legal and regulatory advice in terms of monitoring of compliance with legal and regulatory matter, including liaising with regulators, new client acceptance and name protection/trademarks. It also provides services to implement compliance rules within the group and assist local teams to be compliant. The assessee also provides services of global planning for annual planning process. It also provides support for collating credentials for marketing to clients. Thus, from the nature of services rendered, it is quite clear that they are in the nature of advisory services in certain areas as per the terms of the agreement. From the nature of services, it is quite evident that assesses role in the services provided is purely to assist the Indian AE or other participating group entities in making correct decision on the aspects specifically referred to in the agreement. Thus, the nature of services provided to the Indian AE does not seem to be falling in the category of either technical or consultancy services. In fact, in the assessment orders, the Assessing Officer himself has stated that some of the services are of the nature of FTS. Thus, the Assessing Officer clearly admits that all the services rendered by the assessee are not in the nature of FTS. In spite of that the Assessing Officer has treated the entire receipts as FTS and added at the hands of the assessee. This, in our view, is unacceptable.
11. Having said so, it is necessary to examine whether the other condition of Article 13(4)of India – UK treaty is fulfilled. Even assuming that as per the Assessing Officer’s version, few of the services are in the nature of technical and consultancy nature, the crucial factor needs to be examined is whether while rendering such services the assessee has made available technical knowledge, experience, skill, know-how or processes to the India AE. The expression ‘made available’ has not been defined in India – UK DTAA. However, in this context reference can be made to the MoU to India – US DTAA wherein the term ‘make available’ has been explained. For ease of reference such explanation provided in the protocol to India – USA DTAA is reproduced hereunder:
“Paragraph 4(b) of Article 12 refers to technical or consultancy services that make available to the person acquiring the services, technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design to such person. (For this purpose, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person). This category is narrower than the category described in paragraph 4(a) because it excludes any service that does not make technology available to ‘the person acquiring the service. Generally speaking, technology will be considered “made available” when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available.”
12.The expression ‘make available’ has been subjected to judicial interpretation in various decisions. As per the interpretation given to the said expression, technological skill, know-how etc. to render the services should get transferred to the service recipient in a manner so that the service recipient is able to perform the same services independently on its own in future, without the aid and assistance of the service provider. In other words, in course of rendition of service, the service provider must transfer the technology, technical know-how, skill etc. to the service recipient to the extent that service recipient can perform such services in future without required the assistance of the service provider and without depending upon the service provider. Meaning thereby, the service recipient must be in a position to acquire technical knowledge, knowhow, skill etc., so as to independently apply it. In the facts of the present case, evidently, the services provided by the assessee to the Indian AE are merely for enabling and assisting the Indian AE in making the correct decisions on certain aspects as specifically provided under the group service agreement. Such rendition of services do not result in transfer of technical knowledge, know-how, skill etc. to the Indian AE. Therefore, in our view, the ‘make available’ condition provided under Article 13(4)(c) remains non-compliant. That being the position, the receipts would not fall within the definition of FTS as provided under Article 13(4) of India – UK DTAA. While coming to such conclusion, we have drawn support from the judicial precedents cited before us by learned counsel for the assessee.
13. In view of the aforesaid, we hold that the receipts, not being in the nature of FTS under Article 13(4)of India – UK DTAA, are not taxable at the hands of the assessee in India. Grounds are allowed.”
7. It is observed from the DRP order that the factual matrix of the case is same and identical for the AY 2018-19 the DRP followed its directions and findings given for the AY 2018-19 even for the AY 2020-21 which is under consideration. Therefore, facts being identical respectfully following the order of the Tribunal for the assessment years 2018-19 and 2019-20 we hold that the receipts towards services rendered under Intra Group Service Agreement would not fall within the definition of FTS as provided under Article 13(4) of India UK DTAA and hence not taxable at the hands of the assessee in India.
8. Coming to fee received towards advisory services rendered by the assessee to RCIPL it is observed that the assessee has rendered the following services:
- “Identifying potential buyer for the client;
- Provided support in preparation of management presentation and other material for distribution to potential buyers, all of which was based on the inputs received from the client and supported in coordination of marketing exercise; and
- Supported RCIPL in advising on potential transaction options and evaluation of pros and cons of such options.”
9. On a reading of the assessment order and the DRP directions, we found that none of the authorities have given any reasoning as to how the advisory services rendered by the assessee to RCIPL during the year under consideration satisfies make available clause and is taxable as FTS under Article 13 of the India UK DTAA.
10. In our considered view none of the above services rendered by the assessee to RCIPL suggest that such services provided by the assessee resulted in transfer of technical knowledge, knowhow, skill etc. and fulfills the make available clause under Article 13(4)(c) of India UK DTAA. Therefore, the reasoning and the findings given by the Tribunal for the assessment years 2018-19 and 2019-20 applies even for the fees for advisory services and, therefore, we hold that such receipts also would not fall within the definition of FTS as provided under Article 13(4) of India UK DTAA. Ground nos. 2 & 3 are allowed.
11. As we have decided ground no. 2 of grounds of appeal in assesses favor, the without prejudice ground raised by the assessee in ground no. 2.1 is not adjudicated upon and left open.
12. In the result, appeal of the assessee is partly allowed as indicated above.
Order pronounced in the open court on 07.03.2025
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