Shell Global Solutions International BV Vs DCIT (ITAT Ahmedabad)
Services Rendered Outside India by Non-residents to foreign clients of Indian Entity will not Fall under Deeming Provisions of Section 9 of Income Tax Act, 1961
The Ahmedabad bench of Income-tax Appellate Tribunal (herein referred to as “ITAT” or “Tribunal”) has recently held that where the services performed by a non-resident taxpayer outside India for foreign clients of an Indian entity for it business outside India and for those services the non-resident has also received payments outside India, such income cannot be deemed to accrue or arise in India. The tribunal has held that in the case of Shell Global Solutions International BV v. Deputy Commissioner of Income Tax, International Taxation-I [2023] 155 taxmann.com 242 (Ahmedabad – Trib.)[11-10-2023].
Facts of the case:
1. Shell Global Solutions International BV (herein referred to as “Assessee” or “Taxpayer”), an entity incorporated in Netherlands, was engaged in providing engineering services in relation to manufacturing of coal and gasification equipment to Larsen & Toubro (for sake of brevity referred as “L&T”).
2. The services were provided by the assessee to L&T for its Engineering, Procurement and Construction (EPC) contracts outside India for its overseas customers.
3. The taxpayer contended before the tax officer that such services will not ought to be taxable in India as Fees for Technical Services (FTS) under Section 9(1)(vii) of the Income-tax Act, 1961 (“the Act”) since services were rendered outside India and were also received outside India.
4. The assessee relied on the decision of the high court in the case of Motif India Infotech Pvt. Ltd. in ITA No. 1177 of 2018 were it was held that “held that the source of income is outside India since assesses customer work based outside India” and Bangalore ITAT in the case of Titan Industries Ltd. 11 SOT 206 were the tribunal decided “when the customers of the company are located outside India, then the source is outside India.”
5. However, the tax officer held that the manufacturing of gas fire equipment has been done in India by L&T and then supplied outside India. And that only the location of placing the orders were outside India and all manufacturing work for which which assessee provided its services were done in India and thus source of such income will not be outside India.
6. The Dispute Resolution Panel (DRP) confirmed the order of the tax officer and held that the assessee were not rendering any services outside India and business was carried out from India.
7. Thus, the assessee filed an appeal before the tribunal.
Tribunal’s Decision:
1. The Hon’ble tribunal observed the facts of the case where the taxpayer was providing engineering services related to coal gasification equipment to be installed at the plant site outside India. The services were rendered by the assessee from its office abroad and the payments were also received outside India.
2. The tribunal noted the observation of high court in the case of Motif India Infotech Pvt. Ltd. with regards of section 9(1)(vii) of the Act which outlines that FTS payable by a resident of India will be deemed to accrue or arise in India. However, there are exceptions to this which are FTS payable in respect of services utilized in a business or profession carried on by such person outside India, or it is for the purpose of making or earning any income from any source outside India.
3. The tribunal further held that the assessee was providing services to be utilized by L&T for serving its foreign clients and the source of income of the assessee were those foreign clients. The L&T has made payments to the assessee for its business carried out by it outside India.
4. According, the tribunal ruled in favor of assessee.
Conclusion: The ITAT’s decision in the Shell Global Solutions International BV vs. DCIT case has clarified the tax treatment of services provided by non-resident taxpayers to foreign clients of Indian entities. In such cases, where services are rendered outside India and payments are received outside India, the income cannot be deemed to accrue or arise in India. This ruling upholds the principle that income sourced outside India is not subject to taxation under Section 9 of the Income-tax Act, ensuring fairness and clarity in the taxation of international transactions.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
These appeals have been filed by the Assessee against the orders passed by the Ld. Disputes Resolution Panel -2, (in short “Ld. DRP”), Mumbai vide orders dated 29.12.2015, 29.11.2016 & 20.09.2017 passed for the Assessment Years 2011-12 to 2013-14. Since common facts and issues for consideration are involved for all the assessment years before us, all years are being heard together and issues are being disposed of by way of a common order.
We shall first take up the appeal of the assessee for A.Y. 2011-12
2. The assessee, M/s. Shell Global Solutions International B.V. is a company incorporated in Netherlands and is engaged in the business of providing research and technical services to array of petroleum related segments. It’s services include chemical analysis, crude oil evolution, engineering, energy optimisation, gas to liquids conversion, re-gasification, hybrid cracking, inspection, thermo-analysis and water treatment.
3. During the year under consideration, the Assessing Officer observed that as per Form No. 3 CEB, the assessee had received certain amounts from it’s Associated Enterprises (in short “AE”) in India for services related to operations of LNG storage and re-gasification. During the course of assessment, the Ld. Transfer Pricing Officer (in short “TPO”) observed that the assessee had provided services related to operation of LNG storage and re-gasification terminal to its Associated Enterprises, HPPL and Hazira LNG Pvt. Ltd. The assessee has adopted CUP method for determination of Arms Length Price (in short “ALP”). However, the TPO observed that no comparison appears to have been made with the available internal CUP nor any alteration has been made to the above amount while conducting the transfer pricing study in respect of the fact that the prices charged to non-AE parties are substantially higher than prices charged to the AE by the assessee. During the course of transfer pricing proceedings, the TPO observed that the assessee charged an average rate of Euro 564.45 per hour to its AE Hazira LNG Pvt. Ltd. and at an average rate of Euro 347.96 per hour to its AE Hazira Port Pvt. Ltd. as against Euro 2075.45 per hour charged to third parties. Further, the assessee provided manpower services to another Indian Associated Enterprise SIMPL which were benchmarked using CUP as the most appropriate method. The TPO observed that the personnel provided by the assessee to its AE were subsequently provided to a third party by the AE. The TPO observed that the average hour rate charged by the assessee to its AE was Euro 187.5 while average hour rate charged by the AE to the third party was Euro 338.25. During the course of proceedings before the TPO, the assessee took the argument that the assessee had charged a higher price for the aforesaid services from it’s AE, it would have let to tax base erosion in India, however, the TPO rejected the arguments put forth by the assessee. Accordingly, the Ld. TPO made an upward adjustment of Rs. 13,49,53,506/- on account of the above transactions during the course of the proceedings. Similar adjustments were made for A.Ys. 2012-13 and 2013-14 by the Ld. TPO as well, against which the assessee is in appeal before us. With respect to the aforesaid issue of Transfer Pricing Adjustment the assessee has taken the following Grounds of Appeal:-
ITA No. 780/Ahd/2016 (A.Y. 2011-12)
“1. The Learned AO/Transfer Pricing Order(‘TPO’) has erred in and learned DRP has further erred in confirming action of the AO / TPO on the facts and in law in applying the transfer pricing provisions to the international transactions entered into by the Appellant with the Indian Associated Enterprises in respect of services rendered to them and making a transfer pricing adjustment of Rs. 13,49,53,506/-.”
ITA No. 747/Ahd/2017 (A.Y. 2012-13)
“Transfer Pricing Adjustment of Rs. 57,57,77,763
1.1. The learned AO / TPO has erred on the facts and in law and learned DRP has further erred in confirming the action of the AO / TPO on the fact and in law in applying the transfer pricing (‘TP’) provisions and making a TP adjustment to the value of international transactions entered into by the Appellant with Hazira LNG Private Limited (‘HLPL’), Hazira Port Private Limited (‘HPPL’) in respect of rendering services in relation to operation of LNG storage and regasification.
1.2. The learned AO / TPO has erred on the facts and in law and learned DRP has further erred in confirming the action of the AO / TPO on the facts and in law in applying the TP provisions and making a TP adjustment to the value of international transactions entered into by the Appellant with Shell India Markets Private Limited (‘SIMPL’) in respect of rendering of manpower services.
The Appellant prays that the TP provisions are not intended to apply where the adoption of the arms-length price would result in a decrease in overall tax incidence in India.
1.3. The learned AO / TPO has erred on the facts and in law and learned DRP has further erred in confirming the action of the AO / TPO on the facts and in law in misinterpreting directions of the learned DRP in earlier years, wherein learned DRP has accepted the legal position that the TP .provisions cannot be applied where the adoption of the arm’s length price would result in a decrease in overall tax incidence in India, however, TP adjustment was upheld on account of the losses incurred by HLPL, HPPL and SIMPL in the respective years, without appreciating the facts that:
