2015-VIL-01--DT

Equivalent Citation: [2015] 378 ITR 465

AUTHORITY FOR ADVANCE RULINGS

A.A.R. No 1508 of 2013

Date: 28.09.2015

IN RE : GUANGZHOU USHA INTERNATIONAL LTD.

Vs

For The Appellant : Mr. V.P. Gupta, Advocate Mr. Anunav Kumar
For The Respondent : Mr. Sanjay Puri, CIT(IT)-1, Ms Sukhvinder Khanna,CIT-DR(AAR),ND

BENCH

Mr V.S. Sirpurkar and Mr. A.K. Tewary,JJ.

JUDGMENT

(ii) Reference has been made to the case of CIT Vs Toshuku Ltd to liken the case of the applicant to that of the export agents operating on behalf of Indian exporters outside India, commission paid to whom was decided to be not taxable in India. The status of the applicant is much different from that of the export agent as is evident from the service agreement between the applicant and UIL which was on a principal to principal basis and where the applicant was to perform its obligations under the agreement “as an independent contractor/service provider.”

(iii) The case of HMS Real Estate P Ltd In re has been cited to claim that only the markup element of the fees received for providing services to UIL in India may be considered for taxation. Reliance on this case is also faulty. In that case the payment that was not subjected to tax in India was in relation to the services that were rendered by a USA based consultant to a USA based company which was providing services in India. The Hon‟ble Authority, while holding the payments made to the USA Company providing services in India as taxable in India, also held that the payments made to a USA based consultant for rendering services to another company in USA as not taxable in India. Since the applicant is receiving payment for providing services to an Indian company (i.e. UIL) in India, the entire payment will be subject to tax @ 10% as provided in the DTAA.

13. Shri Puri cited the decision of the ITAT Mumbai Bench in the case of Ashapura Minichem Limited v/s Asstt. Director of Income Tax (IT) (ITA No.2508/Mum/08) wherein a similar issue was considered. He pointed out that the facts in case of Ashapura Minichem were similar as this company had entered into an agreement with a China based company and under the said agreement the Indian company was to pay US Dollar 1 million in consideration of Bauxite Testing services by the Chinese company in its laboratories and for preparation of test reports. The basic thrust of assessee‟s contention in this case was that since no part of the testing services was rendered in India, the Chinese company did not have any tax liability in India. The ITAT analyzed the provisions of DTAA between India and China, between China and Pakistan and went behind the expression”provision of services‟. ITAT held that the expression”provision of services‟ is much wider in scope and will cover the services even when these are not rendered in the other contracting state, as long as these services are used in other contracting state and, therefore, the technical services in question are clearly covered by Article 12(4) of the Treaty. This position was further clarified with the help of provisions of Article 12(6) of the Treaty saying that such services are specifically covered by the deeming fiction under Article 12(6) as well.

The applicant‟s counsel, in his rejoinder to the arguments put forward by Shri Sanjay Puri, pointed out that the reliance of the Revenue on the notification for the purpose of service tax dated 20th June, 2012 is for levy of tax on services provided and is not relevant here. As regards the decision of ITAT, Mumbai Bench in the case of Ashapura Minichem Limited, he stated that the language of Article 12(4) of India-China DTAA is very clear and specific and needs to be given its literal interpretation and, secondly, the ITAT has wrongly observed that by giving interpretation to clause 4 to Article 12 to the effect that only income for services rendered in India will be taxable in India, will render Article12(6) meaningless. According to the applicant‟s counsel Article 12(6) is a deeming provision and will have its applicability only if the payment is covered in the definition of fee for technical services as defined in Article 12(4), and, moreover, Article 12(6) is for the purpose of avoiding any dispute as regards accrual of income which provides that income will be deemed to arise in India if the payer is in India. He further pointed out that the conclusion given by ITAT Mumbai in respect of interpretation of DTAA provisions is wholly incorrect and unwarranted.

14. We have considered the rival contentions carefully. The issue to be decided is whether the payment received by the applicant from the Indian company for services rendered in China is taxable in India under Article 12(4) of DTAA between India and China. Article 12 of the Treaty reads as under:-

“Royalties and fees for technical services

1) Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State.

2) However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties of fees for technical services.

3) The term “royalties” as used in this Article means payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.

4) The term “fees for technical services” as used in this Article means any payment for the provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State, but does not include payment for activities mentioned in paragraph 2(k) of Article 5 and Article 15 of the Agreement.

5) The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties of fees for technical services arise, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein; and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

6) Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is the government of that Contracting State, a political subdivision, a local authority thereof or a resident of that Contracting State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.

7) Where by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement.

15. It is also relevant to look into the provisions relating to fees for technical services in the DTAA between China and Pakistan which is as under:-

The term “fees for technical services” as used in this Article means any consideration (including any lump sum consideration) for the provision of rendering of any managerial, technical or consultancy services by a resident of a Contracting State in the other Contracting State (including the provision by such resident of the services of technical or other personnel) but does not include consideration for any activities mentioned in paragraph 3 of Article 5 or Article 15 of the Agreement.

16. The applicant‟s counsel emphasized that unless the services are actually performed in India, the same is not taxable in India. According to him the expression”provision of services‟ should be construed as”rendering of services‟. At this stage it is necessary to point out the distinction between India-China Treaty and Pakistan-China Treaty. In the first case the expression used is “provision of services of managerial, technical or consultancy nature” and in later case it is “provision of rendering of any managerial, technical or consultancy services”. We notice that similar issue had come up before this Authority in AAR No.1005 of 2010 in the case of Inspectorate (Shanghai) Limited and the Authority had gone into details in respect of Article 12 of DTAA between India and China. The following paragraphs of the ruling are relevant:-

“11. It is important to take note of the deeming fiction under Article 12(6) of the Treaty. This Article, inter-alia, provides that “Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is the Government of the Contracting State, a political subdivision, a local authority thereof or a resident of that Contracting State.” In other words irrespective of the situs of the technical services having been rendered, according to this treaty provision, the fees for technical services will be deemed to have accrued in the tax jurisdiction in which person making the payment is located. That is typical manifestation of the source rule that we have discussed earlier in this order in the context of domestic law provision, and which in principal, requires taxability of an income in the tax jurisdiction in which it is sourced. Normally, the source of an income is the country in which person making the payment is located. There could, of course, be situations in which a payment related to business or profession being carried out in one country is being made by a resident of another country who is carrying out such business or profession in the first country. In these situations, even though the payment is not received from a resident of the first country, the true source of earning is located in the first country. Second limb of Article 12 (6) takes care of such situations and makes the manifestation of source rule even more unambiguous. It provides that even when person making the payment is not resident of the other contracting state but the payment is being made by him in connection with a permanent establishment or fixed base in the other contracting state, such royalties and fees for technical services will be deemed to have accrued in the other contracting state. In such a situation, the true source jurisdiction will be that other contracting state even though the payment may be made from outside both the contracting states, and, therefore, the income is deemed to have accrued in that other contracting state.

12. Article 5(5) of the treaty is also relevant. The same reads as follows:

“An enterprise of Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other Contracting State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph”. [emphasis supplied]

13. It factually needs to be noted that the role of Inspectorate India was spot inspection. There seems to be some grey area in the use of the expression “provision of services” and “utilization of services”. There are three types of situations envisaged:

(a) Provision

(b) Rendering

(c) Utilization

14. According to the Revenue the applicable provisions relate to categories (a) & (c) while the applicant submits it relates to (b). We are of the considered view that it would depend upon the factual scenario and there cannot be any straitjacket formula.

15. In view of above, a literal interpretation to a tax treaty, which renders treaty provisions unworkable and which is contrary to clear and unambiguous scheme of the treaty, has to be avoided. In any case, even on merits, we are of the considered view that the scope of the expression”provision for services‟ is much wider in scope than the expression”provision for rendering of services‟ and will cover the services even when these are not rendered in the other contracting state, as long as these services are used in the other contracting state. Therefore, the technical service in question is clearly covered by Article 12(4) of the treaty. This position is further clarified, and is specifically covered by the deeming fiction under Article 12(6) as well. The impugned payment to the Chinese company, therefore, is covered by the scope of “fees for technical services” within meanings assigned to that expression under Article 12 of the India-China tax treaty and is taxable in India as such. Above is the position highlighted by the ITAT, Mumbai. We are in the agreement of the view taken.”

17. We respectfully agree with the rulings given as above. The expression”provision of services‟ is not defined anywhere in the tax Treaty. The applicant‟s counsel has relied on the judgement of Hon‟ble Supreme Court in the case of Carborandom Company (supra) which was decided on the basis of provision of the relevant sections of the then Income-tax, 1922, as it existed, which did not have any provision on the”fees for technical services‟ which under the Income Tax Act of 1961 are to be deemed to accrue or arise in India, regardless of the place where the services were rendered. He also does not get any support from the judgements of Hon‟ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. (supra) and Clifford Chance (supra) because these judgements were not in respect of DTAA between India and China but were in respect of chargeability to tax in India as per Section 9(1)(vii) of the Income-tax Act read with relevant Article of DTAA between India and Japan and India and UK respectively. His further reliance of the judgement of Hon‟ble Delhi High Court in the case of M/s Voest Alpine AG (supra) is also misplaced because it is based on the specific provisions of relevant Article in DTAA between India and Austria. We are here concerned only with DTAA between India and China. Any other Treaty either between India and other country or between China and other country cannot influence the scope of Treaty between India and China. Be that as it may, since the applicant‟s counsel has sought to make a distinction between India-China DTAA and Pakistan-China DTAA, we notice that Pakistan-China DTAA refers to”provision of rendering of any managerial, technical or consultancy services‟ whereas India-China DTAA refers to”provision of services of managerial, technical or consultancy nature‟. The distinction between these two DTAAs clearly points out that the scope of”provision of services‟ as in India-China Treaty is much wider than scope of”provision of rendering of services‟ as in Pakistan-China Treaty. Based on this distinction this Authority had held in the case of Inspectorate (Shanghai) Limited that”provision of services‟ will cover the services even when these are not rendered in the other contracting state (i.e. India in this case) as long as these services are used in the other contracting state (i.e. India in this case). The ITAT Mumbai Bench in the case of Ashapura Minichem had also reached at the same conclusion saying that if at all the contrast with China-Pakistan tax Treaty shows something, this contrast shows that the India-China tax Treaty intends to follow the source rule, while China-Pakistan tax Treaty gives up the source rule for fee for technical services.

18. The next issue is whether the services rendered in this case can be covered within the definition of fees for technical services in Article 12(4) of DTAA. In this respect the list of services rendered by the applicant as per Appendix A to the service agreement is a very clear guide. The applicant is not only identifying the products but also generating new ideas for UIL after conducting market research. It is also evaluating the credit, organization, finance, production facility etc. and based on this evaluation it is giving advice in the form of a report to UIL. Such evaluation can be given only by an expert in the specific area. The applicant company is also providing information on the new developments in China with regard to technology/product/process upgrade. These are specialized services requiring special skill, acumen and knowledge. These services are definitely in the nature of consultancy services. What is to be seen in such cases whether the recipient (i.e. UIL) intended and desired to utilize expert services of qualified and experienced professionals in the absence of its own ability to evaluate and review technical and financial competence of various organizations. As UIL was unable to do this on its own and could not find any professional in India for these purposes, it had to approach the applicant located in China, who offered their services. The Hon‟ble Supreme Court in the case of GVK Industries & Anr vs ITO & Anr(2015) TIOL-10(SC-IT) l-10(SC-IT) had noted as under:

“In this context, a reference to the decision in C.I.T. V. Bharti Cellular Limited and others (2009) 319 ITR 139=2009-TII-11-HC-DEL-INTL, would be apposite. In the said case, while dealing with the concept of”consultancy services‟, the High Court of Delhi has observed thus:

“Similarly, the word “consultancy” has been defined in the said Dictionary as “the work of position of a consultant; a department of consultants.” “Consultant” itself has been defined, inter alia, as “a person who gives professional advice or services in a specialized field.” It is obvious that the word “consultant” is a derivative of the word “consult” which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as “ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from a proposed action.” It is obvious that the service of consultancy also necessarily entails human intervention. The consultant who provides the consultancy service, has to be human being. A machine cannot be regarded as a consultant”.

Appendix A to the service agreement in this case makes it very clear that the applicant had the skill, acumen and knowledge in the specialized field of evaluation of credit, organization, finance and production facility of an organization, in conducting market research, in giving expert advice for improvement of high quality of standards, advising on new development in China with regard to technology/product/process up gradation. The UIL asks for advice from the applicant and refer to the source of information provided by the applicant. The nature of these services in a specialized field mentioned in Appendix A would surely come within the ambit of the term”consultancy services‟.

19. The last question is with respect to amount which should be brought to tax i.e. whether the gross amount should be taxed or only the profit element. Similar issue had come up before the Authority in the case of DANFOSS Industries Private Limited (AAR 606 to 2002) wherein the thrust of the argument of the applicant was that there was no income element in the service fee and that it was only reimbursement of the cost. It was held therein by this Authority that the entire sum will be chargeable to tax and can be assessed to tax under the Act and that such sum might be income or income hidden or otherwise embedded therein and that the scheme of tax deduction by source applied not only to amount paid which would wholly bear income character such as salaries, dividends, interest on securities etc. but also to gross sums, the whole of which might not be income or profit of the recipient, such as payments to contractors and sub-contractors and the payment of insurance commission. In the case of Timken India Limited (AAR No.617 of 2003) also it was decided that entire amount was liable to be taxed in India and accordingly the applicant was obliged to withhold Income-tax at appropriate rate. We respectfully follow the same ruling in this case also. The rate of tax is 10% on the gross amount under the DTAA.

20. In view of the above, the rulings are pronounced as under:-

A. Question No.1: The amount of service fees received by the applicant from UIL for providing consultancy services are taxable in India.

B. Question No.2: The service fee received by the applicant is chargeable to tax to the extent of full amount received by it.

C. Question No.3: The service fee received is taxable in India as fees for technical services at the rate of 10% of the gross amount.

The Ruling is accordingly given and pronounced on this day of 28th September, 2015.

 

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