Referred Sections:
Section 143(3)
Section 144C(13) of the Income-tax Act, 1961
Section 9(1)(vii) of the Act
Section 234B of the Act
Section 271(1)(c) of the Act
Referred Cases / Judgments:
Spencer Stuart International Vs. ACIT
1 ITA No. 6252/Del/2012 & 1991/Del/2015
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: `C' NEW DELHI
BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER
AND
MS SUCHITRA KAMBLE, JUDICIAL MEMBER
ITA No. 6252/DEL/2012 ( A.Y 2009-10)
H. J. Heinz Company, USA Vs ADIT
7 Floor, D-Shivsagar Estate,
th Circle-1(2)
Dr. Annie Besant Road, Worli International Taxation
Mumabi New Delhi
AACCH2144P (RESPONDENT)
(APPELLANT)
ITA No. 1991/DEL/2015 ( A.Y 2011-12)
H. J. Heinz Company, USA Vs ACIT
7th Floor, D-Shivsagar Estate, Circle-2(1)(1),
Dr. Annie Besant Road, Worli International Taxation,
Mumabi Room NO. 410, 4th Floor, E-
AACCH2144P Z Block, Pratyaksh Kar
(APPELLANT) Bhawan
New Delhi
(RESPONDENT)
Appellant by Sh. Salil Kapoor, Adv, Ms.
Soumya Singh, Adv, Ms.
Ananya Kapoor, Adv
Respondent by Sh. G. K. Dhall, CIT(A) DR
Date of Hearing 27.05.2019
Date of Pronouncement 23.08.2019
ORDER
PER SUCHITRA KAMBLE, JM
These appeals are filed by the assessee against the order dated
15/10/2012 passed by Assessing Officer for A.Y. 2009-10 and order dated
21.01.2015 passed by the Assessing Officer for A.Y. 2011-12.
2 ITA No. 6252/Del/2012 & 1991/Del/2015
2. The grounds of appeal are as under:-
ITA NO. 6252/DEL/2012 A.Y. 2009-10
" On the facts and in the circumstances of the case and in law, M/s
H. J. Heinz Company (hereinafter referred to as the `Appellant')
craves leave to prefer an appeal against the order passed by the
Assistant Director of Income-tax, (International tax), Circle 1(2), New
Delhi (hereinafter referred to as the `learned AO') under section 143(3)
read with section 144C(13) of the Income-tax Act, 1961 (hereinafter
referred to as the `Act') on the following grounds, each of which are
without prejudice to one another:
Ground 1: General
1. On the facts and in the circumstances of the case and in law,
the Learned AO/ Dispute Resolution Panel - I New Delhi (hereinafter
referred to as the `DRP') erred in assessing the total income at Rs
2,21,02,821 as against income of Rs 32,48,463 computed and
returned by the Appellant;
Ground 2: Taxing of reimbursements of Rs 1,88,54,358 as Fees for
Technical /included service (`FTS/FIS) and Royalty under the Act
and Double Taxation Avoidance Agreement between India and USA
(`DTAA')
2. On the facts and in the circumstances of the case and in law,
the Learned AO/ DRP erred in holding that the cost reimbursements of
Rs 1,88,54,358 received by the Appellant towards providing support
services to its group affiliates are taxable as FTS both under section
9(1)(vii) of the Act as well as Article 12(4) of the DTAA;
3. On the facts and in the circumstances of the case and in law,
the Learned AO erred in holding that the Appellant has made
available technical knowledge, skill, experience, etc. to the recipient of
services;
4. On the facts and in the circumstances of the case and in law,
the Learned AO/DRP further erred in holding that the cost
reimbursements are also taxable as `Royalty' both under section
3 ITA No. 6252/Del/2012 & 1991/Del/2015
9(1)(vi) of the Act as well as Article 12 of the DTAA;
5. On the facts and circumstances of the case, the Learned AO/
DRP failed to appreciate that the amounts represented pure
reimbursement of costs and hence does not result into any taxable
income accruing in India;
6. Without prejudice to the above, the Learned AO/ DRP failed to
appreciate that the income, cannot be both `royalty' as well as `FTS'
and hence the order passed on account of non application of mind,
needs to be quashed;
Ground 3: Not granting credit of taxes deducted at source (TDS') of
Rs 44,43,786
7. On the facts and in the circumstances of the case and in law,
the Learned AO erred in not granting credit for TDS of Rs 44,43,786
claimed by the Appellant in the return of income;
Ground 4: Levy of interest under section 234B of the Act
8. On the facts and in the circumstances of the case and in law,
the Learned AO erred in levying interest under section 234B of the
Act, without appreciating that its income, if any, is subject to tax
withholding and hence it being a non-resident, no interest is leviable;
9. Without prejudice to the above, the Learned AO failed to
consider that after granting credit of TDS amounting to Rs 44,43,786,
no tax is payable by the Appellant, and accordingly no interest is
leviable;
Ground 4: Initiation of penalty proceedings under section 271(1)(c)
of the Act
10. On the facts and in the circumstances of the case and in law,
the Learned AO erred in initiating penalty proceedings under section
271 (1 )(c) of the Act for concealment of income and furnishing of
inaccurate particulars of income, without appreciating the facts and
circumstances of the case."
4 ITA No. 6252/Del/2012 & 1991/Del/2015
ITA No. 1991/DEL/2015
On the facts and in the circumstances of the case and in law, M/s H. J.
Heinz Company (hereinafter referred to as the `Appellant') craves leave to
prefer an appeal against the order passed by the Assistant Director of
Income-tax, (International tax), Circle 2(1)(1), New Delhi (hereinafter
referred to as the `learned AO') under section 143(3) read with section
144C(13) of the Income-tax Act, 1961 (hereinafter referred to as the `Act')
on the following grounds, each of which are without prejudice to one
another:
Ground 1: General
1. On the facts and in the circumstances of the case and in law, the
Learned AO/ Dispute Resolution Panel - I, New Delhi (hereinafter referred
to as the `DRP') erred in assessing the total income at Rs 10,17,16,750 as
against an income of INR 5,18,235 computed and returned by the
Appellant;
Ground 2: Taxing of reimbursements of Rs 9,82,61,852 as Fees for
Technical I included service (`FTS/FIS) and Royalty under the Act
and Double Taxation Avoidance Agreement between India and USA
(`DTAA')
2. On the facts and in the circumstances of the case and in law, the
Learned AO/ DRP erred in holding that the cost reimbursements of Rs
9,82,61,852 received by the Appellant towards providing support services
to its group affiliates are taxable as FTS both under section 9(1 )(vii) of the
Act as well as Article 12(4) of the DTAA;
3. On the facts and in the circumstances of the case and in law, the
Learned AO erred in holding that the Appellant has made available
technical knowledge, skill, experience, etc. to the recipient of services;
4. On the facts and in the circumstances of the case and in law, the
Learned AO/ DRP further erred in holding that the cost reimbursements
are also taxable as `Royalty' both under section 9(1 )(vi) of the Act as well
as Article 12 of the DTAA;
5. On the facts and circumstances of the case, the Learned AO/ DRP
5 ITA No. 6252/Del/2012 & 1991/Del/2015
failed to appreciate that the amounts represented pure reimbursement of
costs and hence does not result into any taxable income accruing in India;
6. Without prejudice to the above, the Learned AO/ DRP failed to
appreciate that the income, cannot be both `royalty' as well as `FTS' and
hence the order passed on account of non application of mind, needs to be
quashed;
Ground 3: Not granting credit of taxes deducted at source (`TDS') of
Rs 1,19,35,314
7. On the facts and in the circumstances of the case and in law the
Learned A.O erred in not granting credit for TDS of Rs.1,19,35,314/-
claimed by the Appellant in the return of income'
Ground 4: Levy of interest under section 234B of the Act,
8. On the facts and in the circumstances of the case and in law, the
Learned AO erred in levying interest under section 234B of the Act, without
appreciating that its income, if any, is subject to tax withholding and hence
it being a non-resident, no interest is leviable;
9. Without prejudice to the above, the Learned AO failed to consider
that after granting credit of TDS amounting to Rs 1,19,35,314, there is no
tax is payable by the Appellant, and accordingly no interest is leviable;
Ground 4: Initiation of penalty proceedings under section 271 (1 )(c)
of the Act
10. On the facts and in the circumstances of the case and in law, the
Learned AO erred in initiating penalty proceedings under section 271 (1)(c)
of the Act for concealment of income and furnishing of inaccurate
particulars of income, without appreciating the facts and circumstances of
the case."
3. H. J. Heinz Company is a Company is a tax-resident of the United States
of America (USA). It is a leading manufacturer of foods products with a
portfolio of global brands. It is stated to be headquartered in Pittsburgh, USA
listed on the New York Stock Exchange, with operations in over 10 locations
6 ITA No. 6252/Del/2012 & 1991/Del/2015
world-wide. Together all these entities are from the Heinz Group. The
assessee company stated to have entered into a global agreement dated 3rd
May 2007 with its group entities including Heinz India Pvt. Ltd. As per the
agreement, the entire costs incurred by the assessee for undertaking the
support activities for affiliates are allocated/shared between the affiliates
based on an allocation key. No mark up is charged by the assessee on the
cost allocated of its affiliates. Heinz India, a private limited company,
incorporated under the Indian Companies Act, 1956 is an indirect and
independent subsidiary of the assessee. Pursuant to the Agreement entered
into with Heinz India, the assessee allocated cost of $ 367,603 equivalent to
Rs. 18,854,358/- without any mark up to Heinz India and received a
reimbursement towards the same during the subject year. Based on the facts
and circumstances of the case, the Assessing Officer taxed receipts of
Rs.18,854,358/- received by the Assessee under the aforesaid agreement as
FTS. The assessee Company, resident of USA filed its return of income on
30/09/2009 declaring a total income at NIL. The case was selected for
scrutiny and notice u/s 143(2) was issued. In response to the notice
Authorized Representative of the assessee Company appeared on various
dates and filed details before the Assessing Officer. During the course of the
proceedings, the assessee Company vide order sheet entry dated 25/11/2011
was given a show cause and was asked why the amount received in lieu of
support activities given by the assessee should not be added back to the
income of the assessee. The assessee vide letter dated 2/12/2011 submitted
its reply. The Assessing Officer had taken cognizance of the reply of the
assessee and draft assessment order was passed on 13/12/2011.
Subsequently, the assessee filed objections before the Dispute Resolution
Panel (DRP). The DRP vide its direction dated 24/9/2012, directed the
Assessing Officer to tax the amount of Rs. 18,854,358/- at the rate of 10%.
The taxable income of the assessee was computed by the Assessing Officer
vide order dated 15/10/2012 as under:-
7 ITA No. 6252/Del/2012 & 1991/Del/2015
Particulars Amount (Rs.)
Gross amount received by the 32,48,463
assessee company as Royalty (Tax
Payable @ 15%) 1,88,54,358
Gross amount received by the 2,2,1,02,821
assessee company as FTS/Royalty
(Tax Payable @10%)
Total Income
Thus, the Assessing Officer assessed an income of the assessee at Rs.
2,21,02,821/-.
4. Being aggrieved by the assessment order, the assessee filed appeal before
us.
5. The Ld. AR submitted that the receipt of Rs. 1,88,54,358/- from Heinz
India constitute reimbursement of expenses and the same is not taxable in
India as Fees For Technical Services under the Income Tax Act, 1961. The Ld.
AR submitted that the activities carried out by the assessee under the
agreement is broadly in the area of Human Resources, Strategic Planning and
Marketing, Finance and Information Systems. Cost incurred by the assessee in
terms of time and effort of its employees for carrying out the activities are
shared amongst the various affiliates on a uniform and consistent basis using
appropriate allocation factor in the manners specified in the Agreement.
Clause 5.2 Agreement specifically deals with allocation of cost and provides for
the mechanism for the same. The Ld. AR submitted that an accounting
method consistent with US Generally Accepted Accounting Principles and
Assessee's accounting policies would be used to identify all direct and indirect
cost associated with activities carried out by the assessee for each affiliate. For
each cost centre an appropriate allocation factor is identified. The above costs
are allocated by the assessee to its Affiliates without charging any mark
8 ITA No. 6252/Del/2012 & 1991/Del/2015
up/profit element. The cost contribution/payments made by Heinz India as a
participant to the Agreement merely represents a reimbursement of the costs
incurred by the assessee towards the above activities. In substance and in
form the payment cannot be considered as income earn by the assessee. The
same can be seen from the agreement itself that there is a zero percent mark
up. Expenses incurred by the assessee and reimbursement by Heinz India are
mere recoupment of expenses and would not constitute income of the assessee.
The assessee merely allocates the costs and does not charge any mark up. In
view of the above, the Ld. AR submitted that reimbursement of expenses
received from Heinz India is not taxable in the hands of the assessee in India
under the provisions of the Act. The Ld. AR further submitted that the
addition is liable to be deleted on this ground alone as there are various
judgments on this issue where it is held that when there is only recoupment of
expenses, there is no element of income and held the same cannot be held to
be taxable in India. The decisions on reimbursements are as under:-
Dunlop Rubber 142 ITR 493 Kolkata High Court
DECTA 237 ITR 190-AAR
Siemens Aktiongesellschaft 189 Taxman 422-AAR Bombay High Court
ABB Ltd 189 Taxman 422-AAR
Ernst & Young Pvt. Ltd. 49 Taxmann.com 386 Kolkata ITAT
6. The Ld. AR further submitted that the assessee does not "Make
Available" technical services of Heinz India and hence should not be taxable as
Fees for Included Services (FIS) under the provisions of the DTAA. The Ld. AR
submitted that in the present case factually no technical knowledge etc. was
ever made available by the assessee to Heinz India. The fact that the assessee
performs such activities on a year on year basis also supports the contention
that no technical knowledge etc. was `made available'. Heinz India has not
acquired any knowledge which can be used by Heinz India in its operations in
India. The Ld. AR submitted that the assessee does not `make available' any
9 ITA No. 6252/Del/2012 & 1991/Del/2015
technical knowledge, skill, etc to Heinz India, nor does it develop and transfer
any technical plan, design, etc. Therefore, the reimbursements received by the
assessee cannot be said to be covered within the meaning of FIS under the
DTAA. Hence, such reimbursement should not be taxable in India under the
DTAA. The Ld. AR submitted that in light of the definition and judicial
pronouncements of various courts for any payment to qualify as FIS under the
DTAA the following criteria are essential:
(i) The services need to be a technical or consultancy nature and
(ii) The services need to make available technical knowledge, experience
skill, know-how or processed, are concerned of the development and transfer of
a technical plant or technical design.
7. The Ld. AR further submitted that a technical or consultancy services is
taxable only if the services make available the technical knowledge, experience,
skill, know-how or process or consist of development and transfer of a technical
plan or technical design, the technology is considered to be made available
when the person acquiring the service is unable to apply the technology. The
fact that the provision of the service made require technical input by the person
providing the service does not per say mean that technology knowledge, skills,
etc are made available to the person charging services. Similarly the use of
product which embedded technology is not part to be considered to make the
technology available further, even if the services are considered to be
managerial in nature, the same would not be taxable in India US Tax Treaty
because under the US Tax Treaty, the Treatment Managerial Services is not
included under the definition of Fees of Included Services. In view of the above,
by a draft Fee for Technical Knowledge etc is made available to a purchaser any
fees generated would not be FIS under Article 12(4) of the DTAA. Services
rendered may not make available any technical knowledge skill knowhow or
service processed if the service provider is able to show that;
(i) such services do not enable the service recipient to apply the technology
if any contained therein under independent manner in future.
10 ITA No. 6252/Del/2012 & 1991/Del/2015
(ii) Such services also do not contemplate development or transfer of a
technical plant or technical design.
(iii) The payment to the service provider is for service simplicter and not for
making available any technology knowledge, experience etc.
Accordingly, the service recipients should be able to make use of such technical
knowledge, skill etc by means in his business or for his own benefit without
recourse to the service provider in the future. The aforesaid principle has also
been upheld in the following decisions wherein the concept of `making available'
has been discussed in detail and the issue is ruled in favour of the tax payers.
i) US Technology Resources (P) Ltd. 407 ITR 327
ii) Guy Carpenter & Co. 346 ITR 504 (Del HC)
iii) De Beers India Minerals (P) Ltd. 346 ITR 467
iv) Raymond Ltd. 86 ITD 791
v) Koninklijke Philips Electronics Pvt. N. V. (2018) 99 taxmann.com 23
vi) Exxon Mobil Company India (P) Ltd. (2018) 92 taxmann.com 5
vii) Bombardier Transportation India (P) Ltd. 162 ITD 586
viii) Timken Company (2017) 88 taxmann.com 21
ix) Outotec Oyj (2017) 162 ITD 541
x) Steria (India) Ltd. 386 ITR 390
xi) Cummins Ltd. 381 ITR 44
xii) Sandvik AB (2015) 61 taxmann.com 31
xiii) Measurement Technology Ltd. 376 ITR 340 AAR
xiv) Sandvik Australia Pty. Ltd. (2013) 31 taxmann.com 256
xv) Endemol India Private Limited 361 ITR 340
xvi) Invensys Systems Inc (2009) 183 Taxman 81 AAR
xvii) KPMG Ltd. (2013) 142 ITD 323
xviii) Renaissance Services BV (2018) 94 taxmann.com 465
xix) Veeda Clinic Research (P) Ltd. (2013) 144 ITD 297
xx) Reliance General Insurance Co. Ltd. (2018) 97 taxmann.com 350
Further, the case laws mentioned hereunder are specifically on the proposition
11 ITA No. 6252/Del/2012 & 1991/Del/2015
that managerial services are not covered under FIS article in India-USA DTAA:
i) Raymond Ltd. 86 ITD 791
ii) Koninklijke Philips Electronics Pvt. N. V. (2018) 99 taxmann.com 23.
iii) Steria (India) Ltd. 386 ITR 390
iv) Cummins Ltd. 381 ITR 44
v) Measurement Technology Ltd. 376 ITR 340 AAR
vi) Invensys Systems Inc (2009) 183 Taxman 81 AAR
Further, the case laws mentioned hereunder are specifically on the proposition
that since support services are rendered year-on-year, they do not satisfy make
available test and hence is not taxable as FIS:
i) Exxon Mobil Company India (P) Ltd. (2018) 92 taxmann.com 5
ii) Bombardier Transportation India (P) Ltd. 162 ITD 586
iii) Outotec Oyj (2017) 162 ITD 541
In light of the above submissions and the relevant case laws in favour of
the assessee, the Ld. AR submitted that the said services cannot be held to be
FIS and hence are not taxable in India.
8. The Ld. AR submitted that the receipts of Rs. 1,88,54,358/- from Heinz
India do not fall within the ambit of ancillary and subsidiary clause. The
amount received is not ancillary and subsidiary to the payment of royalty
under TTLA. At the outset itself, the Ld. AR submitted that the parties of both
the agreements, TTLA and SA are entirely different. While one aims to provide
license on which royalty is being earned, the aim of the assessee is to ensure
uniformity, consistency and international standards across all group
companies, for the purpose of which these services and activities have been
identified and support services are accordingly being provide which are of the
nature of General Management, Human Resources, Finance, Data Processed,
Quality Control, Purchase, Business Development, Law and other related
areas. Moreover, the service charges under the SA are not paid only for sales
12 ITA No. 6252/Del/2012 & 1991/Del/2015
covered under TTLA. License is only for specified products and Royalty under
TTLA is paid only for Licensed Products. Services under the SA are not
products specified and causes are alleged on several diverse criteria. The Ld.
AR pointed out the sales break up chart which demonstrate that the sale of
licensed products is only 1-2% of the total sales. If service charges are payable
for total sales within the services charges cannot be said to be ancillary and
subsidiary.
9. The Ld. AR relied on decision of International Tire Engineering Resources
(LLC) 185 Taxman 209 and Spencer Stuart International Vs. ACIT 94
Taxman.com 380. There is no overlap between TTLA and SA Agreement and,
therefore, SA in no manner assists in the TTLA. The Ld. AR submitted that the
assistance under TTLA are specifically provided for technology assistance as
provided under Clause 3.4 and 3.5 at the exclusive cost of Heinz India and
services under SA which does not cover any product specific Technology
Assistance or product specific Quality Control. The very fact that SA is for the
business as a whole and not restricted to the Licensed Products establishes
that SA is in the ordinary course of business. The total sales of Heinz India are
Rs. 748.20 crores out of which sales from tomato ketchup is only Rs. 13.43
crores. Accordingly, the sales from tomato ketchup constitute only 1-2% of
total sales made by Heinze India. The service charges paid are approximately 6
times the amount of royalty paid as the services charges paid Rs. 1.88 crores
and the royalty received is Rs. 32.48 lakhs. Moreover, they are altogether
separate agreement. In India- US DTAA, there is a Memorandum of
Understanding (MOU) which states 5 parameters to determine the application
of "Ancillary and Subsidiary" Clause. In order for a service fee to be considered
"ancillary and subsidiary" to the application or enjoyment of some right,
property, or information for which a payment described in paragraph 3(a) or
(b) is received, the service must be related to the application or enjoyment of
the right, property, or information.
13 ITA No. 6252/Del/2012 & 1991/Del/2015
10. The Ld. AR further submitted that the receipts of Rs. 1,88,54,358/- from
Heinz India do not fall within the ambit of royalty and hence is not taxable.
Royalty has been defined under the India-US DTAA as payments consideration
received of any kind for the use of or right to use any intellectual property. A
perusal of the services covered under the Service Agreement shows that they
are in the nature of General Management, Human Resources, Finance, Data
Processing, Quality Control, purchasing, business development, law and other
related areas which nowhere fall within the ambit of royalty has been defined
under Article 12. The Ld. AR relied upon the decision of Marck Bio Sciences
Ltd. (2017) 164 ITD 205 Ahmedabad Tribunal and Vanoord Dredging & Marine
Contractors BV ITA 7589/Mum/2012, Mumbai ITAT. The Ld. AR submitted
that the decisions relied upon by the Assessing Officer are not applicable in the
present case as the same are distinguishing in the factual aspect with the
present assessee's case.
11. The Ld. DR submitted that the arguments of the Ld. AR are focused
entirely on coverage of the fees paid under Paragraph 4(b) of Article 12 which
is narrower than the category described in Paragraph 4 (A) because which
excludes any service that does not make technology available to the present
acquiring the service. The question is whether the assessee is covered under
Paragraph 4(A) of Article 12. The Ld. DR submitted that the DRP held that the
services provided are clearly, ancillary and subsidiary to the application or
enjoyment of the right, property or information for which royalty is paid and
hence covered under Paragraph 4 (a) of Article 12. There is no dispute that the
nature of activities are covered under the exclusions under Paragraph 5 of
Article 12. Thus, only issue to be decided whether the service fee is to be
considered "Ancillary & Subsidiary". As has been stated in the Memorandum of
understanding concerning Fees for Included Services under Article 12, the
memorandum also identified several factors which may be relevant to such
determination specially using the words facilitate, customarily provided, the
amount paid is in substantial, single contract or set of related contracts person
14 ITA No. 6252/Del/2012 & 1991/Del/2015
performing the services is the same person and the person receiving the
royalties. The Ld. DR submitted that as regards the relation test the DRP has
given a finding that services provider under SA dated 3/5/2007 flow from the
terms of TTLA dated 21/2/2005 and there is a clear relation between the two.
The DR's observation established that not only the services provider under SA
are related to the application and enjoyment of rights granting under TTLA but
the predominant purpose for the payment of service fees under SA is for the
application and enjoyment of rights granted under TTLA. As per the TTLA the
assessee licensed certain know-how, technology and ongoing technical
assistance in connection with the manufacture, distribution, marketing and
sale of products manufactured by the manufacturer. It can be seen that the
restrictions/liability of the licensee and the control exercise by the assessee is
in respect of 3 areas i.e. use of trade mark Clause 2, use of technology Clause 3
and quality control, Clause 4 towards this end, the licensee that to
manufacture in accordance with the standards, specifications, and instructions
supplied by or approved by the assessee as per Clause 2.1. It has to ensure
the secrecy and confidentiality of the formulation and actual ingredients of the
suffice tax as per Clause 3.3.B and for this purpose there is a provision of
training of the employees of the licensee by the assessee as per Clause 3.4 and
that of making available of technology specialized by the assessee for
development of employee training and managerial skills and in the operation of
factory and manufacture of license products Clause 3.5. Quality control is
recognized as one of the important aspects of the TTLA. Its importance can be
gauged from the fact that it is the most elaborate and exhaustive of the above
three control systems. The entire agreement provides for quality claim control
measures and includes inspection of facilities, equipment and materials used
for preparing, processing, packaging, advertising, selling and distributing the
products manufactured. The other clauses of the agreement identify the
areas where the license need to be confirmed with the quality control
programmes of the assessee. These are
(i) Personnel management
15 ITA No. 6252/Del/2012 & 1991/Del/2015
(ii) Resources Management including internal quality audit
(iii) Documentation data control and quality system management
(iv) Purchase Management
(v) Production process control
(vi) Handling, storage, packaging, preservation and delivery
(vii) Maintenance of quality control records
(viii) Training and
(viii) Auditing.
The Ld. DR further submitted that as against above support services as defined
under Article 1.8 of SA include (but not limited to)
(1) General Management
(2) Human Resources
(3) Finance
(4) Data Processing
(5) Quality Control
(6) Purchasing
(7) Business development
(8) Law and Order
Moreover, while analyzing the relationship between the services provided with
the earning of royalty, the Ld. DR pointed out that the quantum of value of
royalty receipts is directly dependent upon the Net Sales Value of licensed
products. Thus, any services resulting in enhanced sales, maximization of
profits, increase in the efficiency and benefits of economies of scale of the
licensee facilities the effective application or enjoyment of the rights granted
under TTLA as well as mechanism of royalty receipts in the hands of the
assessee. The Ld. DR further submitted that Quality Control is central to the
TTLA. The licensee has been entrusted with the obligation of maintaining
quality and any shortcomings in these areas will seriously and adversely affect
the TTLA. All the above observations established that the services received by
16 ITA No. 6252/Del/2012 & 1991/Del/2015
the licensee are not only related to the application or enjoyment of the rights
granted to it under TTLA but the predominate purpose of the arrangement
under which the payment of the service fee and such other payments are made
to facilitate the effective application or enjoyment of such rights. Thus, the
facilitation test is satisfied. The second test as per the memorandum is whether
such services are customarily provided in the ordinary course of business
arrangements involving royalties described in Paragraph 3 of the agreement.
The answer to this in the present case is in negative since a separate agreement
was necessitated for the provision of these services. The third test revolves
around the quantum paid for such services and whether the amount paid for
the services is an insubstantial portion of the combined payments for the
services and the right, property or information described in Paragraph 3 of the
agreement. The Ld. DR pointed out that the quantum paid is not insignificant
and is more than the amount of royalty paid. Hence, the answer to this
question is in negative. The fourth test as per the memorandum is whether the
payment made for the services and the royalty described in Paragraph 3 of the
agreement are made under a single contract (or a set of related contracts). The
Ld. DR submitted that as held by the DRP, both the S.A and the TTLA are
related contracts. The last test as per the memorandum is whether the person
performing services is the same person as the person receiving the royalties
described in Paragraph 3 of the agreement and the answer is yes according to
the Ld. DR. Thus, the Ld. DR submitted that all the test stated under the
memorandum are specified and the service fee can be considered ancillary and
subsidiary to the application or enjoyment of rights for which royalty was paid
and hence covered under Paragraph 4(a) of Article 12. The Ld. DR further
submitted that the assessment order and the DRP directions/order of the CIT(A)
are emphatically relied upon by the Revenue Authorities. The Ld. DR submitted
that the undisputed facts before us are that:
(i) Characterization of the services as technical services and it is not at all
disputed.
17 ITA No. 6252/Del/2012 & 1991/Del/2015
(ii) Services are ancillary and subsidiary to the application or enjoyment of
the right, property or information for which royalty is paid. The Ld. DR further
submitted that the assessee conveniently ignored and overlooked the
applicability of the provisions of Article 12(4) (a) to it. In its letter dated
2/12/2011 to the Assessing Officer in Para 16, the assessee itself had quoted
the said provision.
(iii) The services provided by the assessee are not covered under any of the
exclusionary provisions of Article 12(5) of the DTAA. The nature of services
provided under various agreements and the interplay and interlinkage of such
agreements have been elaborately discussed by the DRP. After examining the
provisions of TTLA and S.A (GA), the DRP recorded a finding that TTLA is
critical to its (i.e. assessee) earning of royalty & (GA) dated 3rd May 2007 only
formalizes that arrangement for provision of support services in the areas listed
on a commercial basis. The areas listed in GAR identical that and flow from the
terms of the TTLA dated 21st February 2005 and are clearly ancillary and
subsidiary to the application or enjoyment of the right, property or information
for which royalty is paid. It would be out of contest, therefore, to highly the
similarities and the interconnectedness of the obligations of the licensee under
TTLA and services received by it under SA. The Services provided by the
assessee by virtue of SA merely him to ensure that obligations exceeded upon
the licensee by TTLA are fulfilled. The memorandum of understanding
consisting Fees For Included Services in Article 12 ends further credence to the
above findings of the DRP. The memorandum also identified several factors
which may relevant to such determination although not ancillary controlling.
These include three positive tests and two negative test:
(i) The extent to which the services in question facilitate the effective
application or enjoyment of the right, property or information.
(ii) The extent to which such services are customarily provided in the
18 ITA No. 6252/Del/2012 & 1991/Del/2015
ordinary course of business arrangements involving royalties described in
paragrapah3.
(iii) Whether the amount paid for the services ( or which would be paid by
parties operating at Arm's Length) is in substantial portion of the combined
payments for the services and the right, property, or information described in
Paragraph 3.
(vi) Whether the payment made for the services and the royalty described in
Paragraph 3 are made under a single contract or a set of related contracts)
(v) Whether the person performing the services is the same person as
related person to the person receiving the royalties described in Paragraph 3 (
for this purpose, persons re considered related if the relationship is described in
Article 9 (An associated enterprises or if person providing the service is doing so
in connection with and over all arrangements which includes the payer and
recipients of the royalties.
12. The Ld. DR further submitted that the Facilitation Test as envisaged in
the Memorandum, when applied to the obligations and services as
enumerated in the above table leaves no uncertainty. Quality Control is
central to the TTLA. Its importance can be seen from the fact that it is the
most elaborate and exhaustive of the above three control systems. In-fact
Exhibit-E is the most elaborate exhibit of the entire agreement providing
for a variety of quality control measures including "inspection of facilities,
equipment and materials used for preparing, processing, packaging,
advertising, selling and distributing the products manufactured(Cl-4.2)
Exhibit-E identifies the areas where the licensee needs to confirm with the
quality control parameters of the appellant. The licensee has been
entrusted with the obligation of maintaining quality and any shortcomings
in these areas will seriously and adversely affect the effective application
19 ITA No. 6252/Del/2012 & 1991/Del/2015
or enjoyment of the rights granted to it under TTLA. The assessee is in
absolute control over the entire production, quality control and marketing,
sale & distribution process through the use of Technology (Cl-3) and
Quality Control (Cl-4) clauses of the TTLA. The licensee has to
manufacture "in accordance with the standards, specifications and
instructions supplied by or approved by" the assessee (Cl-2.1) in a "factory
approved by the assessee" [Cl.4.2] and as per the Quality Standards'
provided in the agreement [Exhibit- E] or as approved by the assessee.
[Cl.4.2] This provides the assessee to have a right of access to the factory
to inspect the facilities, equipment and materials used in preparing,
processing, packaging and records involving advertising, sale and
distribution and operations and Quality Control.[Cl.4.2] The assessee is
also obligated under TTLA to provide services of "technical specialists"
[C1.3.5]and training [Cl.3.4 & 3.5]to the personnel of the licensee. It shall
provide "Ongoing Technical Assistance" to the Licensee[C1.3.2] as well as
'instruction and training' to the employees of the licensee at its own
factory in the areas involving manufacture/production and marketing of
the products. [Cl.3.4] Assessee shall make available qualified technical
specialists to work with and assist the licensee in the development of
employee training and managerial skills and in the operation of the
factory and the manufacture of licensed products. [Cl.3.5] All the above
observations establish that the service received by the licensee under SA
are not only related to the application or enjoyment of the rights granted
to it under TTLA but the predominant purpose of the arrangement under
which the payment of the service fee and such other payments are made
are to facilitate the effective application or enjoyment of such rights as
granted by the licensee under TTLA. Moreover, while analysing the
relationship between the services provided with the earning of royalty, it
should be remembered that the quantum and value of royalty receipts is
directly dependent upon the Net Sales value of licensed products. Thus,
any services resulting in enhanced sales, maximization of profits, increase
20 ITA No. 6252/Del/2012 & 1991/Del/2015
in the efficiency and benefits of economies of scale of the licensee
facilitates the effective application or enjoyment of the rights granted
under TTLA as well as maximization of Royalty receipts in the hands of
the appellant. Thus, the facilitation test is satisfied. The second test as
per the Memorandum is whether such services are customarily provided
in the ordinary course of business arrangements involving royalties
described in paragraph 3. It can't be said that services as envisaged in SA
are customarily provided in the ordinary course of business arrangements
involving royalties. Thus, the answer to this in the present case is in
negative since a separate agreement was necessitated for the provision of
these services.
13. The Ld. DR further submitted that the assessee has put a lot of
emphasize on the zero mark up on the services rendered and argued that these
being pure reimbursement does not have any element of profit in it and hence
cannot be brought under taxation. The Ld. DR submitted that the contentions
of the Ld. AR cannot be accepted as no evidence in support of the claim was
placed by the assessee before the Revenue Authorities. There is no embedded
profit element furnished before the Revenue by the assessee. As per the
provisions in the TTLA, there is a provision and for independent
reimbursement also. The zero marker as provided in Article 5.2 (D) of the SA
has to be appreciated with reference to the provisions under US Transfer
Pricing Rules and cannot be taken as absolute. The zero mark up as provided
in Article 5.2 (D) of the SA must viewed against and contrasted with the
Article 1.8 of the SA which defines support services as the services described in
Article 3 & provided to the recipients on a commercial basis. The DRP on the
basis of the assessee's submissions concluded that this arrangement is merely
a basis for the recovery of the fees, charged on a commercial basis. Re-
imbursements to the non recipient enterprises have been held as taxable by
courts under various other provisions of the Act i.e. u/s 44 BB. The Ld. DR
further submitted that although purely academic in view of the application of
21 ITA No. 6252/Del/2012 & 1991/Del/2015
the provisions of Article 12 (4) (a) of the DTAA, nevertheless and without
prejudice; the assessee's claim that it does make available any knowhow or
technology through it services also cannot be accepted. The Ld. DR further
submitted that the SA is nothing but an extension and enable instrument of
TTLA. Clause 3.1 of the TTLA provides for the licensee of proprietor
information provided by the assessee mostly in writing. Moreover, the assessee
through its technical specialized and trainee at its own factories enables the
licensees employees develop and acquire managerial scales and scales in the
operation of the factory and manufacture of licensee products in fact as per
Clause 3.7 of the TTLA. The assessee will be entitled to the exclusive benefit
without any consideration being payable. If any new, improved or changed
method of marking or manufacturing the licensee products which are
discovered by the licensee or any of its employees. Viewed from this
prospective, there is no doubt that the requirements make available Clause
also stand satisfied. The Ld. DR relied upon the decision of the Hon'ble Delhi
High Court in case of Centrica India Off Shore Vs. CIT(A) (2014) 364 ITR 336.
The Ld. DR also relied the decision of the AAR in the case of Intertek Testing
Services India Pvt. Ltd. (2008) 307 ITR 418. The Ld. DR further submitted that
the cases/decisions relied upon by the assessee are distinguishable on facts
and are delivered in the contest of make available provision and hence have not
reliefs to the present case, since it is covered under the provisions of Article
12(4) (A) of the DTAA. Accordingly, it is prayed that the order of the DRP be
sustained and the assessee's appeal be dismissed.
14. In rejoinder, the Ld. AR submitted that that the services rendered under
the Service Agreement (SA) dated 3 May 2007 entered between Heinz US and
its various other associated companies including Heinz India is ancillary and
subsidiary to the Technology Transfer and License Agreement (TTLA) entered
between Heinz US and Heinz India is misplaced in view of the following
reasons:
22 ITA No. 6252/Del/2012 & 1991/Del/2015
(i) Heinz US is the ultimate parent of Heinz India whereas Heinz Italia is the
holding company of Heinz India. The SA cannot be ancillary and subsidiary to
the TTLA entered with Heinz US as the sales of the licensed products
manufactured by Heinz India under the TTLA with Heinz US is only
approximately 1 to 3% of the total sales of all the products manufactured/
traded by Heinz India.
(ii) The services rendered under the SA are for the benefit of all the products
(not only restricted to TTLA) manufactured by Heinz India.
(iii) During the course of hearing on 10 December 2018. As could be perused
from the submission of DR filed on 16 January 2019, the above fact as stated
in point 2 above is undisputed. Amount of royalty and support service received
from Heinz India as compared to sales of tomato ketchup by Heinz India. The
support services cannot be considered to be ancillary and subsidiary to the
TTLA entered between Heinz US and Heinz India under the TTLA, between
Heinz US and Heinz India, Heinz US has granted license to Heinz India to
manufacture, distribute, market and sell only the Licensed products.
15. The Ld. AR submitted that Heinz US has entered into SA dated 3 May
2007 with its various associated companies including Heinz India for providing
services in areas of general management, human resources, finance, data
processing, quality control, purchasing, business development, law and other
related areas and in turn to ensure uniformity, consistency and international
standards across all group companies. The Ld. AR submitted that the purpose
of both the Agreements TTLA & SA are entirely different. While one aims to
provide license on which royalty is being earned, the aim of the SA is to ensure
uniformity, consistency and international standards across all group
companies, for the purpose of which these services and activities have been
identified and support services are accordingly being provided which are of the
nature of general management, human resources, finance, data processing,
quality control, purchasing, business development, law and other related
23 ITA No. 6252/Del/2012 & 1991/Del/2015
areas. The Ld. AR submitted that the Ld. DR was in correctly stating that the
TTLA pertains to products manufactured by the licensee i.e. Heinz India. The
TTLA agreement clearly states that it is pertaining to granting of license in
connection with the distribution, marketing and sale of licensed products.
'Licensed products' as mentioned in Exhibit A of the TTLA agreement states the
list of licensed products i.e. tomato ketchup, condiments and sauces, beans,
convenience meals, baby foods and pasta/ noodles only. On the basis terms of
TTLA, Heinz India has paid royalty to Heinz US on the sales of tomato ketchup,
which constitute only 1 to 3% of total sales of Heinz India against which a
royalty of Rs 32.48 lakhs and Rs 34.54 lakhs during the AY 2009-10 and AY
2011-12 respectively was paid by Heinz India to Heinz US. Further a technical
assistant services, if required under the TTLA would at best be rendered for the
license products and not for all the products manufactured by Heinz India.
There is no overlap between the TTLA and SA Agreement and, therefore, SA in
India manner assist in the enjoyment of the TTLA. Services under SA do not
cover any product specific technology assistance or products specific quality
control. The very fact that SA is for the business as a whole and not restricted
to the license products established that SA is in the ordinary course of
business. The total sale of Heinz India during Assessment Year 2009-10 is Rs.
748.20 crores out of which sales from tomato ketch up is only Rs. 13.43
crores. Accordingly, the sales from tomato ketch up constitutes only 1-3% of
total sales made by Heinz India. The service charges paid are approximately
six times the amount of royalty paid as the services charges received are
Rs.1.88 crores and the royalty received is Rs. 32.48 lakhs.
16. The Ld. AR further submitted that 5 factors (though not conclusive) are
outlined in the Memorandum of Understanding in the India-US treaty to
determine whether service fee is ancillary and subsidiary to application or
enjoyment of right, property or information for which royalty payment is
received. The services under SA are not linked to TTLA since, the TTLA related
solely to use of the product marks in the manufacturing process while the SA
24 ITA No. 6252/Del/2012 & 1991/Del/2015
related to centrally managed operation and administrative support functions
that are similar for all affiliates that can be consolidated into one global
function for efficiency purposes. The affiliates benefitted by obtaining greater
operational and administrative coverage that previously didn't exist. Further,
from Heinz India's perspective, several services under SA like legal, finance,
ethics corporate communications, etc cannot be linked to only royalty paid to
Heinz US under TTLA since the sales of tomato ketchup is only 1-3% (approx)
of overall sales made by Heinz India during the year under consideration. The
services under SA for the purpose of greater efficiency and optimum utilization
of resources through centralized management and reduced costs, irrespective
of whether any payment of royalty is received by parent company. The Assessee
renders support services for central operations and administrative support
functions.
17. Further, the Ld. AR in submitted that a separate support service
agreement has already been entered by Heinz India under which the support
services are rendered to various group entities of Heinz US Worldwide. In the
instant case, amount paid for the services under SA is approximately six time
amount paid under TTLA and, therefore, the payment could be constitute to be
ancillary or subsidiary to royalty payment made to Heinz US. The Ld. AR
submitted that the Ld. DR agrees in his synopsis that the quantum paid is
significant and is more than royalty paid. Therefore, the Ld. AR submitted that
the Support Service Agreement cannot be ancillary said to be ancillary or
subsidiary to the TTLA as the benefits arising out of the support services are
for all he products manufactured by Heinz India i.e. Complan, Glucon D,
Nycil, Tomato ketchup and also for the corporate office of Heinz India for e.g.
finance, legal, human resource, general management, information system, etc.
Further, it is humbly stated that `Heinz' trade name is not used on products
such as Complan, Glucon D, Nycil, etc which constitute 90% and more of total
sales of Heinz India.
25 ITA No. 6252/Del/2012 & 1991/Del/2015
18. The Ld. AR submitted that in the present case, the activities carried out
by the assessee under the agreement are particularly in the area of general
management, human resources, strategic planning and marketing, finance and
information systems. Costs incurred by the Assessee in terms of time and effort
of its employees for carrying out the activities are shared amongst the various
affiliates on a uniform and consistent basis using appropriate allocation factor
in the manner specified in SA. Clause 5.2 of SA specifically deals with
allocation of costs and provides for the mechanism for the same an accounting
method consistent with US Generally Accepted Accounting Principles and
Assessee's accounting policies would be used to identify all direct and indirect
costs associated with the activities carried out by the Assessee for each affiliate
for each cost centre an appropriate allocation factor is identified. The above
costs are allocated by the Assessee to its Affiliates without charging any mark
up/ profit element. The cost contribution/ payments made by Heinz India as a
participant to SA merely represents a reimbursement of the costs incurred by
the Assessee towards the above activities. In substance and in form the
payment cannot be considered as income earned by the Assessee. As can be
seen from the agreement itself, there is 0% markup. The definition of Support
Services in the SA means the activities performed by the assessee in the areas
of area of general management, human resources, finance, data processing, etc
are to be provided to Heinz India on a commercial basis i.e. the services to be
provided should be such that are provided between two unrelated parties. The
expenses incurred by the assessee and reimbursed by Heinz India are mere
recoupment of expenses and would not constitute income of Assessee. The
Assessee merely allocates the costs and does not charge any mark-up. In view
of the above, the Assessee wishes to submit that the reimbursement of
expenses received from Heinz India is not taxable in the hands of the Assessee
in India under the provisions of the Act. The Ld. AR further submitted that
the addition is liable to be deleted on this ground alone as there are various
judgments on these issues which have held when there is only recoupment of
expenses, there is no element of income and held the same cannot be held to
26 ITA No. 6252/Del/2012 & 1991/Del/2015
be taxable in India. The decisions are as follows:-
Dunlop Rubber 142 ITR 493 Kolkata High Court
DECTA 237 ITR 190-AAR
Siemens Aktiongesellschaft 189 Taxman 422-AAR Bombay High Court
ABB Ltd 189 Taxman 422-AAR
Ernst & Young Pvt. Ltd. 49 Taxmann.com 386 Kolkata ITAT
19. In respect of issue relating to make available technical services to Heinz
India. The Ld. AR submitted that the assessee does not `Make Available'
Technical Services to Heinz India and hence should not be taxable as FIS
under the provisions of the DTAA. In the present case, the Ld. AR submitted
that factually no technical knowledge, etc was `Made Available' by the assessee
to Heinz India. The fact that the assessee performs such activity on year on
year basis also supports the contention that no technical knowledge etc. was
`made available'. The Ld. AR submitted that the assessee does not "make
available" any technical knowledge, skill, etc. to Heinz India, nor does it
develop and transfer any technical plan, design, etc. Therefore, the amount
received by the Assessee cannot be said to be covered within the meaning of
FIS under the DTAA. Hence, such reimbursements should not be taxable in
India under the DTAA. Article 12(4) of the DTAA defines the term `FIS'. In light
of the above definition and judicial pronouncements of various courts it is now
a well settled law that for any payment to qualify as FIS under the DTAA, the
following criteria are essential. The services need to be of technical or
consultancy nature; and the services need to make available technical
knowledge, experience, skill, knowhow or processes, or consist of the
development and transfer of a technical plan or technical design. These are
essentials a `technical or consultancy service' is taxable only if the services
`make available' technical knowledge, experience, skill, know-how, or
processes, or consist of development and transfer of a technical plan or
27 ITA No. 6252/Del/2012 & 1991/Del/2015
technical design. The technology is considered to be `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. Similarly, the use
of a product, which embodies technology, is not per se considered to make the
technology available. Further, even if the services are considered to be
managerial in nature the same would not be taxable under India US tax treaty
because under the India US tax treaty the term `managerial' services is not
included under the definition of fees for included services. In view of the
above, by contrast, if no technical knowledge, etc is `made available' to a
purchaser, any fees generated would not be FIS under Article 12(4) of the
DTAA. Typically, services rendered may not make available any technical
knowledge, skill, know-how or processes if the service provider is able to show
that such services do not enable the service recipient to apply the technology
(if any) contained therein, in an independent manner, in future such services
also do not contemplate development or transfer of a technical plan or
technical design; and the payment to the service provider is for service
simpliciter and not for making available any technical knowledge, experience,
etc.
20. Accordingly, the service recipient should be able to make use of such
technical knowledge, skill, etc by himself in his business or for his own benefit
without recourse to the service provider in the future. The aforesaid principle
has also been upheld in the following judicial precedents wherein the concept
of "make available" has been discussed in detail and the issue has been ruled
in favour of the taxpayers even in the cases of the support services rendered
under a global agreement. The following decisions were relied by the Ld. AR
US Technology Resources (P) Ltd. (2018) 407 ITR 327 (Kerala)
H.C
28 ITA No. 6252/Del/2012 & 1991/Del/2015
Guy Carpenter & Co. Ltd. [2012] 346 ITR 504-Delhi H.C
De Beers India Minerals (P) Ltd. [2012] 346 ITR 467 (Karnataka)-
H.C
Koninklijke Philips Electronics N. V. [2018] 99 Taxmann.com 23-
Kolkata ITAT
ExxonMobil Company India (P.) Ltd [2018] 92 taxmann.com 5 -
Mumbai ITAT
Bombardier Transportation India (P.) Ltd. [2017] 162 ITD 586
(Ahmedabad - Trib)
Timpken Company [2017] 88 taxmann.com 21 - Kolkatta
ITAT
Outotec Oyj [2017] 162 ITD 541 - Kolkatta ITAT
Steria (India) Ltd. [2016] 386 ITR 390- Delhi- HC
Cummins Ltd. [2016] 381 ITR 4 4 - A A R
Sandvik AB [2015] 61 taxmann.com 31 - Pune ITAT
Measurement Technology Ltd. [2015] 376 ITR 461 - AAR
Sandvik Australia Pvt. Ltd. [2013] 31 taxmann.com 256 - Pune
ITAT
Endemol India Pvt. Ltd. [2014] 361 ITR 3 4 0 - A A R
Invensys Systems Inc [2009] 183 Taxman 81 - AAR
KPMG Ltd. [2013] 142 ITD 323 (Mumbai- Trib
Renaissance Services BV. [2018] 94 taxmann.com 465 -
Mumbai ITAT
Veeda Clinic Research (P) Ltd. [2013] 144 ITD 297 (Ahmedabad -
Trib
29 ITA No. 6252/Del/2012 & 1991/Del/2015
Reliance General Insurance Co. Ltd. [2018] 97 taxmann.com
350-Mumbai ITAT
Further, the case laws specific on the proposition that managerial
services are not covered under FIS article in India-US treaty are as follows:-
Raymond Ltd. [2003] 86 ITD 791-Mumbai ITAT
Koninklijke Philips Electronics N.V- [2018] 99 taxmann.com 23 -
Kolkatta ITAT
Steria (India ) Ltd. [2016] 386 ITR 390 - Delhi- HC
Cummins Ltd. [2016] 381 ITR 4 4 - A A R H C
Measurement Technology Ltd. [2015] 376 ITR 461 - AAR
Invensys Systems Inc [2009] 183 Taxman 81 - AAR
Further, the case laws specific on the proposition that since support services
are rendered year-on-year, they do not satisfy make available test and hence is
not taxable as FIS:
ExxonMobil Company India (P) Ltd. (2018) 92 Taxmann.com 5- Mumbai
ITAT
Bombardier Transportation India (P.) Ltd. [2017] 162 ITD 586
(Ahmedabad - Trib)
Outotec Oyi- [2017] 162 ITD 541 - Kolkatta ITAT
The Ld. AR submitted that the reliance of Centrica India Offshore Pvt. Ltd
(2014) 364 ITR 336 cannot be applied in the facts of Heinz US as in the
Centrica ruling the case of whether the salary payment made to overseas
entity is taxable or not. Further, the payment made under the case of Centrica
was not for year-to year basis as in the case of Heinz US. Thus, the Ld. AR
submitted that the said service cannot be held to be FIS and hence are not
taxable in India.
30 ITA No. 6252/Del/2012 & 1991/Del/2015
21. We have heard both the parties and perused all the relevant materials
available on record. It is pertinent to note that taxability of the payment made
by Heinz India towards the cost allocated by Heinz USA in respect of the
activities carried out will depend upon the characterization of such payment.
Such payment could be governed by Article 12 `Royalties and fees for
included services' or Article 7 `Business Profits'. The term "fees for included
services" (FIS) has been explained in Article 12(4) of the DTAA which reads as
under:
"4. For purposes of this Article, "fees for included services" means payments
of any kind to 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:
(a) are ancillary and subsidiary to the application or enjoyment of the
right, property or information for which a payment described in paragraph
3 is received; or
(b) make available technical knowledge, experience, skill, know-how, or
processes, or consist of the development and transfer of a technical plan or
technical design.
The assessee has filed the present appeal challenging the assessment order on
the ground that the cost reimbursement of Rs. 1,88,54,358/- received by the
assessee towards providing support services to its group affiliates are taxable
as FTS both u/s 9(1)(vii) of the Act as well as Article 12(4) of the DTAA taxing
the same by the assessing officer as royalty is also not just and proper. From
the perusal of the records it can be seen that the assessee has entered into a
global agreement effective from 3rd May, 2007 with its group entities (affiliates),
including Heinze India Pvt. Ltd. (Heinze India) for the provision of support
activities. The underlying objective of the agreement is to achieve consistency of
31 ITA No. 6252/Del/2012 & 1991/Del/2015
approach and economies of scale for the group entities. The activities carried
out by the Heinz, USA under the agreement are broadly in the area of supply
chain Human Resources, Strategic Planning and marketing, Finance and
information systems from the DTAA as well as the agreements entered into by
the assessee company as well as Heinz, India Novel Define but services are
coming while claiming the reimbursement. The approach of the assessee is that
the services should not be considered as taxable contending that they are
merely reimbursements and reimbursement cannot be taxed. But to come
under the category of reimbursement of certain receipts of service, the same
has to fulfill certain criteria for which the services have to be provided by the
assessee to its affiliated companies. The assessing officer has observed that the
services provided by the assessee are in the area of supply chain, human
resources, strategic planning and marketing, finance and information systems
under the agreement which is an admitted fact. Thus, services have been
utilized by the Indian Company as well. The concept of make available requires
that the fruits of the services should remain available to the service recipients
in some concrete shape such as technical knowledge, experience, skills etc.
which is met in the instant case as can be reflected from the nature and
duration of the contract. The service recipient has to make use of such
technical knowledge, skills etc. by himself in his business and for his own
benefit. Thus, the short durability or permanent usage of the service envisages
by the concept of make available services remains at the disposal of their
service recipients. Thus, the consideration qualifies as fees for technical
services (FTS) both under the Income Tax Act and under the tax treaty as well.
The Ld. AR relied upon the various decisions in respect of meaning of make
available under DTAA and certain support services which do not satisfy make
available clause under DTAA. The first case law of the Hon'ble Jurisdictional
High Court is Guy Carpenter and Company Ltd. 346 ITR 504. After going
through the decision in this particular case, the issue was whether the nature
of reinsurance brokerage, commission which was paid by insurance companies
operating in India to the assessee was assessable as fees for technical services
32 ITA No. 6252/Del/2012 & 1991/Del/2015
within the meaning of Section 9(1)(vii) of the said Act read with Article 13 of the
India United Kingdom Double Tax Avoidance Agreement or not. The Hon'ble
Delhi High Court observed that a plain reading of Article 13(4)(c) of the DTAA
indicates that fees for technical services would mean payments of any kind to
any person in consideration for the rendering of any technical or consultancy
services which inter alia makes available technical knowledge, experience, skill,
know-how or processing or consist of the development and transfer of a
technical plan or technical design. In the said case, the assessee did not
maintain any office in India and has a referral relationship with J. B. Boda
which is not affiliated company of the assessee. Thus, the factual aspect differs
with the present assessee and therefore the ratio laid down by the
Jurisdictional High Court decision is not applicable to the facts of the present
case. In fact the assessee during the hearing has given almost 20 decisions
which are quoted hereinabove as the submissions of the Ld. AR which are not
be applicable in the present case as the factual aspect differs and has unique
features which will not be applicable in the present case. As regards the
decision that certain support services cannot be taxable as royalty on the
DTAA, the decision of the Tribunal cited by the Ld. AR will not be applicable in
the present case. Decisions on ancillary and subsidiary clauses in DTAA will
also be not applicable. As regards, the decision on reimbursement the Hon'ble
Bombay High Court in case of Siemens (supra) has held that the amounts
received by the assessee therein under the agreement would be royalty under
the DTAA but would fall within the expression, industrial or commercial profits
within the meaning of Article 3 of the DTAA. Thus, the ratio will not be
applicable in the present case. Thus, Ground No. 2 is dismissed.
22. As regards the ground no. 3 not granting credit of taxes deducted at
source the issue is remanded back to the file of the assessing officer for
granting due credit of TDS after proper verification. Needless to say the
assessee be given opportunity of hearing by following principle of natural
justice, therefore, ground no. 3 is allowed.
33 ITA No. 6252/Del/2012 & 1991/Del/2015
23. As regards ground no. 4 regarding levy of interest u/s 234B, the same is
consequential hence is not adjudicated here.
24. As regards ground no. 5 (wrongly mentioned in Appeal memo as Ground
No. 4) relating to initiation of penalty proceedings u/s 271(1)(c) of the Act, is
consequential and Ground No. 1 is general in nature, hence, does not require
adjudication.
25. As regards to ITA No. 1991/Del/2015, the same is having identical
issues, hence the same is also partly allowed for statistical purpose.
26. In result, both the appeals of the assessee are partly allowed for
statistical purposes.
Order pronounced in the Open Court on 23rd August, 2019.
Sd/- Sd/-
(R. K. PANDA) (SUCHITRA KAMBLE)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 23/08/2019
R. Naheed
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
34 ITA No. 6252/Del/2012 & 1991/Del/2015
Date of dictation
Date on which the typed draft is placed before the
dictating Member
Date on which the typed draft is placed before the
Other Member
Date on which the approved draft comes to the Sr.
PS/PS
Date on which the fair order is placed before the
Dictating Member for pronouncement
Date on which the fair order comes back to the Sr.
PS/PS
Date on which the final order is uploaded on the
website of ITAT
Date on which the file goes to the Bench Clerk
Date on which the file goes to the Head Clerk
The date on which the file goes to the Assistant
Registrar for signature on the order
Date of dispatch of the Order
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