Consideration For Advisory Services Not Taxable As Fees For Included Services Under India-US DTAA: Calcutta High Court

The bench of Justices T.S. Sivagnanam and Hiranmay Bhattacharyya also took note of the Calcutta High Court’s decision in M/s Timken India Limited v. Deputy Commissioner of Income Tax (2016), where it was ruled that the advance ruling sought by the Indian subsidiary, regarding its tax obligations while remitting payment to its foreign holding company under an agreement, was not binding on the foreign company.

The assessee- The Timken Company, a US Company, entered into an agreement with Timken India Limited (TIL), its Indian Subsidiary, for providing certain services. The Assessing Officer (AO) opined that the compensation payable by the recipient/TIL to the assessee was in the nature of Fees for Included Services (FIS), taxable under Article 12 of the Indo-USA Double Taxation Avoidance Treaty (DTAA). Therefore, the AO ruled that the compensation was liable to tax in India and thus, it made additions to the assessee’s income.

Against this, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT(A)). The CIT(A) concluded that the agreement between the parties was purely for rendering advisory services and such advisory services cannot be treated as Fees for Included Services under Article 12(4)(b) of the Indo-US Treaty since there is no technology which is made available to the recipient. It ruled that what was transferred through the agreement was only commercial information.

Against the order of the CIT(A), the revenue department filed an appeal before the ITAT, who upheld the findings of CIT(A). The ITAT held that consideration for rendering advisory services cannot be treated as Fees for Included Services under Article 12(4)(b) of the DTAA. The ITAT further concluded that since the assessee did not have any permanent establishment in India, the income arising to it in India cannot be taxed under Article 7 of the DTAA as ‘business profits’ either.

The revenue department filed an appeal before the Calcutta High Court challenging the ITAT’s order.

The revenue department submitted before the High Court that the ITAT had committed a substantial error in law by deleting the additions made by the AO by not taking note of the ruling pronounced by the Authority of Advance Ruling (AAR) which held that consideration for various services was taxable in hands of the assessee, Timken USA, both under the Income Tax Act, 1961 as fees for Technical Services (FTS) and under Article 12 of the Indo-USA DTAA as Fees for Included Services (FIS).

The High Court noted that in a writ petition filed by the assessee and TIL before the Calcutta High Court (M/s Timken India Limited v. Deputy Commissioner of Income Tax (2016)), challenging the vires of Section 44D(b) of the Income Tax Act, the High Court had examined the binding nature of the ruling given by the AAR. The High Court had noted that TIL had sought a ruling regarding its tax obligation while remitting payment under the agreement to the assessee foreign company. The Court had held that by virtue of Section 245S of the Income Tax Act, the advance ruling pronounced by the Authority was binding on the Indian company, TIL, since it had sought such ruling. Simultaneously, the ruling was binding on all the relevant Income Tax Authorities, in respect of the Indian company and the relevant transaction.

The Calcutta High Court in M/s Timken India Limited v. Deputy Commissioner of Income Tax (2016) had, however, held that the opinion of the AAR was not binding on the foreign company, The Timken Company, and that the opinion has to be confined to the obligation of the Indian subsidiary. The High Court had further concluded that the contention raised by the assessee foreign company in the writ petition, that it should be entitled to claim deductions from the payments received for technical services under the agreement, was not covered by the opinion rendered by the AAR.

The bench noted that the said decision of the Calcutta High Court has attained finality as the revenue has not challenged it in an appeal.

The Court reckoned that the ITAT had concluded that the assessee was rendering only advisory services, which cannot be treated as included services under Article 12(4)(b), and thus, the contention regarding the binding nature of the AAR had become academic.

The bench further observed that as per the agreement, TIL was required to compensate the assessee for all the costs incurred in providing such services. Further, the assessee was to issue invoices covering only costs without any mark-up.

“In our considered view, the agreement between the parties had been properly interpreted by the CIT(A) and on re-examination, the Tribunal also concurred with the CIT(A). Thus, we find no different view is possible than the interpretation given by the CIT(A) as approved by the Tribunal. Therefore, the order passed by the learned Tribunal is affirmed on this aspect...”, the Court said.

The Court thus dismissed the appeal.

Case Title: Commissioner of Income Tax (International Taxation & Transfer Pricing) versus M/s. The Timken Company

Citation: 2023 LiveLaw (Cal) 8

Dated: 04.01.2023

Counsel for the Appellant: Mr. Tilak Mitra, Adv. Mr. Soumen Bhatttacharjee, Adv.

Counsel for the Respondent: Mr. J.P. Khaitan, Sr. Adv. Mr. Avra Mazumder, Adv. Mr. Binayak Gupta, Adv. Mr. Suman Bhowmik, Adv. Mr. Samrat Das, Adv

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