2016-TII-222-ITAT-KOL-INTL

OUTOTEC OYJ Vs DDIT: KOLKATA ITAT (Dated: October 14, 2016)

Income tax - Section 144C & India Finland DTAA - Article 13(4).

Keywords - FTS - fees for technical services - managerial services - make available clause - service fee.

Whether merely because the provision of the service may require technical input by the person providing the service, it cannot be said that technical knowledge & skills are 'made available' to the person purchasing the service - YES: ITAT

Whether mere rendering of recurring managerial and supervisory services by a non-resident entity to its Indian Group concern, without transfer of any skill or experience, will satisfy the test of 'make available clause' - NO: ITAT

Whether the amount received by the Finland resident entity from its Indian Group Company, for rendering the said routine managerial services, would qualify as 'FTS' as per Article 13(4) of the Indo Finland DTAA - NO: ITAT

The assessee, a tax resident of Finland, is engaged in the business of providing innovative and environmentally sound solutions for a wide variety of customers in metals and mineral processing industries. During the year under consideration, the assessee had earned revenue of Rs. 82,22,381/- by providing management support and other services to its group company Outotec India Pvt Ltd. The assessee contended before the AO that the services provided by it were managerial services and these services fall outside the definition of FTS under India Finland DTAA. The assessee also contended that no services had been made available so as to tax the amount as FTS. The AO however rejected the contentions of assessee and held that these services constituted FTS. On appeal, the DRP went to examine the service agreement entered by the assessee with the Indian group company and found that the invoices furnished indicated that services have been provided by the assessee to its group company for IT Services, setting up of IT Infra and also other services which have been simply described as 'service fee'. The DRP observed that the absence of specific nature of service fee in the invoices could lead to assumption that all the nature of services have been rendered by the assessee. Accordingly, it held that the services rendered by the assessee company to be FTS and upheld the action of the AO in taxing the same in the sums of Rs. 82,22,381/- and Rs. 1,66,45,061/- for the A.Ys 2010-11 and 2011-12 respectively.

Having heard the parties, the Tribunal held that,

+ it is found that the services rendered by the assessee squarely falls within the definition of 'Fee for Technical Services' as per the provisions of the Act, on which point there is no dispute by both the sides. The only dispute is whether the same would fall under FTS as per DTAA or not. Although various arguments were advanced by both the sides with regard to inclusion of the term 'managerial' in India Finland DTAA, to decide whether the services rendered would fall within the ambit of 'fee for technical services', it would be appropriate to ignore the same and decide the issue by deciding on the basis of 'make available clause ' of any technical knowledge, skill etc by applying the DTAA. It is found that the DRP is harping on the point that the expertise of the assessee which was used in the fields of marketing services which is in its own domain of metal industry will definitely be a technical and consultancy service. This observation is made because according to DRP, when marketing information, web content, customized software specific to the group concerns available through WAN, consideration for these payments will definitely be 'FTS' and the information made available to the Indian group concern is clearly capable of replicating the services through its own personnel. Accordingly, the DRP concluded that the make available clause is satisfied in the instant case. In the considered view of this Tribunal, in order to be covered under the definition of 'FTS' by the provisions of Article 13(4) of the India Finland DTAA, not only the services should be of technical in nature but such as to result in making the technology available to the person receiving the technical services. It is also agreed that merely because the provision of the service may require technical input by the person providing the service, it cannot be said that technical knowledge, skills, etc are made available to the person purchasing the service. As to what are the connotations of 'making the technology available to the recipient of technical services', as is appropriately summed up in protocol to Indo -US DTAA, "generally speaking, technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology". It has been held by various judicial forums that the principle of parallel treaty interpretation is permissible where language of the two treaties is similarly worded and one treaty clarifies meaning of the terms (or language) used;

+ it is found in the instant case, from the nature of services rendered by the assessee to the Indian group company, there is no technology or technical knowhow, skills etc that were made available by the assessee in order to enable the Indian group company to function on its own without the dependence of the assessee. It is not in dispute that the agreement entered between Outotec Oyj and Outotec India Pvt Ltd is for an indefinite period and such services are provided on recurring basis by the assessee to Outotec India Pvt Ltd. There seems force in the argument of the AR that had the technical knowhow, skills etc being made available by the assessee to Outotec India Pvt Ltd, then there would be no need for Outotec India Pvt Ltd to recourse to the recipient for these services. We also hold that the other services such as IT Infrastructure, IT administration (collectively referred to 'IT Support Services') also do not satisfy the 'make available' test as no technology, knowhow, skills etc were transferred to the recipient. We also hold that the repair and supervision services provided to few other Indian parties do not satisfy the make available test as these are routine repairs and supervisory services and there is no transfer of technology or skill or experience at the time of provision of such services by the assessee. In the instant case, what was rendered was only managerial services without any transfer of technology, knowhow, skills etc and it is a recurring service year after year. In view of the aforesaid facts and findings, this Tribunal holds that the amounts received by the assessee from Outotec India Pvt Ltd does not qualify as FTS as per the DTAA.

Assessee's appeals allowed

2016-TII-221-ITAT-MUM-INTL

STATE BANK OF MAURITIUS LTD Vs DDIT: MUMBAI ITAT (Dated: September 30, 2016)

Income Tax - Sections 28, 37, 143(3), 147 & 271(1)(c) - India Mauritius DTAA - Article 3, 7(3), 23 & OECD and UN Model Convention - Article 3(2).

Keywords - penalty for concealment - benefits of DTAA - profits of PE - OECD convention - business profits - allowable revenue expense & inaccurate particulars.

Whether mere recording of notes in the Income Tax Return filed, cannot absolve the assessee from furnishing accurate particulars of income disclosed - YES: ITAT

Whether when the assessee complies with the statutory procedural requirement of filing the prescribed form and certificate of CA, can the same absolve such assessee of its liability to prove bona fide of the deduction claimed in its return - NO: ITAT

Whether when an assessee interprets provisions of law without any legal basis and resultantly deprives the State of its due taxes, it is a deemed case of filing of inaccurate particulars, warranting levy of penalty - YES: ITAT

Whether high profile assessees availing professional services, can be allowed to make claims that are prima facie inadmissible to avoid penal consequences, on the plea of ignorance - NO: ITAT

The assessee is engaged in the business of banking. It had filed its return of income, showing income of Rs.3.15 crores. Subsequently, AO completed the assessment u/s. 143(3) r.w.s. 147 determining the income of the assessee at Rs.5.27 crores. During such proceedings, AO found that the assessee had claimed expenditure of Rs.2.31 crores on acquisition of fixed assets. The AO held that expenditure incurred by the assessee was capital in nature though it had claimed it as revenue expenditure. He further found that the assessee had not only claimed capital expenditure, but it had also claimed depreciation on the assets. He held that the assessee had claimed double deduction on the same expenditure to the extent of the depreciation claimed. He directed the assessee to show cause as to why a capital expenditure incurred on fixed assets should not be treated as capital expenditure. After considering the submission of the assessee, the AO held that the domestic law would apply in the case of the assessee, that the claim made by it was on account of capital expenditure, for which deduction was not admissible. The AO also initiated penalty proceedings as per the provisions of section 271(1)(c). In reply to penalty notice, the assessee filed its letter, dated 10.03.2007 and argued that it had not concealed its income nor did it furnish inaccurate particulars, that in terms of Article-7(3) of the Indo Mauritius DTAA Treaty it had claimed capital expenditure as a deductible item, that the expenditure was incurred wholly and exclusively for the purpose of business. AO held that the assessee, in addition to claiming 100% deduction on the capital expenditure, claimed depreciation on fixed assets, that it amounted to double deduction to the extent of depreciation claimed, that by making claim for deduction of capital expenditure, to which it was not eligible for, the assessee had furnished inaccurate particulars of its income, that it was the duty of the assessee to show the correct total income and pay taxes accordingly, that the claim of the assessee that disallowance was made only due to difference of opinion was an incorrect statement, that the assessee had claimed the expenditure incurred for acquiring fixed assets, that it had also claimed depreciation, that the assessee had furnished inaccurate particulars of income by claiming deduction for capital expenditure, that it was a fit case where penalty u/s. 271(1)( c) should be levied. Accordingly, AO levied penalty of Rs.1.27 crores.

On appeal, CIT(A) held that one of the issues to be decided was as to whether a disclosure made in the return of an expense being deductible against business profit suffice to save a tax payer from levy of penalty. It had held that penalty was leviable in cases where the assessee would not offer any explanation or would fail to substantiate it. It had also observed that AO had analysed all the facts and had reached to a conclusion that the assessee was incorrect in claiming capital expenditure as an allowable revenue expenditure, that the conclusion of the AO was based on analysis of accounting and commercial principles and were supported by provisions of treaty and commentary on International Taxation, that the assessee had not offered any convincing explanation as to why and on what basis it believed that capital expenditure could be claimed as deduction from business profits. CIT(A) also held that the assessee had over looked the provisions of Article 3(2) of the OECD and UN Model Convention. As per the FAA the business profit had to be ascertained in accordance to section 28, as envisaged by Article 3(2) of the Treaty, that the profits of the PE were required to be computed in accordance to Chapter IV of the Act, that the provisions of section 37 did not allow capital expenditure for computing profit and gains of business and profession. It had also held that assessee had not interpreted the mandate of Article 7(3) of the DTAA correctly, that the said Article did not hold that even capital expenditure was allowable, that the assessee was not able to explain as to how it arrived at the conclusion that the word 'expenses' included capital expenditure also. CIT(A) also referred to Article 23 of Indo-Mauritius DTAA and held that provisions of the Act relating to computation of taxable income would definitely apply in the case of the assessee except where the provisions contained in the DTAA were contrary to the conditions specifically mentioned in the Act, that the assessee could not have any advantage by citing the provisions of Article-3 of the DTAA, that there was no specific contrary provision in the treaty, that restriction on deductibility of expenses under the Act would be applicable in computation of profits attributable to Indian PE.s of Mauritius Tax Residence. Referring to provisions of section 37, it had held that capital expenditure could not be claimed as deduction while computing the income chargeable under profits and gains of business, that it was not clear as to how the assessee could derive the inference that capital expenses were allowable while computing the income under the head business profit, that there was over valuing national and international judicial precedence to the contrary, that the assessee had not adduced any evidence to support in its favour either by way of any judicial precedent or by production of any legal mandate.

CIT(A) referred to Explanation 1 to section 271(1)(c) (A) and (B) and held that the assessee had not offered any explanation that was not substantiated by it. He also held that the assessee had made a disclosure of income in computation of income about allowability of capital expenses but it was not able to provide and substantiate the basis of the said claim. He further observed that the assessee had even claimed depreciation on the capital assets which had been written off by claiming the full expenditure, that during the assessment proceedings the assessee was asked to provide the basis of the claim made with regard to allowability of capital expenditure, that in support of its claim the assessee had advanced only theoretical arguments, that no conflicting jurisprudence was brought to light on the issue, that claim of depreciation alongwith the claim of full deduction of expenses of the capital assets could not by any stretch of imagination be supported by any accounting standard or principles, that it was virtually prohibited by all accounting norms the world over, that assessee had blatantly defrauded the Revenue, that it was the most appropriate case of furnishing inaccurate particulars of income. It had also held that as a matter of policy the department was taking only 1-3% of cases for scrutiny, that as the case has not been selected for investigation, there would have been loss of revenue on account of erroneous and unsupported claim of the assessee, that the assessee had furnished inaccurate particulars of income. Finally CIT(A) upheld the order of AO.

Having heard the matter, the Tribunal held that,

+ mere recording of the notes in the return cannot absolve and protect the assessee who had not furnished accurate particulars. If the explanation and the reasoning of the assessee is accepted, then in all cases where a note is made in a return, but a wrong claim of deduction is made, no penalty u/s.271(1)(c) can be imposed. Merely because the assessee complies with the statutory procedural requirement of filing the prescribed form and certificate of CA, cannot absolve the assessee of its liability if the act or attempt in claiming the deduction is not bona fide. Bona fide of a claim can be proved by the circumstances and facts. If the assessee had anything in its favour-in form of a commentary, an opinion of a tax expert dealing with such issues at international level, or an order of any legal forum to hold that capital expenses can be claimed as revenue expenditure and depreciation can be claimed for such an expenditure stand taken by it would have been taken as bonafide belief. Here, the assessee claims it interpreted the DTAA and decided that it was eligible for a particular deduction. Thus, it has acted as an interpreter of law and a judicial authority. As per the judicial procedure only and only the Courts are authorised to interpret the law. The assesseess, AO.s, FAA.s and even the Tribunal cannot interpret the law. It is out of their domain. The assessee had interpreted the Treaty for its own benefit resulting in paying lesser taxes. It is not a case where the assessee makes a claim during the assessment proceedings after paying taxes about the claims for which it had some doubt. If an assessee interprets provisions of law without any legal basis and resultantly deprives the State of its due taxes it is a case of filing of inaccurate particulars. We agree that the Act is one of most vexed and complicated legislation and has been subjected to numerous amendments from time to time, that it requires highest degree of interpretative skills and divergent views on interpretation of tax provisions, that law does not postulate that an assessee must accept an interpretation against him even when a favourable view is credible and tenable. But, the facts of the case prove that no judgment or opinion was brought to notice of the revenue authorities indicating that the stand taken by the assessee was based on some reasonable basis. In our opinion, the claim made by it falls under the category of a 'fanciful claims under the garb of interpretation', and same is not bona fide;

+ we hold that the assessment and penalty proceedings are separate and independent and the decision of levying or confirming the penalty should be taken on the basis of the explanation filed during the penal proceedings. In our opinion, if the claim itself is not bona fide-that it lacks good faith-then penalty has to be imposed for filing inaccurate particular. Information in the return was given to gain some tax advantage which was otherwise not due to the assessee and such an attempt has to be termed filing of inaccurate particulars. Intention of the assessees in claiming capital expenditure as allowable expenditure and further claiming depreciation is visible to the proverbial 'naked eyes', so, if the AO/FAA decided not to remain a mute spectator to such an attempt, no fault can be found with them. The FAA has in his elaborate order clearly proved that as to how the explanation of the assessee was not genuine or bona fide and how it is not supported by any authority. Rather the available material was against the stand taken by the assessee. It is also a fact that the assessee not a small time trader running a proprietary concern or a shop in the remote part of the country and is not aware of the tax laws. It is supported by a team of professionals. Such assessees are expected to lead from front and not to claim deductions that are prima facie not admissible. Let us make it clear that we do not want to mix ethics and penalty matters. What we are emphasising is that assessee availing professional services should not make claims that are prima facie inadmissible to avoid penal consequences. We would also like to mention that the cases relied upon by the assessee are distinguishable on facts. In the case of Infosys Technologies Ltd. the issue was not about levy of penalty u/s.271(1)(c). In the matter of Rucha Engineers Pvt. Ltd. the FAA deleted the penalty holding that in a case where the issue was the nature of the receipt i.e. capital or revenue receipt penalty should not be levied. The order of the FAA was confirmed by the higher forums. In short, both the cases are of no help to the assessee. In contrast, the matter relied upon by the DR, i.e.N.G. Technologies is useful in deciding the issue. In that matter the assessee had pleaded that claim made by it was bonafide and all the facts were disclosed. The FAA, upholding the order of the AO, had held that mistake committed by the assessee could not be said to be bonafide. However, the Tribunal reversed the order of FAA. SC dismissed the SLP against HC's ruling that where against basic principle of accountancy, assessee claimed capital loss on sale of fixed assets in profit and loss account and had not revised return voluntarily, penalty for concealment of income was justified. In our opinion, facts of the case under consideration are quite similar to the facts of N. G. Technologies. Considering the peculiar facts and circumstances of the case cumulatively, we hold that order of the FAA does not suffer from any legal or factual infirmity.

Assessee's appeal dismissed