TII Instant Update - 2017-TII-INSTANT-ALL-476

2017-TII-57-HC-DEL-TP

VALVOLINE CUMMINS PVT LTD Vs DCIT: DELHI HIGH COURT (Dated: July 31, 2017)

Income tax - ALP - AMP expenses - bright line test - total turnover - notional compensation - brand enhancement

The Assessee, a wholly owned subsidiary of Valvoline International inc. USA and Cummins India Ltd., is engaged in the manufacturing and marketing of automotive lubricants, transmission fluids, gear oils, hydraulic lubricants, automotive filters, specialty products, greases and cooling system products. It also offers Car Brite, Car Care products for automotive cleaning and maintenance. For the AY in question, the Assessee filed its return declaring an income of Rs.1,34,82,35,760. The return was picked up for scrutiny, wherein noticing that there were international transactions undertaken by the Assessee viz. import of trading goods, export of finished goods, provision of support services and payment of royalty, the AO made a reference to the TPO for determination of ALP the aforementioned international transactions undertaken by the Assessee with its AE. The TPO passed an order proposing an aggregate adjustment of Rs.31.95 crores to the returned income of Assessee. Oou of this proposed aggregate adjustment, an amount of Rs. 23.98 crores was towards AMP expenses for which the TPO imputed a notional arm’s length compensation by the AE. The remaining adjustment of Rs. 7.97 crores was towards the payment of royalty, which came to be deleted by the DRP. The TPO applied the ‘Bright Line Test’ by comparing the proportion of AMP expenses, as a percentage of the total turnover incurred by the Assessee with that of the comparables. The TPO held that the AMP expenses as a percentage of the total turnover in case of the Assessee was 4.20% whereas for the comparables it worked out to an average of 0.51%. It was held by the TPO that the AMP expenses in excess of the BLT incurred by for enhancing the brand name ‘Valvoline’ owned by the AE had to be compensated by the AE.

On appeal, the HC held that,

Whether the mere fact that Assessee was permitted to use the brand name of its AE, would automatically lead to an inference that expenses that the Assessee incurred towards AMP was only to enhance the AE's brand value - NO: HC

+ it is noted that this Court in Sony Ericsson India Pvt. Ltd. case had categorically found that the BLT was not an appropriate yardstick for determining the existence of an international transaction or for that matter for calculating the ALP of such transaction. The decision of the Full Bench of the ITAT in L.G. Electronics India Pvt. Ltd. v. ACIT - 2013-TII-15-ITAT-DEL-SB-TP which sought to make BLT the basis was set aside by this Court. Once the BLT has been declared by this Court in Sony Ericsson India Pvt. Ltd. to no longer be a valid basis for determining the existence of or the ALP of an international transaction involving AMP expenses, the order of the TPO was unsustainable in law. The mere fact that the Assessee was permitted to use the brand name ‘Valvoline’ will not automatically lead to an inference that any expense that the Assessee incurred towards AMP was only to enhance the brand ‘Valvoline’. The onus was on the Revenue to show the existence of any arrangement or agreement on the basis of which it could be inferred that the AMP expense incurred by the Assessee was not for its own benefit but for the benefit of its AE. That factual foundation has been unable to be laid by the Revenue in the present case. On the basis of the existing record, the TPO has found no basis other than by applying the BLT, to discern the existence of international transaction. Therefore, no purpose will be served if the matter is remanded to the TPO, or even the ITAT, for this purpose. For the aforementioned reasons, this Court is of the view that the ITAT was not justified in remanding the matter to the AO/TPO for determining the ALP of the alleged international transaction involving AMP expenses, when in fact, the Revenue was unable to show that there existed an international transaction between the Assessee and its AE in the first place.

Assessee's appeal allowed

2017-TII-116-ITAT-BANG-INTL

ABB FZ LLC Vs DCIT: BANGALORE ITAT (Dated: June 21, 2017)

Income Tax – Sections 5, 9, 9(1)(vi) & 90 - India-UAE DTAA - Article 12

Keywords - income deemed to accrue in India – royalty – fee for technical services – service PE - permanent establishing - period of rendering services

The assessee is a non-resident company incorporated in United Arab Emirates. It is engaged in the business of providing regional service activities for the benefit of ABB legal entities in India, Middle East and Africa. In pursuance of the regional headquarter service agreement between the assessee company and ABB Limited, the assessee company rendered services to ABB Limited during F.Y.2009-10 and 2010-11. The assessee had received from its associated enterprises an amount of Rs. 1,78,42,63SI- and Rs.6,68,13,781/- in the F.Y.2009-10 and 2010-11 respectively. The assessee claimed the above amounts to be non-taxable in India as per India UAE DTAA, as the DTAA does not have a clause for fees for Technical services and since this clause has been specifically excluded from the treaty, the taxability would fall under Article 22 - other income and as per which, the said amount would be taxed in India only if the entity has a PE in India and as there is no PE in India, the sum is not liable to be taxed in India. The Assessing Officer held that the assessee, apart from claiming that its income is not taxable in India in absence of the clause in DTAA, has not taken trouble of proving its claim w.r.t. non-existence of PE in India, despite giving ample opportunities. None of the specific details called for by the AO were furnished by the assessee, barring a letter which claimed that some services were provided by the assessee through e-mail, phone calls, video conference and the like. Assessing Officer treated the consideration received by ABB FZ-LLC for rendering technical services as that to have been covered u/s.9(l)(vi) of the Act and not as per DTAA. In the alternative argument, the AO found that most of the services rendered by the assessee were covered under the definition of 'Royalty' as per Explanation 2(ii), 2(iv) and 2(vi) u/s.9(l)(vi) of the I.T. Act, 1961, as well as under Article 12(3) of the India UAE data. DRP confirmed the action of the AO and a final assessment order was passed by the AO.

On appeal, the ITAT held that,

Whether an entity can claim entitlement to benefits under Indo-UAE DTAA if it was neither a resident of UAE at the time of filing of returns within the meaning of Article 4 of the DTAA nor it was wholly managed and controlled by another entity in UAE – NO: ITAT

+ though it is the case of the assessee that the assessee is a company incorporated in UAE, but the certificate has not been furnished by the assessee before the authorities below saying that the assessee is a resident of UAE. Though assessee is a company, but for the purpose of qualifying for the benefit under DTAA in term of Article 1 and Article 4 of DTAA, it is necessary assessee company is managed and controlled wholly in UAE. In the absence of any such finding by the authorities below and also in the absence of evidence produced by the assessee, it is difficult to give the benefit of DTAA to the assessee. It is for the assessee to furnish the certificate of residence of UAE and the onus is on the assessee to prove that the assessee is managed and controlled wholly in UAE. The certificate of residence was issued only for a period of one year, w.e.f 01.04.2012 and the said certificate was issued on 27.10.2014. A resident alone under Article 4 of DTAA can avail the benefit of DTAA. Since the certificate issued by the UAE authorities, was issued only for one year from 01.04.2012, whereas the assessment years under consideration are 2009-10 and 2010-11. The returns of income for these years were filed on 09.09.2010 and 27.02.2011 respectively; therefore this certificate would not help the assessee as this is not relevant for the years under considerations. Thus it is amply clear that the assessee was not a resident of UAE at the filing of returns of income within the meaning of Article 4 of DTAA. Further the assessee has not placed any evidence showing that the assessee was wholly managed and controlled in UAE and is a tax entity in UAE. Accordingly, the assessee is not entitled to any benefits of DTAA;

+ the agreement entered between the Central Government and a foreign government can only be in respect of tax leviable under law in force in that country of the same income which is subjected to tax in India. If the income is not subjected to tax in India, then the Central Government is not authorised to enter into an agreement with a foreign country for the purpose of avoiding double taxation. Therefore, taxation of income is sin-qua-non in both the contracting and other contracting state. In the present case, the assessee has not filed any document to show that the income arising out of the services rendered by the assessee are taxable in UAE. For the purposes of falling in other income under Article 22, it is necessary that the income should not be expressly dealt in Articles 6 to 21.In the matter of IBM India Ltd, it was held that if the income is not falling under any of the categories mentioned in the DTAA, then it will fall in residual Article 22. Therefore, it will have a trapping of business profit and therefore, it is required to be dealt under Article 7, instead of Article 22. Article 22 would become redundant if residual income is to form part of Business Income. Any income which is also not forming part of business profit under Article 7 as well would also form part of residual clause namely Article 22, therefore to say and hold that residual clause (Article 22) would become part of business profit (Article 7) would make the Article 22 incongruous;

Whether service PE is dependent upon continuation of the activity for the same project or connected project for periods aggregating to more than 9 months within any 12 months period – YES: ITAT

+ the DRP has categorically held that the assessee is having a PE. In view of Rule 29 of the ITAT Rules, the Revenue can support the order passed by the authorities below on the basis of Article 5(2)(i), to say that the assessee is having service PE within the meaning of DTAA. It is not a case of the assessee that the objection of PE was not at all addressed or raised before the lower authorities. More over the finding of the DRP holding that there existed a PE of the assessee has not been challenged by the assessee before the Tribunal. Furnishing of services including consultancy services by assessee to ABB Ltd for the project in India or with connected Project was for a period 3 months after commencing its activities in January 2010. Thus, it fulfil the prerequisite of service PE and service PE do not require permanent establishment as well. In the present age of technology where the services, information, consultancy, management etc., can be provided with various virtual modes like e-mail, internet, videoconference, remote monitoring, remote access to desktop, etc., through various software, therefore, the argument of fixed place of business, raised by the Senior Advocate for the assessee that three employees were rendered services only for 25 days cannot be sustained, as the services can be rendered without the physical presence of employees of the assessee. The clause 2 of Article 5 is by way inclusive definition in nature and the definition given in clause No1 of Article 5 has been enlarged by clause 2, therefore Article 5(2) do not required to fulfil the requirement of Clause 1 of article 5 of DTAA. The Article 5(2) is' independent clause and the condition of having fixed permanent place of business under article 5(1) is not attracted for PE under Article 5(2);

+ it is not disputed by the assessee that the assessee was providing the services of consultancy in the other contracting state i.e., in India. It is also not disputed that the enterprise was rendering these services through its employees. It is not the stay of the employees for more than 9 months, which is required to be there but it is fact of rendering of services or activities which was required to be rendered for a period of nine months. Once the activity of the assessee commenced only in the month of January, 2010, then the argument of completing 9 months service before March, 2010, is preposterous, implausible and against the common sense. It is not expected to complete 9 months between January, 2010 to March, 2010. The completion of 9 months activities by the enterprise was only conceived in a period of 12 months. However is not disputed 'by the' assessee that the enterprise / assessee continues to render the services with effect from January, 2010 and thereafter also in the subsequent assessment year. The services are required to be rendered by the enterprise through its employees or other personnel for a period of nine months within any 12 months period. The requirement of fixed place of business is not applicable to the clauses (2), (4) mid (5). Clause (i) of Article 5(2) which provides the service PE, is not dependent upon, the fixed place of business as is only dependent upon the continuation of the activity for the same project or connected project for a period / periods aggregating to more than 9 months within 12. Accordingly assessee is having the service PE in India;

Whether activities of assessee are covered under 'Royalty clause' of DTAA, if the information provided by assessee are in the nature of 'know-how contract' which could be used for commercial and industrial purposes and that special knowledge would remain unrevealed to the public – YES: ITAT

+ the information provided by the assessee to ABB Ltd, were acquired by the assessee of its expertise, experience and knowledge based on its association with ABB group Zurich. The said information are not available in the public domain or cannot be acquired by ABB Ltd on its own effort and the information which are provided were in the nature of special knowledge, skill and expertise. The assessee has merely provided the access to such specialised knowledge, skill and expertise and has not done anything more, for rendering the services. 'The agreement gives ' opportunity to ABB Ltd. of using the information pertaining to industrial / commercial / scientific experience belonging to Assessee. It would not be possible for the assessee to render these activities or services merely with the help of three persons sent only for 25 days to India as the nature of activities scope and ambit of clauses in the agreement is very wide and it is not possible to render these services either through 3 employees or through phone call (moreover the assessee has not provided any evidence of actual rendering of services), therefore instead of providing the services by the assessee through it employees, the assessee had merely given the access to ABB Ltd various secret, confidential, IPRs information and other information acquired by it from its past experience to ABB Ltd. If the services were actually rendered by the assessee, (as claimed by the assessee) then it is essential that the assessee would have sent some of its officer on its payroll to actually execute the services at various branch offices of ABB Ltd. Assessee is required to undertake collecting, analysing and delivering of security intelligence and information to the service recipient under "The Regional Headquarter Services" to ABB Ltd , then the deployment of manpower by the assessee was necessary and similarly the deployment of manpower is equally necessary in case of education in basic sector procedure and regulations to new employees of service recipient (ABB Ltd);

+ activities which were allegedly rendered by the assessee were in the form of sharing or permitting to use the special knowledge, expertise and experience of the assessee,(which the assessee had acquired from its parent company,) and was shared by it with ABB Ltd. squarely falls within the realm of 'royalty', as defined in Article 12(3) INDO -UAE DTAA and in the form of rendering the services. The visits of the officials of the assessee to ABB Ltd was only for the purposes of providing access for using the information pertaining to industrial / commercial / scientific experience belonging to Assessee and to help ABB Ltd to commercially exploiting it. The dominant character of agreement between the assessee and Indian company was for sharing secret, confidential and IPRs information made available during the years under consideration under the said agreement clearly suggest that the activities of the assessee were covered under the Royalty clause of DTAA. The information provided by the assessee to ABB Ltd were in the nature of know-how contract, given by assessee to ABB Ltd, so that such know-how can used ABB Ltd, for its commercial and industrial purposes and further this special knowledge and experience would remain unrevealed to the public. These information were not already existing and were supplied by the assessee after its development or creation to ABB Ltd and there also exist specific provisions concerning the confidentiality of these information (clause 9). Moreover the assessee has done very little after giving access to these information to ABB Ltd., thus the information provided of the assessee given to ABB Ltd with the right to use and exploit commercially were concerning industrial, 'commercial or scientific experience activities would fall under Royalty of DTAA .' As the activities under consideration of the assessee falls under Royalty Clause 12 of DTAA and not under residual clause, therefore the assessee is liable to be taxed within India in accordance with Article 12 of DTAA, section 5 read with section 9 of Income Tax Act. Once payment of any kind is received as a consideration for the use of, or the right to use, industrial commercial or scientific equipment by the assessee, it will fall within the realm of Royalty as per DTAA.

Assessee's Appeals dismissed