Mckinsey Business Consultants Sole ... vs Assessee

The aforesaid appeal has been filed by the Assessee, against final assessment order dated 30.06.2014, passed u/s 143(3) r.w.s. 144C(13) in pursuance of directions given by the Dispute Resolution Panel-II Mumbai (DRP), dated 16.06.2014, for the A.Y. 2011-12. In the grounds of appeal the assessee has raised following grounds:

ITA No. 5452/Mum/2014 2 Assessment Year: 2011-12

1. The learned AO/ Hon'ble Dispute Resolution Panel ('DRP') has erred in concluding that borrowed service rendered by the Appellant are in the nature of 'royalty' under Article 7 of the India-Greece Double Taxation Avoidance Agreement ('India- Greece Tax Treaty').

2. The Hon'ble DRP's order and finding on the evidence submitted is contrary to the details filed before the learned AO and is also contrary to the record and order of the DRP.

3. The learned AO/ Hon'ble DRP has erred in not following the earlier decisions pronounced by the Hon'ble ITAT in the case of group companies of the Appellant wherein the ITAT has held that the borrowed service charges received by the Appellant's group companies is not taxable in India.

4. Without prejudice to the above, on the facts and in the circumstances of the case and in law, the learned AO / Hon'ble DRP has failed to appreciate and apply the order passed by the Competent Authorities of India and United States of America as per Article 27 of the India- US Double Taxation Avoidance Agreement (India-US Tax Treaty') in the case of the Appellant's group companies for prior years wherein it has been held that income from borrowed services should not be taxable in India in the hands of the Appellant. The Appellant prays that the principles underlying the said order ought to have been applied and pray accordingly.

5. The learned AO has erred in levying interest under Section 234D of the Act, since no refund of Rs 8,120 has been granted to the Appellant till date.

6. The learned AO has erred in charging interest under Section 234B of the Act.

7. The learned AO has erred in initiating penalty proceedings under Section 271(1)(c) of the Act.

2. Brief facts of the case are that assessee, McKinsey Business Consultants Sole Partner Limited Liability, is a foreign company incorporated in Greece. The assessee had entered into international transaction with its associate concern, McKinsey and company INC India ITA No. 5452/Mum/2014 3 Assessment Year: 2011-12

Branch during the financial year relevant to the A.Y. 2011-12. The assessee has provided assistance in the form of borrowed service to McKinsey India, in consideration for which, the assessee received an amount of Rs.50,103/- from the Indian company. The said income was not offered for tax by the assessee in the return of income as the said income was earned in the course of business of the assessee and therefore, it qualify as business profits under Article 3 of Indian-Greece DTAA. Since the assessee does not have any permanent establishment (PE) in India and therefore, its income is not liable to be taxed in India. In the draft assessment order, the AO observed that assessee's contention cannot be accepted, because similar reasons for non- acceptance by the AO has been discussed in the assessment orders for the earlier years in the case of the assessee as well as in the cases of the group entities. Thus, in view of the findings given in the assessment orders for the earlier years of the group entities, the said amount of income is to be taxed as "fees for technical services" within meaning of section 9(1)(vii) and also under the provisions of India-Greece DTAA.

3. Before the DRP, the assessee raised objections that, India-Greece DTAA does not have specific article for taxation of services which are in the nature of strategic/management/consultancy services. In absence of specific article for taxation of fees for such services in the DTAA, the income in the nature of fees for services rendered by the assessee will be liable to be taxed under Article 3 as business profits. It was also brought to the notice before the DRP that ITAT Mumbai Bench, in similar cases of assessee's group companies for past years it has been held that borrowed service charge received by the assessee cannot be considered as 'fees for technical services'. The DRP held that the income ITA No. 5452/Mum/2014 4 Assessment Year: 2011-12

will taxable under XVII (1) of the Indo-Greece DTAA and accordingly, would be taxable in India and there is no express provision to the contrary made in the DTAA. Article 6 of the DTAA is also not applicable. Just because the treaty is silent on the particular type of income, it cannot be said that such income will be automatic qualified as business income. Under these circumstances, the provisions of the Indian Income Tax Act have to be considered and applied. Thus, the services rendered by the assessee company are clearly taxable as 'fees for technical services' u/s 9(1)(vii).

4. Before us, learned senior counsel, Shri Porus Kaka submitted that there is no FTS clause in the Indo-Greece DTAA and therefore, such an income if at all can be taxed as business income under Article 3. However, such a business income can be taxed as business income under Article 3, only when assessee has a permanent establishment in India. Admittedly assessee does not have permanent establishment in India, therefore, the amount received by the assessee for rendering of services cannot be taxed in India. He further submitted that in the group cases of the assessee, the Tribunal in series of decisions, in the context of other DTAA's, where FTS clause is enshrined have held that, it is not fees for technical services, as and there is no make available of technical knowhow etc. In the context of Indo-Thailand Treaty and India- Indonesia Treaty where there is no FTS clause, the Tribunal has held that it is to be treated as business income. Since, assessee does not have any permanent establishment, then it cannot be taxed in India. He specifically drew our attention to the decision of ITAT Mumbai Bench in the case of McKinsey and company (Thailand), ITA No. 7624/Mum/2010, ITA No. 5452/Mum/2014 5 Assessment Year: 2011-12

order dated 10.07.2013. Thus, the issue involved is squarely covered in favour of the assessee.

5. On the other hand Ld. DR strongly relied upon the order of the DRP as well as order of the AO.

6. We have heard the rival submissions and also the relevant findings given in the impugned order. The sole issue arising in this appeal is, whether the fees for borrowed services rendered by the assessee is taxable in India as FTS or not. The assessee's case is that in absence of FTS clause in the India-Greece DTAA, the fees received by the assessee is nothing but business income, which falls within the ambit of business profit under Article 3 of Indo-Greece DTAA. Since, such a business profit can only be taxed as is attributable to the permanent establishment, therefore, in this case when there is no permanent establishment the said business income cannot be taxed in India. On the other hand department's case is that Article 17 provides that the domestic law will govern the assessment and taxation of income wherever, there is no provision in the treaty, accordingly, the said income is to be taxed as FTS under section 9(1)(vii) of the Indian Income-tax Act. A bare perusal of Article 17 makes it abundantly clear that it deals with residual items of income which are not covered by any of the articles of the treaty. However, in this case the assessee has earned income by rendering the services in the course of its business and therefore, it is nothing but business profit which is covered under Article 3. Admittedly the assessee does not have PE in India the same cannot be held to be taxed in India as per the express provision of Article 3. Exactly similar nature of case has been dealt by the Tribunal in the case of McKinsey company, (Thailand) (supra)wherein the Tribunal observed and held as under:-

ITA No. 5452/Mum/2014 6 Assessment Year: 2011-12

"7. Presently we are dealing with a situation in which the assessee earned income by rendering the services which are in the course of its business. Ordinarily, such income would remain under Article 7, unless specifically dealt by other Articles. The case of the AO is that Article 12 is applicable. We have noticed that such Article deals only with 'Royalties' and riot 'Fees for included services'. Obviously, the application of Article 12 is ruled out. In that view of the matter, such income would remain included under Article 7 and will not move in the lap of Article 22, which deals with items of income not expressly dealt with in the other Articles of the DTAA. As the nature of the extant income is such which is otherwise specifically covered under Article 7, it cannot be considered in the residual provision of Article 22.

8. Once there is an income in the nature of 'Business profits', its taxability can be considered only within the ambit of Article 7 of the DTAA. As the assessee is a tax resident of Thailand, the business profits can. be taxed in India only if the enterprise carries on business in India through a Permanent Establishment (PE) situated in India. As it is not the case of the A.O. that the assessee has a PE in India, the amount of income would fall under Article 7 but cease to be taxable in India because of the absence of the PE.

9. Whichever way we may view the income, the opinion of the authorities below of including it under Article 12 or under Article 22 is not sustainable. The amount falls under Article 7 as 'Business profits' and is hence not chargeable to tax because of the absence of any PE in India. We, therefore, hold that the amount. of Rs.79.99 lakh falls under Article 7 and not under Article 12 or Article 22 of the DTAA.

10. Section 90 deals with the consequences of Agreement with foreign countries or specified territories. Sub-section (1) provides that the Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India, inter alia, for granting of relief in respect of income on which tax is payable both in India and the other country. Sub- section (2) of section 90 provides that where the Central Government has entered into an agreement with the Government of any country outside India or a specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. In other words if a particular item of ITA No. 5452/Mum/2014 7 Assessment Year: 2011-12

income is taxable under the Income-tax Act, 1961, then it shall cease to be taxable in India, if the DTAA provides exemption in respect of such income. The core of the matter is that the DTAA overrides the regular provisions of the Act, in so far as it is more beneficial to the assessee. If the DT A provides for a more liberal mode of computation of income, then it is this mode of computation, which needs to be followed notwithstanding any contrary provision contained in the Act. However, if there is no specific provision in the DTA concerning a particular aspect, then it is the basic law, that is, the Act, which applies. As we are dealing with a situation in which India has entered into a DTAA with Thailand and the nature of receipt is covered under Article 7 but in the present circumstances it is not chargeable to tax in India, patently the consideration of the provisions of the Act is ruled out. We, therefore, overturn the impugned order on this issue and hold that the amount in question is not includible in the total income of the assessee."

Since, similar provisions are appearing in Indo-Greece DTAA, we hold that the fees received by the assessee cannot be taxed in India as FTS. Accordingly ground 1 to 4 raised by the assessee as treated as allowed.

7. So far as the issue raised in ground no. 4, the same has become academic in view of the finding given above.

8. So far as the issue relating to charging of interest u/s 234B, it has been admitted by both the parties that this issue is no longer res- integra in view of the decision of Hon'ble jurisdictional High Court in the case of DIT Vs. NGC Network Asia LLC (2009) 313 ITR 187 (Bom). Accordingly, the said ground is treated as allowed.

9. So far as the issue of levy of interest u/s 234D, this matter is restored back to the file of the AO, as the assessee has claimed in its ground of appeal that no refund has been granted to the assessee. This fact needs to be verified by the AO and appropriate relief may be given, if admissible in law. Ground no. 7 is premature and accordingly same is dismissed.

ITA No. 5452/Mum/2014 8 Assessment Year: 2011-12

10. In the result, the appeal filed by the Assessee is partly allowed.

Order pronounced in the open court on this 13th day of February, 2015.

Sd/- Sd/- (N.K. BILLAIYA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 13.02.2015 *Srivastava Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT(A) Concerned, Mumbai The DR "L" Bench

//True Copy// By Order

Dy/Asstt. Registrar, ITAT, Mumbai.