IT Appeal No. 2944 (Mum.) of 2012
[ASSESSMENT YEAR 2007-08]

B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND VIJAY PAL RAO, JUDICIAL MEMBER

Ajay Shrivastava for the Appellant.
Porus Kaka and Manish Kantu for the Respondent.

ORDER

Vijay Pal Rao, Judicial Member - This appeal by the Revenue is directed against the order dated 27.1.2012 of Commissioner of Income Tax (Appeals) for the assessment year 2007-08.

2. The Revenue has raised the following grounds in this appeal:

3. Ground No(s). 1 to 3 regarding Marketing & Management Services held by the CIT(A) to be taxed as Business Profits instead of Fees for Technical Services held by the AO. We have heard the ld. DR as well as ld. Senior Counsel for the assessee and considered the relevant material on record. The assessee is a foreign company and taxed resident of United State of America. The assessee is inter alia engaged in the business of rendering, marketing and management services to WNS Global Services Pvt. Ltd. which is its associated enterprise in India. The assessee has entered into marketing and management services agreement with WNS India pursuant to which it is entitled to receive fees at its cost plus 10% mark up for the marketing and managerial services rendered by it. During the year under consideration the assessee has received an amount of Rs. 68,15,11,339/-towards marketing and management services rendered by it to WNS India. Since the assessee's employees visited India for providing managerial services, therefore WNS India constitutes service PE under Article 5(2)(1) of Indo-USA DTAA. Accordingly an amount of Rs. 6,52,13,074/- has been attributable to such service PE for managerial service rendered in India and which has been declared by the assessee in its return of income for the year under consideration. The AO held that the assessee renders expertise and technical knowledge for conduct of business of the Indian concern viz. WNS India. The AO accordingly held that the marketing and management services rendered by the assessee to WNS India is 'Fees for Included Services' (FIS) under Article 12(4)(b) of Indo-US DTAA and taxed the same as FIS under Article 12 of Indo-US DTAA. On appeal, The CIT(A) has decided the issue in favour of the assessee by following the decision of this Tribunal is assessee's own case for the earlier assessment year.

4. At the outset we note that for the earlier assessment years 2003-04 to 2006-07 an identical issue has been considered and decided by the Tribunal in favour of the assessee. We further note that in the assessment years 2004-05 and 2005-06 the order of this Tribunal has been confirmed by the Hon'ble Jurisdictional High Court. In the latest decision dated 14.12.2012 for the assessment year 2006-07 in WNS North America Inc. v. Asstt. DIT (International Taxation) [2012] 28 taxmann.com 173 (Mum.) the Tribunal has again considered and decided this issue in paras 2.4 to 2.6 as under:

"2.4. Having heard the rival submissions on the point and considered the relevant material on record, we do not find any force in the arguments put forth on behalf of the Revenue for two reasons. Firstly- the Assessing Officer treated this amount as "Fees for induced services" under Article 12(4)(b) of the DTAA by relying on similar view taken by him in earlier year. Such earlier year's order passed by the A.O. has been eventually considered and overturned by the Tribunal. In this order it has been held by the Tribunal that the amount is not taxable as FIS under Article 12(4)(b). There is absolutely no difference in the facts and legal position prevailing in the earlier year vis-a-vis the current year. As such, there can be no question of deviating from the view taken by the Tribunal in such earlier year, which we fully subscribe to.

2.5. The second reason for not accepting the learned Departmental Representative's contention for considering the issue as per section 9(1)(vii) of the Act is that primarily the AO in the impugned order has relied on Article 12 of the DTAA to hold the amount as FIS. Nowhere did he refer to section 9, directly or indirectly to fix the taxability of this amount as FIS under the provisions of the Act. However, with a view to provide completeness to this order, we would like to note that the scope of section 9(1)(vii) is somewhat different in comparison with the Article 12(4)(b). In order to rope in any amount within the purview of FIS under the Article 12(4)(b) of DTAA, which has been invoked by the AO, it is essential that the payment should be to make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design.' On the contrary, there is no such requirement of 'making available' any managerial, technical or consultancy services'. Simple rendition of such services is sufficient, It is not the case of the Revenue that the assessee made available some managerial, technical or consultancy service to WNS India. Even if we consider for a moment that the marketing and management services rendered by the assessee were in the nature of technical services as per section 9(1)(vii), the same would not become FIS as per the DTA because of the language of Article 12(4)(b) which mandates that such services must he made available to the payer of the consideration. As the assessee in the instant case has not made available any technical knowledge, experience, skill etc. to WNS India, in our considered opinion, the same cannot be subjected to tax by considering the provisions of section 9(1)(vi) on stand-alone basis. We will discuss infra in a little more detail that the provision of the Act or the relevant Double Taxation Avoidance Agreement, whichever is more beneficial to the assessee, shall apply. As the provisions of Article 12(4)(b) are beneficial to the assessee in comparison with section 9(1)(vi), it is the prescription of Article 12, which shall apply in supersession of section 9(1)(vi) of the Act. We, therefore, held that the marketing and management services rendered by the assessee to WNS India are not chargeable to tax as FIS under Article 12 of the DTAA. The impugned order is, therefore, reversed to this extent.
2.6. As we have held in the foregoing para that the amount of Rs. 41.02 crore cannot be considered as FIS, naturally the amount received by the assessee on this score needs it be examined from the angle of taxability under other provisions. It is important to note that the assessee filed its return declaring total income of Rs. 2,38,78,407 by inter alia treating the sum of Rs. 4.11 crore being the consideration for the provision of marketing and management services in India as falling under Article 7. The AO has treated the entire amount of Rs. 41.02 crore as FIS and thus computed the total income by ignoring the income offered by the assessee. As such the business income shown by the assessee as per Article 7 shall revive and become taxable. The AO is directed to include such amount in the total income of the assessee. Insofar as the remaining receipts of Rs. 36.18 crore, being the consideration for the provision of marketing and management services outside India is concerned, the same cannot be subjected to tax in India because such income cannot be said to have accrued or arisen to the assessee or deemed to have been accrued or arisen to the assessee in India. Even the existence of the Service PE in India will not make it taxable because of no involvement of such PE in earning this income for which the services were rendered outside India."

Following the earlier orders of this Tribunal as well as Hon'ble High Court we decide this issue against the Revenue and in favour of the assessee.

5. Ground No. 4 regarding Force of Attraction Rule. The ld. DR has submitted that when the receipts towards the fee for marketing service treated as business income and not as FIS then the same are taxable in India as attributable to the service PE in view of the force of attraction Rule. He has further submitted that even treating the receipts towards marketing services as business profits the same are liable to be taxed under Article 7 r.w. Article 5 of Indo-US DTAA. The ld. DR has contended that there is a composite agreement under which the assessee has provided marketing and management services to WNS India and once the services provided in India are held to be taxable because of the service PE in India then the similar and part of the composite service provided outside India is also attributable to the service PE in view of the force of attraction Rule. Since this issue has not been considered by this Tribunal as well as by the Hon'ble High Court in the earlier years therefore, the Revenue has raised this issue as an alternative plea. In support of his contention he has relied upon the decision of this Tribunal in case of Hindalco Industries Ltd. v. Asstt. CIT [2005] 94 ITD 242 (Mum.) and submitted that the Tribunal in the said case has observed that when principle transaction itself is such that it involves taxability in source country, the transactions subsidiary and integral to such a transaction also give rise to the taxability of subsidiary transactions in the source country. The ld. DR has further submitted that the benefit of services is received in India, therefore the services are deemed to have been rendered or made available in India.

6. On the other hand, the ld. Senior Counsel has submitted that the issue in the case of Hindalco Industries Ltd. (supra) was whether the payment for training fee was part of sale of know-how and therefore the said decision is not applicable in the facts of the case of the assessee wherein the principle transaction of marketing and management services was outside India and only because the employees of the assessee visited India for more than one day WNS India is treated as service PE in view of Article 5(2)(l)(ii) of Indo-US DTAA. Since the Indian concern is a related enterprise therefore the visit of the employees of the assessee to India constitute the Indian concern viz. WNS India as service PE. He has referred the assessment order and submitted that the AO has mentioned in para 2 that the employees of assessee visited India during the assessment year under consideration for more than one day and therefore as per Article 5(2)(l) of Indo-US DTAA, the existence of employees constitutes a service PE in India. Thus, the ld. Senior Counsel has submitted that as per the agreement for providing the marketing and management services territory means the North America and European Region, therefore the Principle activity as per the agreement was to provide the marketing and management services in North America and European Region and not in India. Thus, the decision of this Tribunal in case of Hindalco Industries Ltd. (supra) is not applicable. He has further contended that the force of attraction Rule applies only when apart from the business through PE if the assessee carries on business activity in the other Contracting State of same or similar kind as those affected through the Permanent Establishment. He took us to Article 7 of Indo-US DTAA and submitted that as general Rule the profits of an enterprise of a Contracting State shall be taxable only in that State unless the business is carried on in the other Contracting State through PE situated therein. Therefore, only exceptional is that in case the business conducted through the PE shall be taxable in the other Contracting State otherwise the profits of the enterprise shall be taxable in the State of residence. The ld. Senior Counsel then pointed out that the force of attraction Rule applies only in a situation when an enterprise of the Contracting State carries on business through PE as well as direct business activity in the other State where the Permanent Establishment situated and the business activity carried on directly is same or similar kind as those effected through Permanent Establishment. The ld. Senior Counsel thus advanced his arguments that in the case of the assessee the marketing and management services provided outside India cannot be brought under Article 7 in the category of the business activities carried on of the same or similar kind as those effected through the PE. Accordingly, he has vehemently opposed the alternative ground raised by the Revenue.

7. We have considered the rival submissions as well as relevant material on record. There is no dispute that out of total marketing and management fee of Rs. 8,15,11,339/- received from WNS India only a sum of Rs. 6,52,13,074/- has been attributed to such PE because the services were rendered in India. The remaining amount of marketing and management fee received by the assessee is regarding the services rendered outside India. The ld. DR has contended that since the services which were rendered in India and outside India are same or similar in nature and as per the composite agreement therefore, the entire service is attributable to the service PE in India by applying the force of attraction Rule. We do not find merit in the contention of ld. DR because the force of attraction Rule germane under Article 7(1) of the Indo-US DTAA which reads as under:

8. The plain reading of Article 7(1) makes it clear that only in case when enterprise of Contracting State carries on business in the other Contracting State through its PE as well as otherwise and both the activities are of same or similar kind then the business activities carried on not through PE shall also be treated as attributable to the PE and the profit of the enterprise may be taxed in the other State so much of them as its is attributable to PE. There is no scope of any ambiguity as the Article 7(1) gives a clear understanding that the force of attraction Rule applied only in respect of the business carried on by an enterprise of Contracting State in the other Contracting State through PE as well as without involvement of PE. Therefore, the two essential conditions emerge for applying the force of attraction rule are (i) the business activity carried on should be in the other State where the PE is situated (ii) the business activity carried on must be of the same or similar kind as those effected through PE. In the case in hand the condition of business activity carried on in the other State where the PE is situated is not satisfied because the marketing and management services in question are provided by the assessee outside India. Since the said issue of providing the services outside India has been decided time and again by this Tribunal as well as by the Hon'ble High Court in assessee's own case therefore in view of the finding on the ground no(s). 1 to 3 there is no need for further deliberation/discussion on the same. Having held that the marketing and management services in question were rendered outside India and income of such services cannot be said to have accrued or arisen to the assessee or deemed to have accrued or arisen to assessee in India, the existence of service PE in India would not make it taxable under Article 7 of Indo-US DTAA.

9. In view of the above discussion we do not find any merit or substance in the alternative plea raised in ground no. 4 of the Revenue's appeal. The same is dismissed.